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Sasfin reviews credit policies after fraud-related loss

Single credit loss event causes 41% decline in headline earnings.

Sasfin is reviewing its credit policies and processes after suffering a single credit loss in excess of R30 million during the six months ended December 31 2017.

The banking group took a loss of between R30 million and R40 million in trade finance, channelled through its Hong Kong subsidiary, due to the dodgy dealings of a client importing goods from around the world. “The client went rogue. He wasn’t honest, his balance sheets were not honest, there were assets in there that weren’t honest, he was stripping assets out of the business illegally… It was one of these situations where this client, who appeared to be an honest guy, turned out to be very dishonest and we’ve had to take this loss,” explained former chief executive Roland Sassoon.

The business has since gone into liquidation and Sasfin, still in the process of conducting a “post mortem”, aims to recover some of the losses.

New chief executive Michael Sassoon said a full review, with a view to enhance credit processes and policies is underway. “We lend money to small- to medium-sized businesses, who are in a difficult space in this economy and have been for some time. The way you manage, assess, engage and control them is important and so we’re reviewing that. We’re not particularly concerned because of our long-term track record. But when you have one big credit event like this you look yourself in the mirror and ask, ‘could we have done better?’ And we could have done better.”

The single event effectively pushed the group’s credit loss ratio up by 79 basis points to 200 basis points and saw impairment charges on loans and advances jump 74.81% to R68 million. If adjusted for the event, the group’s credit loss ratio would have been around 70 basis points to 80 basis points, acting CFO Francois Otto said at the results presentation.

Sasfin’s headline earnings fell by 41.39% to R50.49 million while headline earnings per share fell by a similar margin to 157.95 cents on the back of the credit loss and a higher effective tax rate. The group’s effective tax rate increased from 16.43% to 46.38% due to the reversal of a deferred tax asset, a change in estimate related to a deferred tax liability and a lower portion of income earned in Hong Kong, a lower tax jurisdiction. “Earnings growth would have otherwise been positive as total assets grew by 13.78% to R13.15 billion on the back of growth in gross loans and advances of 7.09% and funding by 12.68%,” it said in a statement.

Income, at group level, fell by 2.48% to R578.04 million. Effective cost management initiatives led to a 7.53% decrease in operating costs to R407.68 million and an improvement in its cost-to-income ratio to 70.52% from 72.05%.    

Return on equity fell to 6.86% from 12.23%. Sasfin lowered its interim dividend by 41.39% to 46.89 cents per share, in line with its dividend policy of paying out 30% of interim headline earnings.

Historic trends show that the group reports stronger growth in headline earnings in the second half of its financial year. Adrian Cloete, a portfolio manager at PSG Wealth, said the group is likely to report better earnings in the second half but that full-year earnings ate still likely to be below that of the prior year due to the impact of once off events in the first half.

Sasfin’s share price closed flat at R46.88 per share following the release of the results, which were largely in line with its recent trading update. “The current share price is pricing in current earnings. Sasfin needs to demonstrate a recovery in earnings and the share price will follow earnings up,” Cloete said.

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Not good enough. No public company should ever be at the mercy of one client no matter how big a client that is. In fact, the bigger the client, the bigger the risk.
It looks like this usiness needs to plan a new strategy…perhaps the Ex Sanlam boys should consider it a buy or merger for ARC – the shareholders might be in a receptive mood at this stage!

Agree with Mack.Cannot believe that it was rational business decision to put so much risk in one client. Surely Sasfin inspected the securities like houses or contracts or whatever before the loan was granted. ??

These things do happen in the world of finance.Sasfin are reknowned to be a particularly strict bank when it comes to credit,and my take of this event ,is that senior management probably got to close to the client and ignored the warning signs.Many a good bank have burnt their fingers in this manner.I recall some of the banks directors falling over their feet to see that ex lawn mowing owner business turned fund manager J Arthur Brown

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