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Abil attempts to save the “good” bank

Get rid of Ellerines fast.

JOHANNESBURG – The board of African Bank Investments Limited (Abil) is determined to secure its banking operations and insulate the bank from its loss-making furniture retailer, Ellerine Holdings, chief financial officer (CFO) Nithia Nalliah announced on Wednesday.

“We are going to take this business back to what it used to do at a very profitable return to shareholders. We remain convinced there’s a significant market for unsecured lending in South Africa…Abil has a proven track record in that regard, generating a return on equity (ROE) of 50% prior to its Ellerines acquisition,” Nalliah said on a late conference call.

He was speaking hours after the unsecured lender issued an operational update for the third quarter ended June 30, in which it predicted a group headline loss of R6.4 billion for the full year to September 30 (2013: +R365 million) and announced it would need to raise capital of at least R8.5 billion.

Nalliah admitted that Abil had not been able to “get Ellerines right”. Negotiations to sell it are ongoing and will deal Abil a capital blow of between R1.5 billion and R2.5 billion, as it essentially pays to have the asset it paid more than R9 billion for in 2008 taken off its hands.

However, Nalliah said the core part of Abil’s lending business was already producing the required returns for the risk being assumed and “various options” were being explored to ring-fence the “good” advances book from the impact of the “bad” book.

Independent experts called in

Head of research at brokerage Imara SP Reid, Stephen Meintjies said Abil’s major problem was that its lending criteria had not been stringent enough. Abil seems to have finally made the same realisation and is changing the way it classifies non-performing loans (NPL), which will require a concomitant R3 billion increase in its provisioning for them.

Previously, Abil would only define a loan as non-performing when instalments were more than three months in arrears, known as Contract Delinquency (CD) 4. The lender now plans to classify a loan as non-performing when it is only one instalment behind (CD1).

Nalliah admitted that Abil should have taken this decision sooner, but said “CD4 was good for many years” and saw the bank in a strong position. “We are now granting loans to people who can afford them,” he said. “There are a significant number of risks we’ve stopped granting credit to,” he said, adding loan sizes had decreased and maximum loan terms reduced from 84 months to 60 months, while new business was more profitable.

As NPL formation slowed, Abil was revisiting its underwriting, collections and provisioning methodologies to bring them more in line with the rest of the industry. Independent advisors who had helped restructure distressed European banks after the financial crisis were doing this, said Nalliah.

Tracy Brodziak at Old Mutual Equities believes that much of Abil’s future will depend on this independent assessment.

R8.5bn equity raise

“We have not said that it is a rights issue, so we will come to the market once we decide how we do that,” Nalliah said of Abil’s R8.5 billion capital raise, the details of which will be forthcoming at month end. He said the board had decided to be cautious and raise slightly more capital than was required, lest it had to come to the market again.

Chief investment officer at Anchor Capital, Sean Ashton said the probability of Abil remaining independent was drastically lower, given the trading update. “There is every possibility it gets swallowed by the bigger banks,” he said.

“We’ve been short for a long time and negative for a long time,” commented Jean Pierre Verster of 36ONE Asset Management, whose investors have no doubt benefited from Abil’s mispriced securities.

Meintjies believes Abil could yet turn a corner. “When you’ve raised all this equity and you’ve shortened the loan terms, are generating positive cash flow and changing provisioning… all of those things should keep the funders on board,” he said.

Meanwhile, the Sarb has said it would continue to monitor Abil’s situation closely, amidst speculation that a failure on the part of the lender would cause systemic risk to South Africa’s financial system.

Magnus Heystek of Brenthurst Wealth Management said Abil’s bankruptcy could impact South Africa’s sovereign credit rating, if ratings agencies believed it was a reflection of poor consumer health and the unsecured lending rot.

Speaking on the conference call, Abil chairman Mutle Mogase said CEO Leon Kirkinis had tendered his resignation a few times in the past, but the board believed he would be the person to turn the bank around. “Given the circumstances, we have now decided to accept his offer to leave the bank,” Mogase said. “A settlement has not been discussed.”

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