| Mon 18 Aug 2008, 7:05 | | ABL/ABLP - African Bank Investments Limited - Trading update for the third |
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ABL ABLP
ABL
ABL/ABLP - African Bank Investments Limited - Trading update for the third
quarter ended 30 june 2008
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")
TRADING UPDATE FOR THE THIRD QUARTER ENDED 30 JUNE 2008
ABIL issues quarterly updates in order to provide investors with more timely
insights into strategic and operational performance trends. These updates cover
certain key metrics but are not in themselves indicators of the group`s
profitability.
For the purposes of this trading update, the operations of Ellerines (including
its financial services activities) have been addressed separately under the
heading Ellerines, whilst the ABIL business prior to the acquisition of
Ellerines is dealt with separately under the heading of African Bank.
The trading conditions as they relate to the ABIL group for the third quarter
ended 30 June 2008 reflect the different stages that the two business units find
themselves in. The African Bank business unit commenced with its price
differentiation, risk segmentation and price reduction strategy some years ago.
As a result, this business continues to experience significant growth which,
combined with cost control, has resulted in an expansion of the market it
serves. On the other hand Ellerines has only just taken the first tentative
steps along this journey. As a result, the growth in Ellerines is more
influenced by the present market dynamics. In addition, this has been
exacerbated by the risk reduction underwriting interventions made in February
2008 given the poor quality of credit that was written prior to the acquisition
of Ellerines. Accordingly, sales in the heavily credit dependant brands remain
subdued and are only likely to meaningfully grow as the new refined underwriting
models take hold over the course of the next twelve months.
African Bank
Sales of new loans granted for the quarter increased by 39% over the equivalent
quarter last year to R2.4 billion, resulting in year-to-date sales increasing by
40% to R7.1 billion. These sales were achieved, despite a reduction in the loan
approval rate from 70% in June 2007 to 61% in June 2008, as a result of the
continued tightening of the underwriting models. Conversely, the price reduction
strategies and lengthening of term and loan sizes to mainly lower risk clients
continue to feed through into the portfolio, together with a steady increase in
new clients. The bank expects sales growth for the full year to be between 35%
and 40%, ahead of the previously communicated targets.
The current economic environment has been characterized by growing inflation
leading to higher interest rates. Whilst certain consumer segments (mainly the
middle to higher end) are experiencing pressure from both of these factors,
African Bank`s clients primarily carry only fixed rate debt and therefore are
relatively immune to interest rate movements. Inflation, however, erodes client
affordability levels and therefore their ability to service debt. These
inflationary pressures have however, been somewhat countered by higher levels of
wage increases feeding through the system more recently, tighter minimum living
expense thresholds being implemented in the underwriting models, and more
affordable instalments. The average monthly instalment for new loans granted in
June 2008 was R560, compared to R570 per month for June 2007.
Gross advances grew by an annualised 42% in the nine months to June 2008, from
R10,9 billion to R14,3 billion, as a result of the higher sales. The growth in
gross advances for the full year to 30 September 2008 is expected to be at the
higher end of the 38% to 43% target. However, the continuing shift in the
weighting of sales to the medium and low risk clients is expected to result in
the decline in the total average yield being between 6% and 7%.
Asset quality has remained steady over the last quarter. The vintages of loans
granted since the introduction of the NCA in June 2007, are tracking comfortably
in the middle of the underwriting range between 14% and 16% of cash due. Non-
performing loans (NPLs) as at 30 June 2008 were R3.7 billion or 25,7% of gross
advances (September 2007: 27.6%), although this decline is primarily a function
of the continuing strong growth of new loans, on which NPLs have not yet fully
emerged.
Bad debt write offs as a percentage of average gross advances were an annualised
8.1% for the 9 months to June 2008, compared to 5,9% for the 12 months to 30
September 2007, whilst NPL provision coverage has remained steady at 62,4%
(September 2007: 63,0%). The bank expects the bad debt charge for the full year
to be between 10% and 10,5%.
The continued focus on cost control is expected to result in operating costs
being in line with expectation, whilst the higher than expected growth in
advances will result in the operating costs to average gross advances ratio for
the full year being marginally below the 9% target.
Despite the strong year to date growth in the balance sheet, the funding profile
and cash reserves remain within the bank`s targets. Total funding (including
subordinated bonds) has grown by an annualised 52% to R11.4 billion (September
2007: R8.2 billion). The current interest rate environment and generally higher
credit spreads will result in the average cost of funds increasing by
approximately 1% above the average 9.7% for the 12 months to September 2007.
