It’s not the market’s fault -- CEO
Soldiering On | The originator of unsecured lending in South Africa says too much analysis got in the way of his gut feelings when it came to judging the levels of debt that poor consumers have been shouldering each month
LEON Kirkinis, CEO of African Bank and the champion of unsecured lending in South Africa, refuses to blame the markets for his company’s humbling annual results that were released this week.
Headline earnings plunged. Bad debt increased by 6%, which on a R50-billion book meant a substantial loss that forced him to ask his shareholders for an extra R5.5-billion to bolster his capital base. To add insult to injury, their dividends fell from 195c/share last year to 30c/share.
These disasters were reflected in African Bank’s share price, which fell 53% earlier this year, making it the worst performer on the FTSE and JSE’s All Share index.
But blaming the market is a cop-out and he will not do it, says Kirkinis.
“I hate this thing where people blame the market. It’s disingenuous. The answer is always looking at you in the mirror. Some of the stuff that related to the emergence of risk we should have foreseen. I underestimated the extent of it.”
There were warnings last year about the growth of unsecured lending. Kirkinis says he did not ignore them.
“We were the first ones to say we were worried about the growth in credit and that we thought it was too fast.” What did he do about it? Pulled back on credit, he says. But not enough and not soon enough.
“With the benefit of hindsight, I should have been more decisive earlier on.”
In fact, it was only this year that he took his concerns seriously enough to act on them. By then it was too late. “I should have pulled back the credit harder last year as opposed to during the course of this year. We took too long.”
Did the boom years make him arrogant?
“There was certainly arrogance in the way we handled the Ellerines acquisition,” he says. He has decided to sell the retail part of the furniture business but will keep the financial services part. He admits he did not do a “good enough” due dividend, paid too much for it and took on a mountain of debt he did not know about.
“But that’s not what got in the way of being more decisive. That came from too much analysis and not trusting my gut.”
His glib responses to doubters last year suggested a man who thought he had the unsecured lending game tapped. African Bank practised good
That is one thing we can’t be criticised for. That is unfair — Kirkinis denies that African Bank tried to cover up its bad debts
business principles and applied affordability calculations and strict business rules before granting loans. Payslips were used extensively to determine the credit history of customers, stability of employment, and so on.
African Bank’s information was reliable, he said. He angrily rejected accusations by the national credit regulator that the bank was lending money recklessly.
He made it sound like the risk element inherent in unsecured lending could be managed to a point where it became negligible.
“I have never said there is no risk,” he says. “We’re a risk-taker. You can’t make returns and not take risk — that’s the nature of business.”
He concedes that the risk mitigation measures he listed so impressively to journalists, analysts and investors “didn’t work as well as they should have”.
This does not mean that the busi- ness model is suspect or no longer relevant, he says. “It does mean that we made some mistakes.”
He hates being compared with Capitec and is clearly sick and tired of being asked why his much smaller rival (17% of the unsecured lending market versus African Bank’s 40%) has done and is doing so much better. One important difference is that African Bank takes much longer to concede that bad debt is bad debt and write it off accordingly, rather than pretend it is “just” a non-performing loan.
Capitec writes off after three non-payments. African Bank writes off after 12 non-payments. Kirkinis denies that this is part of the problem. But the fact that he has brought it down to 12 months from 17 months suggests an acknowledgement of sorts that it indeed may be.
“It’s an acknowledgement that 17 months was too long and therefore we ended up carrying assets of poor quality on our balance sheet for too long,” he says.
The shorter the write-off period, the more likely you are to have “a revolving door of loans being written off and then coming back on to the balance sheet. You don’t want to have this constant reclassification of assets on your balance sheet.”
Also, he does not want to sell his debtors to debt collectors too soon because then there would be less chance of them coming back to him.
Kirkinis, 54, deserves praise for admitting to mistakes. But one suspects that his real agenda is to protect the image of unsecured lending, which he pioneered in this country 20 years ago and which he has done more than anyone else to talk up since then.
He invented the model and it has given his life a sense of purpose that it never had while he was working as a young chartered accountant in merchant banking. One gets a sense of missionary zeal when he talks about it. So it is easier for him to admit that he made a mistake or two than that the model itself is fatally flawed.
He thinks too much is made of the “so-called schism” between secured and unsecured lending. The difference is the existence of collateral. But the value of this collateral is prone to all sorts of unpredictable factors,
There was certainly arrogance in the way we handled the Ellerines acquisition . . . but that’s not what got in the way of being more decisive. That came from too much analysis and not trusting my gut
making loans extended on the basis of collateral only marginally more secure than loans extended when there is no collateral.
“The value of collateral is so driven by the supply of credit that it artificially gets boosted in periods of high credit growth. Suddenly you’re lending against collateral that is getting higher and higher in value because the credit is driving the market. When that stops, the value of the collateral starts to fall.”
So it is not that unsecured lending is so risky, he says. All lending is risky. “At the end of the day, people can either afford to borrow based on their income and commitments, or not. Whether you’re secured or unsecured doesn’t matter.”
So why are his bad debts so much higher than those of banks in the secured lending market? “Because we have a bigger risk appetite.”
According to the national credit regulator, there is credit worth R1.5-
I hate this thing where people blame the market. It’s disingenuous. The answer is always looking at you in the mirror. Some of the stuff that related to the emergence of risk we should have foreseen. I underestimated the extent of it” — on how African Bank ended up caught short Seventeen months was too long and therefore we ended up carrying assets of poor quality on our balance sheet for too long” — on how African Bank changed its policy of writing off bad debts after 17 months
trillion in the market. Seventy-five percent of this is mortgages and car loans, but they make up only 16% of the number of transactions in the market.
“So the vast majority of people borrow in the unsecured space. There are higher risks because they have less savings — less ability to weather a shock to the system in terms of income and expenses. It is not the fact that these loans are unsecured that creates the risk.”
Kirkinis denies that he tried to cover up his bad debt.
“That is one thing we can’t be criticised for. That is unfair.”
But the disaster was so sudden that there are only two options. Either he did not see it coming, which means he was hopelessly out of touch with events, or he had been hiding it?
“Sh** happens and people have short memories. We’ve been here for a long time and intend to be here for a long time.”