| Thu 17 Jan 2002, 0:00 | | Absa - Further Announcement Regarding A Profit War |
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Announcement of 15 January 2002.
ABSA GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1986/003934/06)
(Share code: ASA ISIN: ZAE000013389)
("ABSA")
FURTHER ANNOUNCEMENT REGARDING A PROFIT WARNING AND A CAUTIONARY
ANNOUNCEMENT OF 15 JANUARY 2002
1. INTRODUCTION
Absa issued a profit warning and a cautionary announcement on 15 January
2002, simultaneously with the announcement that the Board of UniFer Holdings
Limited (UniFer) requested that the JSE Securities Exchange South Africa
suspend trading in its shares owing to a material deterioration of its
advances book.
Absa announced on 15 January 2002 that although Absa, excluding UniFer, is
performing according to market expectations, the above mentioned is
anticipated to have an adverse effect on Absa's earnings for the year ending
31 March 2002. Shareholders were therefore advised to exercise caution when
dealing in Absa securities until further notice.
The following information will be presented to the investment community and
news media on 17 January 2002.
2 FURTHER INFORMATION
2.1 History of Absa involvement with UniFer
Absa acquired a 51% stake in UniFer effective from April 2000, after a
thorough due diligence late in 1999. After a period of acceptable
performance at UniFer, the UniFer Board became concerned about exceptionally
fast growth in the UniFer advances book reported to the board in May 2001,
and cautioned management accordingly. The Board appointed a new CEO in June
2001. In order to position the organization optimally in the micro lending
industry, the Board, instructed management to appoint business process re-
engineering consultants to formulate and implement a new business model for
the Group. In additional to the above, an Absa executive director Dolf
Wright was seconded to UniFer at the request of the UniFer board in mid-
November 2001. In order to determine the current state at UniFer, the Board
initiated audit and forensic investigations. Following an initial report-
back in January 2002, both the UniFer and Absa Board meetings came to the
conclusion that decisive action and transparent disclosure is immediately
required.
2.2 The nature, extent and impact of the problem
Provisions in UniFer were understated. The present picture is that the
extent of the understatement in UniFer provisions is R1,5bn (fully aged)
The auditors have been tasked to verify the position and will report in 30
days from 14 January 2002. Given this position the net asset value of
UniFer is at risk. It has been calculated that the negative effect on
Absa's earnings is approximately 100 cents per share. Absa's group capital
adequacy ratio is not at risk and has been revised down from 12,1% to 11,4%.
Absa Bank's capital adequacy is not affected.
2.3 The origin of the problem
When the market fundamentals in microlending changed with the curtailment of
Persal deductions, UniFer responded by announcing a period of consolidation.
After this slowdown, alternative collection methods were introduced and
UniFer management adopted a strategy of rapid growth. Despite UniFer
management's assurances to the contrary, it now becomes clear that the use
of a decentralised credit model and inadequate administration capacity and
systems underlie the inadequate provisions. This arose primarily from
overheated trading in the period April to June 2001. Understanding of the
situation was exacerbated by misrepresentations to the UniFer Board by
management.
3 UNIFER TURNAROUND PLAN
The critical success factors for UniFer going forward revolve around a
thorough market potential and industry review, as well as improved risk
management systems, policies and procedures. In addition to this, an
aggressive collections drive is central to the recovery strategy.
The core focus areas for UniFer's turnaround is the strengthening of
management coupled with efficiency improvements. Strengthening management
entails the secondment of specialist Absa skills to UniFer as well as the
enforcement of financial and corporate governance at UniFer. Efficiency
improvements will be undertaken with regard to the collection processes, the
application of Absa systems as well as cost reductions.
Short-term actions as well as a long-term strategy underpin UniFer's
turnaround. The short-term actions that will be undertaken include the
restructuring of UniFer, the leveraging and acceleration of synergies with
Absa as well as the implementation of a new credit model and collection
methodologies.
4 CONCLUSION
In addition to the above, Absa will take a number of other decisive actions
with regard to UniFer. These are as follows:
* Underwrite UniFer's recapitalisation;
* Protect UniFer's depositors;
* Ensure transparent communication;
* Strengthen UniFer's risk management capability; and
* Second Absa executives to UniFer.
Johannesburg
17 January 2002
Merchant Bank to the transaction
Absa Corporate Finance
Sponsor to ABSA
Merrill Lynch
Date: 17/01/2002
