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Quarterly operational update for the third quarter ended 30 June 2013 and strategic announcements
AFRICAN BANK INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
(Registered Bank controlling company)
(Registration number 1946/021193/06)
(Ordinary share code: ABL) (ISIN: ZAE000030060)
(Preference share code: ABLP) (ISIN: ZAE000065215)
(“ABIL” or “the group”)
AFRICAN BANK LIMITED
(Incorporated in the Republic of South Africa)
(Registered bank)
(Registration number 1975/002526/06)
Company code: BIABL
(“African Bank”)
QUARTERLY OPERATIONAL UPDATE FOR THE THIRD QUARTER ENDED 30 JUNE 2013 AND
STRATEGIC ANNOUNCEMENTS
ABIL issues quarterly updates in order to provide investors with timely insights into strategic and
operational performance trends. These updates should be viewed as guidance on trading conditions,
rather than an indication of profitability. The current announcement contains important information on
strategic changes at ABIL, as well as an overview of current trading conditions and operational progress.
Strategic initiatives
- Improving the yield / risk relationship
- Enhanced collection activities achieved through additional resource commitment
- Strengthening of the capital base by up to R4 billion
- Review of EHL’s strategic fit
Operational performance
- Environment remains challenging, both for credit and furniture retail
- 19% growth in advances to R60,3 billion
- Reduced credit disbursements of R17,7 billion for 9 months period (10% lower year-on-year)
- Increase in NPLs as percentage of advances to 30,2% from 29,2%
- Continued favourable access to funding markets
- Good progress on implementation of risk reduction measures
Trading environment
The third quarter proved to be another challenging period with the trends of the first half of 2013
continuing through the quarter, albeit improving. Over the past 12 months the environment in which ABIL
operates has changed considerably due to the rapid deterioration in the economy and the high levels of
indebtedness amongst consumers, following a period of high growth in unsecured lending.
STRATEGIC INITIATIVES
Since we first highlighted our concerns around the level of growth in the industry, the over extension of
the consumer market and the increasingly challenging collections environment in August 2012, the group
has conducted a thorough review of the business. In the quarter under review, the group has initiated the
following strategic initiatives to:
- significantly improve the yield/risk relationship and the asset quality of the book,
- enhance collection procedures,
- strengthen the capital base, and
- review the strategic alternatives for EHL.
Significant progress has already been made on the implementation of the aforementioned initiatives and
the first results are expected by the last quarter of 2013. The full benefits of these initiatives will be
realised from the second half of 2014.
Improving the yield/risk relationship
In order to enhance returns, the Banking unit’s customer acquisition model has been recalibrated and
refined to optimise the yield versus risk relationship. These changes will improve the Bank’s return on
assets in the medium term. Over the past 3 months, the group implemented a range of far reaching loan
size and pricing changes to reduce exposure in less profitable market segments. Medium and higher risk
groups had loan sizes reduced by between 7% and 63% depending on the risk group, with loan terms
reduced by between 3 and 24 months. We estimate the impact of the changes to affect 40% of
customers through smaller loans, shorter terms and lower instalments. The cumulative effect of cutbacks
in the furniture retail credit offer over the past nine months, reduced disbursements in this portfolio by
some 15% to 20%, predominantly but not exclusively aimed at the non-furniture credit originated in the
EHL stores.
Separately, ABIL is in the process of rolling out a significantly improved proposition for low risk customers,
including new products and distribution options, whereby ABIL is looking to increase the number and
overall proportion of low risk customers.
Whilst the cutbacks will impact a significant number of customers, the increased focus on a greater
proportion of low risk customers will lessen the impact on total disbursements, with an estimated
reduction in disbursements of approximately 10%.
Enhancing collection activities
Collections activities have been increased in a flexible and sustainable manner by dedicating a certain
amount of African Bank branch and furniture store working hours to collections. The call centre has been
bolstered further, bringing the total capacity to some 1 300 agents. Collections activities have been
increased and are beginning to bear fruit as they continued to improve from the lows of Dec-2012/Jan-
2013, although not yet at the same levels as last year. Significantly less early settlement of debt by other
credit providers has also reduced collections ratios, compared to 2012. Further improvements in
collections strategies are to be implemented for all credit portfolios.
