Why Absa took 0.3% of clients’ money

Absa has faced criticism for sinking 0.3% of its Money Market clients’ investments in the wake of African Bank’s crash and bailout.

Absa Money Market (AAM) clients were notified as late as Tuesday (19 August) that the fund had removed all African Bank investments from its market.

African Bank was placed under curatorship on 10 August, which affected all investment funds with exposure to the troubled bank.

Following guidance from the Financial Services Board, Absa had to adjust the value of its Money Market by 0.3%, effectively swiping that value off of clients’ investments, providing a 0% interest rate for the period.

With a money market value of R52.8 billion, Absa in effect swiped off R158.4 million in investments.

Money Market clients were not impressed with the news, and even less so that they were notified long after the move.

According to the Absa, however, its hands were effectively tied.

No time to act

On 10 August, the South African Reserve Bank (SARB) decided to bail out African Bank through a multi-billion rand rescue plan.

Under the plan, African Bank will be restructured with Sarb overseeing the process – however, cash will come from a consortium comprising Absa, Capitec, First Rand, Investec, Standard Bank and the Public Investment Corporation (PIC).

African Bank had crashed after being unable to recoup many of the short term loans it had issued. The bank was facing record losses for the year, and told shareholders and government that it needed R8.5 billion to avoid collapse.

“This had an impact on all seven of South Africa’s Money Market Funds with exposure to African Bank, including the AAM Money Market Fund,” Absa said.

The bank said that instruction was communicated to the group late on Monday (11 August) afternoon that the decision had to be completed that same day.

“Unfortunately this meant that not all our clients would have received communication timeously. The FSB circular stipulates that clients had to be communicated to within a period of 21 days.”

“We believe we have implemented the Sarb decision in the fairest way to all investors. In addition to this, on Friday we acted decisively by removing all ABIL exposure from the Absa Active Management Money Market Fund.”

The group stressed that its savings accounts and deposits were not impacted.

Absa’s exposure to African Bank was removed on Friday 15 August to provide certainty and confidence to investors, the group said.

The Fund now only has exposure to the five large banking groups – Absa, FNB (through RMB), Investec, Nedcor and Standard Bank – and the government.

According to communique from an Absa fund manager, the bank was invested in ABIL because it “was a sound organization at the time the group invested a portion of the funds”.

“Investors in unit trust funds are not guaranteed capital or return,” they noted. “While the risk profile of the money market fund is low, the regulations do allow the unit trust funds to reduce the capital in events like this.”

Ratings agencies react

While clients simmer in their disapproval – with some even removing investments from the money market altogether – ratings agency Fitch responded to Absa’s money market swipe positively.

The agency upgraded the AAM’s credit rating by four notches from A to AA+ following the action.

In justifying its upgrade, Fitch said that “the removal of the African Bank exposure has removed uncertainty from the fund” and that this move “has had a materially positive impact on the fund’s credit quality.”

However, following the bailout of African Bank, ratings agency Moody’s downgraded all of South Africa’s banks to Baa1, and placed them under review for further cuts.

Despite this, Absa said it supports Sarb’s view that South Africa’s banking sector remains healthy and robust.

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Why Absa took 0.3% of clients’ money