Last week, African Bank Investments Limited (Abil) warned that it expects a whopping 90% fall in earnings for the year. The share price plunged in response, and fresh concerns surfaced over the sustainability of South Africa’s unsecured lending market. But Afrifocus expert Johann Scholtz says that Abil’s woes don’t necessarily mean that the unsecured lending market is broken. Scholtz points out that the write-down of Abil’s non-performing loans book is largely the result of changes to Abil’s write-downs policy. In other words, these aren’t new bad loans, just bad loans that used to be counted as good ones and therefore, the change doesn’t mean that the unsecured lending market is deteriorating. However, the write-downs at Abil are only one among many signs of unsecured lending market instability, and it’s likely that investors will continue to abandon the space, despite its profitability. – FD
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ALEC HOGG: African Bank shares fell seven and a half percent after the unsecured lender said it expects full year headline earnings per share to be 87 to 90 percent lower. Joining CNBC Africa to share his views on this and the company’s rights offer is Johan Scholtz, Head of Research at Afrifocus. Another shock from Abil, Johan?
JOHAN SCHOLTZ: Yes Alec. We had the previous trading update I think it was in the middle of September, where they indicated that the earnings were going to be down by 60 percent. There were three issues really that were new in this trading update. The first one is the initial impediments that they need to take against their non-performing book, and this amounts to about R600 Million. That really takes us to the 90 percent down level indicated in today’s trading update and they also announced that they will also have to take an additional R1.5 Billion of equity capital that they are going to raise through the rights issue. If you cast your mind back they cut back originally and said that they needed to raise a four Billion by a rights issue underwritten by Goldman Sacs – that has just changed now to five and a half Billion. I can only speculate that it’s a question of their funders indicating to them that they are uncomfortable with the levels of capital currently in African Banks and that the four Billion rights issue was not going to be sufficient to address more funding concerns. And then the last issue that came out of today’s announcement – I don’t think that it came as a surprise to anybody, but the fact that they will have to impair the good \will that they paid for the Ellerines business that they paid to the tune of R4.6 Billion. So if you cast your mind back to when Able originally bought Ellerines – I think the quantum was about Ten Billion that they paid for the whole business, so basically half of that value will be written back now. Obviously the impairment charge – it’s a non cash charge which doesn’t impact on earnings per share either
ALEC HOGG: Ja, but its still 4.5 Billion rand that they shouldn’t have spent in the first place. There was a lot of unhappiness at the time that they did the deal with Ellerines and as I recall Johan – I’m sure you do as well – that management said “we know what we’re doing, we will turn this to account” my goodness that was a disaster. The real issue here is that you have a R12.5 Billion-market cap business. That’s all that it’s worth now. They are going to go out there and raise almost half of that again in fresh capital. Why would Goldman Sachs be underwriting this – unless it’s going to make a lot of fees?
JOHAN SCHOLTZ: Exactly Alec, and also that we don’t know the issue price yet, what discount is going to be applied yet and I can only imagine that Goldman Sachs is pushing for a very steep discount to the current share price which will obviously dilute the existing shareholders further.
ALEC HOGG: So why would anybody buy Abil shares today given that there’s this huge rights issue around the corner?
JOHAN SCHOLTZ: That’s been puzzling me Alec. The fact that after the previous trading update that was after the bullish trading update, we really saw the price increasing from about R15 to about R18 before today’s announcement, so its very puzzling to me to see that increase in the share price given the fact that we don’t even know what the end dilution is going to be coming from the rights issue.
ALEC HOGG: That’s puzzling you, what’s puzzling us here is – why is the Capitec share price unmoved in fact even stronger on a day that more skeletons are coming out of the unsecured market?
JOHAN SCHOLTZ: I think we need to be cautious, to draw a straight line to Capitec in today’s announcement, it’s really quite technical the provisions they need to take against existing non-performing loans, in actual fact they indicated the trends in non performing loans are starting to improve, so I think its more a question of possibly incorrect accounting policies that were followed by Able in the past and underproviding against their NPL’s as opposed to seeing any trends in new NPL formation. One just need’s to bear in mind that Capitec has got a completely different provisioning model from African Bank.
GUGULETHU MFUPHI: Johan, with the likes of Transaction Capital moving out of the unsecured lending space, do you expect any other’s to follow suit?
JOHAN SCHOLTZ: We’ve seen the big Four already starting to tighten on their credit extension in the unsecured space, and I think African Bank has also started to pull back. I don’t think that people are necessarily going to exit the space completely – it still remains a very lucrative space if you look at the kind of interest rates that people are earning. My concern is –On various occasions, the South African reserve bank and others have indicated we are not seeing a systemic issue. I’ll buy that argument as far as it goes on the broader space, but there is systemic risk in the sense that if you start seeing people pulling back from credit extension, you are putting further pressure on consumers that are already under also of pressure.
ALEC HOGG: Well, that was Johan Schultz – Head of research at Afrifocus.
