Investors fled African Bank Investments Limited (Abil) again yesterday, sending its shares tumbling to an almost 20-year low as the local lender looked unable to plug an R8 billion hole in its finances from a tide of unsecured loans that have gone bad.
The bank shocked the market on Wednesday when it said it needed to raise R8.5bn in new capital after warning of a massive annual loss, following which its chief executive quit.
That fundraising looks almost impossible given that the bank needs several times more capital than it is now worth.
After falling 60 percent to R2.70 on Wednesday, Abil hit a low of 28c yesterday, close to its 1995 level of 20c. It closed at 50c, valuing it at R545 million – a steep fall for a company worth more than R20bn at its height.
“Equity investors have thrown in the towel. It’s literally uninvestable,” one Johannesburg-based trader, who declined to be identified, said.
“The South African consumer credit bubble has burst.”
Abil’s troubles stem from a business model based solely on unsecured lending – high-margin loans not backed by collateral – which it offered widely to its core market of low-income borrowers.
But those clients have been hit by rising unemployment, food and fuel costs, as well as slow economic growth – and Abil has been hammered by their bad debts.
Several other commercial banks looked to unsecured lending to boost profits in recent years, but took on less risky loans and were nimbler than Abil in getting out of those positions when economic conditions took a turn for the worse.
Finance Minister Nhlanhla Nene said yesterday that there was no sign of broader contagion to the robust banking sector and added that he was “keeping an eye” on Abil.
“There has been no indication that other South African banks have been affected negatively by Abil’s trading update, which is our major concern,” Nene told reporters.
Abil has traditionally funded itself via the bond market, meaning it has relatively few depositors.
As a result there was no sign of panic at a branch in the working class Johannesburg neighbourhood of Randburg at midday yesterday. There was even a small trickle of customers coming into the branch to fill out new loan applications.
“Everything is fine, it’s business as usual,” said the manager, who did not give her name.
Posters in the windows of the branch advertised cellphone deals with new loans.
“Credit that works for you – apply today,” one advertisement read.
Godfrey Mashele, a 38-year-old employee of a cellphone services firm, said he intended to keep paying off his R3 000 credit card debt regardless of the news.
“I’ve heard they’ve lost money with their customers not paying. But I’ll be carrying on paying down my debt; it’s on a monthly debit order,” he said.
Leon Kirkinis, who resigned as Abil’s chief executive on Wednesday, built African Bank into one of the country’s best known lenders by targeting low-income borrowers with expensive credit – a previously untapped market of people who had been traditionally ignored by banks during apartheid.
Abil said on Wednesday that it would cleave off its bad loans in an attempt to create a ring-fenced “good bank”.
Its bad loans comprise almost a third of its R60.1bn book, while it had R47bn worth of bonds and long-term debt on its balance sheet as at the end of March.
The JSE said it saw no reason to halt trading of Abil’s shares “at this moment”. – Reuters