Why hasn’t APRA siezed Xinja Bank?

Via Ian Rogers at Banking Day:

Immediately means in two months’ time, maybe, at Xinja Bank, in regard to a mooted capital injection by Dubai’s World Investments.

The facts and storyline outlined one week ago surrounding the proposed investment of A$433 million by World Investments – in two stages – is proving malleable and problematic.

The maths of Eric Wilson, the bank’s CEO, in a shareholder letter circulated yesterday is dubious for a start.

“I expect, subject to regulatory approval, that the maximum percentage WI will own will not exceed 40 per cent” Wilson told his owners in document with a lengthy preamble on coping with COVID-19.

Everyone, he said, is “operating from home for two full weeks without any customers noticing.

“We are using a working assumption that by mid-June things will be starting to get back on track.

“At that point we can look at launching the products we have finished and hopefully help get things back on track for a lot of customers.”

At the end of December 2019 Xinja had around $24 million in net assets (and falling fast).

The bank has also had a capital raising underway via the Equitise platform, seeking $50 million though that method. Xinja deferred the closing date on this offer several times, with the deal finally closed off over the weekend.

A glaring omission in Wilson’s update is any mention – let alone detail about the outcome – of the Equitise fundraising.

Let’s say Xinja cobble together $25 million in new money though that offer (though shareholders Banking Day has consulted believe the actual number will be much less).

The WI investment, Wilson explained, “is split into two main tranches. The first tranche of approximately $160 million will most likely start to arrive in May should we be successful in our application to regulators.

“The second tranche will be divided up in a number of ‘drawdowns’ as Xinja requires funds to expand over the next 24 months,” he wrote.

“Each ‘drawdown’ will have the price negotiated.

“The total amount of this investment is currently valued at A$433m. However it will change over time due to exchange rate movements. The first tranche of the investment is to be made at the Series D price of $4.08.”

Then allow for losses incurred over the five months to May. Already chronic, and given the ludicrous pricing on the (now suspended to new customers) Stash deposit account, these losses will be worse than severe.

Accumulated losses already exceed $45 million at the bank, so the actual capital available to the bank even today is thin – exceedingly thin.

Wilson said it, so it must be true that the equity stake of WI “will not exceed 40 per cent”.

Except given a vicarious equity base and silence on the Equitise component, World Investments look to be poised to soon be well and truly in control of the bank, if any of the above analysis is on the money.

A new detail on Xinja’s capital hunt buried in the update is “that it is also part of our shareholder strategy over the next two years to welcome other substantial investors into Xinja”.

So some mystery mob may displace or rival WI as controlling shareholder. Either way, as Banking Day argued last week, a wholesale change of control is underway at Xinja Bank, the difficulty being the capital – needed NOW – isn’t arriving nearly in time.

The entire scheme is subject to approvals from the Emirates Securities & Commodities Authority in the UAE and APRA in Australia.

“The approvals are reasonably complex and not guaranteed,” Wilson cautioned.

Surprisingly, there is no mention of needing clearance from the Foreign Investment Review Board. FIRB rules invoke a threshold of $275 million for “Acquisitions in sensitive businesses” which more than likely applies to banking.

The CEO’s letter did at least shed some light on WI and a two-year long pitch by Xinja to secure a whopping investment – the second-largest (behind Judo Bank) in neobank land – if it comes to pass.

“We have been discussing an investment with World Investments since one of their intermediaries attended our AGM in 2018,” Wilson explained.

“WI in fact turned down an investment in Series C as they felt it was too early and Xinja too unproven. They chose to wait until the full launch of the bank in January to make a final decision on Series D.

“As you would imagine with bank investors of this level of sophistication there has been considerable rigour in developing the deal, reviewing technologies, strategies and future business plans.

“It’s has been a long and exhausting process,” he said.

Trading since 2005, WI is “owned by business leaders in the United Arab Emirates” the company website says. Though where they hoover up their funding for investments (in all sectors) is opaque.

“World Investments has created a fund which will invest the money into Xinja,” Wilson told his shareholders.

“Some of that money comes from World Investments themselves and the rest from other investors. The other investors will be made public once all the regulatory hurdles have been passed.”

Banking Day’s banking and regulatory contacts in Dubai surmise the bulk of these other investors will be funds sourced from China, this being a hallmark of Dubai as a financial centre.

Another curio is that WI is not registered with the Dubai International Financial Centre. This is voluntary, but DIFC promote themselves as “the leading financial hub for the Middle East” and a wonderworld of “the region’s most comprehensive fintech and venture capital environments”.

