AFRICAN BANK INVESTMENTS LIMITED ("ABIL" or "the Group" or the "Company")
AFRICAN BANK LIMITED ("African Bank")
Quarterly operational update for the third quarter ended 30 June 2014, changes to the board, trading statement and cautionary announcement
ABIL issues quarterly updates in order to provide investors with periodic insights into strategic and operational performance trends. These updates should be viewed as guidance on trading conditions, rather than an indication of profitability. This announcement contains an overview of current trading conditions and operational performance, a regulatory update and changes at a board and executive committee level. In addition, a balance sheet review with potential restructuring initiatives is underway and shareholders are therefore advised to exercise caution until the financial effects of these initiatives are announced.
Operational performance
The Group continues to face tough trading conditions, against a deteriorating economic environment negatively impacted by lowered GDP growth expectations, increasing inflation, and loss of customer income through strike action and increased unemployment at 25.5% for the quarter ended June 2014, as reported by Stats SA. ABIL customers‘ disposable income and their ability to service debt continues to be under pressure, driven by a combination of above inflationary cost of living increases, higher relative debt servicing costs and lower growth in their gross income.
Banking unit
Non-performing loan ("NPL") formation for the quarter ended June 2014 decreased by 7.1% from the quarter ended March 2014. The business written post June 2013 continues to perform better than the business written during 2012 as it more closely tracks that of 2011. This level of improvement was, in the opinion of the Board, not adequate to achieve the targeted returns, particularly against the deteriorating economic outlook.
ABIL has therefore implemented further risk cutbacks in this reporting quarter and will continue to assess the need to implement further risk mitigation steps as necessary. These cutbacks are expected to restore the risk yield relationship as the pre June 2013 business rolls off. This is anticipated to result in a combined credit and insurance claims charge of below 40% of total gross income earned by financial year 2018.
Disbursements for the nine months ended June 2014 declined to R14.1 billion, 20% lower than disbursements of R17,7 billion for the comparable period. The lower sales are a result of risk cutbacks implemented in June 2013 and further cutbacks implemented during May and June 2014, in combination with a lower customer credit appetite.
The average net loan size decreased to R13 331 in this quarter compared with R13 868 for the first half of 2014. Average term for the third quarter decreased to 50 months, relative to 54 months for the first half of 2014, and reduced further to 45 months in June 2014. This decline has been primarily driven by the reduction in the maximum loan term from 84 to 60 months. Further risk cutbacks were made that are expected to contribute to a restoration of the risk/yield relationship to less than 40% over the longer term and a reduction in disbursements of between 17% to 22% at an average loan term of below 45 months in the near term.
Gross advances experienced muted growth of 2% to R60.1 billion over the nine months since September 2013 while performing loans have decreased by 3% to R41.1 billion over the same period. NPLs as a percentage of gross advances remain unchanged from 31.7% at March 2014 to June 2014 as a result of lower sales and increased write-offs as NPL migrations continue to remain at the previously reported elevated levels. The income yield has consequently decreased to 31.7% of average advances for the nine months ended 30 June 2014 from 32.2% for the six months ended 31 March 2014 due to increased suspension of income on NPL migration. Gross incoming yields on new business written in June 2014 have increased by approximately 1.5%.
The overall collections run rate is at approximately R7 billion per quarter at an average of 65% of instalments raised on all performing and NPLs. This collection percentage is down from 69% in the comparative period. Collections continue to be under pressure as reflected in the NPL migration numbers and remain an intense area of focus. Special collections initiatives, focussed largely on the NPL portfolio, as published in the update for the six months ended 31 March 2014 are starting to result in better collections on certain problem accounts, although it has not yet had a meaningful impact on the financial results.
Whilst tight cost control has always been a focus area, given that the Banking Unit is in a consolidation phase, we are actively looking at the cost base with a view to intensifying the cost savings and reduction initiatives as part of the restructuring of the Group.
Retail unit
Ellerine Holdings Limited ("Ellerines") recorded merchandise sales of R2.8 billion for the nine months ended 30 June 2014, a 12% decline relative to the comparative period. Retail sales were negatively impacted by further credit risk reduction measures, lower customer demand for credit and the impact of a continuing tough consumer environment.
Cash sales have increased by 9% to R1.3 billion compared to R1.2 billion in the comparative period. Credit sales amounted to R1.5 billion, a 25% decline relative to the comparable period in 2013. The credit sales mix for the nine months at 54% is significantly lower than the 63% in the comparable period.
