Loss of more than R3bn, Abil warns

AFRICAN Bank Investment Limited (Abil) shares tumbled on Friday after the bank warned investors of first-half losses of between R3.1 billion and R3.3bn.

Not even an earlier announcement – that the lender would form a partnership with Edcon – could save the stock. The losses surprised the market, analysts said.

Shares plummeted 15.64 percent to close at R10.52.

The trading update for the six months to March warned shareholders to expect a headline loss of between R3.1bn and R3.3bn relative to R604 million in restated headline earnings for the previous same period.

The headline loss a share was expected to be between R2.39 and R2.54.

“The operating environment continues to be challenging, with consumers remaining under financial pressure,” the bank said.

It said the loans business written up to the end of June last year continued to produce an elevated level of nonperforming loans each month, while business written since June showed the expected level of reduction in credit risk due to stricter underwriting.

Abil’s banking unit was expected to deliver headline losses of between R1.9bn and R2bn because of an increase in provisions of about R600m.

The increase was driven by the higher-than-anticipated emergence of non-performing loans on business written before July 2013.

Another reason for the headline loss was the decision to significantly increase the general provision for credit impairment related to performing loans by about R2.5bn.

Daniel Isaacs, an analyst at 36One Asset Management, said Abil’s poor performance surprised the market, as people thought the business had done what it needed to in terms of provisions against the backdrop of tough economic conditions.

Abil’s stock made strong gains after Edcon’s announcement that it was considering Abil as its secondary creditor.

“This supported the share price because, before this, people thought African Bank was in trouble. However, Edcon’s announcement spoke to the fact that, yes, times are hard but the bank was still sustainable.”

Isaacs said it would be difficult for Abil to sell its furniture retail unit given its current performance.

Headline losses in the retail unit, with Ellerines, Bears and Furniture City among other brands, were expected to be between R1.2bn and R1.3bn. Trading conditions in the furniture industry continued to deteriorate during the period.

Ron Klipin, an analyst at Cratos Wealth, believes Abil’s performance was a result of the deterioration of the economy, which includes unemployment and the strike in the platinum belt, which resulted in workers not earning their salaries.

“All prices, including food, petrol and electricity, have gone up. These results are a function of the outside economy that is beyond Abil’s control.”

He said that in terms of putting an actual number on provisions, Abil thought it was being conservative. However, the operating environment had weakened.

“They need to go back to the drawing board and make additional write-offs as there is no scientific way of making adequate provisions.”

On March 31, Abil had about R5bn in cash balance.