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Quarterly operational update for quarter ended 30 June 2014, changes to the board, trading statement and cautionary
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" or the "Company")
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 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.
Conference call (16:00 SA time). Access numbers for participants dialling from their country:
Live call 48 hour playback Code 31999#
South Africa & Other South Africa & Other
Toll 011 535 3600 011 305 2030
USA USA
Toll free 1 855 481 5362 1 855 481 5363
UK UK
Toll free 0 808 162 4061 0 808 234 6771
On behalf of the Board
Midrand
6 August 2014
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 06/08/2014 08:40:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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