| Thu 1 Aug 2002, 0:00 | | ABIL - Announcement |
|
African Bank Investments Limited
(Incorporated in the Republic of South Africa)
(Registration number 1946/021193106)
(Share code: ABL)
(ISIN: ZAE 000030060)
("ABIL")
ACQUISITION OF THE SAAMBOU PERSONAL LOAN BOOK, WITHDRAWAL OF CAUTIONARY
AND TRADING UPDATE FOR THE THIRD QUARTER ENDING 30 JUNE 2002
1. INTRODUCTION
Further to the cautionary announcements dated 17 May 2002 and
28 June 2002, Deutsche Securities (SA) (Proprietary) Limited is
authorised to announce that African Bank Limited ("ABL"), a wholly-owned
subsidiary of ABIL, has concluded a heads of agreement to acquire the
Personal Loan Book ("the PLB") from Saambou Bank Limited (under
curatorship) ("Saambou"), subject to the conditions precedent set out in
paragraph 4 below.
ABIL is simultaneously releasing its quarterly update that reports on
operating performance.
Readers should note that all ratios used in this announcement are
subject to change, based on the final assessment of the Saambou auditors
("the auditors") of the net book value of the acquired PLB.
2. THE ACQUISITION
2.1.Rationale for the acquisition
In the context of the broader industry consolidation process under way
since the curatorship of Saambou, the Unifer bad debt crisis earlier
this year and a spate of adverse results from retail credit providers
indicating significant credit losses, ABIL believes the acquisition of
the PLB from Saambou will add significant value to its existing business
for the following reasons:
2.1.1. Consolidation of common clients
46% of Saambou`s clients, in addition to holding loans with Saambou,
hold loans previously granted by ABL, whilst 37% of Saambou`s corporate
payroll deduction schemes overlap with those of ABL. The common clients
represent 13% of ABIL`s advances.
Control over the combined exposures will provide ABL with the
opportunity to, if necessary, consolidate or reschedule the loan
exposures of affected clients, mitigating default risk or the risk of
clients going under administration, by providing monthly cash flow
relief to shared clients in need of such relief.
Where clients have been handed over in the legal process, it would
equally be more effective to pursue the defaulting debtor in respect of
his combined exposure.
The consolidation of loan exposures should improve the overall recovery
of non-performing loan portfolios.
2.1.2. Capital efficiency
On a pro forma basis, the transaction increases the annualised return on
equity for the six months to March 2002, from 28,0% to 34,6%. It also
has the effect of reducing the capital adequacy of ABL from 30,4% to
24,9%, in line with the objective of bringing the ratio down to 20,0%
over the medium term. The acquisition is substantially earnings
accretive because the book is funded through surplus cash and
borrowings. The pro forma earnings for the 6 months to 31 March 2002
increases by 26%.
Saambou, historically, has targeted the same market as ABL for the PLB
business as indicated by the significant overlap in customer bases
outlined above. The acquisition increases the size of ABL`s assets and
its exposure to its chosen market. ABL is a cash and capital generative
business and the acquisition provides the opportunity to deploy capital
within ABL`s core business.
2.1.3 Acquisition of new clients and corporate schemes
ABL will gain approximately 240 000 additional clients and access to a
number of additional corporate schemes, without the costs typically
incurred when acquiring new clients and employer deduction agreements.
The acquisition will strengthen ABL`s presence in the payroll sector,
ultimately enhancing the competitive positioning of the bank.
2.1.4 Economies of scale
The takeover of the PLB will result in convenience gains for clients in
due course, due to both the Saambou and existing ABL loan relationships
being managed through one consolidated interface. The economies of scale
would also enable ABL to reduce its cost-to-income ratio and therefore
improve its competitiveness. The pro forma cost-to-income ratio reflects
no immediate increase as a result of the transaction, and is expected to
reduce over time.
