Nicolette Dirk, finance writer, justmoney.co.za
African Bank Investments Limited’s (Abil) bad debt book written pre-June 2013 is still creating major headaches for the bank and its shareholders.
However, the bank predicts that its fortunes will reverse in the second half of 2014’s financial year, after the lower quality business moves through the peak risk emergence period.
According to Abil, the overall impact of the bad debt is likely to be a significant reduction in profitability for the first half of 2014 compared to the restated first half earnings of R604m in 2013.
Abil half year turnaround?
Abil said that it expects the overall credit quality of its books will improve into the second half of 2014.
In a statement they said their loan term and loan size increased on a year-on-year basis reflecting the move to lower risk customers.
The quality of new business written has also improved, the bank said. Abil based this on early performance indicators and their new pricing initiatives, which are positively impacting the incoming yield.
Income yield after suspension of interest on affected non-performing loans (NPLs) continues to stabilise at the same levels as 2013’s financial year.
“While collections remain challenging, particularly over the December and January periods, the stabilising trend over the last few months remains intact,” Abil added.
Decline in merchandise sales
The 21% decline in merchandise sales to R1.18 billion from R 1.48 billion was worsened by the group’s rigid pull back in credit for retail customers. Abil added that this pull back was implemented in order to stem credit losses, and has resulted in credit sales as a percentage of total sales decreasing to 57% from 67% on a year-on-year basis. Cash sales were however up by 2%.
The group is currently developing a revised value proposition to better balance credit risk with retail sales, aimed at improving the quality of credit granted and increasing merchandise sales on credit. According to Abil these changes will be positive for both the retail and the banking unit, even after a potential disposal of the retail unit.
But it expects that the retail unit’s profitability will be considerably lower for the first half of 2014 in relation to the previous financial year.
Outlook for 2014
Abil group CEO, Leon Kirkinis, said the group has emerged in a stronger position from an extremely challenging year.
“Our strategic actions undertaken in 2013 and the improvement in the quality of new business written are expected to produce improved results in the second half of 2014’s financial year,” said Kirkinis.
During the week Abil revealed to Bloomberg that it was involved with partnership talks with regard to Ellerines. The bank had originally intended to sell the furniture business in 2013 to another retail operator.
According to reports, analysts say the challenge for Abil is to ensure than any sale meets with competition authority guidelines and also to find a buyer that was prepared to pay what it wanted for the furniture store chain.