African Bank Investments Ltd. (ABL), South Africa’s largest provider of unsecured loans, said its purchase of a furniture retailer waylaid management and hurt bank profit resulting in losses, resignations and writedowns.
Abil, as it’s known, bought Ellerine Holdings in 2008 for 9.2 billion rand ($858 million). It said at the time the retailer would help it find new clients and boost lending. After a series of writedowns and losses since the acquisition, which Abil had to fund by selling debt or equity because it doesn’t take deposits, it’s now planning to sell the unit and seeking to prevent losses there hurting the rest of the bank.
“We haven’t been able to get Ellerine right,” Nithia Nalliah, acting chief executive officer after Leon Kirkinis’s resigned yesterday, said in a conference call from Johannesburg. “It’s almost impossible for a furniture retailer to profit from the sale of goods. We have repeatedly negatively surprised the market and ourselves.”
The shares dropped as much as 63 percent to less than 1.09 rand as of 10:05 a.m. in Johannesburg, after slumping 61 percent yesterday.
Abil dropped the most on record yesterday after saying it plans to raise at least 8.5 billion rand of capital, having raised 5.5 billion rand in a December rights offer, and that CEO and founder Kirkinis was stepping down with immediate effect after 23 years. The lender expects to post a record full-year loss of as much as 7.6 billion rand.
“Abil’s losses are in large part due to its unique business model,” South Africa’s Pretoria-based central bank said in a statement on its website, adding that it’s the only lender operating a furniture chain. “Credit losses and the drain on its resources have resulted, among others, from the inability of its furniture chain to operate profitably.”
Abil started to falter in March last year after South Africa’s National Credit Regulator said it had been involved in reckless lending. That forced African Bank to abandon plans to raise $300 million in foreign debt markets. Bad debt levels rose more than the bank expected as clients struggled to repay loans amid accelerating inflation and rising unemployment.
“Abil’s survival depends on whether shareholders will support a rights issue,” Tracy Brodziak, a banking analyst at Old Mutual Investment Group, said yesterday in a phone interview from Cape Town. “It’s worse than expected.”
While Abil will raise money with equity it hasn’t yet decided on a rights offer or appointed an underwriter, Nalliah said. Goldman Sachs Group Inc. (GS) underwrote the offer last year.
“I don’t see how any shareholder can come to the conclusion that contributing another 8.5 billion rand to this business is the right thing to do,” Jean Pierre Verster of 36ONE Asset Management, which manages the equivalent of $1.1 billion, said by phone. “I would rather expect that the regulators might get involved here. You see signals of the regulators maybe looking at creating a ‘bad bank’ and ring-fencing that part of the loan book.”
The South African Reserve Bank is in talks with Abil “in search of viable long-term solutions,” the central bank said. “South Africa’s banking sector remains healthy and robust, and there have been no indications that other South African banks have been affected negatively by Abil’s trading update.”
“The Ellerines acquisition was bad, but Abil also became fixated on growth,” said Brodziak, adding that the bank may attract takeover bids. “They got looser and looser with credit management and the provisioning was aggressive.”
Yields on African Bank’s Swiss franc bonds due July 2015 jumped to a record, climbing 1100 basis points to 130 percent. Abil has about 1 billion rand of debt maturing in September and almost 10 billion rand next year.
“The major shareholders are already so deep into this thing, that they can’t afford to let it fail,” Garth Mackenzie, founder of Johannesburg-based TradersCorner.co.za, said by phone yesterday. “The likelihood is that they will probably follow their rights, and recapitalize the business.”
Patrice Rassou, head of equities at Sanlam Investment Management, said his firm will consider carefuly before participating in a rights offering that exceeds the company’s market value.
“Before it was like they were trying to put plaster over a gaping wound,” according to Rassou, who said 54-year-old Kirkinis was the personification of the bank. “What you’re seeing now is major surgery.”
Nalliah, 54, was appointed as finance director in 2009 having been chief financial officer since 2006. Before that he was a senior partner at Deloitte.
“We’d be more comfortable if there was new management,” Brodziak said. “Abil needs to get people in who weren’t part of this.”
The lender, which has been trading as African Bank for 15 years, survived a 2002 crisis among small lenders in South Africa that caused Saambou Holdings Ltd. and Unifer Holdings Ltd. to fail. Abil bought Saambou’s loan book in 2002 and boosted both profit and its share of South Africa’s unsecured lending market.
Now, Ellerine and parts of the bank “might not continue to exist as going concerns,” according to Verster who said he has been selling the stock short. “We are not taking any pleasure in African Bank’s demise but we have been positioned to benefit from the mis-pricing of their securities.”
Abil will split its lending into a “good” bank and a “bad” bank in an attempt to ringfence losses and give its core loans business a chance to survive, Nalliah said. “We’re going to take this business back to what it used to do. We have been waylaid for the last couple of years but we’re going to prove to you that we can do what we did in the past.”
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