2.1.5 Industry risk management
Inadequacies in the national credit information system and the lending
practices of some lenders have in the past led to multiple exposures and
resultant cash-flow strain being incurred by clients without, in many
instances, affected creditors being aware of or able to prevent such
indebtedness. In this context, there is from an industry consolidation
and an ABIL risk management perspective, a significant benefit in
bringing these two books under consolidated management.
With the National Loans Register ("NLR") now operational, and through
closer co-operation in the industry, the occurrence of such overlapping
exposures will be reduced in future. The addition of the Saambou client
base to ABL will enhance the group`s ability to take the lead in this
process.
2.2 Terms of the acquisition
2.2.1 Purchase price
ABL and Saambou (under curatorship) have agreed that ABL will acquire
the PLB for a purchase price equivalent to:
the net asset value of the PLB to be determined by the auditors as at
31 July 2002;
2.2.1.2 less the net present value of future costs of R450 million
(being a fixed amount to cover costs related to the collection of the
PLB over its life) which amounts to R367 million.
The estimate of the purchase price, based on Saambou management accounts
as at 30 April 2002, is as follows:
Rm
PLB gross book 2 828
PLB provisions (1 211)
Net book 1 617
Less provision for collection costs (367)
Projected purchase price 1 250
2.2.1.3 PLB risk profile
ABL believes that this price is fair, based on its detailed evaluation
of the PLB. Approximately R1,1 billion of gross advances is achieving
95% of the expected performance and the PLB loan book that is not
performing is sufficiently provided for.
2.2.2 Settlement of the purchase price
Utilising the above estimates, the purchase price for the PLB will be
settled in full in the following manner:
2.2.2.1 An initial payment of R900m will be made on the fifth business
day after the date of the fulfilment of the last of the conditions
precedent to which the sale will be subject ("initial payment") and;
2.2.2.2 the balance of R350m, bearing no interest, will be paid
within five business days of the publication of the audited financial
statements of the ABIL Group of companies for the financial year ended
30 September 2006 ("loan account").
In the management estimates utilised above, an expected collections rate
of 55% was used. However, depending on the cash collected in respect of
the PLB during the period between the effective date (set out in
paragraph 2.2.4 below) and the fourth anniversary of the effective date,
the loan account will be adjusted as follows:-
Actual cash collected as a % of Loan
scheduled collections, currently account
estimated to be of the order of R3,4 bn
cumulatively determined after 48
months:
Less than 55% of expected cash flows R nil
Equal to or greater than 55% but less R350m
than 59%*
Equal to or greater than 59% but less R460m
than 63%
Equal to or greater than 63% but less R570m
than 67%
Equal to or greater than 67% but less R680m
than 71%
Equal to or greater than 71% but less R790m
than 75%
Equal to or greater than 75% R900m
* Scenario used by management in the pro forma calculations
Should the auditors determine a net book value which differs from that
reflected above, each of the initial payment and the loan account will
be adjusted by half of such difference.
2.2.3. Funding of the acquisition
The initial payment will be funded through a combination of available
cash resources and the utilisation of existing credit facilities. ABL
will not issue additional ABL1 bonds to fund the transaction.
2.2.4. Effective date
The effective date of the sale of the PLB will be 1 August 2002 ("the
effective date").
2.2.5 Other terms of the agreement
2.2.5.1 Approximately 676 employees of the PLB division of Saambou
have already been notified of their retrenchment by the curator. ABL
will be looking to re-employ the majority of these members of staff, who
will be notified in due course.
2.2.5.2 Certain categories of loans have been specifically excluded
from this acquisition (eg. Staff loans, Saampro and FinEd), with the
balance being included (eg. loans that Saambou acquired from Thuthukani
Term Finance).
2.2.5.3 The acquisition specifically excludes any subsidiaries,
associates, joint venture and other investments in companies which
traditionally formed part of the PLB division.
3. PRO FORMA FINANCIAL EFFECTS ON ABIL
Pro forma calculations are based on the published unaudited interim
results for the 6 months ended 31 March 2002.
