African Bank Drops Most in Almost 15 Years on Dividend

African Bank Investments Ltd. plunged to the lowest in almost eight years, leading South African banks lower, after the country’s largest provider of unsecured loans cut its dividend.

The shares fell 17 percent at the close in Johannesburg to

17.40 rand, the lowest since June 2005. It was the biggest loser among South African bank stocks. African Bank cut its first-half dividend by 71 percent to 25 cents a share, it said in a statement today.

African Bank forecast trading conditions to remain “difficult” for the rest of the year as its bad-loan charge rose 45 percent to 3.46 billion rand ($366 million) at March 31 from a year earlier. Nithia Nalliah, the lender’s chief financial officer, said on a conference call today that the lender’s furniture retailer Ellerines, which offers unsecured loans, may post a full-year loss.

“It’s the dividend, at 25 cents per share or five times covered, and the dividend guidance for the full year of three to four times covered” that is hurting shares, said Harry Botha, a Johannesburg-based analyst at Avior Research, with an outperform rating on the shares. “The core banking business seems to be fine. It’s the Ellerines portfolio where most of the mess is.”

‘Well Capitalized’

“We took a conservative decision to lower the dividend in order to ensure we remain well capitalized in this period,” Leon Kirkinis, chief executive officer of the lender, said in an e-mailed response to questions today. “Even though it’s a tough time, we still generated a return on tangible equity,” a measure of profitability, of 24.9 percent, he said.

African Bank, which bought Ellerines in 2008, targets low-income earners with unsecured loans. The country’s National Credit Regulator has said that such loans in South Africa climbed 12 percent in the fourth quarter of 2012. At the same time inflation has accelerated to 5.9 percent, fuel costs have increased and electricity tariffs have climbed, making it harder for consumers to repay their debt.

Nalliah said that Ellerine’s “peak trading is usually in the first half so if trading doesn’t improve the view is that there will be a full-year loss in retail.” He added that lending will be tightened in retail operations.

Net income for the six months through March fell 24 percent to 1.06 billion rand, the bank said.

African Bank’s numbers were “messy” and driven by a cyclical slowdown in consumer-credit markets, Greg Saffy, a Johannesburg-based analyst at RMB Morgan Stanley with an overweight rating on the shares, said today.

African Bank has decreased 46 percent this year, making it the worst-performing bank stock in South Africa. The six-member FTSE/JSE Banks Index fell 3.1 percent in Johannesburg trading today.

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