African Bank Sees Risk of Further Writedowns at Ellerines

African Bank Investments Ltd. said there is a risk of a further 800 million-rand ($77 million) writedown at its Ellerines unit unless December sales allow the furniture retailer to return to profit in its fiscal first half.

African Bank, which last month took a 4.6 billion-rand goodwill impairment on the unprofitable business, has received no offers for Ellerines, though some private-equity firms have shown interest, Chief Financial Officer Nithia Nalliah said by phone from Johannesburg today. The sale of the retailer, announced by African Bank in August, is on hold until the lender’s 5.5 billion rand rights offer is complete, he said.

African Bank, South Africa’s largest provider of unsecured loans, reported a full-year loss of 4.2 billion rand today after the impairment and as consumers struggle to repay debt amid a slowing economy. There is “potential” for a further writedown should Ellerines, acquired in 2008 for 9.2 billion rand, post another loss in the six months through March, the CFO said.

“A couple of months ago you might have thought that further writedowns wouldn’t be necessary, but that isn’t the case now,” Paul Theron, managing director of Vestact Pty Ltd., which manages more than 1 billion rand of assets, said today by telephone. “Other banks have taken similar hits, but after this kind of damage to public perception it will be a good, long while before investors cheer up and go positive.”

Public Perception

African Bank posted a loss for the full year through September after a restated profit of 3.1 billion rand a year earlier, the Johannesburg-based lender said in a statement today. Earnings per share excluding one-time items fell 88 percent to 45.1 cents and the ordinary divided per share dropped 85 percent to 30 cents, the company said.

“We were the first ones to pick up that the trend was turning but we didn’t react fast enough,” Nalliah said. The bank said it took on low-quality loans last year.

Lower consumer confidence, pressure on disposable incomes, higher levels of indebtedness and labor market unrest led to weaker demand for credit products and merchandise, a decline in collections and increased arrears, African Bank said.

A trade buyer with retail expertise may be best-suited to run the Ellerines business, Nalliah said.

African Bank shares fell 2.2 percent to 13.14 rand by the close in in Johannesburg, bringing this year’s decline to 45 percent.

“There’s a strong likelihood that African Bank’s future earning will be better than these today, but the share price recovery will lag,” Theron said. It may take five to seven years for the stock to recover and “it’s still time to be cautious because more dramas and disappointments wouldn’t be too surprising,” he said.

Before it's here, it's on the Bloomberg Terminal.