The transaction has the effect of increasing the pro forma headline
earnings per share by 26% from 59,2 cents per share to 74,8 cents. Pro
forma earnings per share also increases by 26% from 59,8 cents per share
to 75,4 cents. An important effect of the transaction is that it will
increase both provisions and non-performing loans ("NPLs")
significantly. Pro forma provisions increase from 11,6% to 23,1%.
The pro forma effects of the transaction cannot be viewed in isolation.
Investors are cautioned to take cognizance of ABIL`s trading statement
in section 7 and read it in conjunction with the financial effects of
the transaction. The trading profits generated by acquisition are
expected to provide ABIL with significant benefits over the next four
years, but will have an immaterial effect on the results to September
2002, given the timing of the transaction in the financial year.
AFRICAN BANK INVESTMENTS LIMITED - CONSOLIDATED GROUP INCOME STATEMENT
Pro forma Pro forma
Interim adjustment adjusted for 6
6 s months ended 31
months March 2002
to 31
March
2002
YTD
Revenue
Interest Income 971 430 226 183 1
197 613
Interest Expense (184
345) (42 456) (226 801)
Net interest 787 085 183 727
970 812
Charge for bad and (283
doubtful advances 230) (283 230)
Net interest income after 503 855 183 727
provisions 687 582
Net Assurance income 117 364
117 364
Non Interest Income
173 598 173 598
Income from operations 183 727
794 817 978 544
Operating costs
(439 (75 000) (514 888)
888)
Net income from 108 727
operations 354 929 463 656
Share of retained income from
associated companies 1 581 1 581
Net income before 108 727
taxation 356 510 465 237
Indirect taxation
(16 (16 500)
500)
Taxation
(44 (32 618) (77 573)
955)
Net income after taxation 76 109
295 055 371 164
Minority Interest
(2 724) (2 724)
Income attributable to 76 109
ordinary shareholders 292 331 368 440
Adjustments
-
Net goodwill amortised
5 462 5 462
Rentrenchment provisions
(8 573) (8 573)
Profit on disposal of
investment in associate -
Headline earnings 76 109
289 220 365 329
AFRICAN BANK INVESTMENTS LIMITED - CONSOLIDATED GROUP BALANCE STATEMENT
Interim Proforma Pro forma -
- 31 adjustmen 31 March
March ts 2002
2002
YTD
ASSETS
Fixed assets
178 311 178 311
Investment in Associates
8 360 8 360
Goodwill
19 552 19 552
Investments
- -
Deferred Tax Asset
33 636 33 636
Net Advances 1 100 573 5 397 685
4 297
112
Gross advances 2 828 000 7 690 289
4 862
289
Total provisions (1 211 (1 776 177)
(565 000)
177)
Less collection cost
provision (367 000) (367 000)
Less interest No
amortization provision te - (149 427) (149 427)
1
Other Assets
209 735 209 735
Taxation
21 737 21 737
Liquid assets 45 043
311 562 356 605
Short term deposits and -545 043
cash 585 599 40 556
TOTAL ASSETS
5 665 600 573 6 266 177
604
EQUITY AND LIABILITIES
Life Fund Reserves
136 578 136 578
Structured Loans and 600 573
debentures 1 923 2 524 196
623
Deferred Tax Liability
18 941 18 941
Liabilities to depositors
741 089 741 089
Other liabilities
255 472 255 472
Taxation
36 987 36 987
Bank overdraft
20 871 20 871
Total Liabilites 3 734 134
3 133 600 573
561
Capital and Reserves
Ordinary Shareholders`
Funds 2 285 2 285 190
190
Outside shareholders`
Funds 61 498 61 498
Secondary Capital
185 355 185 355
Total Capital and 2 532 043
Reserves 2 532 -
043
TOTAL LIABILITIES AND 6 266 177
EQUITY 5 665 600 573
604
Selected ratios % change
Headline earnings per 59.2 26% 74.8
share (cents)
Earnings per share 59.8 26% 75.4
(cents)
Return on average equity No 28.0% 24% 34.6%
te
2
Capital adequacy (ABL 30.4% -18% 24.9%
only)
Equity to assets 41.4% -7% 38.7%
Cost-to-income ratio 40.8% 0% 40.8%
Net asset value per share 472.0 0% 472.0
Tangible net asset value 458.0 0% 458.0
per share
Total number of shares in 497 156 497 156
issue
Weighted number of shares
in issue (000) 488 498 488 498
Note 1: Generally Accepted Accounting Practice requires that the loan
account payment of R350m due in 48 months be present valued at a market
related interest rate. At 12.86% p.a, the NPV of the R350m is R200,6m.