The reduced sales volumes and its high fixed cost base continue to put pressure on Ellerines profitability which remains loss making.
Regulatory developments
Recent regulatory developments have centred on credit life insurance. The National Credit Act Amendment Bill was promulgated in May 2014, with an implementation date still to be determined. The Amendment Act provided for a form of price regulation for credit insurance, in consultation with the Minister of Finance. In addition, the Ministry of Finance, through National Treasury published a report entitled "Technical report on the consumer credit insurance market in South Africa" on 3 July 2014 for comment by 30 September 2014. This report covers compulsory credit insurance and summarises the different possible options for regulatory intervention and reform and recognises the benefits to both consumers and credit providers of appropriately designed and delivered compulsory credit insurance. ABIL continues to engage constructively with the regulators to assist in ensuring a sustainable unsecured credit market to meet the needs of individuals in South Africa.
We continue to believe that the ultimate outcome of the revised regulations will result in a fairer, better and more equitable unsecured lending industry going forward, adequately balancing the interests of credit providers, customers and regulators.
ABIL Board and Executive Committee appointments
The Board regrets to announce that Leon Kirkinis, the Group Chief Executive Officer, managing director of African Bank and one of the founders of ABIL has resigned with immediate effect after 23 years in the business. The Board owes a huge debt of gratitude to Leon for his vision and leadership during the growth of African Bank and wishes him every success for the future.
The Board has appointed Nithia Nalliah (the Group Chief Financial Officer) to the position of acting Chief Executive of ABIL and managing director of African Bank with immediate effect. Nithia joined ABIL in 2006 as the chief financial officer and the Board is confident that he has the experience and ability to steer ABIL through these trying times pending the appointment of a permanent Chief Executive Officer and Managing Director.
Nithia will continue to occupy the position of the Group Chief Financial Officer pending further appointments.
ABIL is currently in discussions to make further appointments of independent non-executive directors to the ABIL and African Bank Boards. These appointments will add significant financial experience and materially strengthen the Boards. An announcement will follow in due course.
The Company is also pleased to announce the appointment of Pieter (Piet) Swanepoel (52) as Chief Risk Officer ("CRO") and a member of the executive committee ("ExCo") for the Group, effective upon the retirement of acting CRO Pieter Marais on 1 July 2014. Piet brings extensive banking and management experience gained in the banking industry. He was the Executive Director of MLS Bank for 8 years. Piet joined Imperial Bank where he headed up the Property Finance and Professional Divisions. He assisted with the integration of the Property Finance Division into Nedbank Corporate and the Professional Division into Nedbank Business Bank where he ultimately became Head of Professional Nedbank Business Bank. Piet has a B. Com. from the University of Pretoria and completed an Advanced Management Programme at Templeton College, Oxford University.
Business review and restructuring initiatives
Given the difficult conditions faced by both the banking and retail businesses, the Board has decided to implement a series of steps designed to secure the future of its core banking business. These steps include:
- Growing the "good" Bank;
- Insulating the Group from further exposure to Ellerines;
- Further tightening of the risk parameters around new credit business;
- Strengthening the provisioning on the existing advances book;
- Increasing Tier I capital; and
- Securing additional longer term liquidity.
The Group has appointed PwC as an advisor to the board to assist in the restructuring of the Group.
Growing the "good" Bank
The Board is satisfied that there is a core "good" advances book and a sustainable demand for unsecured credit at the appropriate level of risk to generate the commensurate returns for shareholders. However, a section of the advances book has been identified which would not generate the appropriate returns and the intention is to ringfence this part of the book. ABIL is exploring various options to isolate African Bank from the impact of the "bad" book which is also expected to have a direct positive impact on Moody's rating of African Bank. Further details will be announced in due course once finalised.
Ellerines and renewal of cautionary
On 7 July 2014 ABIL issued a cautionary announcement on SENS in relation to a potential disposal of Ellerines and its subsidiaries. While these negotiations are continuing, ABIL is also actively exploring other alternatives that would remove any future exposure of ABIL to Ellerines.
While the financial impact of these measures has not been fully quantified we anticipate that the negative capital impact to the Group will, at a minimum be between R1.5 billion and R2.5 billion.
This will secure the banking operations and insulate the Group from future losses in Ellerines.
Shareholders are advised to continue to exercise caution when dealing in the Company's securities, until a further announcement is made in this regard.
