* Abil shares suspended a day after $1.6 billion rescue
* Firm's woes highlight parlous situation of many poor
* Banking shares index rises after falling last week
(Recasts, adds analyst comment)
By David Dolan
JOHANNESBURG, Aug 11 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
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
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
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.
The SARB said on Sunday that Abil's depositors would be
protected, adding there would be no payment holiday for the
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
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)