The difference between the NPV and the face value is R149,4m. This
equates to the interest amortization provision.
Note 2: In this ratio, the pro forma balance sheet used
includes the effect of the pro forma income for the 6 month
period.
The above pro forma financial statements have
used the following assumptions:
The assumed purchase price as at 31 July is R1 250m. The
amount will be settled through an initial payment of R900m and
additional payment of R350m at the end of 48 months. The
projected purchase price assumes that 55% of scheduled
collections are actually collected.
PLB provisions are currently based on the Saambou provisioning
methodology. A reassessment of these provisions based on ABL`s
methodology may give rise to an adjustment to the carrying
value of the net PLB book.
The income statement is based on the published unaudited
interim results for the 6 months ended 31 March 2002 and
assuming that the acquisition of the PLB took place at the
beginning of that period, being 1 October 2001.
The payment of the R900m is assumed to be funded using cash
balances of R500m, (the related loss of earnings on this cash
balance at 10% per annum has been deducted from interest
earnings) with the balance being funded through term
borrowings. An interest expense on the full purchase price has
been assumed at the ABL bond rate of 14.0% (pre tax). A group
tax rate of 30% was assumed.
4. CONDITIONS PRECEDENT
This acquisition is subject to the following conditions precedent being
fulfilled by 30 September 2002:
4.1 the conclusion of formal written agreements relating to this
acquisition including certain support and ancillary agreements;
4.2 all regulatory approvals being obtained and compliance with their
requirements, including those contemplated by section 54(1) and 54(8A)
of the Banks Act;
4.3 any necessary JSE Securities Exchange South Africa ("the JSE")
approvals being obtained and compliance with their requirements;
4.4 the issue by the Minister of Finance of a notice as contemplated in
Section 18(2)(b)(ii) of the Competition Act certifying that the
acquisition is in the public interest and is subject to the jurisdiction
of the Bank`s Act 1990 only;
4.5 the approval of the acquisition by shareholders in a general
meeting.
5. DOCUMENTATION
A circular to shareholders, which will be subject to the approval of the
JSE, containing full details of the acquisition and convening the
requisite general meeting of ABIL shareholders, is being prepared and
will be sent to shareholders in due course.
6. WITHDRAWAL OF CAUTIONARY
Shareholders are advised that further to this detailed announcement by
ABIL, the cautionary notice is hereby withdrawn.
7. TRADING UPDATE FOR THE THIRD QUARTER ENDING 30 JUNE 2002
ABIL publishes quarterly trading updates to provide investors with
regular updates on operating performance.
7.1 Market conditions
The after-effects of the disruptions in the credit market, resulting
from the curatorship of Saambou and problems at Unifer and other credit
retailers, persisted during this quarter. The over extension of certain
clients remains a component of market dynamics as alluded to previously.
Consequently, ABIL maintained its cautious stance on advances growth and
the tightening of its credit granting processes. The latter was achieved
through stricter vetting criteria including extra measures to more
accurately identify and account for all credit exposures and living
costs in assessing affordability, the shortening of terms, cutting back
on lower yielding products and the rapid blocking of corporates where
risk was perceived to have increased.
The predatory practices of informal debt mediators and certain debt
administrators discussed in the group`s interim results published in May
2002, continued, albeit at a reducing rate. The group is satisfied that
progress has been made in dealing with these practices. It will,
however, take time for the effect of these practices to pass through the
system. It is pleasing to note that the cancellations in Persal have
continued to reduce and that the focus on the legal collections area
earlier in the year is starting to bear fruit.
