African Bank Investments better known as Abil, sent shockwaves through the markets today with its announcement that it was expecting headline losses of R6.4bn, and that CEO of 23 years, Leon Kirkinis would be stepping down immediately. Abil's share price dipped to prices it hadn't seen since 1997, and closed 60.76% down on the day at R2.70. It is understandable that news with such far-reaching consequences would have the markets in a panic, and it is because of this that Dave Woollam has called for a calm sense of rationality to be applied to the situation. Dave, the ex-CFO of Abil, joined Alec Hogg and Patrice Rassou from Sanlam on CNBC Africa's Power Lunch to give a detailed analysis of what is currently going on at Abil and what the outlook is. – LF.ALEC HOGG: Nearly $600m and its announced that Leon Kirkinis, the Group Chief Executive Officer for the last 23 years will be stepping down with immediate effect. Joining us on the line for more on Abil this afternoon, is Dave Woollam, the former Chief Financial Officer of Abil and at Sanlam, the Head of Equities there – Patrice Rassou. Dave, maybe to pick up with you, given that you have a close involvement with this company – 23 years is a long time. Some people say you can overstay your welcome. How long ago was it that you and Leon Kirkinis saw the path ahead for Abil differently, and you decided to leave?.DAVE WOOLLAM: Alec, thank you. I wouldn't like to spend too much time dwelling on who was calling different strategies etcetera. It's certainly an extremely sad day today. What has happened now has almost gone beyond a question of loss and operational issues. It's now one of confidence. I'm certainly going to be calling for people to try to remain calm because there's an enormous consequence to this confidence getting out of control. The issue that I've been calling for, for quite some time is this is really a question of an over-situated market and until the industry actually recognises that fact – that the vast majority of people are simply over-indebted and that this requires almost a national intervention – we're not going to resolve this by tweaking around with provisions or underwriting models..It requires a fundamental new thinking and almost a fresh start. It requires a clean out, a fresh start, and almost, a separation of the bad book into a separate entity/environment, and then a deflating of consumer debt to levels that are sustainable..ALEC HOGG: I get that Dave, but before we go into the solutions, I guess many people are feeling very sore this morning that their Abil shares have dropped by two-thirds again from the already depressed level. One has to ask 'what were the management information systems like when you were there'. You obviously don't know what they are like today. How can they have been so bad that one story was given to investors to put in new money when clearly, that was completely fiction?.DAVE WOOLLAM: Alec, I think if one looks through the analysis or the data here, one has to separate the operational issues and failures from those that I would call more structural, confidence-related issues. The bolstering of provisions, which have been substantially, the main reason for these losses is really, for me, a question of bolstering and strengthening the balance sheet to keep funders in order to continue to fund the balance sheet. Remember, they fund the vast majority of the balance sheet for a fixed return. Almost 80 percent of the balance sheet is funded by fixed income or debt funders, so a lot of this is really structural. Capital preservation and balance sheet strengthening…clearly, the business was in severe trouble and the underwriting decisions that were made in the last couple of years were poor. I think management just didn't see the extent of that unfolding..ALEC HOGG: Patrice, from your perspective, you're not in Coronation's league, which owns 20 percent of Abil and the PIC (Public Investment Commission) – the Public Service Retirement Fund, which owns 15 percent. Were you sucked in to the latest rounds of rights issues?.DAVE WOOLLAM: Alec, its one stop, which was probably the one big bone of contention in our investment team meetings. It depends. In the retail funds around top choice, I have zero general equity – a minute position. In the more aggressive funds, you'll find that some of the portfolio managers have built a slightly bigger position. The reality is that as value investors, you do have to kiss a few frogs. It's often called 'cigarette butting investing'. You really try to look for bargains and unfortunately, this one looks as though it was a bit of a dog. We were very aware, with the rights issue, that the company had problems. It was very difficult to know the extent of the problems. It's a bit like when someone is stung… You often see it in the cowboy and Indian movies: someone is stung and you think that if you just pour some alcohol on the wound, things will get better..In this case, the patient had to be amputated and it was quite hard to tell in advance. We were in there but I would say in a more moderate fashion – quite a cautious fashion, and we bought at lower levels, which doesn't look that clever right now. Rear-view investing, Alec, is always easy, as Warren Buffett says..ALEC HOGG: Indeed, it is, but it's also the type of information that you were given. Are you comfortable that Leon Kirkinis, who's now left the company, was telling you the truth?.DAVE WOOLLAM: The problem is that Leon, as you know him, has always been the guy who sees the glass half-full. Someone like Dave who was at the company, knows that there've been many changes over time and Leon has always seen the positive. He's lived through cycles before and I think the reality is that in the current circumstance, they did very well and there were excesses post the financial crisis, but they were short on the provision side. There were issues in terms of the level of capital, which we thought that the five-billion initial rights issue would have sorted it out, but the current loss that's been announced shows that the situation has deteriorated. Alec, this is not a 'point in time' assessment. Things change over time and it's quite obvious that the consumer has been under continuous pressure in South Africa..Things are not getting better with the