Johannesburg - African Bank Investments Ltd., South Africa’s largest provider of unsecured loans, dropped the most on record after saying it plans to raise capital for the second time in a year and its chief executive officer resigned.
The shares fell as much as 65 percent and were 57 percent lower at 2.99 rand at 3:46 pm in Johannesburg, the lowest intraday level since June 1997.
The stock has declined 75 percent this year, making it the worst performer on the 164-member FTSE/JSE Africa All Share Index.
More than 85 million shares traded, almost 14 times the three-month daily average.
Chief executive and founder Leon Kirkinis stepped down with immediate effect after 23 years with the Johannesburg-based bank, Abil, as it’s known, said today in a statement.
The lender expects to post a record full-year loss of as much as 7.6 billion and will seek a potential 8.5 billion-rand capital increase, following a 5.5 billion-rand stock sale in December.
“Abil’s survival depends on whether shareholders will support a rights issue,” Tracy Brodziak, a banking analyst at Old Mutual Investment Group, said today in a phone interview from Cape Town.
“It’s worse than expected.”
Abil started to falter in March last year after South Africa’s National Credit Regulator said it had been involved in reckless lending.
That forced African Bank to abandon plans to raise $300 million (R3.2 billion) in foreign debt markets.
Bad debt levels rose more than the bank expected as clients struggled to repay loans amid accelerating inflation and rising unemployment.
Takeover Target
“I don’t see how any shareholder can come to the conclusion that contributing another 8.5 billion rand to this business is the right thing to do,” Jean Pierre Verster of 36ONE Asset Management, which manages the equivalent of $1.1 billion, said by phone.
“I would rather expect that the regulators might get involved here. You see signals of the regulators maybe looking at creating a ‘bad bank’ and ring- fencing that part of the loan book.”
The South African Reserve Bank is in talks with Abil “in search of viable long-term solutions,” the Pretoria-based central bank said in a statement on its website today.
“South Africa’s banking sector remains healthy and robust, and there have been no indications that other South African banks have been affected negatively by Abil’s trading update.”
Abil plans to separate its banking activities from its unprofitable furniture retail unit, Ellerine, it said.
Abil bought the company in 2008 for 9.2 billion rand and said last year it wants to sell the unit after a series of writedowns and losses.
African Bank doesn’t take deposits and funded Ellerine losses with money raised in debt or equity markets.
Growth Fixation
“The Ellerines acquisition was bad, but Abil also became fixated on growth,” said Brodziak, adding that the bank may attract takeover bids.
“They got looser and looser with credit management and the provisioning was aggressive.”
Yields on African Bank’s Swiss franc bonds due July 2015 jumped to a record, climbing 1100 basis points to 130 percent.
Abil has about 1 billion rand of debt maturing in September and almost 10 billion rand next year.
Debt holders won’t roll over their holdings unless Abil raises more capital, Kokkie Kooyman, head of Cape Town-based Sanlam Global Investments, said in May after Moody’s Investors Service cut the lender’s foreign rating to Ba1, one step below investment grade.
Darkest Hour
“The major shareholders are already so deep into this thing, that they can’t afford to let it fail,” Garth Mackenzie, founder of Johannesburg-based TradersCorner.co.za, said by phone today.
“The likelihood is that they will probably follow their rights, and recapitalise the business.”
Patrice Rassou, head of equities at Sanlam Investment Management, said his firm will consider before participating in a rights offering that exceeds the company’s market value.
“Before it was like they were trying to put plaster over a gaping wound,” according to Rassou, who said 54-year-old Kirkinis was the personification of the bank.
“What you’re seeing now is major surgery.”
Nithia Nalliah, 54, group financial director, will take over as acting chief executive, the bank said.
He was appointed as finance director in 2009 having been chief financial officer since 2006.
Before that he was a senior partner at Deloitte.
“We’d be more comfortable if there was new management,” Brodziak said.
“Abil needs to get people in who weren’t part of this.”
Beneficial Position
The lender, which has been trading as African Bank for 15 years, survived a 2002 crisis among small lenders in South Africa that caused Saambou and Unifer to fail.
Abil bought Saambou’s loan book in 2002 and boosted both profit and its share of South Africa’s unsecured lending market.
Now, Ellerine and parts of the bank “might not continue to exist as going concerns,” according to Verster who said he has been selling the stock short.
“We are not taking any pleasure in African Bank’s demise but we have been positioned to benefit from the mis-pricing of their securities.” - Bloomberg News