Strengthening the capital base
In order to strengthen ABIL’s balance sheet and to ensure a robust financial position for the coming
years, ABIL's board of directors has decided to pursue an equity raise through a rights issue of up to R4
billion. To that effect ABIL has entered into a standby underwriting agreement with Goldman Sachs
International of up to R4 billion, subject to standard terms and conditions. The proceeds of the capital
raise will serve to improve Basel III capital ratios, particularly the core equity Tier I ratios, and provide
additional capital in the event of economic headwinds and consequential impact on the credit
environment. The group believes that the capital raise is in shareholders' best interests and by enhancing
the capital position of the bank substantially, will also serve to benefit funders and other stakeholders.
Shareholders are referred to the corresponding announcement released on SENS on 5 August 2013 for
further details.
Continued review of strategic options for EHL
The ABIL board is of the view that the group has implemented the majority of the strategic initiatives with
regard to the EHL acquisition. A standalone product-based retail business does not fit the strategic
requirements of ABIL’s risk-based financial services business model. ABIL has therefore decided to
accelerate the disposal of the furniture retail business. The group is actively reviewing various options
designed to fulfil this in an appropriate and timely manner that will optimise the strategic outcomes for
both the group and EHL. This process will ensure that the interests of all stakeholders are enhanced.
The combination of these four key initiatives is clearly a significant undertaking that will require focused
and dedicated attention to advance swiftly. ABIL will continue to inform investors of its progress with each
of these programmes as more information becomes available.
OPERATIONAL PERFORMANCE
The initiatives that ABIL implemented over the past year to deal with the worsening operating
environment is starting to pay off, with the key business drivers generally maintaining stable to slightly
improving trends. Specifically, early stage risk indicators on new business and collections trends on both
existing and new business are improving.
In the retail business, the weak trading environment was further exacerbated by the slowdown in
unsecured lending in general, and by the ABIL group specifically.
Banking unit
Credit disbursements for the nine months ended June 2013 were R17,7 billion, 10% lower than
disbursements for the previous comparable period. African Bank disbursements decreased by 8%, the
credit card portfolios decreased by 19%, while furniture related credit disbursements declined by 10%
year-on-year. The lower sales stemmed from a reduction in applications and higher rejections due to
affordability criteria, as well as the significant further cutbacks on risk exposure that ABIL implemented in
the past quarter. Average approval rates for the first nine months of financial 2013 remained steady at
69%, but the most recent months are trending lower.
The number of loans disbursed for the nine months to June 2013 decreased by 11% to 1,4 million, while
average net loan size increased by 2% to R12 300. Average term for the 9 months period was 50 months,
relative to 49 months for the first half of 2013. This is attributable to changes in the mix of the portfolio
towards a higher proportion of low risk customers and not to increases in loan size and term. These
metrics are expected to increase further as the portfolio weight changes on the back of the cutbacks in
medium and medium-high risk groups and the improved offerings for low risk customers.
Gross advances growth continued to slow, growing by 19% to R60,3 billion year-on-year, relative to the
25% year-on-year growth as at 31 March 2013. African Bank’s loan advances grew by 22% (H1 2013:
28%) and the credit card portfolios increased by 19% (H1 2013: 23%) on the back of new cards issued
and R1,4 billion in card utilisation. Furniture related credit advances grew by 10% (H1 2013: 14%) year-
on-year.
The total income yield for the nine-month period has stabilised, supported by the price increases
implemented from 2012 starting to filter through, but partially negated by the continuing, but diminishing,
influence of the once-off in duplum adjustment in the first half of 2013.
Operating cost growth increased on the back of a charge for the ABIL share incentive scheme relating to
the movement in the share price. Operating cost growth excluding this charge was in line with the growth
reported in the first half of the year.
Non-performing loans (NPLs) as a percentage of advances increased from 29.2% to 30.2%, in line with
expectations. The bad debt charge is marginally higher than the first half of the year in order to maintain
the NPL coverage in line with the 2013 interim period and the 2012 financial year. The African Bank and
furniture credit vintages are tracking at the higher end of historical ranges, but new NPL formation has
started to peak for both the African Bank and the furniture books and credit card vintages continue to
improve, as a result of the risk reduction measures implemented in all three portfolios over the past year.
