Wrap Text
Trading update for the financial year ended 30 September 2013 and trading statement
AFRICAN BANK INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
(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”)
TRADING UPDATE FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2013 AND TRADING
STATEMENT
KEY FEATURES
- Core operating business stable through September 2013 year end
- Risk reduction measures and focus on collections are beginning to improve asset quality
- No material change in the risk profile of the advances book
- Recognizing an incremental loan impairment provision of R1.3 billion and a decrease of R0.8 billion
in the value of the written down book through accounting changes in relation to non-cash flow items
- Increase in IBNR for credit risk by R0.3 billion
- Adopting a more conservative write-off policy
- Increasing the non-performing loan (NPL) coverage ratio to 66% for financial year 2013, relative to
60% in financial year 2012
- Goodwill impairment of R4.6 billion
- Expected headline earnings of between R300 million to R400 million and an expected basic
earnings loss of between R4.2 billion and R4.3 billion for financial year 2013
- Increasing the rights offering size to R5.5 billion, underwritten by Goldman Sachs International
- Tier 1 and Total Capital ratios post the rights offering and inclusive of the impairment estimated to
increase to between 25% to 26% and 33% to 34% respectively
INTRODUCTION
Asset quality has started to stabilise as NPLs appear to be peaking and collections activities to stem the
flow of performing loans to NPLs are delivering positive results. Key credit quality trends have been
improving in the most recent months, as evidenced by lower levels of new NPL formation and reductions
in the first to third missed instalment indicators, which is reflected in the recent vintage trends.
Subsequent to the 18 September 2013 trading update, ABIL, in consultation with its auditors, reviewed its
loan impairment provisioning methodology, with particular focus on the treatment of loans affected by
section 103(5) of the National Credit Act (“NCA”) and provisions for ‘incurred but not yet reported losses’
in the insurance companies (“IBNR”). These are included in the list of measures addressed below.
ABIL has decided to implement certain non-cash flow measures which will affect the financial results for
the full financial year. These include:
1. A change in the loan impairment provisioning methodology
2. An increase in IBNR reserves for credit risk
3. A change to the write-off policy of impaired loans
4. A change to ABIL’s IBNR accounting policy for credit life insurance
5. An exceptional, non-cash charge for impairment of goodwill
For a reconciliation of the full impact of these changes, please refer to the tables in the section below.
1. Restatements following a change in the loan impairment provisioning methodology
In terms of the NCA, once a credit agreement goes into arrears, a credit provider cannot raise interest,
fees and charges in excess of the total outstanding amount of the balance determined at the time that the
first arrears occurred. ABIL has applied this requirement consistently across all its portfolios when
defaulting loans reach the “in duplum” threshold (threshold loans).
For the purposes of calculating the impairment provisions against the non-performing and written off
loans on a portfolio basis, accounting standard IAS39 does not have an alternative treatment for
situations where no interest and fees are permitted to be charged and requires the application of the
effective interest rate of the loans at origination for purposes of the present value calculation. ABIL
historically applied a lower weighted average effective interest rate to calculate the present value of
impaired loans, taking into consideration the fact that no interest or fees are being charged on the
threshold loans. As a result of the growth in the threshold loans over time, the difference between the two
provisioning methodologies has cumulatively become material for the financial year 2013. The group has
therefore changed its provisioning methodology to discount all forecast cash flows at the original effective
interest rates. Accordingly, ABIL intends to recognise an increase in impairment provisions relating to
current year credit losses in financial year 2013. The total impact of the adjustment as at 30 September
2013 is expected to amount to R2 175 million and resulted in an expected increase in provisions of
R1 353 million held against the NPL portfolio and a further write down in the written off book of R822
million. The expected net income statement impact is R2 175 million pretax for the financial years up to
2013 or R1 566 million post tax of which R608 million will be recognised in 2013 and R958 million will be
recognised in prior years.
It is important to note that forecast cash flows remain unchanged, and therefore this adjustment will
reverse to the extent that those cash flows are received. The change will continue to have an impact in
the future on new threshold loans, although the impact will be lessened by the adjustment in the write-off
policy described below. The total portfolio of loans impacted by this adjustment has grown broadly in line
with the growth in NPLs over the past two years.
2. Increase in IBNR for credit risk
ABIL has, over and above the increased impairment provisioning, increased its credit IBNR reserves by
an additional amount of R300 million (R216 million after tax), as a result of increased conservatism.
