African Bank will beat 'junk' rap
Analysts say the company’s biggest shareholders cannot afford to let it fail.
African Bank is poised to bounce back over the long term, analysts agree, largely because of a host of powerful shareholders who can’t afford to let the company go belly up.
A graph of African Bank’s share price looks like the sketch of a downward slalom race.
Shares in South Africa’s largest unsecured lender have dived more than 80% over the past two years. It has relinquished more than 25% of its market value since January. The bank posted a headline loss of R3.1-billion and 337 cents a share in its March interim financials.
It was recently downgraded to “junk” status by Moody’s credit rating agency. But despite the steady “stream” of bad news, analysts are united in one opinion: African Bank will ultimately weather the storm.
“Essentially what they’re going through is a cyclical phenomenon,” said head of Momentum Wealth, Wayne McCurrie. “Now they’re riding the down cycle. That will of course at some stage pick up again.”
Near the end of last year, the cash-strapped bank struggled to maintain sufficient capital to service a loan book riddled with bad debt.
General losses going forward
It managed to raise R5.5-billion from shareholders through a rights issue, enjoying the backing of its five largest shareholders: investment and pension fund giants Coronation, the Public Investment Corporation, Stanlib, Sanlam and Allan Gray.
In March this year, almost 32% of the company’s loan book consisted of non-performing loans. The company allocated R1.3-billion to write-offs.
At the same time, it issued a R2.5-billion provision for general losses going forward.
McCurrie said the bank is now fairly well capitalised.
“Generally speaking, they’ve made provision for all possible bad debts. They should be able to recoup a certain amount of their outstanding loans.”
And, in the current economic environment, the bank will probably not need to expand its loan book much.
Figures from the National Credit Regulator showed that unsecured credit agreements decreased by almost 13% over the last quarter. Year on year, the rand value of unsecured loans in South Africa decreased by almost 17%.
‘Success of the business’
“You’re not going to see another credit expansion for a number of years,” said McCurrie. “The consumer is in for a very tough time.
“African Bank won’t need any capital to expand their book, because there won’t be any demand to expand.”
But Byron Lotter, portfolio manager at investment firm Vestact, has another view. His company held African Bank shares for five years and sold when the bank announced its share rights issue plan.
“Half the success of the business depends on what rate they [African Bank] can borrow at,” said Lotter.
“But the rates they get are obviously dependent on whether they can pay that money back. Because confidence in the company has decreased in a big, big way, the rates they are going to have to pay are just going to increase.
“That’s going to be terrible for their margins.”
In Lotter’s view, the bank’s current plight is more than just the result of a currently cash-strapped consumer.
“Management overextended themselves,” he said. “They were completely gung ho, growing their loan book by 30% or 40% a year. They completely misread the market and it backfired.”
Analysts are unanimous in their criticism of the company’s R9.1-billion purchase of furniture store Ellerines in 2008, just before the market crash.
‘Expensive deal concluded’
“They paid top dollar at the top of the boom time,” said Garth Mackenzie, chief executive of TradersCorner.co.za. “I suppose to a large extent that’s been a contributor to their undoing.”
The purchase, said Mackenzie, could be considered a bad management decision.
“Buying Ellerines at the top of the market smacks of having too much money and forgetting the risks for what they were. This is not the first time we’ve seen a big expensive deal concluded at the height of boom times, and I doubt it will be the last either.”
But the bank defends its decision. “At the time, the price paid, based on the board’s outlook for the future, was deemed fair,” it said in a statement to the Mail & Guardian.
Leon Kirkinis, the bank’s founder and chief executive, has largely escaped the extent of public criticism that one might expect after the bank’s series of shock financial results.
“It is natural to expect investors to have been disappointed with the financial performance of African Bank over the past three reporting periods,” said the bank.
“Various steps have been and continue to be taken to restore investor confidence; for example, the rights issue completed in December 2013, the decision to dispose of Ellerines, increased provisioning for credit losses, and so forth.”
Said Mackenzie: “To be fair, this is the first real big mistake Kirkinis has made. He is still hailed as one of most intelligent bankers in South Africa. The markets must give you a second chance.”
But there’s more to it than investors issuing Survivor-style immunity idols to their favourite businesspeople. Analysts say African Bank’s bigwig stakeholders are in so deep they can’t afford to let the company fail.
Shareholders and bondholders are “so deeply entrenched in this thing that they’re going to have to keep it going,” said Mackenzie.
Even if the company has a few more rights issues, “shareholders will back them,” said Lotter.
Some shareholders have recently increased their exposure, says the bank, with PIC upping its stake to more than 15% and Sanlam Investment Management to more than 5%, “demonstrating renewed confidence in the business”.
“On the international bond market, African Bank’s Swiss bonds pricing has also shown steady improvement after a recent visit to Swiss investors.”
Company’s overall loan book
In McCurrie’s opinion, the share, which dropped from a three-month high of R12.82 at the end of April to its current levels of about R6.80, is a cheap buy for those who “can afford to take a three- to five-year view”.
Lotter feels differently. “It’s not worth the risk for us,” he said.
The share recovered slightly at the beginning of the week, possibly because of the five-month long platinum strike ending. At last count, mining exposure made up approximately 4% of the company’s overall loan book.
The bank took “proactive steps” during the strike to assist the miners, who “had no way of meeting their debt obligations”.
“While there has been some deterioration of payment behaviour of our platinum customers, payments have held up better than might be expected,” said the bank.