Freak out: why African Bank’s record loss has left the market unphased

African Bank Investments, which reported a record first-half loss, is finding buyers for its debt among investors betting the South African lender’s fortunes will improve as the economy rebounds.

Yields on African Bank’s Swiss franc note due October 2017 fell 16 basis points to 4.36% since the Johannesburg-based lender said on May 2 it expected a first-half loss. The bank on Monday reported a loss of R4.38-billion for the six months through March. The premium investors demand to hold the notes over benchmark bonds dropped during the period.

Rising bad loans and losses from African Bank’s furniture unit consumed some of the R5.5-billion the company, the nation’s biggest provider of unsecured credit, raised in a December rights issue. While the shares slumped by 28% since May 2, some of the investors holding about R28-billion of the bank’s debt said the business should recover.

“It’s a business that has value through the credit cycle,” Simon Howie, head of South African and African credit at Cape Town-based Investec Asset Management, which owns the bank’s debt, said by phone on May 15. While the first-half results aren’t great, African Bank has enough cash and its losses are “accounting numbers,” he said.

Increasing provisions
African Bank charges low-income consumers interest rates of as much as 31% for credit that isn’t backed by assets. About R3.1-billion of its first-half loss came after the lender boosted bad-debt provisions as customers struggled to repay loans.

Almost half the nation’s estimated 21-million borrowers had impaired credit records at the end of December as economic growth slowed to a four-year low in 2013. Strikes in the platinum-mining industry and a jobless rate of 25.2% are making it harder for some clients to service debt.

While the company’s response to the challenges is beginning to produce the “desired results,” it is only at the “beginning of a turnaround,” African Bank said in Monday’s statement.

“I’d rather support African Bank than withdraw,” Bruce Stewart, head of debt origination at Nedbank Capital in Johannesburg, said by phone on May 15. “It’s at times like these when you’ve got to stand together.”

Tipping point
While bond yields improved, African Bank shares have dropped 43% in the past 12 months, making it the third-worst performing stock on the 166-member FTSE/JSE All Share Index.

“Some investors would say so far and no further with African Bank”, Conrad Wood, who helps oversee the equivalent of $8.2-billion in fixed-income investments at Momentum Asset Management in Johannesburg, said by phone.

African Bank still plans to sell its Ellerine retail unit, which is a drag on capital, chief executive Leon Kirkinis, 54, said in a presentation in Johannesburg on Monday.

New business volumes won’t grow “significantly” over the next two years after the lender reduced the maximum term for a loan to 60 months from 84 months, the bank said today.

“We continue to believe in the long-term viability of the business,” Greg Saffy, an analyst at RMB Morgan Stanley, said in a May 6 note to clients. About 70% of South Africans rely on unsecured credit as their main source of borrowing, said Saffy, who expects African Bank’s earnings to recover in 2016.

Wood said he will keep supporting the company.

Should enough bondholders stop buying, “then you create a liquidity squeeze and you shoot yourself in the foot,” said Wood. “You don’t want to be the trigger.” – Bloomberg

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Advertisting

Stella set to retain her perks

Communication minister will keep Cabinet perks during her two months of special leave

Not a sweet deal, Mister

Mister Sweet workers say they will not risk their health, and the lives of others, to continue producing and packaging confectionaries

Covid-19 grounds Nigeria’s medical tourists

The country’s elites, including the president, travelled abroad for treatment but now they must use the country’s neglected health system

Nehawu launches urgent court bid over protective gear for health...

The health workers’ union says the government has rebuffed its attempts to meet about mitigating risks to workers

Press Releases

Rahima Moosa Hospital nursing college introduces no-touch facial recognition access system

The new system allows the hospital to enrol people’s faces immediately, using artificial intelligence, and integrates easily with existing access control infrastructure, including card readers and biometrics

Everyone’s talking about it. Even Kentucky

Earlier this year South African fried chicken fast-food chain, Chicken Licken®, launched a campaign for their wallet-friendly EasyBucks® meals, based on the idea of ‘Everyone’s talking about it.’

New energy mix on the cards

REI4P already has and will continue to yield thousands of employment opportunities

The online value of executive education in a Covid-19 world

Executive education courses further develop the skills of leaders in the workplace

Sisa Ntshona urges everyone to stay home, and consider travelling later

Sisa Ntshona has urged everyone to limit their movements in line with government’s request

SAB Zenzele’s special AGM postponed until further notice

An arrangement has been announced for shareholders and retailers to receive a 77.5% cash payout

20th Edition of the National Teaching Awards

Teachers are seldom recognised but they are indispensable to the country's education system

Awards affirm the vital work that teachers do

Government is committed to empowering South Africa’s teachers with skills, knowledge and techniques for a changing world