UPDATE 4-S.African bank shares rally after $1.6 bln Abil bailout

Mon Aug 11, 2014 2:29pm EDT

Related Topics

* Abil shares suspended a day after $1.6 billion rescue

* Firm's woes highlight parlous situation of many poor S.Africans

* Banking shares index rises after falling last week (Recasts, adds analyst comment)

By David Dolan

JOHANNESBURG, Aug 11 (Reuters) - Shares in South African lenders rose across the board on Monday after the central bank launched a $1.6 billion rescue of African Bank Investments over the weekend.

African Bank, known as Abil, shocked the market on Wednesday when it warned of a full-year loss on rising bad debts and said it would need to tap shareholders for new capital for the second time in a year.

The news sparked an investor exodus that wiped about $900 million from its market value over three days and validated some longstanding concerns about Abil's business model of marketing risky, high-interest loans mainly to low-income borrowers.

Abil was almost exclusively focused on selling unsecured loans - which are not backed by collateral - to customers who often did not have an established credit history. It took few deposits and did not offer many traditional banking services.

It also had a money-losing furniture business, bought in 2008 in a disastrous attempt to sell sofas on credit.

"African Bank is rather unique in that it's focused on these unsecured loans. It doesn't really have other significant income sources - they don't do home loans, they don't do lots of retail banking," said Christie Viljoen of NKC Independent Economists in Cape Town.

Analysts and economists had not regarded Abil's meltdown as a direct blow to South Africa's robust banking sector, as its business model was unique in the country, but they had still warned of the perception of contagion, particularly among foreign investors.

Staving off those concerns, the South African Reserve Bank (SARB) on Sunday announced a 17 billion rand ($1.6 billion) rescue, which will see Abil placed under outside supervision and the central bank acquire its "bad loan" book for 7 billion rand.

A group composed of commercial banks such as Standard Bank and Abil's second-largest shareholder, the state pension fund, will underwrite a 10 billion rand capital raising.

"This is a sound move by the SARB," Peter Attard Montalto, an analyst at Nomura International in London, said in a note to clients, adding that the banking system should be able to withstand the shock.

BANK SHARES GAIN

Johannesburg's bank index rose 1.7 percent on the news of the bailout, with all of its constituent lenders gaining ground. Trading of Abil's shares and debt were suspended before the start of trade on Monday.

The bank index had fallen to its lowest since mid-July last week, reflecting jitters about Abil.

Now worth under $50 million, Abil was valued at more than $4 billion at its height in 2012. Even as bad debts spiked in recent years it failed to rein in lending. As recently as December 2012, over a third of its quarterly loans were categorised as "medium to high risk".

The bank's maximum personal loan was $16,800, a large amount given that it was lending to low-income customers in a country where per capita GDP was around $7,500 in 2013.

It also raised the bulk of its funding in the debt markets, meaning it did not have a buffer of cheaper deposits when wholesale funding became more expensive.

While unsecured lending accounts for just 12 percent of outstanding loans by South African banks, Abil's problems illustrate the parlous situation of many poor South Africans.

"When people default on these unsecured loans, it means their income is dropping or their expenses are going up and that slots into the rest of problems we've got at the moment: high unemployment, low growth and high inflation," said NKC's Viljoen.

South African household debt averages around 75 percent of disposable income, meaning servicing debt is a huge burden for low-income households, where food costs alone account for a third of expenditure.

BONDHOLDERS HIT

The SARB said on Sunday that Abil's depositors would be protected, adding there would be no payment holiday for the bank's customers.

The rescue will not immediately benefit shareholders or investors in Abil's junior debt, both of whom will get the chance to later participate in the capital raising.

Investors in senior debt will see their bonds take a 10 percent writedown.

Bondholders have already had a rough ride: in May, credit agency Moody's cut its rating on the bank's debt to "junk" status, citing concerns about spiralling bad loans.

The yield on Abil's Swiss franc debt maturing in 2016 soared to 58 percent on Monday. It had traded below 5 percent at one point in June. Abil had 47 billion rand worth of bonds and long-term debt at the end of March.

(1 dollar = 10.6970 South African rand) (Additional reporting by Tiisetso Motsoeneng; Editing by John Stonestreet and Pravin Char)

FILED UNDER: