| Mon 11 Feb 2002, 0:00 | | African Bank Investments Limited - Trading Update |
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1. INTRODUCTION
To achieve the objective of communicating operating performance more
regularly than the statutory six-monthly reporting periods, African Bank
Investments Limited ("ABIL") publishes quarterly trading updates. These
updates focus on the size of the loan book and movements in constituent
portfolios. These, together with risk-adjusted margins generated on these
portfolios, are the main drivers of performance in the business. It is
important to note that the quarterly update relates purely to the size and
movement of the various portfolios and, in this report for the first time,
an indication of credit performance. As a result, it is not reflective of
profitability on its own.
ABIL is pleased to submit the update for the period ending 31 December 2001.
MARKET CONDITIONS
Two of our major competitors in the industry announced significant losses on
their micro loan books during the past quarter and have been either placed
under curatorship, or the protective custody of their majority shareholder.
Their particular difficulties are the result of the application of credit
policies for the past eighteen months which were too liberal for the risk
profile of this particular niche in the market. These are not new events,
and the over extension of their clients has been a component of market
dynamics for some time.
In addition, a number of retailers who operate in the middle to moderate
income market have reported increasing arrears. These factors, coupled with
a slowing economy and increasing interest rates, prompted ABIL to undertake
a detailed analysis on the present dynamics of the markets that it operates
in. The group has reviewed the impact of these dynamics and believes that
the resultant effects will be that:
a portion of the target market has effectively been disqualified from
further loans for a period of time;
there is evidence of increasing predatory activity such as administration
orders and debt mediating in the market African Bank operates in, which will
lead to higher specific provisions and bad debts over the short-term. These
activities are predominantly undertaken by individuals who were previously
engaged as brokers to loan providers;
job losses will rise, albeit at a moderate pace, which necessitates a more
vigilant analysis of trends in the various economic sectors in which the
group's lending takes place;
the squeeze on disposable income of this sector of the economy will take
time to be felt in the market and the group believes that the preventative
measures already taken over the past year will lesson the impact for the
group;
collection strategies have over the past few months needed to be enhanced in
order to stay ahead of market trends; and
the cost of credit has inevitably increased and, simultaneously, the terms
of credit offerings have been tightened.
ABIL does not expect any other contagion, but will continue to monitor the
situation carefully and communicate with shareholders regularly as
conditions warrant.
Given the recent events, ABIL has decided to expand the quarterly update
from one dealing purely with advances growth, to include indications on
credit performance on its loan portfolios and an analysis of liquidity
conditions in African Bank. These matters are dealt with under sections 7
and 8 of this announcement.
THE LOAN BOOK AT 31 DECEMBER 2001
The events of the past quarter have demonstrated again that the major
challenge for credit businesses in this market is not absolute growth in
credit portfolios but rather achieving the desired risk-adjusted yield from
the portfolio. For the past two years, the group has therefore remained
cautious in its asset growth, concentrating rather on credit quality,
particularly in the light of the systemic changes occurring in the micro
finance sector over this period.
The table below shows the changes in the loan book that have occurred since
30 September 2001.
Total advances for the group grew by 2.4% quarter-on-quarter. Advances
growth in African Bank was relatively flat over the past quarter, primarily
as a result of a decision by management to reduce the term and size of
several of its loan products even further. This decision resulted in lower
growth in new volumes.
Good growth was achieved over the quarter in the retail portfolio (19%), the
Standard Bank joint venture (37%) and Miners Credit Guarantee (20%).
AFRICAN BANK
The bank's portfolios grew by 1.3% quarter-on-quarter. The satisfactory
growth in most of the portfolios continues to be affected by the reduction
in the Persal portfolio.
Corporate payroll portfolio
The corporate payroll portfolio increased by 5.4% in the three months to R1
797 million. This portfolio was the most severely influenced by the decision
to reduce the size and term of loans. The bank has shifted sales into
products which it believes will have a positive impact on the risk-adjusted
yield derived from this portfolio.
4.2 Retail Portfolio
The growth of the retail portfolio by 18.8% to R740 million underlines the
demand for individual retail debit order lending. This sector normally
experiences strong demand in November and December. The bank launched
several new products in this market over the quarter, including products for
weekly and bi-weekly paid employees and entry-level products for clients
with no formal credit history. The interest rates charged for loans in the
retail portfolio were raised in September 2001 and will be raised again in
March 2002 to cater for increased risk in this environment.
