African Bank Investments Ltd
Trading update for the first quarter ending 31 December 2002
(Incorporated in the Republic of South Africa)
(Registration number 1946/021193/06)
(ISIN: ZAE000030060)
(Share code: ABL)
1. INTRODUCTION
In order to communicate operating performance more regularly than the six-monthly statutory reporting periods, African Bank Investments Ltd (“ABIL”) publishes quarterly trading updates. These updates focus primarily on the size and composition of the advances book as well as the levels of non-performing loans (“NPLs”) and provisions, which together constitute the primary drivers of profitability in the group. It is important to note that while the trading update gives an overall indication of these factors as well as any other pertinent issues, these do not necessarily reflect overall profitability levels of the group.
2. MARKET CONDITIONS
The year-end to September 2002 was a particularly difficult period, following the demise of Unifer and Saambou, and the impact that it had on the overall quality of ABIL’s loan portfolio. As a result, NPLs and provisions rose to unprecedented levels giving some concern as to the direction of future bad debt charges. At the time of the year-end announcement, ABIL presented various early indicators of credit quality, which were showing signs of steady improvement.
Traditionally, the first quarter of ABIL’s financial year generates disproportionally higher NPL growth and credit charges given early salary payments in December and the Christmas holidays. Despite this seasonal effect, ABIL is pleased to confirm that the credit experience for the quarter ending 31 December 2002 showed an improvement in NPLs, which were down from R2 989.6 million in September 2002 to R2 904.8 million. Accordingly, the overall NPL levels do appear to have peaked, and are showing positive signs of a further reduction.
Provision coverage to NPLs has been maintained at 79.3% as opposed to 79.5% as at 30 September 2002. The income statement charge for specific provisions was R107.3 million for the quarter to December 2002.
The company believes that demand for credit remains strong, and improving credit default rates will allow the group to return to real advances growth later in the year.
Costs remained tightly managed in the quarter and are in line with continued improvement in the cost-to-income ratio.
The above factors together with the strengthening economy, reducing inflation outlook and improved market sentiment give ABIL cause for cautious optimism and it is well positioned for consistent and steady growth, thereby generating real shareholder value.
3. THETA INVESTMENTS RESTRUCTURING
The Theta Group has been the private equity and new business incubator vehicle for the past few years and has always been separately capitalised as a stand-alone entity with a portfolio of investments. Some of these businesses have now grown to critical mass and are core to the group, and others have failed to meet the group’s investment return hurdles. As previously indicated, over the course of the next few months and subject to obtaining the necessary regulatory approvals, the Theta group will be restructured with the larger critical mass businesses being divisionalised into African Bank, and some of the non-core businesses being sold off.
The businesses that remain will be grouped into a cluster referred to as the “Specialised Lending” division and will continue to focus on their respective markets and clients. The divisionalisation process is driven by capital efficiency and a need to simplify and focus the group on its core competency of unsecured credit provision, and not as a cost-saving or integration imperative. Whilst the process will lead to a more efficient capital structure, it is unlikely that there will be any material positive impact on the new division’s performance this year.
4. GROSS ADVANCES
The table below sets out the composition of the gross advances book as at 31 December 2002 and the movements since 30 September 2002.
ABIL advances fell by 3.5% in the quarter, mainly as a result of significant collections on the Persal and Saambou books. The Specialized Lending Division maintained its gross advance levels over the period, albeit with a better mix, as attention on non-performing businesses has resulted in a curtailment of asset growth in those entities.
Excluding the Persal and Saambou books, on which there is no new lending, the real organic growth on the core African Bank business was up 3.4% or 13.6% on an annualised basis. The following table sets out the movements in the African Bank book over the period. In addition, the table highlights the strong cash flow of the Bank with over R1 billion being collected in the quarter.
5. NON-PERFORMING LOANS
Non-performing loans fell by R84.8 million (2.8%) from R2 989.6 million to R2 904.8 million during the quarter to December 2002.
Non-performing loans within African Bank, excluding the Saambou PLB rose slightly from 36.2% to 37.2% of gross advances or by R52.1 million, mainly due to the seasonal effect of the quarter. It is expected that most of this effect will reverse during the quarter to March 2003.
The Saambou PLB book continues to perform well and NPLs during the period fell by 11% to R1 229.4 million, which represents 57.7% of the total book.
