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ABL ABLP
ABL
ABIL - Trading Update For The Third Quarter Ending 30 June 2006
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 ENDING 30 JUNE 2006
INTRODUCTION
For the last two years, the environment in which the ABIL group operates has
been characterised by a buoyant consumer market, and a benign competitive and
risk environment. This, together with various risk and price differentiation
strategies implemented by the group, and an expansion of the distribution
footprint, has resulted in a period of sustained growth in the lending books.
The segmentation in August 2005 of our client base into discreet risk bands
has enabled the group to become more targeted in its underwriting and pricing.
This led to a lift in sales to lower risk clients, driven by the extension of
larger loans for longer terms at lower prices. Conversely, the group believes
that signals have emerged over the last six months that point to the beginning
of a change in the credit cycle and has therefore adopted a more cautious
approach with regard to higher risk clients. This has had the effect of
tightening the affordability criteria for these clients and thereby reducing
loan sizes and terms. The impact of these latter interventions has been
primarily felt over the last quarter.
The effect of these changes has been a shift over the last year towards higher
volumes of lower risk loans with a longer average term at lower yields. This
has given the group significant pricing power and places it on a strong
competitive footing for the future. The group expects to implement a further
segmentation of the client base into a wider number of risk bands, and a
second round of price reductions to the medium and low risk client bands will
be effected during August 2006.
SALES
Sales value (R million)
2006 2005
% 9 9
change mths Qtr3 Qtr2 Qtr1 mths Qtr3 Qtr2 Qtr1
African
Bank -
retail
products 20% 3 471 1 081 1 079 1 312 2 882 1 086 826 969
African
Bank -
payroll
products (28%) 130 40 43 47 182 57 57 67
Miners
Credit 26% 619 210 178 231 489 147 153 189
Standard
Bank JV 19% 319 99 102 118 268 100 75 93
Commercial
Vehicle
Finance (53%) 61 0 22 39 130 41 42 47
Total 16% 4 600 1 429 1 424 1 747 3 951 1 432 1 153 1 366
Sales of new loans granted for the nine months to 30 June 2006 grew by 16%
over the prior period - a slow down in the 26% growth that was achieved during
the first six months of the current financial year. Excluding the Commercial
Vehicle Finance division that was sold in the period, the adjusted sales
growth for the remaining businesses was 19%. This slow down in the nominal
value of sales is as a result of the changes to the underwriting models that
were effected during the course of the last year.
As a result, the average loan term of sales in the African Bank - retail
products (including Credit Indemnity) segment has increased, from
approximately 16 months to 23 months. This means that sales are made less
frequently to repeat clients and for a given value of nominal sales, the group
will now earn higher total future revenue over a longer period, albeit at a
lower average yield.
The distribution of sales (graph available on www.africanbank.co.za) by loan
terms shows the effect of the shift in the business from short-term loans
(particularly the old Credit Indemnity) to longer-term loans. The large
percentage of loans now in the 25 to 36 months term bracket is as a result of
the 36-month limitation under the Exemption Notice to the Usury Act. This
limitation falls away under the National Credit Act, and opens up
opportunities to extend the terms of certain low risk loans beyond 36 months
from June 2007.
GROSS ADVANCES
% growth As at As at As at
R million y-on-y 30 Jun 06 30 Sep 30
05 Jun
05
Lending books 25% 6 752 5 793 5 392
African Bank - retail
products 40% 5 170 3 926 3 683
African Bank -
payroll products (29%) 496 614 695
Miners Credit 47% 692 651 470
Standard Bank JV 30% 394 348 303
Commercial Vehicle
Finance (100%) 0 254 241
Pay down books (30%) 545 661 777
Persal (22%) 172 197 220
Saambou PLB (32%) 366 450 540
Gilt Edged Management
Services (59%) 7 14 17
Gross advances 18% 7 297 6 454 6 169
As the average term of the new loans granted increases, so does the duration
of the lending books, and accordingly the average advances book on which
income is earned grows faster than sales. This has been particularly relevant
in the markets where Credit Indemnity operated, in which loans of 4 to 6
months were previously the norm, and many of these clients have now migrated
to the longer-term African Bank debit order loans.