Risk tightening measures
As discussed in the trading statement, the Group has implemented a number of measures to reduce risk and ensure that appropriate returns are generated on the new business. We have seen some benefit from these initiatives with NPL formation on business written from July to December 2013, subsequent to the implementation, showing a relative improvement of 11% to 22% compared to the equivalent business written a year earlier before the implementation of the risk reduction measures, after being 6 to 12 months on book. Further steps have been largely implemented including reduction in loan sizes and terms. Whilst these measures may restrain loan growth, we expect that they will positively impact credit risk and profitability and thus reduce the Group's capital requirements.
Strengthening credit impairment provisioning
In light of the unexpected elevated level of risk emergence on the existing advances loan book and to ensure that the existing book remains adequately provisioned, the Board has appointed an independent advisor to review African Bank's underwriting, collections and provisioning methodologies and practices. Upon completion, the Board will review the changes that may be recommended by the independent advisor, and will accordingly advise shareholders. In the interim, the Board has decided to more closely align certain aspects of African Bank's impairment provisioning practices to the industry standard. Amongst these, the most significant is the moving of the point of impairment from the current contractual delinquency ("CD") 4 to CD0. The additional impairment provision that is required for all changes in practices is R3.0 billion.
Increasing Tier 1 Capital
ABIL's equity and core tier 1 capital ratios are currently below the levels achieved following last year's rights offer. In addition, the anticipated costs associated with insulating ABIL from further impact of Ellerines and any additional provisions that might be taken on the lending book following the independent review, will further decrease its equity and core tier I ratios. In order to remedy this situation, we will engage with shareholders, and other stakeholders in the coming weeks about a capital raise which currently is expected to be a minimum of R8.5 billion.
Liquidity
For the nine months commencing 1 October 2013, the Group generated positive operating cash flow, with collections exceeding disbursements. Notwithstanding this, liquidity remains constrained. In the context of an intended capital raise, the Group will engage with a number of key funders and stakeholders to ensure it has appropriate levels of liquidity to meet funding and liquidity needs.
Trading Statement
The banking unit is expected to show a basic loss and headline loss for the second half of financial year 2014. Consequently for the full year the banking unit forecasts a basic and headline loss of at least R4.6 billion compared to the basic loss and headline earnings in financial year 2013 of R3 264m and R654m. Primary factors driving this loss are lower disbursements and higher than expected NPL formation, notwithstanding the 7% decrease in net NPL migrations for 2014Q3 compared the previous quarter.
The retail unit is expected to show a basic loss and headline loss for the second half of the financial year. Consequently for the full year the retail unit forecasts a basic loss of at least R2.9 billion and headline loss of at least R1.7 billion compared to the basic loss and headline loss of R328m and R284m respectively.
The Group is expected to show a basic loss of at least R7.6 billion and headline loss of at least R6.4 billion for the full year compared to the basic loss and headline earnings of R4 199m and R365m for the prior year. This is after the additional credit impairment provision of R3.0 billion pretax in the second half of this financial year. The expected loss per share is at least 543 cents per share whilst the expected headline loss per share is expected to be at least 454 cents per share. It is not possible to provide the guidance on a range due to the various unquantified items listed herein.
The above financial information has not been reviewed and reported on by the Company's external auditors.
Cautionary announcement
ABIL will brief the market on the conclusions of the restructuring (including the proposed Ellerines disposal, provisioning and other related matters), recapitalisation and funding work currently underway and accordingly shareholders should expect a comprehensive announcement in this regard before the end of August 2014.
Given that the business review and restructuring initiatives referred to above have not been finalised and the work on the financial and capital impacts of the items addressed herein have not been completed, the Board is not in a position to accurately quantify the potential impact thereof on ABIL at this time. Accordingly, shareholders and investors are advised to exercise caution when dealing in the Company's securities, until a further announcement is made in this regard.
Conference call
ABIL will hold a conference call with stakeholders at 16:00 SA time on Wednesday 6 August 2014. The presentation covering the conference call will be available for download on www.abil.co.za prior to the call.
Website disclosure
The quarterly trading update will be released on SENS and simultaneously published on www.abil.co.za on Wednesday, 6 August 2014 from 08:00. A presentation will be available on the ABIL website shortly prior to the call.
Statement issued by African Bank Limited (ABIL) through the JSE SENS Service, August 6 2014
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