Given the high levels of non-performing advances, especially within the acquired Saambou PLB book, the group suspends the raising of interest on loans that have a low probability of recovery. The total value of advances on which interest has been suspended as at 31 December 2002 was R1 424 million, which against total gross advances of R6 918.1 million, leaves gross interest bearing advances of R5 494.1 million. The margins calculated using the gross interest-bearing advances have remained steady over the period, with the growth in high yield retail products being offset by the lower yields earned on the Saambou PLB book.
6.
PROVISIONS
The group has maintained a conservative position with regard to provisioning levels and the overall coverage ratio is steady at 79.3% (79.5%). Provisions to gross advances remained constant at 33.3% (33.2%) whilst write-offs reduced from 12.2% to 9.7%, mainly due to the upfront effect of the Saambou PLB write-off in the last quarter of the 2002 financial year.
7. CREDIT QUALITY INDICATORS
The leading credit indicators disclosed in the year-end results announcement, are beginning to translate into lower default rates and levels of NPLs. As previously stated the high levels of NPLs that arose during 2002 were primarily due to an overextended credit bubble resulting from the Saambou and Unifer failures. Whilst significant collection efforts are being made at reducing this legacy, the results and, more importantly, cash collected will take some time to come through. It is expected that these NPLs will work through the system over the next 18 months, with expected recoveries being made and the balances being written off.
Since the previous year end, the vintage curves are continuing to show improving trends. Vintage curves track each month’s new loans and plot the cumulative proportion of that portfolio that migrates to non-performing status. The latest vintage curves are set out below.
During the period of the Saambou and Unifer overextension, the vintage curves peaked out at approximately 20% - 25%, translating into unacceptable loan losses. Since then the curves have shown a sustained improvement, and are now projecting 15% peaks. This improvement was partly a direct result of holding back credit supply (shorter-term loans and higher credit hurdles) and partly due to the improving market environment as customers manage more acceptable levels of credit.
The most recent vintage trends support a slow and careful relaxation of credit supply which should translate into steady growth in advances. This process will however be very carefully managed and as such real advances growth is likely only to pick up in the second half of the year.
The predatory practices of the debt mediators and administrators appear to be slowing, primarily due to the efforts of African Bank in challenging and pursuing legal recourse. The group continues to defend itself in all cases and has been successful in being excluded from more than 50% of all administration applications. In addition, cash received from existing administration orders continues to rise as the portfolio management function takes effect.
Monthly administration orders which fell from approximately 2 200 in April 2002 to approximately 1 700 by September 2002, continued to fall by December 2002 to under
1 000. However this was partly affected by the seasonal slowdown over Christmas.
Persal cancellations continue to decline from a peak of 7 502 in September 2001 to 784 in December 2002 and the collection of this book continues to perform well. While there is no indication from National Treasury as to whether or not Persal will be re-opened, it is unlikely that a decision will have a material effect on this year’s performance.
8. SAAMBOU PLB
The collection process on the Saambou PLB continues to operate at better than anticipated levels. Total cash collections since the acquisition to 31 December 2002 exceed R540 million and a large amount of this has been from the under performing books, which were fully provided on acquisition. Analysis confirms that the overlap between African Bank and Saambou PLB is significant and plans to integrate the collection efforts are being prioritised so as to fast-track the debt rehabilitation of our customers.
9. AC 133
The group is conducting a review of the effects of AC133 on its results and operating performance. The impact of AC133 will be determined and included in the interim results for the current year to be released in May 2003.
10. CREDIT LEGISLATION REVIEW
As indicated in the 2002 Financial year-end results, a review of the Usury Act and other credit legislation is under way, and ABIL believes that this will result in a more certain and appropriate regulatory framework emerging, which is positive for the industry.
On behalf of the board 10 February 2003
Registered office: 59 16th Road, Midrand, 1685
Share transfer secretaries: Computershare Investor Services Limited, 70 Marshall Street, Johannesburg, 2001, PO Box 1053, Johannesburg, 2000
Board of directors: Executive directors: L Kirkinis (Chief Executive Officer), G Schachat (Deputy Chairman), J A de Ridder, D F Woollam
Non-executive directors: AS Mabogoane (Chairman), N Adams, JJ Kekane, SA Levitt, BJT Shongwe, RJ Symmonds, DFG Tembe (Mozambican)Group Secretary: S Martin
First Quarter 2003 – Trading update 28/06/2006 09:36