Investors dump Abil, fearing losses too big to fix

By David Dolan and Ed Cropley

JOHANNESBURG (Reuters) – Investors fled African Bank Investments on Thursday, sending its shares tumbling to a near-20 year low as the South African lender looked unable to plug a $790 million hole in its finances from a tide of unsecured loans that have gone bad.

The bank, widely known as Abil, shocked the market on Wednesday when it said it needed to raise 8.5 billion rand ($790 million) in new capital after warning of a massive annual loss, following which its chief executive quit.

That fundraising now looks nearly impossible given that the banks needs several times more capital that it is currently worth. Abil stock, which hit its 1995 level of 20 cents earlier in the session, stood at 85 South African cents by 1205 GMT, valuing it at $119 million – a precipitous fall for a company worth more than $2 billion at its height.

"Equity investors have thrown in the towel. It's literally uninvestable," said one Johannesburg-based trader, who declined to be identified. "The South African consumer credit bubble has burst."

Abil's troubles stem from a business model based solely on unsecured lending – high-margin loans not backed by collateral – which it offered widely to its core market of low-income borrowers. But those clients have been hit by rising unemployment, food and fuel costs, as well as slow growth in Africa's most developed economy – and Abil has been slammed by their bad debts.

Several other commercial banks looked to unsecured lending to boost profits in recent years, but took on less risky loans and were nimbler than Abil in getting out of those positions when economic conditions took a turn for the worse.

South Africa's finance minister, Nhlanhla Nene, said on Thursday there was no sign of broader contagion to South Africa's robust banking sector and added he was "keeping an eye" on Abil.

"There has been no indication that other South African banks have been affected negatively by Abil's trading update, which is our major concern," Nene told reporters.

"BUSINESS AS USUAL"

Abil has traditionally funded itself via the bond market, meaning it has relatively few depositors.

As a result there was no sign of panic at a branch in the working class Johannesburg neighbourhood of Randburg at midday on Thursday. There was even a small trickle of customers coming into the branch to fill out new loan applications.

"Everything is fine, it's business as usual," said the manager, who declined to give her name.

Posters in the windows of the branch advertised mobile phone deals with new loans. "Credit that works for you – apply today," one read.

Godfrey Mashele, a 38-year-old employee of a mobile services firm, said he intended to keep paying off his 3,000 rand credit card debt regardless of the news.

"I've heard they've lost money with their customers not paying. But I'll be carrying on paying down my debt, it's on a monthly debit order," he said.

UNSUSTAINABLE MODEL

Leon Kirkinis, who resigned as Abil's chief executive on Wednesday, built it into one of South Africa's best known lenders by targeting low-income borrowers with expensive credit – a previously untapped market of people who had been traditionally ignored by banks during the apartheid era that ended in 1994.

But critics said those lending practices were unsustainable.

"The question now is how much the loan book is really worth and if that is enough collateral for equity holders after the bond obligations have been fulfilled." said Nic Norman-Smith, chief investment officer at Lentus Asset Management in Johannesburg.

"Based on the current equity valuation, the market is saying that there will be very little – if anything – left."

Abil said on Wednesday it would cleave off its bad loans in an attempt to create a ring-fenced "good bank".

Its bad loans comprise nearly a third of its 60.1 billion rand book, while it had 47 billion rand worth of bonds and long-term debt on its balance sheet as of the end of March.

The Johannesburg Stock Exchange said it saw no reason to halt trading of Abil's shares "at this moment".

($1 = 10.7310 South African Rand)