How ‘brightest brain’ failed with Abil

African Bank (ABIL)CEO Leon Kirkinis is to step down from his position.photo by Simphiwe Mbokazi 453

African Bank (ABIL)CEO Leon Kirkinis is to step down from his position.photo by Simphiwe Mbokazi 453

Published Aug 31, 2014

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Johannesburg - Leon Kirkinis, described as one of the sharpest minds in banking, changed South Africa by expanding credit to the poor. He also underestimated the risks, wrecked his company, rattled financial markets and left many of his 3.2 million clients drowning in debt.

Kirkinis, 54, co-founded African Bank Investments Limited (Abil) in 1999 and built it into the country’s largest maker of loans not backed by collateral. He resigned on August 6, the same day the company said it would post a record loss and needed R8.5 billion to survive.

The SA Reserve Bank stepped in four days later to salvage what it could.

“He was one of banking’s brightest brains,” David Bullard, who worked with Kirkinis at UAL Merchant Bank in the 1980s, said. “Before creating Abil, he did his research and for a long time it worked.”

He pursued a path to riches that led through some of the poorest provinces, and won the confidence of investors along the way. Styling himself a visionary for lending to South Africans ignored or deemed too risky by conventional banks, Kirkinis fuelled profits making loans at annual interest rates as high as 60 percent.

Like US subprime lenders half a world away, he overestimated his customers’ ability to repay their loans when the economy soured.

Kirkinis left Johannesburg with his wife for a game farm far from the city shortly after stepping down, a person with knowledge of the matter said. He didn’t respond to phone calls from Bloomberg News.

Abil’s “inherent flaw” was that it didn’t provision enough for bad debts, Kokkie Kooyman, the head of Sanlam Global Investments, said. That left the lender vulnerable when its target market suffered “severe deterioration” from protracted mining strikes that began in 2012, he said.

Beyond that, the “stupidest mistake” was buying the country’s second-largest furniture retailer, Ellerine Holdings, in 2008, according to Kooyman, who said he argued about it with management at the time.

The consequences of the failure reverberated through the financial industry and beyond. Moody’s Investors Service lowered its credit ratings on the four largest banks, cutting billions of rand from their market value.

The bank’s demise might also bring closer a ratings downgrade of South Africa itself, Standard Bank said in a note on August 20.

Money market funds, including those run by Cadiz Asset Management, Stanlib and Barclays’ local unit, imposed losses on investors. Toyota South Africa was among companies that cancelled bond sales as investors shied away.

Kirkinis projected an everyman image, eschewing the typical banker’s attire of suits and ties in favour of jeans, sport shirts and sneakers. He drove a yellow Jeep Wrangler to work.

While some chief executives spend their leisure time in Plettenberg Bay, Kirkinis preferred to be in nature and away from people, he said in a January 29 interview.

He spent part of his December holidays last year at the Vaal Dam, where he has a boat and sometimes goes wake-boarding.

He projected confidence and ease in conversation with the press. Employees at the bank’s 1 000-seat call centre in Johannesburg yelled his name and erupted into song when he visited with two Bloomberg journalists in January 2013.

“He told a compelling story with conviction and that obviously would have swayed people into trusting his judgment,” said Royce Long, a fund manager at Obsidian Capital, which sold its shares in Abil after it published a profit warning in January last year.

As the company prospered, so did Kirkinis. In 2012, he was ranked the 37th wealthiest person in South Africa in the annual Sunday Times Rich List, with his holding valued at an estimated R660m. That same year, Abil paid an annual dividend of R1.95 a share.

By November, when the company held a rights offer, the stake’s value had shrunk to R274.1m. Following the rescue, shareholders will probably be wiped out.

Until recently, Abil didn’t take deposits, relying instead on stock and bond markets to fund its lending and Ellerine’s ensuing losses. The company increased net revenue every year for the past decade.

When the central bank stepped in, it split off Abil’s bad loans from the “good bank”, buying the book of soured debt for R7 billion with plans to recoup the money by collecting on the loans. The good bank was assigned a curator and seven financial institutions were appointed to underwrite a R10bn capital increase. Abil’s shares and its bonds were suspended the next day.

Holders of ordinary shares, preference shares and subordinated debt may lose everything, while senior debtholders stand to lose 10 cents on the rand.

Authorities are still sorting through the mess. Hlengani Mathebula, a Reserve Bank spokesman, said the regulator was determining what further steps it might take.

The National Credit Regulator would work with the curator to ensure the bank served clients fairly, chief executive Nomsa Motshegare said in a statement on August 13.

The National Prosecutions Authority and the Hawks didn’t respond to e-mails seeking comment. – Bloomberg

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