This bodes well for NPL formation into 2014. Provisions are being closely monitored and coverage of
non-performing loans has been kept stable, despite substantially higher write-offs.
Liquidity
African Bank issued a R600 million seven year bond, as well as a R1 billion three year Jibar-linked bond
under its Domestic Medium Term Note (DMTN) programme during the past quarter. The group also
continued to achieve significant rollover rates for maturing liabilities in the money market. Whilst the costs
of the most recent funding raised has trended slightly higher, funding costs for the full year are still
expected to be lower than the previous year.
Capitalisation
Capital adequacy as at 30 June 2013 was in line with figures reported in March 2013, with retained profits
offsetting risk weighted asset (RWA) growth.
On a proforma basis, based on March 2013, the proposed R4 billion capital raise will increase the ABIL
Tier 1 ratio to 28.1% (from 19.9%) and the total capital ratio to 35.8% (from 27.6%)
Retail unit
The slowdown in furniture sales evident in the first half of the year worsened in the past 3 months, due to
the continued pressure on the consumer and the cutbacks in credit granting. EHL recorded merchandise
sales of R3,2 billion for the nine months to 30 June 2013, a 13% decline relative to the previous
comparative period. Comparable sales (on a square metre basis) decreased by 7% relative to last year.
Cash sales of R1,2 billion were 12% lower than the prior year. Credit sales amounted to R2,0 billion, a
decline of 13% relative to the comparable period in 2012. The credit sales mix for the nine months at
62,6%, was in line with last year’s 62,9%. The most recent credit sales mix was however substantially
lower as a result of the lower offer rates and smaller loan sizes at increased pricing.
Gross margins reduced by 0,5% over the period due to lower buying volumes. The EHL group managed
to contain its operating cost growth to single digits. Operating cost growth increased on the back of an
additional charge for the ABIL long term incentive scheme due to the movement in the share price.
Operating cost growth excluding this charge was in line with the growth reported in the first half of the
year.
The EHL store footprint increased by 11 stores relative to 2012, in the 9 months to date while at the same
time, the retail trading area was reduced by a further 4% to 651 178 m², through smaller store sizes and
innovative store layouts. Year-to-date stock turn reduced to 2,9 times from 3,3 times in the first half of the
year, on the back of the decline in sales. Stock levels are lower than last year, as the centralised logistics
capabilities begin to manifest.
Regulation
Good progress has been achieved on the material regulatory developments with regard to emolument
attachment orders, payments systems processes and affordability guidelines. Active and cooperative
engagement is continuing on credit life as well. Further announcements will be made on conclusion of
these consultative processes.
The matter before the National Consumer Tribunal with regards to the allegations of reckless lending by
the National Credit Regulator is following its due process and is expected to be heard in October 2013.
Outlook
The Banking unit earnings for H2 2013 are expected to be lower than H1 2013 for the reasons discussed
above. The retail environment remains challenging and unpredictable. ABIL will provide more detailed
guidance on the results for the full year as part of the right issue announcement in a pre-close statement
in September 2013.
We believe that the group has identified the challenges in the operating environment over the last year
and has responded proactively to improve risk adjusted profitability and its longer term strategic outlook.
We are confident that the benefits from our initiatives will materialise in the short to medium term.
The proposed capital raise will strengthen ABIL’s balance sheet while improving Basel III capital ratios
and position ABIL for the future.
The information provided in this update is not an earnings forecast and has not been reviewed and
reported on by the group’s external auditors.
Conference call
ABIL will hold a conference call on Monday, 5 August 2013 at 16:00 (SA time) for interested parties. 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 Monday, 5 August 2013 from 08:00.
A presentation will be available on the ABIL website.
Conference call Access numbers for participants dialling from their country:
(16:00 SA time)
Live call 48 hour playback Code 2134#
South Africa South Africa
011 535 3600 011 305 2030
USA USA
1 412 317 6060 1 412 317 0088
UK UK
0 808 162 4061 0 808 234 6771
Queries: Investor Relations on 27 11 564 7297 or investor.relations@africanbank.co.za
On behalf of the board
Midrand
5 August 2013
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 05/08/2013 08:11:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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