Johannesburg - Shares in bailed-out South African lender African Bank Investments (Abil) were suspended on Monday, as investors shrugged off a financial meltdown that appeared to pose no wider risk to the banking sector.
The central bank and commercial banks stepped in on Sunday with a R17 billion plan to rescue Abil from a flood of bad debts mostly racked up on risky payday loans to unsecured borrowers.
Abil warned on Wednesday of a full-year loss and said it would need a massive capital raising to shore up its balance sheet.
That led to a shareholder exodus that wiped more than R9.6 billion from its market value in three days.
Abil has been pounded by the failure of many of its core market of low-income borrowers - hit by unemployment, slow economic growth and stubbornly high inflation - to repay loans.
Economists said problems with unsecured lending - high-interest loans not backed by collateral and which totalled 12 percent of South African banks' credit exposure as of the end of January - highlight deeper economic woes.
“It's not a big warning sign that the rest of the banking sector is going to go down the tubes,” said Christie Viljoen of NKC Independent Economists in Cape Town.
“When people default on these unsecured loans, it means their income is dropping or their expenses are going up and that slots into the rest of problems we've got at the moment: high unemployment, low growth and high inflation.”
South African household debt averages around 75 percent of disposable income, meaning servicing debt is a huge burden for low-income households, where food costs alone account for a third of expenditure.
A BIG HIT FOR SOME
Underscoring the lack of investor concern about broader consequences for the banking system, Johannesburg's banking index was up 0.7 percent at 12:00 SA time.
The central bank bailout was good news for taxpayers and customers, NKC's Viljoen added.
Abil said in a statement that trade of its shares and debt would be suspended immediately on the Johannesburg bourse, and it would apply to have trade suspended on foreign exchanges.
Its shares trade in the United States and Germany and it has debt in dollars and Swiss francs.
Under the 17 billion rand rescue, Abil will be put under curatorship, or outside supervision.
The Reserve Bank will pay 7 billion rand for Abil's “bad loans” book - a near 60 percent discount to the face value - and a consortium of commercial banks will underwrite a 10 billion rand capital raising.
The rescue represents a big hit for shareholders and investors in Abil's junior debt, both of whom will be “afforded the opportunity” to participate in the “good bank,” the Reserve Bank said, referring to the capital raising.
Investors in senior debt will see their bonds take a 10 percent reduction.
Abil, which is today worth under $50 million (R534 million), was valued at more than $2 billion at its height, buoyed by aggressive lending to mainly poor, black customers who had previously been shut out of the financial system.
Even as bad debts spiked in recent years the bank failed to rein in lending. As recently as December 2012, over a third of its quarterly loans were categorised as “medium to high risk”.
The bank's maximum loan size was $16,800, a staggering amount in a country where per capita GDP is around $7,500.
It also raised the bulk of its funding in the debt markets, meaning it did not have a buffer of cheaper deposits when wholesale funding became more expensive.
In 2008 it acquired a furniture business in a disastrous attempt to sell sofas on credit.
That unit applied for temporary protection from creditors on Friday. - Reuters