Higher provisions for bad debt and squeezed margins following a run on deposits depressed earnings at South African bank BoE, which is talks on a takeover by bigger rival Nedcor, results on Monday showed.
Analysts said the weak first-half results suggested that Nedcor’s R7,5-billion offer for BoE was fair and that shareholders should accept it.
SCMB banking analyst Andrew Heathcote said since the results he had changed his view and was now recommending that BoE shareholders accept what he had previously regarded as a cheap offer. ”The standalone risks are too great,” he said.
BoE, which suffered a run on deposits in February, said overall earnings fell four percent to R551-million after stripping out one-off items and their tax effects. Earnings per share edged to 25,2 cents after share buy-backs, from 25,1 cents a year before.
BoE’s shares shrugged off the weak results, supported by the security of Nedcor’s offer, and were trading steady at 352 cents at 1249 GMT in a flat broader market.
”The results are rubbish,” said one analyst, adding he was surprised by the size of a rise in bad debt provisions at BoE’s Credcor division, which services the mass market. But he said the results suggested Nedcor was paying a fair price for BoE.
BoE said the provisions came after it reappraised credit risk in the small — or ‘micro’ — lending and consumer credit sectors, following significant job losses among lower income groups, an over-extension of credit in that sector and shifts in spending patterns.
The group’s bad debt charge increased by R93-million mainly because of the additional provision at Credcor. Bad debts as a percentage of average advances deteriorated to 1.3% from 1.0% in March, 2001.
Margin pressure
BoE’s margins — rising in the rest of the industry — also came under pressure following a deposit run at the Cape-based bank triggered by a run at peer Saambou.
Financial authorities took Saambou into administration in February after depositors, nervous about the industry’s over-exposure to the risky, small loans sector, pulled more than one billion rand from accounts in a matter of days.
The Reserve Bank and Ministry of Finance issued a statement guaranteeing BoE’s deposits, but that failed to fully restore BoE’s liquidity levels, BoE said. ”These unprecedented statements had the effect of stemming the outflow but have, to date, not led to the normalisation of BoE’s liquidity position.”
The group said net margin was enhanced by the acquisitions of Credcor and Cashbank, which added R44-million, but this was offset by pressure on overall margins, the liquidity situation and the effect of cash used for share buy-backs.
”As a result, net margin decreased by R70-million against the same period last year,” it said.
BoE said it had needed to increase funding from the more-expensive interbank market — to R11.593-billion from R298-million in September — to replace the outflow of private sector institutional and individual depositors.
”This has led, in the latter part of the first half, to a higher cost of new funding and the need to manage asset growth carefully”. BoE said the remaining inflow of R6.8-billion from the sale of its NBS home loan book to FirstRand would help improve the group’s funding profile.
BoE’s board is recommending shareholders accept the offer from number three bank Nedcor — consisting of R290 in cash plus 0.485 Nedcor shares for every 100 BoE shares — to form the country’s largest banking group in terms of domestic banking assets. – Reuters