economy, with the strikes etcetera, and the book must have deteriorated quite a bit from a year ago and we even see that. Just looking at the numbers yesterday at Nedbank when, despite the fact that they've stopped the rot there, their personal loans book is getting worse..ALEC HOGG: Well, CNBC Africa's Bruce Whitfield spoke to Leon Kirkinis two months ago about his position at Abil. It's a short clip. Let's have a look..BRUCE WHITFIELD: Over the last couple of months, we've seen Coronation take its stake in the business up to 22 percent. Stanlib has about eight percent. More recently, the PCI has disclosed that it's gone to over 15 percent and you have Sanlam Investment Management sitting at over five percent, leaving half the shares in the hands of four or five institutional investors. This suggests a great deal of institutional confidence. I've spoken to them about your personal future. They say you're the right guy for now. Do you see yourself running this business two years from now?.LEON KIRKINIS: I believe so. I obviously serve at the behest of the board. I am committed and passionate about this business. It's in a tough space and I have the energy and commitment to get it into a better place. One must always recognise that you have to be relevant. You can't be arrogant and assume that you're here forever. It's up to the board and the shareholders to decide that. In this period that we've been in, as you say, the board has been unanimously committed and so have the shareholders..ALEC HOGG: So Dave Woollam, the board has supported Leon Kirkinis through this mire. I guess we should be asking members of the board why they did so. If you take your years that you worked together, was he the person who always saw the glass as half-full? As a consequence, might he have been giving the wrong messages to investors who put a lot of new money in?.DAVE WOOLLAM: Alec, if I go back to my early days, I would credit Leon with being an extraordinary visionary and I would certainly classify him as one of those pioneering entrepreneurs. To some extent, to be successful at that, you have to be one of those optimists (the half-full, driven optimists) because you face a lot of adversity when you're an entrepreneur trying to pioneer new markets. That character was therefore, an enormous strength in the early days. When you become a larger organisation, what you need around you is a balance of people with skills and expertise who can moderate and possibly question some of your decisions. One of the things Abil was always a little bit weak at was structure..It ran itself from a 'seat of the pants' type of thinking and I would say that in the last couple of years, there's been less strategic thinking and structure around their decision and more opportunistic or possibly, short-term type of thinking and I think that's come to bear right now. I think it's a sad day. Leon was undoubtedly a great entrepreneur. He had a great vision. I think it's a confidence question now. It really is. Unfortunately, to start again or to start afresh, they've had to make this decision and I think the business is going to be weaker right now without him, but I guess they have to start from somewhere..ALEC HOGG: Dave, if they asked you to go back to Abil, would you?.DAVE WOOLLAM: That's a difficult question because they haven't asked me. I guess I would have to think about it if they did, but I think it would be very unlikely. I have many other interests. What I would say though, is that I have been doing in the last year (and I will continue) is to fight for reform and change in this industry. If I could play any role in helping Abil to achieve that – because they are the biggest. They're 40 percent of the market – what I want to see is an industry, which is built around sustainable footings, then a regulatory environment, and more responsible lending practices. If I could play any role in that, I would my hands up and volunteer. I do however, call for calm and I think there's a systemic risk involved right here – millions of customers are involved…thousands of Employees, billions of Rands worth of investor money and it really does require calm thinking..We need to move away from this panic mode right now and find a solution because there's enormous systemic risk attached to this situation..ALEC HOGG: Indeed, there is. Patrice Rassou and from your perspective, where did Abil start going wrong? Some say it's when they decided to buy Ellerines, a furniture store, which they haven't been able to offload..PATRICE RASSOU: I think you hit the nail on the head here. I think the quality of the loans that came out of the Ellerines branches were significantly worse than the loans that Abil itself (the bank) originated and it's something that Leon and his team always struggled to get their hands around. On top of that, there was really a bit of over exuberance when it came to the unsecured market/personal financial crisis as the banks withdrew secure lending. It was an opportunity for the likes of Abil to access a new customer base, which was more middle market with bigger loans and longer-term. By itself, having bigger and longer-term loans increased the risk in the loans that they were advancing and I don't think that was fully captured and well provided against. It's only now, over the last year, that the difficult consumer environment…that we're starting to see the results of that and this is the problem..Being behind in provisioning means these big losses coming through and not really having a handle on the credit scoring. It's quite obvious – and I agree fully with Dave's wise words – I think there's a need to rethink. There's a need for more level headed banking here and a more conservative outlook on things. I'm sure that it is for the betterment of the country, that African Bank survives because it is a key player in the unsecured market. For many people, there is a need for this type of loans, but I think it's maybe gone a bridge too far in terms of the type of loans it was advancing..ALEC HOGG: Well, the former governor of the South African Reserve Bank, Tito Mboweni, did recommend that the Government buy a bank. Here's an opportunity. That was Dave Woollam, the Chief Financial Officer (in bygone years, at Abil) and Patrice Rassou who's Head of Equities at Sanlam.
