AFRICAN Bank Investments Limited (Abil) is no stranger to dire straits – after peaking at R40.49 on April fool’s day in 2012, its share price tumbled erratically to reach R6.88 on August 4. That is when the bottom really fell out.
Abil announced that it needed R8.5 billion to stay in business – mostly due to it failing to make a success of its R9.2bn purchase of Ellerines in 2008. The founding chief executive stepped down, and the shares lost almost all their remaining value, sliding from R6.88 to 50c in just two days.
What caused the problems?
Aside from Abil doing a poor job of keeping Ellerines profitable, the bank has been plagued by a poor business model and bad financial management. Alongside Capitec, the bank is what is known as an unsecured lender – meaning that the loans that it issues to its customers are not backed by assets owned by the borrower. When the borrower fails to pay, the bank has no way of recouping the value lost.
This type of lending is necessary in the South African context as many low-income customers do not own any significant assets and would otherwise not have any access to finance. It is however, far riskier than the traditional lending model and this is the second mistake Abil made: it did not sufficiently diversify its income streams.
Unlike Capitec, Abil does not make use of retail deposits (direct deposits from individual consumers), cutting out an important source of funding available to most leading banks. Capitec’s retail deposits were worth R23.6bn in February.
What happens now?
In order to stop Abil writing itself off completely and leaving its investors in the lurch, the SA Reserve Bank agreed to bail out the bank. Abil will be split into two separate entities – the “bad” part of the bank which includes all soured loans that Abil customers are not able to pay back, and the “good” bank consisting of the healthy, manageable assets. These financial assets will be transferred to the new bank at 90 percent of their value, enforcing a 10 percent loss on investors.
The Reserve Bank will buy the R17bn of soured loans at a cost of R7bn.
The Reserve Bank, which believes Abil is no longer able to manage its own operations, has put the bank under the curatorship of Tom Winterboer of PwC to oversee the transition to becoming a new organisation and possibly relisting on the JSE.
Questions have been raised as to whether the Reserve Bank is justified in bailing out Abil. Those who stand to lose are not vulnerable individuals but large pension funds, banks, and other wholesale investors. Coronation Fund Managers, for example, manages about R570bn in assets yet its exposure to Abil is about R5bn.
Were it and others to lose the entire value of their investments in Abil it would not make a significant impact on the health of the country’s financial industry.
There is however, a bigger context. For the Reserve Bank, R7bn is not a huge dent yet its swift and efficient action on retaining the security of investments into South Africa’s financial assets sends a strong signal to local and foreign investors. It is not as drastic as saying all investments will be protected and mismanagement tolerated, but it does instil confidence in the stability of the financial markets. Foreign financial inflows are critical to the economy to finance the current account deficit. A few billion rand for a bailout is a small price to pay to reduce the risk of capital flight.