By Hennie Pretorius and Angelique Ruzicka
African Bank Investments Limited (Abil) announced an annual loss of R7.6 billion yesterday along with the resignation of its chief executive Leon Kirkinis.
In a Sens announcement the bank said: “The Board regrets to announce that Leon Kirkinis, the Group Chief Executive Officer, managing director of African Bank and one of the founders of ABIL has resigned with immediate effect after 23 years in the business. The Board owes a huge debt of gratitude to Leon for his vision and leadership during the growth of African Bank and wishes him every success for the future.”
The Board has appointed Nithia Nalliah (the group chief financial officer) to the position of acting chief executive of ABIL and managing director of African Bank with immediate effect.
It is, however, hunting for a new head: “Nithia joined ABIL in 2006 as the chief financial officer and the Board is confident that he has the experience and ability to steer ABIL through these trying times pending the appointment of a permanent chief executive officer and managing director,” said the Board.
But this has done little to address investors’ concerns. At the time of writing, Abil shares had fallen to a low of 28 cents but have since climbed back up to 79 cents per share, suggesting lack of faith about whether the bank can ride out the storm.
Who is to blame?
The South African Reserve Bank (SARB) partly attributed the losses to Abil’s “unique business model.” According to SARB, Abil is the only South African bank to own and operate a furniture chain.
Abil purchased the Ellerines furniture store in 2008 paying in excess of R9 billion. But Abil has been unable to operate its furniture chain in a profitable manner and has been trying to sell it with not much success.
But the furniture business is not the only concern. The size of Abil’s loan book and the ability of its borrowers to pay back their loans has long been a worry. Questions have been raised about whether the bank conducted adequate affordability assessments.
This comes as similar questions are being asked of Absa, Nedbank’s Motor Finance Corporation (MFC) and Standard Bank over vehicle finance applications that were put through via Satinsky Group, which introduced a scheme where motorists could get new cars for ‘as little as R699’ a month about two years ago.
The monetary rewards scheme offered by Blue Lakes Trading and Promotions, which helped Satinsky Group clients to finance their premiums has since collapsed leaving many struggling with their repayments. Some Satinsky clients have claimed details were changed on their vehicle finance application forms and that the banks didn’t conduct proper affordability assessements.
Should you buy African Bank shares now?
According to an online article in the Mail and Guardian (M&G), Abil narrowly escaped going down by securing finance from its top five investors towards the end of 2013.
The top five investors include Coronation, the Public Investment Corporation, Stanlib, Sanlam and Allan Gray, raising R5.5 billion between them in an effort to bail out Abil in December.
But not all investors were convinced of the survival of African Bank. According to M&G, investment firm Vestact, who held shares in Abil for five years, sold their shares as soon as they started doubting Abil’s chances of survival.
When the share dropped from around R12 to less than R7 in April, Vestact said it was not worth the risk to buy the shares, even at almost half the price.
Too big to fail?
This is a question many are asking. If shareholders don’t come to the rescue the impact could be serious as some major companies have debt exposure to African Bank while many pension funds are said to be invested with the troubled bank too.
Internationally, banks have been bailed out by governments and investors alike amid concerns that their bankruptcy would rock the economy and send pension funds into a spiral.
In 2008, bank Northern Rock was bailed out by the British Government due to financial problems caused by the subprime mortgage crisis. Royal Bank of Scotland (RBS), Lloyds TSB and HBOS were also bailed out by the British government.
In the United States, the federal government bailed out mortgage giants Fannie Mae and Freddie Mac for $187 billion (R2004 billion) in 2008. According to reports this money has now been recouped for taxpayers.
Private investors have also provided help during the 2008 financial crisis. Renowned investment guru Warren Buffet had his company Berkshire Hathaway come to the rescue of global investment banking business Goldman Sachs.
But not all financial institutions have been rescued. Financial services firm Lehman Brothers was left to collapse after it filed for Chapter 11 bankruptcy protection on 15 September 2008.
Will a bail out work?
Some institutions that were bailed out have been revived and investors have managed to get their money back.
Just two years after Northern Rock’s bailout in 2010 the bank was split into two parts (assets and banking) to aid the eventual sale back to the private sector.
Meanwhile, U.S. taxpayers have recouped all of the $187 billion (R2004 billion) they gave mortgage giants Fannie Mae and Freddie Mac.
At this stage it is difficult to tell whether Abil will produce the same results for investors. Only time will tell whether the acting CEO and whoever takes over from him will be able to turn Abil around.
Clearly there are many vested interests in not letting the bank go bust. The SARB has said it is monitoring Abil’s situation and will be deliberating with its board and senior management regarding a long term solution.