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African Bank: The good, the bad, and the worrying

Despite some promising indicators, its lending book has clearly deteriorated.
The bank’s credit loss ratio has rocketed, painting a clear picture of a consumer under significant stress. Image: Supplied

That African Bank would swing to a loss for the year ended September 30, 2020, is not surprising.

At the half-year mark it reported a R111 million net loss after tax after a R550 million Covid-19 impairment in the bank (as well as a R303 million provision in its insurance business).

Analysts will surely be scrutinising the unlisted bank’s figures as it continues its recovery, for any signs of distress that could be lurking in the books of its larger, listed rivals.

The good news is that the bank was profitable in the second half of the financial year as most of that provision was released (only R111 million remains).

But as the effect of the lockdown and the pandemic rolls on, the bank cautions it is “no longer possible to isolate the impact … on the full-year results”.

The good

The major highlight in these numbers is that it had a total of R6 billion in retail deposits at the end of September. That’s more than double the amount from a year prior, and around 60% higher than the R3.8 billion at the end of March. It hasn’t provided a breakdown but it is difficult to imagine that this has changed materially since its disclosure at the interim stage where 85% comprised fixed deposits.

Its 50 000 savings customers (from 26 000 a year ago) have an average balance of R105 000, with a 45% reinvestment rate as deposits mature.

Customers have clearly been attracted to the bank’s interest rates, which are among the highest in the market.

This growth has seen retail funding jump from 12% in September 2019 to 35% of total funding (far higher than its 2021 target of 25%). Despite the higher interest rates it pays customers, this is cheaper than many other sources. The bank says its cost of funding was 8.57% (nominal) as at September 30.

The bank’s focus on cost discipline is a positive sign. Retrenchments are never easy, but African Bank began a Section 189A process in October, which outgoing CEO Basani Maluleke (her resignation was announced on January 25) – notes will “likely result in the reduction of approximately 300 positions” across its 3 700 employees.

Read:

The bad

New loans are down 37% year on year, with most of the contraction coming in the second six months as a result of “tightened credit underwriting” in August. As at March, it had disbursed R4.2 billion in new loans, versus R6.8 billion for the full year. This has not just impacted interest income (broadly flat versus 2019) – the bank says this has resulted in a 3.9-percentage point drag on its non-performing loan ratio.

The bank will all but certainly miss its non-interest income target of R500 million by 2021, given that the figure for 2020 is R387 million (excluding collection fees charged to Residual Debt Services for the legacy book). Contrast this to the net interest income for the year of R1.255 billion. However, the bank has seen fit to publish a target for 2023 of R750 million from non-interest income. Key to this will be the uptake of its transactional account.

This account (MyWorld), launched in 2019, continues to “steadily” attract customers with growth being affected by the pandemic. The bank has disclosed for the first time that 26% of the 368 000 accounts opened to date are inactive and unfunded. Transaction metrics suggest that many of the sign ups in the six months between March and September are active, transacting clients. Sustaining this will be critical, especially as it grows this segment to critical mass. Its ‘digital’ channel, including transactional banking, made a R454 million operating loss in the year.

The worrying

Maluleke’s surprise resignation on Monday is not entirely worrying.

The bank is in a sound position (from a capital point of view), and it is likely she has been headhunted for a far larger role in the market than the painstaking process of diversifying African Bank into something more than just a lending business (which used to have a furniture business attached). It is still not great news though.

However, Business Live reports that she resigned due to a breakdown in the relationship between herself and chair Thabo Dloti. Warning bells should be screeching. One wonders what shareholders (especially the Reserve Bank) will make of this.

African Bank contends that 86% of its loan disbursements are currently to low-risk customers (in the “best five of 22 risk bands”). The book is still deteriorating, however.

The average size of loans disbursed in the second half is R35 187, a noticeable increase on business written in the six months before lockdown. Close to 60% of loans sold were over R100 000. In the second six months the average term of disbursements was 57 months, with more than half of new loans sold for over 72 months.

This paints a clear picture of a consumer under significant stress.

Source: African Bank 2020 results presentation

There is no real change in the percentage of disbursements used to settle existing African Bank debt (around 11% or 12%). But this means that a tenth of its loan book is constantly being rolled over.

The bank’s credit loss ratio rocketed from 7.5% in September 2019 to 11.7% in September 2020.

It says this resulted “initially from the weakening macroeconomic environment and [was] exacerbated by the adverse impacts of the Covid-19 pandemic”.

Non-preforming loans are up from 35.2% of the book to 41%. That means R41 out of every R100 lent out has resulted in Stage 3 loans, or those which have “defaulted but have not yet reached write-off”.

As at September 30, these total R11.6 billion and “remain on balance sheet” as they “have all had receipts in the last eight months before the reporting date”.

