Global Credit Ratings (GCR) has downgraded the national scale ratings assigned to African Bank Limited to A-(ZA) and A2(ZA) in the long-term and short-term respectively; with the outlook accorded as negative. Furthermore, the international scale rating assigned to African Bank Limited has been downgraded to BB+ with the outlook accorded as negative.
African Bank Limited is a dominant lender of unsecured credit to low- and middle-income consumers, and of secured furniture credit through furniture retailer Ellerines Holdings Limited.
According to Dirk Greeff, Sector Head: Financial Institution Ratings at GCR, the bank’s poor credit performance follows regulatory concerns about the swift pace of unsecured lending growth and rising consumer stress.
“While declining debt affordability and retail spend on durable goods have dampened performance in the past 18 months, suboptimal underwriting decisions pre-July 2013 also contributed to the poor result as the majority of the loan book in F13 and 1H F14 was originated during this period.”
In July 2013, the bank tightened underwriting and collection procedures and changed provisioning policies. Thereafter, credit sales growth turned negative and loan book growth has slowed, amplifying non-performing loans (NPLs).
The bank, with a net loan book of R48,4bn at 1H F14, posted substantial losses in F13 and 1H F14, despite positive top-line growth. Revenue grew 10% (annualised) in 1H F14 (F13: 18,3%) and net interest margins contracted by 140bps to 11,5% in 1H F14 (F13: 12,9%).
Operational losses eroded statutory capital by R2,9bn in F13/1H F14, mitigated by ABIL’s R5,5bn rights issue in December 2013 (R4,8bn of which was injected into bank capital). At 1H F14, total capital adequacy of 26,4% approached the 2014 target (27%) but remains below the long-term target of 30%. Capital stress tests indicate that African Bank has inadequate reserves in a moderate-high stress scenario; broadly, balance sheet metrics are acceptable, but high volatility in credit losses and earnings place capital at increased risk.
Greeff says the group is expecting a challenging year. Consumer strain points to slow top-line growth and margin pressure. Existing provisions should protect earnings against unexpected NPLs. Higher funding costs are likely, reflecting increased risk and rising rates, while remedial action within the business may put upward pressure on costs.
“A return to sustainable profitability coupled with slowing NPL formation would signal declining business risk, and be positively viewed. Any changes in South Africa’s sovereign rating could also have an impact on the rating. More positive macroeconomic trends affecting consumer health would support improvement in African Bank’s top line growth and profitability. Continued earnings volatility, deterioration in credit risk metrics (in particular NPL levels and write-offs), and diminished capital adequacy would put downward pressure on the ratings,” concludes Greeff.