3. Change to the criteria for write-off of impaired loans and impact on asset quality
In conjunction with ABIL’s review of its provisioning methodology described above, the group has been
conservative in terms of write-offs by making two changes in order to ensure that the NPLs carried into
financial year 2014 are of an improved quality. Firstly, ABIL has reduced the period before write-off from
17 months of non-payment to 12 months of non-payment. This policy change resulted in an additional
write-off of R1.3 billion during financial year 2013. Secondly, ABIL has identified certain NPLs within the
furniture credit portfolios and accelerated the write-off, amounting to R1.7 billion. This has had the effect
of reducing the NPL portfolios by R3.0 billion, of which R970 million consists of threshold loans. The net
effect of the R800 million reduction in the written off portfolio and the increase in write-offs on which no
extra valuation is recognized, results in this portfolio being valued at 6.3 cents in the Rand versus 17.6
cents in the financial year 2012. Refer to the table below for the impact of these changes in the respective
financial years.
The impact of the restatements following the change in the loan impairment provisioning methodology
and the change to the write-off policy, are depicted in the table below.
Impact of changes on asset quality ratios in the banking unit
Sep 2013 Sep 2012 Sep 2012
(restated) (as
published)
NPLs before adjustments and additional write-offs R billion 19.6 15.2 15.2
Impairment provisions R billion 12.5 9.1 9.1
Threshold loans adjustment R billion 1.3 0.8 n/a
Increase in IBNR for credit risk R billion 0.3
Impairment provisions post the Threshold loans and R billion 14.1 9.9
IBNR adjustments
NPL coverage post the Threshold loans and IBNR % 71.8 65.5 60.0
adjustments
NPLs as % of advances post the Threshold loans % 31.7 28.6 28.6
and IBNR adjustments
Additional bad debt write-offs R billion 3.0
NPLs post additional write-offs R billion 16.6
Impairment provisions post additional write-offs R billion 11.1
NPL coverage post additional write-offs % 66.6 60.0
NPLs as % of advances post additional write-offs % 28.2 28.6
Written-off book R billion 1.3 1.7 2.1
Valuation of the written-off book (cents in the Rand) cents 6.3 13.7 17.6
4. Change to ABIL’s IBNR accounting policy
The insurance subsidiaries’ credit life insurance policies are taken up by African Bank customers when an
African Bank loan is sold. These policies cover the African Bank customers for various risks such as
retrenchment, death and disability. These policies are monthly policies and if a customer defaults on their
African Bank loan installments they also default on the insurance premiums.
The accounting standards do not require the IBNR on credit life claims to be provided within policyholder
liabilities if IBNR is offset against future income in the calculation of the statutory reserves. The
calculation of the statutory reserves gives rise to a negative reserve (i.e. asset) which is the value of
future insurance premiums after allowance for unexpired insurance risk. In terms of the ABIL accounting
policy the insurance subsidiaries have not recognized this asset which amounted to approximately R1.8
billion at 30 September 2013.
ABIL is of the view that it is a fairer presentation of the financial position of the group if the IBNR on credit
life claims is accounted for as policyholder liabilities. Thus the accounting policy has been changed. The
effect is a liability of R550 million as at the end of September 2013. Of this amount approximately R260
million was already provided for in the group prior to September and the finalization resulted in a more
accurate quantification of (the remainder of R 290 million (R210 million after tax) related to prior years,
and which is shown as a restatement of prior year results.
5. Exceptional, non-cash charge for impairment of goodwill
IAS 36 – Impairment of Assets, requires goodwill to be tested for impairment annually. IAS 36 further
requires that this assessment be based on the business units’ recoverable amount, considering the most
recent cash flow projections and excluding any changes that management will implement in the future to
improve the performance of the business units.
Based on the above, ABIL has identified that the carrying value of the goodwill related to the Ellerines
acquisition exceeds the recoverable amount. This impairment is primarily due to the lower profitability in
the 2013 financial year compared to prior financial years. As a result, the entire goodwill carried at African
Bank of R4 billion and R641 million of the goodwill related to the Retail business has been impaired.
The impairment of goodwill for accounting purposes has no impact on regulatory capital as goodwill is
always deducted from core equity tier 1 capital.
Review of financial year 2013
ABIL initiated a series of actions in early 2013 to address the impact of the weak operating environment
on the group’s performance, through initiatives that included improving the yield/risk relationship on the
back of lower offer rates, smaller loan sizes for higher risk customers and increased risk based pricing.
These risk reduction measures, while boding well for the quality of its book in future years, materially
reduced disbursements and merchandise sales growth. The combination of lower advances and revenue
growth, the changes in accounting policy and associated impairments and the exceptional charges
described above, will result in a negative effect on headline earnings for financial year 2013.
ABIL indicated in its 18 September 2013 trading update that the Retail unit was expected to reflect a
merchandise sales decline of approximately 15% for 2013 and therefore generate a headline earnings
loss of approximately R200 million excluding the impact of the long term incentive plan hedge losses due
to share price reduction (R240 million including the LTIP hedge loss). Actual merchandise sales for the
2013 financial year declined by approximately 16% and including the LTIP hedge loss and the
IBNR adjustment within the insurance subsidiaries as set out above, the Retail unit is now expected to
reflect a headline loss of approximately R280 million to R290 million.
