Credibility at stake as Abil flags 90% plunge in earnings

Johannesburg - African Bank Investments Limited (Abil) issued its second profit warning in five weeks on Friday, flagging a 90 percent plunge in full-year earnings, due in part to rising bad debts among its core market of low-income borrowers.

Shares in the bank dropped as much as 8 percent after it said it would also increase a planned rights issue by over a third to R5.5 billion, but it recovered all these losses later.

Some analysts said the warning – so soon after the last – would add to concerns about management’s willingness to communicate with investors.

“The biggest problem they face is credibility, that’s the real issue,” said one, who declined to be named because he is not authorised to speak to the media.

Analysts have long been worried about a surge in unsecured lending in Africa’s biggest economy, highlighting the risk of default on high-interest loans not backed by collateral in a country where household debt already accounts for three-quarters of disposable income.

Many banks have been getting more cautious. Growth in unsecured personal loans in South Africa slowed to 17 percent in August from 30.1 percent in December 2012.

But Abil has been hit by its exposure to low-income borrowers, with unemployment remaining stubbornly high at about 25 percent.

It said on Friday that, after consulting with its auditors, it would hike provisions – the money it sets aside to cover bad debts – and write off a chunk of its loan book.

The bank said headline earnings a share for the year through September were likely to be as low as 37c, down from R3.782 a year earlier. Headline earnings exclude certain one-time items. Abil had previously flagged a 58 percent to 63 percent earnings drop.

“It marks a departure from previous guidance, it’s worrying,” said Johann Scholtz, the head of research at Afrifocus Securities in Cape Town.

Abil shares were up 2.66 percent at R17.35 on Friday after the bank also said its planned rights offer would increase from R4 billion to R5.5bn. The stock has lost half its value this year compared with a 15 percent rise on the all share index.

Chief executive Leon Kirkinis conceded the new warning would raise questions around the credibility of the management team – something which is particularly important to the bank as it does not take deposits and so relies on the bond market for funding.

“That’s entirely justified to be asking those questions and we’re not going to be defensive and pretend it’s not an issue in people’s minds,” he said.

Abil said it expected a pretax hit of R2.2bn to its net income from higher provisions and other write-downs. It would write off R3bn worth of its bad loan portfolio and shorten the amount of time before bad loans were written off its balance sheet.

It also wrote down the value of its retail furniture business – which it is trying to dispose of – by R4.6bn. While Abil has used the Ellerines furniture business to sell sofas and living room tables to low-income customers on credit, it has been squeezed by slowing consumer demand.

The yield on Abil’s 2017 dollar bond had remained stable at 7.085 percent as the bank’s recapitalisation reduced investors’ risk, one analyst said. – Reuters