The strengthening of the economy is evident in the latest economic
indicators. While the group is confident that it will benefit from this
strengthening, it will remain cautious until the industry-specific
issues of over extension and overlap of clients have been satisfactorily
resolved and the Saambou book has been incorporated fully into ABL.
7.2 The loan book at 30 June 2002
The table below shows the changes in the loan book that have
occurred since 30 September 2001.
Total advances for the group remained flat over the quarter. Advances
growth in ABL increased by 1,1%, while advances in Theta Investments
reduced by 2,3% quarter-on-quarter, mainly on the back of the
contraction in African Contractors Finance and GEMS.
The composition of the ABL book continued to change, with good growth
being achieved over the quarter in the retail portfolio (17,3%) and the
Standard Bank joint venture (6,4%). These two loan portfolios have grown
by 60,2% and 73,1% respectively, in the nine months since September
2001. The reduction in the corporate book was as a result of a much
tougher market and the effect of the tighter credit stance of the group
as explained earlier. The Persal book continued to run down as expected.
The loan book excluding Persal grew by 20,5% on an annualised basis.
At Credit Indemnity advances growth was under similar pressure as a
result of the generally constrained credit environment, with first time
credit approval rates dropping significantly. MCG started to grow its
book again, after it pulled back in the previous quarter. GEMS scaled
down completely in anticipation of its integration into ABL, which is
expected to be finalised by December 2002. ACFC is aggressively
collecting its book as part of the restructuring of its business. Its
book is expected to reduce further before year-end.
The acquired PLB will add advances of R2.8 billion to the existing book.
The PLB consists of 59% payroll loans and 41% of debit order loans.
Over the next couple of months the group will focus on incorporating the
PLB into its business, rather than pursuing strong growth in advances.
The significant addition to ABIL`s advances and earnings will provide it
with the opportunity to review and restructure its product range to
cater for unfolding trends so as to sustain market leadership.
The review process at Persal is progressing and the group is confident
that the outcome of the review would be positive to new business
prospects.
ADVANCES IN R`000 % % 02-Jun 02-Mar 01-Dec 01-Sep
Chang Chan
e ge
from from
Mar Sept
02 01
AFRICAN BANK LIMITED 1.1% 4.3% 3 885 3 843 3 776 3 726 587
240 441 632
Persal - Historic -9.6% - 618 427 684 057 756 574 938 936
34.1
%
Persal - -5.1% 16.7 171 693 180 853 210 124 147 111
Consolidated %
Parastatals and post 2.1% - 193 661 189 739 200 196 211 034
office 8.2%
Transitional Local 4.8% 10.6 208 195 198 714 199 240 188 306
Council (TLC`s) %
Private Sector, -3.1% 2.1% 1 589 1 639 1 586 1 556 866
corporate and mining 299 822 537
Retail 17.3% 60.2 998 428 851 048 740 316 623 382
%
Standard Bank Joint 6.4% 73.1 105 537 99 208 83 645 60 952
Venture (53%) %
SAFRICH - - 19 972 24 359 46 881 69 709
18.0% 71.3
%
Persal - - 7 074 9 717 28 968 47 891
27.2% 85.2
%
Corporate - - 12 898 14 642 17 913 21 818
11.9% 40.9
%
THETA INVESTMENTS -2.3% 11.4 972 200 995 068 956 077 872 335
%
Credit Indemnity -0.1% 17.9 230 848 231 125 199 522 195 811
%
Miners Credit 6.9% 30.0 313 791 293 440 288 898 241 341
Guarantee %
Gilt Edged -6.8% - 225 306 241 695 245 672 225 882
Management Services 0.3%
African Contractor - - 200 284 226 033 219 447 206 941
Finance 11.4% 3.2%
Quatro - - 1 971 2 775 2 538 2 360
29.0% 16.5
%
TOTAL ABIL advances 0.3% 4.5% 4 877 4 862 4 779 4 668 631
412 868 590
Saambou advances 2 828
000
Total advances 58.5% 65.0 7 705 4 862 4 779 4 668 631
% 412 868 590
Gross advances
growth
Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun-02
00 00 01 01 01 01 02
Government 2 996 874
(Persal) 214 1 1 1 1 797
830 499 221 134
Payroll 2 2538 2578 2 543
business 169 2 2 2 2
206 103 260 445
Retail/debit 272 1245 1410 1537
order 473 704 946 1
business 089
Saambou PLB 0 2828
Total 4 863 7 705
advances 4 4 4 4 4 4
655 509 306 427 669 780
Graphs referring to data above will appear in press announcement
7.3 Provisions and bad debts
The group indicated at its interim results in May that it expected NPLs
to continue to increase and provisions to remain within the stated
ranged of 11%-13%.