September 30, 2019 (restated) September 30, 2020 % of book as at September 30, 2020
Stage 1 R10.075 billion R8.532 billion 30%
Stage 2 R9.205 billion R8.187 billion 29%
Stage 3 R10.454 billion R11.609 billion 41%
Total book R29.734 billion R28.328 billion 100%
Written-off R12.720 billion R15.185 billion

African Bank’s credit impairment charge is R3.4 billion for the year, which is R1.2 billion (or 58%) higher than in 2019. On net revenue of around R6 billion, this is a material increase (and the reason for the full-year loss).

Whether the situation deteriorates further from this point is anyone’s guess ….

COMMENTS   15

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Dr Phil ‘The best predictor of future behaviour is past behaviour’

Resigned or pushed?

Dloti (chair with a track record of toxicity) has lurched from financial house to financial house and it is worrying when a CEO does an immediate resignation just before results leaving the CFO to do press releases.

You might have a valid point

When they start caring about their staff they will do better. Unfortunately S.A. has a culture of everything is O K when it clearly IS NOT! What they need is people i the right positions to nurture this back to health.

VBS version 2

Well spotted, but light years definitely not the same.

Apparently VBS did not even have an IT system, apparently it was all run on e x c el spreadsheet. (Speaking under correction)

Plus I was always suspicious of Mr. Zuma endorsing VBS so publicly.

Surprised are you? You can add capitec to your bag of worries.. Perhaps present the same analysis of capitec. Or are you waiting for another collapse before claiming “we told you so”

Retrenchments – recession – depression ?

I think we will see unprecedented retrenchments by ”all and sundry” this year – it has always been the first reaction by banks to save costs – the so-called reduction of costs or spending in response to economic difficulty.

The big bank’s actions will hit the headlines first but methinks the smaller banks like Investec, Capitec has already started with this process/programs.

I think it’s only a matter of time before the small banks like Investec start closing their offshore branches in London and Sydney – they offshore ”pie” by now is only a fraction of what it used to be. The ”weak” rand was always blamed in the past for bad offshore earnings, but this time methinks the numbers will be catastrophic!
Non-performing loans in most banks and methinks, especially in banks like Capitec, must be rocketing on a daily basis…
One of these days office space in Sandton will be offered at a massive discount, and it might just start in places like Grayston Drive (no 90 to 100) and Alice Lane, first?

Jan S Marais, the flamboyant founder of Trust Bank said many moons ago – ”Banking will never be the same again”, and that wasn’t done in jest!

Investec doesn’t operate like a retail bank .

They don’t have “branches” (I’m not talking the odd branch that is actually head office)

Your comment makes no sense.

Investment banks have been doing reasonably well. The markets have been full of opportunity.

Where they will feel the pinch:
– The provision of facilities to smaller companies
– The property portion where tenants aren’t paying full rental.

A: Where did I say that they ”operate like a retail bank’?

According to Investec, this is their core business –

”Today Investec employs more than 8,700 people worldwide and is publicly traded in London and Johannesburg. Our divisions include Corporate & Institutional Banking, Private Banking, Wealth & Investment and Asset Management” –

In March 2020, the Asset Management business was demerged and separately listed as Ninety One. Their statement pertaining to the cost is all over the internet.

They don’t have “branches” (I’m not talking the odd branch that is actually head office)

Your comment makes no sense.

A: Maybe it doesn’t makes sense to you (it’s also just my view!) but, you should have a look at all those products that they mentioned – the risk reward and failure levels is relevant for them as well.
Go back to the financial market crisis in 2007 – have a look at their commercial property book – between them and Absa, they were long and wrong, much more than any other local bank.

Investment banks have been doing reasonably well. The markets have been full of opportunity.

Most International Investment Banks ”made like Donald and Duck” from this market , a long time ago – the South African M&A book ”got sold out”. Corporate failures have been hitting the headlines lately!

Where they will feel the pinch:
– The provision of facilities to smaller companies
– The property portion where tenants aren’t paying full rental.
A: This market is very small – talk goes around very fast – I for one, won’t be too surprised to see Milton and Friends back in sunny SA very soon. Maybe he could find a space on one of the two floors that I think that are being vacated at Head Office, right now…this is only my view

Correct me here please. The majority of this thing is owned by government (aka the taxpayer), minority by SA’s big banks (aka depositors and shareholders; suckers all). So a kind of Land Bank / VBS with a teaspoon of sugar, teed up to be plundered. Pain incoming.

Are they not listing on the JSE some time soon?
Good investment for you Paul.

Absolutely. I think I will sell my Steinhoff, SASOL, PPC and Tongaat that I have held for years and have surely appreciated over this period (“shocked” if they haven’t) and with my profits I shall buy African Bank (again?). Fool me once.

Why the speculation about Capitec. It’s share price is at the same level year on year whereas the big 5 banks are down between 16% and 38%.

I have some SBK shares and they are going nowhere, no dividends either.

Used to be a prized share to have in your portfolio.

One analyst told me once they are top heavy, go for sme(s).

End of comments.

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