African Bank Investments Limited (Abil) yesterday became the poster child of all that is wrong with unfettered lending as its shares plunged after the lender forecast a record annual loss of almost R8 billion and announced the departure of its founder and chief executive, Leon Kirkinis.
The woes of Abil represent a tough challenge for the financial regulators as they now must work to reassure depositors and investors and restore confidence in one of the country’s key lenders.
Abil’s scramble for ways to stabilise itself may include breaking up the bank into so-called “good” and “bad” portions in order to prevent the possible contagion of its deposit base.
Although most of Abil’s problems are self-inflicted, the lender is also a victim of a stifling lending environment exacerbated by South Africa’s moribund economy. Its shares slid as much as 65 percent to an intraday low of R2.39. They closed 60.76 percent lower at R2.70, a slide that wiped more than R6bn off the bank’s market value, underscoring anxiety among investors.
Abil said Kirkinis would be replaced by the chief financial officer, Nithia Nalliah, as the acting chief executive.
In a conference call with investors Nalliah admitted that the bank did not have enough “bandwidth” within its executive team to deal with the necessary restructuring on its own. The bank has appointed auditing and consulting firm PwC to advise on its turnaround plan.
It also said it planned to raise at least R8.5bn in fresh capital to plug a gaping hole in its balance sheet. This will mark the second capital raising in a year.
The bank said it expected a basic loss of at least R7.6bn for the year to September compared with R4.2bn in the previous year, and a headline loss of at least R6.4bn for the full year, from headline profit of R365 million previously.
“Abil customers’ disposable income and their ability to service debt continues to be under pressure, driven by a combination of above-inflationary cost of living increases, higher relative debt servicing costs and lower growth in their gross income,” the bank said.
The Reserve Bank said Abil’s losses were in large part due to its unique business model.
“Credit losses and the drain on its resources have resulted, among others, from the inability of its furniture chain, Ellerines, to operate profitably,” the Reserve Bank said, adding that it would continue to engage with Abil on the challenges it faced and that measures to resolve these challenges were under discussion.
Abil’s troubled retail unit, Ellerines, forecast a basic loss of at least R2.9bn and a headline loss of at least R1.7bn.
Steve Meintjes of Imara SP Reid said the positive aspects of Abil’s third-quarter update included a 7.1 percent decline in non-performing loans formation, a decline in the average net loan size to R13 331 and positive operating cash flow for the nine months to June.
“Abil is belatedly bringing its impairment criteria in line with its highly successful peer, Capitec, and has strong institutional shareholders who may back the upcoming rights issue,” Meintjes said. He advised the average investor to hold their investments at this stage.
Ron Klipin at Cratos Wealth said the total impairment was substantial and could wipe out Abil’s market capitalisation, which was R4.1bn at the close.
“If you look at the total impairment the bank’s capital and reserves will be written off,” he said.
Klipin was of the view that the scenario of a “bad bank” and “good bank” could be a workable possibility, if this concept could be used in South Africa. This tactic helped stabilise some of the largest banks in the US during the financial crisis of 2008 and 2009.
The move would entail ring-fencing two separate entities. Klipin’s suggestions were in line with the bank’s business review and restructuring initiatives, which include growing the “good bank” and insulating the group from further exposure to Ellerines.
Klipin added that loans made last year could be held by the good bank and prior loans could fall under the bad bank.
“The problem with the loan books done before 2013, was that they were done with very lax credit criteria.”
The terms of the loans granted prior to 2013 were extended, resulting in the bad debt situation not being visible.
“In essence, investors did not know how bad things were. But the big bite came when the macroeconomic situation began deteriorating, which had a severe impact on the micro-lending market,” Klipin said.
Jean Pierre Verster at 36One Asset Management said things had gone from bad to worse, and the chief executive’s departure was not a surprise, especially after he had previously said the bank was improving.
“It is clear that it is not the case and that he was not in touch with reality. It is also clear that not only have shareholders lost confidence in the company, judging by the drop in the share price today, but now the board has also lost confidence in Kirkinis,” he said.
Verster was of the view that Abil’s problems ran deeper than the chief executive and the solution was more complex than Kirkinis resigning.
“The problem is much wider, it is about how Abil has always done business and that needs to change with the changed regulatory environment and the change in the consumer indebtedness environment. But the bank has not changed,” he said.
Verster, who felt bearish about the group’s prospects, said he did not see who was going to support the R8.5bn rights offer after a further R7.6bn loss this year. This meant that the company was writing down its net tangible asset value to R1 a share and then having a rights issue.
“Abil’s survival depends on whether shareholders will support a rights issue,” Tracy Brodziak, a banking analyst at Old Mutual Investment Group, told Bloomberg. “It’s worse than expected.”
What was probable, though, Verster suggested, was for the regulators to get involved. “There is a moral hazard risk when people think they should not pay back Abil loans. The loan contracts are still valid.”
He said even with interventions from regulators – the SA Reserve Bank and the registrar of banks – equity investors could still have their investments wiped out.