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African Bank labels 2013 as a challenging year

By Staff Writer
Nicolette Dirk, financial writer, Justmoney.co.za
 
Bad debt write-offs of R3bn, a R4.6bn goodwill write-off relating to Ellerine and an economic loss of R1,5 billion were some of the factors that contributed to African Bank Investments’s (ABIL) toughest year in 20 years.
 
This was according to Leon Kirkinis, CEO of ABIL who gave an overview of the bank’s annual financial year on Tuesday 11 November. 
 
“I am not proud of this year’s annual results. This year has gone from difficult, to very difficult. But it is better to be frank about a challenging period,” he said. 
 
ABIL’s 2013 challenges
 
ABIL reported their headline earnings and headline earnings per share decreased by 88% to R365 million (from R3 billion in 2012) and 45,1 cents (378,2 cents for 2012) respectively.
 
ABILs return on equity decreased to 2,9% for the financial year 2013. Return on average tangilble equity decreased to 6,8% (50,0% for 2012). Altogether the group generated an economic loss of R1,5 billion after the charge for the cost of equity.
 
Earlier this year ABIL reported that both headline earnings and earnings for the six months to 31 March 2013 were expected to decline by between 25% and 28% relative to the R1 370 million reported for the equivalent six months to 31 March 2012. Similarly, headline earnings per share and earnings per share were expected to decrease by between 25% and 28% relative to the comparable 170,4 cents per share.
 
Kirkinis blamed the weakening economy and eroded disposable income as one of the causes of the bank’s position.
 
“Regulatory debate has intensified in terms of determination of customer affordability, credit extension, insurance products, customer protection and capital adequacy,” said Kirkinis.
He added that the negative perception of the unsecured lending industry and negative trading statements from March to October 2013 has led to perceived loss of creditability.
 
The writing on the wall
 
Kirkinis said that in August 2012 they expressed concern about the high growth levels in the unsecured industry. He explained that this centred around the increased total instalments on loans in their customer base.
 
In December last year ABIL attempted to solve this problem through pull backs in offer rates and reduction of loan sizes. But he added that this should have occurred sooner and to a larger extent.
 
“In 2012 we also reduced offer sizes and terms to customers employed in the civil service that were becoming increasingly indebted,” said Kirkinis.
 
ABIL’s prospects for 2013
 
According to Kirkinis by the end of March 2013 it was clear that the levels of collections were below historic norms. A contributing factor to this was the reduced settlements from third parties, which were R1 billion lower than the previous year.
 
“Revised collections practises did not make up for the shortfall. We hesitated until June 2013, in ultimately applying the significant changes to the risk appetite to improve the risk relationship,” said Kirkinis.
 
Bad debts written off
 
For 2013, R10,2 billion in gross bad debt was written off for the financial year. This was up from 2012 which was R5 billion.
The credit quality in their furniture book also deteriorated significantly during the year with this portfolio increasing from 18,5% of the book to 31,8%. As a result coverage in this book was increased from 58,9% in 2012 to 75,2%. 
 
This year also saw African Bank pay a R20 million fine to the National Revenue Fund after it was found that 397 of its customers had been defrauded by employees at the banks’ Dundee branch:  
 
How has ABIL taken action?
 
The bank increased its impairments provisions to 63,6% from 59,2%. Credit life reserves also increased to 3,1% from 0.7%. In addition ABIL set more criteria for potential borrowers and now only an average of 16% of applicants have access to secured credit through the bank.
 
“Our internal research for 2013, regarding affordability showed that 76% of all respondents have personal disposable income. This disposable income constitutes approximately one third of net personal income across income segments,” said Kirkinis.
 
Lessons learned
 
Kirkinis said the bank has learnt that growth cannot be driven by term size and yield.
 
“The role of garnishees must also be reviewed. Payment system should be put in place to ensure lenders are treated fairly. The constant churning of customer loans is detrimental to the customer and the industry,” said Kirkinis.

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