Small is not always beautiful

CEO Michael Sassoon, who plans to broaden Sasfin’s focus, is confident the bank is on the path to better results

Many believe the only advantage that Sasfin might have over other banks is an understanding of small businesses. Over the years, the company has carved out a niche facilitating transactions for low-turnover businesses that bigger banks do not ordinarily service.

Sasfin offers debtor and trade finance, equipment finance and start-up finance, as well as facilitating BEE transactions.

But the company’s financial performance over the past few years raises questions about its success as a one-stop-shop for small businesses.

Loans and advances extended to customers rose 17.8% in the year to June 2018, but the quality of its lending book leaves much to be desired.

The banking group has almost doubled its impairment charges — the figure was R144.1m for the year to June 2018, against R81.4m in the previous period.

The company’s creditloss ratio has risen sharply in the past five years from 68 basis points to 197 bps now — more than double that of Nedbank, Standard Bank and Absa. It is also close to twice as much as FNB’S.

Sasfin’s credit-loss ratio is high because it operates in a riskier environment, lending to small and less-stable businesses as well as the bigger ones. Financial institutions incur impairment charges when money lent to customers appears unlikely to be fully repaid, and their credit-loss ratios widen as these losses materialise.

Sasfin CEO Michael Sassoon concedes that shareholder frustration is justified. He has tried to bring calm by promising that declines seen in this year’s financial results will not be repeated. “We’ve been good at complex transactions and we aren’t going to stop now. We’ll do it in a way that is more sustainable,” Sassoon tells the FM.

The bank recently reviewed its credit policy and lending criteria. Sassoon says the strategy will be to have a bigger spread of clients, and to grow the number of smaller clients on Sasfin’s new digital banking platform B\\yond, launched in March, which is linked to Xero accounting software and could be a boon for smaller clients who don’t have in-house accountants.

“We’ve tactically embedded Xero … in such a way that businesses can access the basic payroll, basic accounting system and automatic invoicing from one account, and it is working,” Sassoon says. “We are seeing substantial growth in customer numbers every month.”

To get more established businesses on its books, Sasfin is targeting those that generate between R10m and R200m in annual turnover as potential clients for trade and debtor finance.

“Our fundamentals remain the same but we have to look at how and where we can do things differently,” Sassoon says, and the group’s income stream would change substantially in the next few years.

For instance, Sasfin increased its foreign revenue by 32% in the past financial year and its offshore assets under management now sit at R10bn. “We are making strides in growing foreign income but we want to be more aggressive in other areas as well.”

The company is exploring offshore opportunities for trade and debtor finance as well.

In SA, it is branching into mezzanine and bridge finance and will soon announce a partnership with a third party, which is likely to be a retailer or telecoms company.

Through the partnership Sasfin will roll out some of its products to the consumer market under the third party’s brand. So far the company has focused solely on providing credit and banking products to business owners, but the imminent partnership will facilitate its entry into the highly contested low-income segment.

But while the recovery and diversification plans promise to re-establish Sasfin’s grip on the market, shareholders are still concerned that they will not have much impact on the bottom line in the short term. The company’s cost-toincome ratio is not declining as fast as they would like, and the burgeoning loans and advances are funded through additional borrowing rather than customer deposits. Sassoon says while the full benefit of these initiatives will be realised in the medium to long term, there should be short-term improvements as well, and the credit-loss ratio in particular should be down next year.

We’ve been good at complex transactions and we aren’t going to stop now Michael Sassoon