Moody`s recently affirmed the A1.za/P-1.za, long-term and short-term national
scale credit ratings African Bank with a stable outlook.
Whilst African Bank continues to monitor the credit environment carefully, and
moderate its underwriting models appropriately, we remain confident that our
growth strategies remain intact and that market conditions over the medium-term
will support these strategies.
Ellerines
The challenging economic environment brought about by rising inflation, and high
interest rates has negatively impacted the Ellerines customer to a far larger
degree than the African Bank customer. In addition, the intentional tightening
of credit granting criteria post the acquisition by ABIL has resulted in sales
of merchandise for the six months ended June 2008 being 4,3% lower than the
equivalent period last year. After adjusting for new and closed stores, the like
for like decrease in sales for this period was 5,2%. Inflation over this period
was an average of 10,4%. Sales within the brands that target the lower income
customer were most adversely affected, decreasing by 11,6%. The brands that
target consumers in the middle and higher income sector were less affected by
the tightening of the credit underwriting and had an increase in sales of 1,4%
and 0,1% respectively.
The business continues to focus on strategies to compensate for these difficult
trading conditions, including further segmentation of the credit risk
underwriting models, price reductions in the cost of credit and credit life
insurance for the majority of its customers and more aggressive product pricing
and marketing campaigns.
The percentage of sales that were facilitated by credit fell to 44,0%, down from
55,7% in the equivalent period last year. Consequently, the advances balance
declined marginally from R5,308 billion at take-on in January 2008 to R5,266
billion (net of the fair value adjustment) at June 2008.
The most recent Ellerines vintages are trending lower. Focused collection
efforts are beginning to have the desired effect on the vintages as evidenced by
the downward turn in their trajectory. The inferior quality business previously
written is now feeding through into the NPLs and this combined with flat
advances has resulted in the NPLs to gross advances ratio increasing to 31,7% in
June 2008, from the 25,3% reported at the interims for March 2008. NPL coverage
remains steady at 86,3% (86,1% in March 2008).
One of the key strategic focuses is that of reducing the cost base of the
business. The recent SENS announcement of 1 August 2008 relating to the brand
integration and management structure rationalisation is the start of this
process. The result of these and other cost saving initiatives will become
evident from the 2009 financial year.
Three key factors will significantly affect the financial results of Ellerines
to September 2008; the depressed sales levels and the concomitant affect on
margin and credit related income, the high levels of debtors costs brought about
by liberal credit granting and the exclusion of the most profitable trading
period being October to December. Accordingly, the expected earnings of the
Ellerines business unit (excluding the charge for the BEE programme set out
below) for each of the 3rd and 4th quarters respectively will be below that
reported for the 3 months to 31 March 2008.
The reconfiguration of the Ellerines business, including its financial services
activities, is proceeding within expected timeframes and we remain confident of
our ability to deliver value to our customers and shareholders.
BEE programme
ABIL`s second BEE programme - Masonge (which means "Lets Save") was launched on
6 August 2008, aimed primarily at Ellerines and African Bank employees but also
includes black members of the general public. A fresh issue of 11,6 million ABIL
ordinary shares, reserved as part of the purchase consideration for Ellerines,
and worth approximately R312 million, will be issued to Masonge at par value in
September 2008. The fair value of these shares determined at the date of issue
will fall within the scope of IFRS 2-Share-based payments, and will be recorded
as an expense through the income statement with the corresponding credit to
shareholder equity. While there will be no effect on net asset value, headline
earnings will be reduced by this charge.
On behalf of the board
Midrand
18 August 2008
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
This announcement, together with a short presentation, is available on the
African Bank Investments Limited website at http://www.abil.co.za.
CONFERENCE CALL
Leon Kirkinis, ABIL`S CEO, will conduct a conference call for investors, fund
managers and analysts on Monday 18 August 2008. The conference call will take
the form of a short presentation, followed by questions. Interested parties are
invited to download the presentation from our website prior to the conference
call.
CONFERENCE CALL TIMES
South Africa: 16:00pm
United States: 09:00am Eastern Time
United Kingdom: 15:00pm
Access numbers for participants dialling from their country:
South Africa Toll +27 11 535 3600
Toll Free 0800 200 648
United States Toll Free 1800 860 2442
United Kingdom Toll Free 0800 917 7042
PLAYBACK
A replay of the recording will be available for 48 hours should you be unable to
participate in the call and wish to listen to the trading update.
To access the replay please call:
South Africa +27 11 305 2030
Code 2134#
USA 1 412 317 0088
Code 2134#
UK 0808 234 6771
Code 2134#
Date: 18/08/2008 07:05:02 Produced by the JSE SENS Department.
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