Johannesburg - Retail giant Edcon is hoping to turn around its fortunes and increase its credit customer base through a potential deal with African Bank Investments Limited (Abil) as its second credit provider, but analysts believe the timing is wrong.
Edcon announced last week that it had signed a term sheet, which would form the basis for negotiations to establish Abil as a secondary provider to the retailer’s customers who did not fit Absa’s credit criteria.
Edcon sold its debtor’s books to Absa for R10 billion in 2012.
In its results for the third quarter to December, Edcon said it ended the quarter with 133 000 fewer credit customers than in the previous corresponding quarter.
On a twelve-month rolling basis, credit sales decreased from 51.4 percent to 47.2 percent of total retail sales.
Edcon also indicated that it was in advanced discussions on potential solutions for a second credit provider to improve net approval rates.
“When implemented, this should give customers improved access to credit facilities,” it said.
Edcon said last week that Abil’s credit would be granted subject to the bank’s criteria.
Retail analysts said yesterday that Edcon was continuing to lose market share as Absa’s credit-granting criteria was getting stricter.
Abri du Plessis, the chief investment officer at Gryphon Asset Management, said at this point the credit cycle was highly geared and this was evident as all the credit retailers were struggling to grant credit.
“From this perspective, it is understandable why Absa is hesitant in granting credit. Its just not the right time,” he said.
Du Plessis said it was clear that Edcon was looking for a more aggressive credit provider.
However, “the timing is wrong and it will not help them with their problems”.
On the other hand, Abil’s unsecured lending model has struggled to deliver profits in recent months.
In its trading update for the six months to March, Abil warned of a worse-than-expected outlook.
It said the overall impact was likely to be a reduction in first-half profitability, compared with the restated first-half earnings of R604 million in the 2013 financial year, despite a material improvement from the restated earnings for the second half.
At its furniture retailer, Ellerines, there was a 21 percent decline in merchandise sales to R1.18bn in the quarter to December from R1.5bn in the quarter to December 2012.
The bank was also hit with a R300m fine by the National Credit Regulator for alleged reckless lending.
However, it managed to negotiate the fine down to R20m.
Du Plessis said all the problems surrounding Abil were a sign of how the bank dealt with credit in the past, which he believed was not prudent.
“Maybe that will change as the corporate is under pressure to grow profits and get back to the previous growth cycle.”
Du Plessis added that Edcon was also looking for somebody that was little bit more aggressive on credit granting.
“Edcon is also under more pressure compared to its peers, and we have not seen that much growth from them.”
He added that Edcon was under pressure to correct the situation, but the question the retailer needed to ask was: “Is the growth problem one of restricted credit?”
He said the credit cycle had not reached its peak yet, and that it was not expected to improve in the next 12 months or so.
“The cycle will definitely be impacted on by the next interest rate hike, which will happen anytime this year.”
Another analyst, who asked to remain anonymous, said should this deal come through it would give Edcon some kind of comfort in granting credit in less-restrictive manner.
“From Edcon’s perspective, it has been losing market share; they want to win that back and this is one of the ways to do it,” the analyst said.
Edcon said its contract with Absa would not be affected. Barclays Africa, formerly Absa Group, shares lost 0.32 percent to R153.50.