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Is African Bank’s model sustainable?
Broken record
Maarten Mittner
Image by: Russell Roberts
African Bank has cherished its position as the dominant player in the unsecured lending market but has been forced to change its business model. Maarten Mittner examines the challenges it faces after being accused by the regulator of reckless lending.
When African Bank CEO Leon Kirkinis presented the group’s annual results in November, a technical glitch caused music to suddenly blare out in the hall just as he was explaining the group’s bad debt situation. “I know we have improved, but it is way too early to bring out the music,” he joked.
The music has to be put on hold as the group tackles numerous issues, including charges of reckless lending, greater competition, flat credit sales and a bad debt headache which reduced income by about a quarter last year.
Kirkinis is dismissive of the allegations made last week by the National Credit Regulator (NCR) that African Bank is a reckless lender. “It would not be in our interest as a sustainable player in the industry to be reckless.”
He was surprised by the regulator’s allegations, and its request to the consumer tribunal to fine the bank R300m.
“The NCR’s response is unwarranted,” he says.
The fine comes after African Bank says it has already tightened up systems and cut back lending.
Kirkinis says the bank discovered the sophisticated fraud on which the NCR is basing its allegations in November 2011 and has been in touch with the regulator since then. It was limited to a few employees at its Dundee branch and fraudulent activities amounted to just over R15m, raising questions about the size of the fine.
NCR executive head Nomsa Motshegare did not respond to requests for comment on the fine.
After a dive of just over 6%, African Bank’s share price rebounded and it seems the reckless lending charges will not have a detrimental effect on the company. Kirkinis says investors and shareholders remain confident about its prospects.
But the question is: can the biggest player in unsecured lending remain dominant, or will it eventually founder on the shores of unexpectedly high bad debt?
There are good reasons to believe that African Bank will survive.
Steve Meintjes, research head at Imara SP Reid, says African Bank’s slowing growth in unsecured lending is positive. “It is a vigilant company and wants to prevent unexpected shocks which often happened in the sector in the past.”
The company could have difficulty in the short term, however, and the earnings target is a bit overambitious. “It is addressing issues such as bad debt, which could more affect competitors in the future,” Meintjes says.
The first quarter to end-December showed how hard the road ahead could be. Total credit sales, or disbursements, as African Bank calls them as the figure excludes credit cards, were flat. Nonperforming loans – those on which no income has been earned in over three months – improved slightly. Bad debt remains high, reducing “marginally” over the period.
For the financial year to end-September bad debt write-offs, or impairments, reduced African Bank’s income by R5,2bn, 45% more than in the previous period. That means African Bank’s income of R19,1bn could have been R5,2bn higher were it not for the dubious quality of the loans granted. At the same time nonperforming loans still on the books amounted to R15,2bn, representing 28,6% of gross advances.
African Bank’s vision is to remain the dominant provider of risk-based financial services. This would include having the largest number of advances, client base and distribution network. With gross advances increasing by 8% to R57,3bn at end-December, 2,6m customers and 637 distribution points countrywide, it is number one in the industry.
However, while it was practically the only mainstream player in unsecured lending a decade ago, it now has competitors, including Capitec and to some extent the big four banks.
The battle for this turf comes amid growing problems for African Bank, such as bad debt, a difficult takeover of Ellerines, expensive funding and reduced lending margins.
Though Capitec’s business is not strictly comparable with that of African Bank, its unsecured lending activities overlap, with Capitec consistently overshadowing African Bank’s performance.
For example, Capitec doubled headline earnings in 2012. In its most recent interims, even allowing for a slowdown in business, Capitec reported growth in HEPS of 35%. African Bank grew earnings 18% to end-September but that would have been less were it not for a tax benefit. African Bank is also getting strong competition from other retailers, such as JD Group, whose financial services unit lifted earnings 31,3% for the last year. Pep Stores – owned by Pepkor – provides loans through its Capfin division to thousands of customers. Read More