Reconciliation of the expected impact of recent changes
Sep 2013 % Change Sep 2012
Headline Earnings guidance R million R million
300 to 400 (87%) to (90%) 3 041
Add back changes post 18 September 2013:
Section 103(5) adjustment 608 (255)
Change to IBNR accounting policy (32)
Additional credit IBNR 70
50
Additional loss in EHL
Headline earnings pre adjustments 1 028 to 1 128 (59%) to (63%) 2 754
Basic Earnings Guidance R million R million
Headline earnings 300 to 400 3 041
Other headline earnings
adjustments (12)
Goodwill impairment (4 641)
(4 241) to (4
Basic earnings/(loss) 341) (240%) to (243%) 3 029
Change in earnings per share Cents
Headline earnings per share 37.0 to 49.4 (87%) to (90%) 378.2
(523.3) to
Basic earnings/(loss) per share (535.6) (239%) to (242%) 376.7
The table reconciles headline and basic earnings incorporating the changes to the comparative numbers
for the financial year 2012. The adjustments are explained more fully in the various sections of this
trading update and in the trading statement released on 18 September 2013.
Headline earnings and headline earnings per share are both expected to decrease by between 87% and
90. Basic earnings and basic earnings per share are expected to decrease by between 240% and 243%
and 239% to 242% respectively.
Excluding the impact of the headline earnings adjustments in respect of the non-cash flow items, headline
earnings are expected to decrease between R983 million and R1 133 million, which represents a
decrease of 59% to 63% from headline earnings of R2 754 million in financial year 2012, excluding the
impact of any restatements. The effect of the change in loan impairment provisioning methodology
resulted in a charge to headline earnings of R608 million in financial year 2013, a credit of R255 million in
financial year 2012 and a decrease in opening retained earnings for financial year 2012 of R1 452 million.
The change in the criteria for write off of impaired loans has not impacted headline earnings.
The change to the IBNR accounting policy resulted in a credit to headline earnings R32 million in financial
year 2012 and a decrease in opening retained earnings for financial year 2012 of R239 million. The group
expects an additional loss in Ellerines of between R40 million and R50 million for financial year 2013. The
combined impact of the two changes has resulted in a charge to headline earnings of R658 million in
financial year 2013 and credit headline earnings of R287 million in financial year 2012.
Update on the proposed rights offering
As communicated on 16 September 2013, ABIL shareholders have approved resolutions related to the
rights offering at an EGM held on 16 September 2013. In light of the additional impairment charges, the
ABIL board has decided to increase the size of the rights offering to R5.5 billion. To this end, Goldman
Sachs International has increased the standby underwriting agreement with ABIL to R5.5 billion, subject
to the normal terms and conditions. The group remains committed to complete the rights offering before
the end of calendar year 2013. Declaration data for the rights offering is announced separately today.
As at 30 September 2013, incorporating the impairments, and on a pro forma basis, the proposed capital
raise will result in the following capital adequacy ratios for ABIL.
Sep 2013 June 2013
Capital items (Pro forma) (as reported)
Tier 1 Ratio 25% – 26% 19.6%
CAR 33% – 34% 27.2%
Prospects
The actions taken by ABIL during financial year 2013 are expected to position the group positively for
sustainable growth and returns over the medium to longer term. The revised conservative write-off criteria
of impaired loans will provide the potential for recoveries in future years, while the higher NPL coverage
and enhanced asset quality ratios will strengthen the balance sheet. The rights offer will strengthen
ABIL’s and African Bank’s capital adequacy ratios and provide a foundation to grow advances while
comfortably meeting the changing regulatory requirements in terms of Basel III. The risk reduction
measures implemented by the group and the increased focus on collections have begun to improve asset
quality and the growth in new NPLs has started to slow, which bodes well for improved asset quality in
financial year 2014.
The information provided in this trading statement is not an earnings forecast and has not been reviewed
and reported on by the group’s external auditors. The full year results for the year ended 30 September
2013 are expected to be released on SENS and RNS on or about Monday, 11 November 2013.
Conference call
ABIL will hold a conference call for interested parties on 25 October 2013 at 15:00 (SA time).
Conference call details Access numbers for participants dialing from their country:
Live call 48 hour playback Playback code [26829]#
South Africa & Other South Africa & Other
+2711 535 3600 or +2711 305 2030
+2710 201 6800
UK UK
0 808 162 4061 0 808 234 6771
Communication with management
Queries: Investor Relations on 27 11 564 7495 or investor.relations@africanbank.co.za
On behalf of the board
Midrand
25 October 2013
Sponsor
RAND MERCHANT BANK LIMITED (A division of FirstRand Bank Limited)
Date: 25/10/2013 09:08:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