On the Xinja blog (or “Community Forum”) and also in Wilson’s Q&A on the Equitise platform, Banking Day’s harsh recent reporting on the bank has come in for some schtick, and fair enough. Equally, customers and investors have either cited or relied on our commentary these last few weeks to air dissent with the breezy narrative of a bank, or fintech, menacing incumbents.

Belief in fintech takes the form of fundamentalism in Wilson world.

“I continue to have real faith in our neobank model, and indeed the global neobank Movement,” he assured shareholders, ignorant of proven social movements – the trade unions and the Labor Party say – and defying the collapse in investment flows into his sector of finance.

Banking Day yesterday approached P&L Corporate Communications, the external PR firm used by Xinja Bank, to clarify or rebut many of the points made in this article. True to form, there was no response.

Then, in an embarrassing coda, Moven Bank in the US – a challenger bank of which  Australian fintech and digital banking champion Brett King is CEO – has folded its tent.

Brett King is a board advisor to Xinja.

Moven had a mere 220,00 customers, with accounts closed by the end of April. The board was seeking to spin off the bank from the (still trading) enterprise division, an impossible task in the current market.

In an interview with American Banker, King was asked: “Is it that funding dried up, or is it that you felt like this just isn’t the right time to go out and pitch this because everything is so uncertain?”

King: “When we went out to talk about financing and credit raising, most of the conversations we had were, ‘We’re just going to wait and see, it’s pencils down right now. We’re not doing any new deals.’

“And so we didn’t know when that would return. The risk was every month … we were absorbing losses that may result in us cutting staff and not being able to support the commitments we’ve made contractually to the enterprise business.”

Absorbing losses, unsustainable losses, being the mark of Xinja Bank as well; a badly-undercapitalised neobank under intense scrutiny by the Council of Financial Regulators.

Because, you know, virus.

David Llewellyn-Smith
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  1. Ronin8317MEMBER

    A bank that takes deposit but don’t lend out money? What could possibly go wrong? I’m sure the money ended up ‘somewhere’ though, probably in Dubai.

      • darklydrawlMEMBER

        But currenty they have no loans. Just hundreds of millions in deposits earning 2.2% with no income to acutally pay that interest. It seems like a ponzi scheme. No idea how they think this is sustainable. I suspect somone’s plan is to steal as much as possible and fleece the taxpayers for the bank guarantee. Nothing else seems to make sense.

    • TailorTrashMEMBER

      And the taxpayers will be on the hook for those vaporised deposits ………how good is business in this new Straya …..the governement will,pay for everything at the moment …………

    • Yep, they should just take depositors’ money and punt it on the stock market — could make a fortune!

      On the other hand …

  2. Ian Rogers at Banking Day has been trash talking Xinja and fintech for a while now. He’s a dinosaur and I’m sure he’s on the payroll of the big 4.

    Investors are falling over themselves to get into this company. Capital raising won’t be an issue for Xinja.

    • darklydrawlMEMBER

      Can you explain why Les. Not being a smart arse, I genuinely cannot understand how they plan to stay afloat in the present climate. I know they were going to start issuing loans, but they haven’t yet, and are not likely to in the current climate. It seems they zero income, yet are paying out 2.2% interest (plus operating costs) on millions of dollars of deposits (which is higher than the cash rate).

      They’ve stopped taking deposits as it buggered up their capital ratios – so they seem kind of stuck.

      How is that sustainable / viable? Ok, folks can invest into the business and they can get more capital, but what is the end game here for the investors? It seems any money is just being whittled away in paying interest on deposits and costs. Is what they are offering really that unique and valuable? What am I missing here?

      • dd, you’d have to ask the investors that. Sorry I can’t give you a more detailed answer but I suspect is has to with:
        * Significantly lower overheads than the established industry.
        * Strong marketing and evidence of consumer demand.
        * Operating in a country with (relative to other countries) solid prudential regulation, an obsession with mortgages and real estate investment (at all levels of society), a government that will do absolutely everything necessary to prevent a real estate crash, very strong demand for Australian real estate from foreigners and a system that welcomes it. Lending in Australia is like being given a licence to print profit, government guarantee on deposits, etc.

        Yeah, the rona probably isn’t going to do the industry many favours and nor is the RBA idiocy of rate cuts to zero. As far as I’m aware, Xinja wasn’t planning on making loan products until later in the year anyway.

        Maybe they won’t do so well. I don’t really care (well actually more competition in the industry is probably a good thing). But the investment dollars are coming willingly for it.