Sasfin has flagged moral corruption in the private sector as a growing concern after a significant fraud-related loss weighed on its financial results.
The banking group reported a 37.69% decline in headline earnings per share to 381.21 cents as its credit loss ratio deteriorated to 197 basis points from 124 basis points and impairments jumped just over 77% to R144.18 million in the year to June 30, 2018.
The single credit loss, incurred in the first half of Sasfin’s financial year, relates to a client who “went rogue” and misstated the financials against which it borrowed. Sasfin was exposed to the client through its banking unit and Hong Kong subsidiary, which facilitates trade finance, and took a loss of between R30 million and R40 million, as previously reported by Moneyweb. It has instituted court proceedings against the client in a bid to recover some monies, which have been fully written off and would come as a windfall if successful, according to chief executive Michael Sassoon.
He says the biggest single client credit losses relate to fraud rather than Sasfin’s exposure to strained sectors of an ailing South African economy. Apart from the large single credit loss, Sassoon told Moneyweb of a recent audit in which it found that a client attempted to pass off empty boxes as stock against which it tried to borrow. Such audits form part of the group’s fraud detection strategy, in which it is investing heavily.
“Unfortunately, we live in a country which has become morally corrupt and that has flowed into the private sector. You see businesses that portray their assets as something which they really aren’t, and we need to go check that.
“In cases where a client that has gone under pressure in a difficult environment but acted in good faith, typically, we’ve been okay because we’ve been well secured, and we’ve worked with the client. But when the client starts acting in bad faith or maybe we didn’t pick up some fraud from the client, that’s where we’ve taken the most pain.”
Sasfin, in addition to bolstering its fraud detection and assessment capabilities, is instituting more rigorous credit risk review and extension processes.
Magda Oosthuysen, Sasfin’s recently appointed head of credit, says she is beefing up her team with experienced professionals so that its members are able to better understand the business models and management teams of small businesses, which often lack capital buffers and the ability to access capital. The aim is to put Sasfin in a position to better assess a group of clients that “other banks probably don’t understand and won’t bank”, but which can be banked.
She adds that credit decisions will be more collective in nature and will make use of a newly-developed risk rating model, where a risk assessment is allocated to each client. “We want to make sure that we properly understand the risk associated with a client,” she says. “There is a very big difference in the risk associated with, say, a listed entity with a meaningful net asset value and access to capital markets versus a smaller entrepreneurial business [and] we can’t do exactly the same risk assessment on both. That is why we are going to run through the model for 12 months, test and test and back-test it so that at the end of 12 months we hopefully have a risk rating model that we can use for portfolio management, for pricing and a range of other things.”
During the period under review, the group also took a more conservative approach on deferred tax assets arising from losses, which – coupled with a change in its deferred tax liability estimates owing to changes in tax legislation – saw its effective tax rate jump to 35.04% from 20.12%. “A business-as-usual tax rate would have been circa 23%,” it said.
It delivered a return on shareholders’ equity of 8%, down from 13.52%. Sassoon says the absence of once-offs such as the fraud loss and change in tax rate could see returns hit the low teens in the coming year.