UPDATE 3-Investors dump South Africa's Abil bank as problems mount

Thu Aug 7, 2014 2:10pm EDT

(Recasts with retail business rescue, adds comment from economist and lawyer)

By David Dolan and Ed Cropley

JOHANNESBURG Aug 7 (Reuters) - Investors fled African Bank Investments on Thursday, as the South African lender faced a $790 million hole from a flood of unsecured loans gone bad and its furniture retail business applied for creditor protection.

The bank, widely known as Abil, shocked the market on Wednesday when it said it needed to raise 8.5 billion rand ($790 million) in new capital after warning of a massive annual loss, after which its chief executive quit.

On Thursday its furniture retailing arm - which Abil acquired in 2008 in a disastrous attempt to sell sofas on credit - applied for temporary protection from creditors.

Any attempt by the bank to raise the funds to survive looks near-impossible - Abil needs several times more capital than it is currently worth. Its stock plunged to a record low of 20 African cents on Thursday and ended the day at 50 cents, valuing it at $102 million. It was a precipitous fall for a company worth more than $2 billion at its height.

"Equity investors have thrown in the towel. It's literally uninvestable," said one Johannesburg-based trader, who declined to be identified. "The South African consumer credit bubble has burst."

The bank's troubles stem from its reliance on unsecured lending - high-margin loans not backed by collateral - which it marketed aggressively to low-income borrowers. But those clients have been hit by rising unemployment, food and fuel costs, and Abil has been slammed by their bad debts.

South African Finance Minister Nhlanhla Nene said he was "keeping an eye" on Abil, but said there was no sign of broader contagion to the banking sector, which is widely regarded as being well capitalised and sound.

"There has been no indication that other South African banks have been affected negatively by Abil's trading update, which is our major concern," he told reporters.

"UNIQUE BUSINESS MODEL"

South Africa's central bank said on Wednesday that the problems at Abil were largely due to its "unique business model" - it is closer to a payday lender than a traditional bank and relies on bond markets, not deposits, for funding.

While Abil's problems were unlikely to have a direct impact on the rest of the country's banking sector, regulators were likely to act quickly to stave off concerns for its peers, said Kevin Lings, chief economist at Stanlib.

"There may well be some support, in some form," he said. "The support would be highly conditional and it would either be looking to help it as a going concern or looking to wind the entity down."

In recent years South African banks turned to unsecured credit - such as personal loans - to offset weak demand elsewhere. But most commercial banks have reined that lending in as weaker economy prompted more customers to default.

There was no sign of panic at an Abil branch in the working class Johannesburg neighbourhood of Randburg at midday on Thursday. There was even a small trickle of customers coming into the branch to fill out new loan applications.

"Everything is fine, it's business as usual," said the manager, who declined to give her name.

Posters in the windows of the branch advertised mobile phone deals with new loans. "Credit that works for you - apply today," one read.

Godfrey Mashele, a 38-year-old employee of a mobile services firm, said he intended to keep paying off his 3,000 rand credit card debt regardless of the news.

"I've heard they've lost money with their customers not paying. But I'll be carrying on paying down my debt, it's on a monthly debit order," he said.

BUSINESS RESCUE

Abil's furniture retailing arm said on Thursday it had applied from temporary protection from creditors, or "voluntary business rescue" under South Africa's Companies Act.

The process allows a company that still has commercial prospects an opportunity to potentially rehabilitate itself, said Brandon Irsigler, a director at law firm Norton Rose Fulbright.

"This is a middle path between debtors not being able to recover their money and forcing an otherwise viable business into liquidation to the detriment of everybody," he said.

Leon Kirkinis, who resigned as Abil's chief executive on Wednesday, built the bank into one of South Africa's best known lenders by targeting low-income borrowers with expensive credit - a previously untapped market of people who had been traditionally ignored by banks during the apartheid era that ended in 1994.

But critics said those lending practices were unsustainable.

"The question now is how much the loan book is really worth and if that is enough collateral for equity holders after the bond obligations have been fulfilled." said Nic Norman-Smith, chief investment officer at Lentus Asset Management in Johannesburg.

"Based on the current equity valuation, the market is saying that there will be very little - if anything - left."

Abil said on Wednesday it would cleave off its bad loans in an attempt to create a ring-fenced "good bank".

Its bad loans comprise nearly a third of its 60.1 billion rand book, while it had 47 billion rand worth of bonds and long-term debt on its balance sheet as of the end of March.

The Johannesburg Stock Exchange said it saw no reason to halt trading of Abil's shares "at this moment". ($1 = 10.7310 South African Rand) (Aditional reporting by Wendell Roelf in Cape Town and Stella Mapenzauswa in Johannesburg; Editing by Sophie Walker)