VBS MUTUAL BANK

Overview and background

Background

Established: 1982 (initially operated as Venda Building Society). Granted permanent Mutual Bank license on 11 October 2000.

Products and services: savings, fixed and notice deposits, mortgage, short-term loans, investment loans and fuel and contract financing.

Funding: main source of funding is savings, deposits and fixed and notice deposits.

Clients: 22 051 depositors, 1 105 loan accounts.

Branches: 6 operational, 1 not yet operational

Head office: Makhado; Corporate office: Rivonia.

Shareholders: Vele Investments (58.85%), PIC (27.63%), Dyambeu (4.60%), General Public (8.93%).

Employees: 140.

Auditors: KPMG

Financial information - Jan18* - (*As submitted to SARB).

Total assets - R2.04bn

Total loans & advances - R1.78bn

Total funding related to the public -

R1.54bn

Capital and Reserves - R 476mn

Total Off-balance-sheet size R185.2mn

Profitability

Major issues of concern raised by SARB

Inadequate and questionable governance and risk management practices.

A deficient compliance function and culture.

Aggressive growth strategy in balance sheet amidst funding challenges.

Weak asset and liability management practices (high liquidity risk).

Sectorial depositor concentration risk (Municipalities were 32 days, 3, 6 and 12 months

maturations).

Possible illegality of municipality deposits accepted by the bank and the legal developments

in that regard.

Volatility in financial performance as well as regular and significant losses caused by high

operating expenses due to aggressive infrastructure expansion plans.

The negative impact of these losses on capital.

Venture into new products and services without commensurate investment in the

enhancement of internal controls.

Negative media coverage of the bank (reputational risk).

Lack of proactive communication with the regulator on significant developments and delayed

responses by management to crises.

Poor quality of regulatory reports and other information submitted to the regulator.

Municipality deposits at VBS Mutual Bank

February 2015 First municipality deposit appears on

list of largest depositors.

From Sep 2015 VBS was warned against reliance

placed on 10 largest depositors (of which municipality

was largest).

From Sep 2016 VBS warned against increasing

sectorial concentration of municipalities and worsening

liquidity mismatch position.

18 August 2017 VBS alerted SARB to court

application against National Treasury and possible

illegality of deposits from municipalities.

29 August 2017 VBS was advised to seek alternative

liquidity contingency plans in the event of total

municipality deposits outflow.

Reports from 5 September 2017 2 March 2018:

o Municipalities increased from 12 to 16

o Total deposits increased from R1.06bn to R1.58bn

o Total inflows R1.18bn

o Total outflows R714.63mn

o Net movement R517,50mn.

VBS continued to accept municipality deposits up to and

including 2 March 2018

Key events leading up to curatorship (1)

Key events leading up to curatorship (2)

Curatorship

Question 1 Part A) Identify and discuss the gaps which threatened VBS business strategy using the information provided (20 marks)