As a result, lending books grew by 25% to R6,8 billion on the back of a 16%
growth in sales. During this period the acquisition of the Teba Credit JV
book by Miners Credit was largely offset by the disposal of the Commercial
Vehicle Finance division. The pay down books continued to decline, albeit by
a slower 30%, as the remaining loans in these portfolios are largely
restructured NPLs (administration orders and legal judgements) on which a
steady, but reduced, instalment is being received. The pay down books now
only comprise 7% of the total gross advances.
Total advances grew by 18% in the period from R6,2 billion at 30 June 2005 to
R7,3 billion at 30 June 2006.
ASSET QUALITY
% change
R million from Jun 05 30 Jun 06 30 Sept 05 30 Jun 05
Advances
Performing 18% 5 315 4 812 4 488
Non-performing 18% 1 982 1 642 1 681
Total advances 18% 7 297 6 454 6 169
Impairment provisions
and reserves
Impairment provisions 28% 1 312 979 1 029
Stangen credit life
reserves (75%) 35 138 141
Total impairment
provisions and 15% 1 347 1 117 1 170
reserves
Ratios
NPLs as a % of total
advances 27,2% 25,4% 27,4%
Impairment provisions 61,2%
as a % of NPLs (NPL 66,2% 59,6%
coverage 1)
Life reserves as a %
of NPLs (NPL coverage 1,8% 8,4% 8,4%
2)
Total impairment
provisions and
reserves as a % of 68,0% 68,0% 69,6%
NPLs (NPL coverage)
Total impairment
provisions and
reserves as a % of 18,5% 17,3% 19,1%
total advances
Bad debt write-offs
as a % of average 7,5% 19,7% 21,6%
gross advances
Due to the strong growth in sales during the latter half of 2005, the previous
steady decline in non-performing loans (NPLs) has now reversed as the NPLs
from this period begin to feed through, resulting in NPLs increasing by 18%
from R1,7 billion to R2,0 billion over the last twelve months. NPLs are
expected to continue to grow for the foreseeable future as the arrears and
defaults from higher sales volumes mature. Overall provision coverage on NPLs
has been maintained at 68%. Write-offs remained below long-term averages as
the NPLs from recent high sales growth have not yet had sufficient time to
mature to full delinquency status.
Credit quality is best reflected through vintage charts (graph available on
www.africanbank.co.za). As indicated in the African Bank Retail vintage
chart, risk has remained within the group"s targeted range, albeit at the
higher end of such range.
OUTLOOK
There is early evidence that the credit cycle may be entering a new phase
where environmental conditions are unlikely to be as favourable as they have
been in the last two years. This view is informed by a moderately rising
interest rate and inflationary cycle combined with increasing competitive
credit supply, albeit off a low base. As competitors increase their exposure
to this market segment, average credit balances particularly to higher risk
clients are rising. It is those clients who are prone to taking on more credit
when it becomes more readily available. Accordingly the steps taken in this
last quarter to tighten the underwriting to those segments are pre-emptive in
nature and designed to ensure that the group is not unduly exposed to emerging
risk as conditions change.
The group has deliberately positioned itself so as to anticipate a more
challenging trading environment over the foreseeable future. The changes
implemented by the group over the last eighteen months and the flexibility of
its business model will allow it to continue to attain its stated short and
medium term financial targets.
With regard to the full financial year to 30 September 2006, the group expects
that growth in new loans granted will be similar to the nine months to June
2006, while the growth in lending books will be at the higher end of the 18%
to 22% target set. The total yield on average gross advances is dropping in
line with expectations. The bad debt charge as a percentage of interest income
is running slightly above the 20% target of the group, while this is being
offset by continued tight control over operating costs.
On behalf of the board
31 July 2006
This announcement is available on the African Bank Investments Limited website
at http://www.africanbank.co.za.
Registered office: 59 16th Road, Midrand, 1685
Share transfer secretaries: Link Market Services South Africa (Pty) Limited,
11 Diagonal Street, Johannesburg, 2001.
Board of directors
Executive directors: G Schachat (Deputy Chairman), L Kirkinis (Chief Executive
Officer), A Fourie, TM Sokutu, DF Woollam
Non-executive directors: AS Mabogoane (Chairman), DB Gibbon, BD Goba, R
Naidoo, BPF Steele, GZ Steffens (German), DFG Tembe (Mozambican),
A Tugendhaft.
Group Secretary: S Martin
Midrand
31 July 2006
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 31/07/2006 07:00:29 AM Produced by the JSE SENS Department