As at 30 June 2002, provisions excluding insurance reserves increased by
R205 million since March 2002 to 15,8% of advances on the back of the
continuing increase in NPLs. This is above the expected range previously
indicated and is a direct result of the issues discussed before. There
is evidence that the rate of increase in the NPLs (and provisions) has
started to taper off.
The group is confident that the bad debt write-offs as a percentage of
advances will remain within the range of 5,5%-7,5% previously indicated.
Monthly application for
administration orders
2001/Sep 7 425
2001/Oct 2 995
2001/Nov 1 962
2001/Dec 616
2002/Jan 1 864
2002/Feb 11 967
2002/Mar 5 471
2002/Apr 3 434
2002/May 3 547
2002/June 2 500
Graphs referring to data above will appear in press announcement
The monthly applications for new administration orders continued to come
down. This was as a result of the negative publicity received by
administrators and the efforts of ABL and the Banking Council to
investigate and prosecute the unethical operators. The loan book under
administration in ABL has grown to R400 million, excluding Saambou. The
Saambou book has also been affected by the trend in administration
orders. The Saambou book currently has R145 million classified under
administration, however, ABIL believes that the actual amount may be
higher.
Persal
cancellatio
ns
Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun-
01 01 01 01 02 02 02 02 02 02
Monthly 7502 5595 6755 4655 3291 5554 3610 2987 2336 1311
cancellatio
ns
Graphs referring to data above will appear in press announcement
The number of cancellations in Persal has declined rapidly as the steps
taken by ABL and government started taking effect. Government is
actively discouraging a culture of non-payment and the risk in this
portfolio should continue to reduce further over the next few months.
7.4 Costs
Costs remain contained, with cost increases for the nine months to June
2002 still well below inflation. Costs at the banking unit were
substantially below the level for 2001, while increases in Theta
Investments` costs have started to taper off. The incorporation of the
Saambou book will result in greater economies of scale as discussed in
paragraph 2.1.4.
7.5 Margins
The gross yield on the book, being interest, assurance and other income,
has remained steady over the past three months. The interest and other
income yields increased on the back of changes implemented by the group,
while the assurance yield reduced slightly on lower sales volumes. The
net yield continued to be impacted by the significantly higher charge
for bad and doubtful debts.
The combined book of ABIL and Saambou will have yielded a gross yield of
42%, which is lower than the 51,2% achieved in March 2002. This
reduction occurs as a result of the higher proportion of NPLs in the
PLB.
7.6 Future trading prospects
The deterioration in credit quality over the past nine months has
triggered not only a higher than expected charge for provisions and bad
debts, but the need to curtail advances growth to accommodate the
increased risk. This negative impact is expected to continue until year-
end.
The acquisition of the PLB, while particularly positive for the earnings
outlook for the 2003 financial year, will have little impact on the
earnings for 2002, as the effective date in terms of Generally Accepted
Accounting Practice, will be later than 1 August 2002.
On behalf of the board
Midrand
31 July 2002
Financial Advisor and Sponsor Co-Legal Advisors to ABIL
Deutsche Securities (SA) Prinsloo, Tindle and
(Proprietary) Limited Andropoulos Inc.
Reg. no: 1995/011798/07
Curator to Saambou Moss-Morris Inc.
John Louw, KPMG
Date: 01/08/2002 07:28:36 AM Produced by the JSE SENS Department
