When bank­ing and re­tail col­lide

Finweek English Edition - - Companies & Markets -

QUES­TION: ????? How do you eat an ele­phant? AN­SWER: One bite at a time. That’s a les­son that ex­ec­u­tives at African Bank In­vest­ments Lim­ited (Abil) would be wise to re­mem­ber. Not that Abil has nec­es­sar­ily bit­ten off more than it can chew. How­ever, it may just be deal­ing with a bout of in­di­ges­tion af­ter con­sum­ing the fur­ni­ture re­tailer El­ler­ine 12 months ago. In­te­gra­tion is pro­ceed­ing apace, ac­cord­ing to its lat­est an­nual re­port, which also il­lus­trates some of the con­sid­er­able chal­lenges the deal presents the en­larged group.

Top pri­or­ity has been to sep­a­rate the fi­nan­cial ser­vices and re­tail busi­nesses of El­ler­ine to erad­i­cate cross sub­sidi­s­a­tion and to in­tro­duce Abil stan­dards across the board. It would seem they’re nec­es­sary.

Abil has, since its in­cep­tion, de­vel­oped a solid busi­ness model ca­ter­ing to the bor­row­ing needs of the mid­dle mass mar­ket de­fined as LSM 3-8. That gives it an es­ti­mated mar­ket seg­ment worth R96bn. El­ler­ine has tra­di­tion­ally been less dis­cern­ing and has tar­geted a broader mar­ket, which means Abil’s po­ten­tial lend­ing uni­verse has swollen to more than R160bn.

It’s a great op­por­tu­nity. But there’s a lot to learn. “African Bank has sub­stan­tially more com­pe­ten­cies and abil­ity to ser­vice the higher LSM clients that El­ler­ine brings with it, but it has fewer com­pe­ten­cies to ser­vice the un­banked or in­for­mally em­ployed base. As a re­sult, credit ex­ten­sion and sales to the lower seg­ment brands that typ­i­cally ser­vice the in­for­mally em­ployed and un­banked clients are un­der se­vere pres­sure due to the over lib­eral credit ex­ten­sion that occurred prior to Abil tak­ing con­trol of El­ler­ine and Abil’s re­sul­tant tight­en­ing of credit cri­te­ria,” reads the an­nual re­port.

It’s a warn­ing in tighter global credit mar­kets that in­vestors need to heed as the group scram­bles to ad­dress the weak­nesses in credit grant­ing poli­cies in the lower cus­tomer seg­ments of El­ler­ine.

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