The joint venture with Standard Bank has continued to show satisfactory
growth, albeit from a low base.
The National Loans Register has been implemented and should become fully
operative over the next couple of months. It is expected to reduce sales
volumes in this area of the portfolio initially, but should greatly enhance
the risk underwriting profile of clients in this market over time.
ADVANCES AS AT 30 December 2001
ADVANCES IN Rm % Change Dec-01 Sep-01 Jun-01 Mar-01
AFRICAN BANK 1.3% 3 777 3 727 3 524 3 612
LIMITED
Persal - Historic -30.3% 546 784 1 159 1 422
Persal - 35.6% 210 155 - -
Consolidated
Parastatals and -5.1% 200 211 229 287
post office
Transitional Local 5.8% 199 188 185 183
Council (TLC's)
Private Sector, 5.4% 1 797 1 704 1 401 1 314
corporate and
mining
Retail 18.8% 740 623 508 385
Standard Bank 37.2% 84 61 42 22
Joint Venture
(53%)
SAFRICH -32.7% 47 70 107 132
Persal -39.5% 29 48 62 78
Corporate -17.9% 18 22 45 55
THETA INVESTMENTS 9.6% 956 872 796 562
Credit Indemnity 1.9% 200 196 181 138
Miners Credit 19.7% 289 241 214 100
Guarantee
Gilt Edged 8.8% 246 226 186 165
Management
Services
African Contractor 6.0% 219 207 213 157
Finance
Quatro 7.5% 3 2 2 2
TOTAL 2.4% 4 780 4 669 4 427 4 307
COLLECTION METHODOLOGY SPLIT WITHIN THE ADVANCES
PORTFOLIO
%Change Dec-01 Sep-01 Jun-01 Mar-01
Government -20.4% 786 987 1 221 1 499
(Persal)
Payroll business 6.0% 2 749 2 592 2 260 2 103
Retail / debit 16.3% 1 023 880 731 544
order business
SMME 6.1% 222 209 215 160
2.4% 4 780 4 669 4 427 4 307
4.3 Persal portfolio
The Persal book has continued to reduce in line with expectations. The
majority of the book will be run down over the next financial year.
Following Government's decision in the middle of 2001 to allow
consolidations of the existing loans of its employees, African Bank actively
took part in the consolidation and rehabilitation of public servants and, as
a result, this portfolio grew to R210 million. Participants in the market
had until 31 December to consolidate Persal loans.
The consolidation process and the implementation and effectiveness of the
business agreement between government, the banking industry and the
insurance industry are currently being reviewed. The outcome of this review
will have a significant bearing on the possibility of allowing new business
to be written in this sector, which is being explored with government.
4.4 Parastatals/Transitional Councils portfolios
Portfolios in the quasi-government sectors have continued to decrease as a
result of tightened credit policy due to market changes brought about by
corporate restructuring in these sectors. The restructuring of certain of
the Transitional Local Councils(TLC) has largely been implemented and
exposure to certain TLCs has now been increased, albeit at a conservative
rate.
5. SAFRICH
Safrich sold most of its corporate loan book in 2001, and a portion of its
Persal book was sold to African Bank in January 2002. This is part of the
ongoing process of winding down the business.
6. THETA INVESTMENTS
This portfolio is the aggregation of the portfolios of the underlying
subsidiaries of Theta Investments. These are Credit Indemnity, Miners Credit
Guarantee(MCG), Gilt Edged Management Services (GEMS), African Contractor
Finance Corporation(ACFC) and Quatro.
The portfolio grew by 9.6% over the three months, with MCG showing the best
performance with 19.7% growth for the quarter.
Credit Indemnity produced good turnover over the past three months. The
growth in turnover is not reflected in the gross advances for December 2001,
because it is negated by large receipts. Bonuses are traditionally received
in December and customers tend to repay their loans with these bonuses,
which has a large impact on the book due to its short-term nature (4
months).
MCG showed 20% growth in the quarter as its dominance in the mining sector
increased following the withdrawal of other significant players. Teba
Credit, a joint venture between Teba Bank and MCG, launched a new 24-month
product, which enhanced advances.
The GEMS book grew in line with expectations.
ACFC continues to make significant progress in building a robust business
and reducing bottlenecks. Although advances were sizable, the company also
enjoyed significant receipts on completion of some of the large contracts
which were financed.
7. PROVISIONS, NON-PERFORMING LOANS(NPLs) AND BAD DEBTS
Whilst ABIL's quarterly updates have focused exclusively on the growth in
its loan book in the past, the events over the past quarter have
necessitated some comment on the trends in portfolio risk.
In the 2001 annual report the group stated that NPLs and provisions were at
historical lows and that it anticipated that these would increase in 2002.
The experience over the past three months has been in line with this view.
NPLs and specific provisions showed an increase that can mainly be
attributed to the normal cyclical increase in provisions in this quarter.
This occurs as a result of the seasonal closures of corporates and the
labour market in general in early December, re-opening mostly in the middle
of January only. The provisioning methodology employed by the group is
particularly dynamic, and if there is a default on an instalment due on a
loan, a specific provision will be raised on that loan immediately.
Provisions have also, however, been impacted by predatory practices such as
administration orders and debt mediating. These trends are being closely
monitored and strategies have been put in place that should effectively
counter these activities during the current financial year. Overall, though,
the rise in the level of provisions over the past quarter is in line with
historic trends. The retail portfolios have started to mature and actual
loss ratios have begun to align themselves with levels consistent with
forecast losses. Taking these factors into account, if present market
conditions continue, the group expects total provisions (excluding
insurance) to range between 11% and 13% at year-end, up from the 9% level
reported in September 2001.
Core bad debts, in ABIL's case, arise primarily as a result of job losses.
Such bad debts tend to be non-actionable. The incidence of this factor
remains reasonably stable at this stage. Actionable bad debt includes bad
debt related to administration orders, resignations, cancelled stop orders
and debt mediating. Actionable bad debts have been responsible for an
increase beyond historic trends. Overall, bad debt write-offs as percentage
of advances are for the full year, expected to be in a range between 5.5%-
7.5%, although the impact may be felt disproportionately in the first half
of the year. This arises as a result of the group writing off doubtful
debtors at a relatively early stage and curing the bad debt only once
adequate performance has been demonstrated.
8. LIQUIDITY AND SOLVENCY
The group has consistently adopted an extremely cautious approach to funding
in African Bank, which is also responsible for the management of group cash
flows. Accordingly, the duration of the bank's liabilities at 23 months
exceeds the duration of its assets at 12 months. As a result, the bank's
cash flow risk involves it having to reinvest funds emanating from its asset
portfolios until liabilities mature, rather than the traditional approach of
banks having to roll short-term liabilities to fund assets.
At present the group has net cash holdings, assuming all short-term
liabilities are repaid, of R240 million. In addition, the bank has committed
unconditional undrawn facilities of R500 million and standby facilities of
an additional R350 million. The decision in October 2001 to raise R1 billion
of AB01 bonds maturing in 2004, has proven in hindsight to be particularly
useful given the potential for consolidation in the group's core market.
Accordingly the group has no liquidity or solvency risk, which is very
relevant given the uncertainties facing A2 banks at present. The graph below
depicts the maturity profile of the bank's liabilities to third parties.
9. CANCELLATION OF SHARES
At the Annual General Meeting on 6 February 2002, shareholders voted in
favour of the cancellation of 17,1 million shares held by Stangen. These
shares form part of the specific buy-back ABIL concluded in June 2001. The
cancellation of the shares will reduce the number of shares in issue to 497
million.
10. FUTURE TRADING PROSPECTS
The withdrawal of major competitors from the market will allow ABIL to
concentrate on improving service levels, operating efficiencies and credit
underwriting strategies during the course of this year. In spite of the
current dynamics in the markets in which ABIL operates, which will be
monitored continuously, the group is confident that its earnings growth for
2002 will exceed that of the previous comparable period.
On behalf of the board 11 February 2002
Registered Office Transfer Secretaries
59 16th Avenue, Mercantile Registrars Limited
Midrand,1685 8th Floor, 11 Diagonal Street
Private Bag X170, Johannesburg,2001
Midrand, 1685
