That African Bank would swing to a loss for the year ended September 30, 2020, is not surprising.
At the half-year mark it reported a R111 million net loss after tax after a R550 million Covid-19 impairment in the bank (as well as a R303 million provision in its insurance business).
Analysts will surely be scrutinising the unlisted bank’s figures as it continues its recovery, for any signs of distress that could be lurking in the books of its larger, listed rivals.
The good news is that the bank was profitable in the second half of the financial year as most of that provision was released (only R111 million remains).
But as the effect of the lockdown and the pandemic rolls on, the bank cautions it is “no longer possible to isolate the impact … on the full-year results”.
The major highlight in these numbers is that it had a total of R6 billion in retail deposits at the end of September. That’s more than double the amount from a year prior, and around 60% higher than the R3.8 billion at the end of March. It hasn’t provided a breakdown but it is difficult to imagine that this has changed materially since its disclosure at the interim stage where 85% comprised fixed deposits.
Its 50 000 savings customers (from 26 000 a year ago) have an average balance of R105 000, with a 45% reinvestment rate as deposits mature.
Customers have clearly been attracted to the bank’s interest rates, which are among the highest in the market.
This growth has seen retail funding jump from 12% in September 2019 to 35% of total funding (far higher than its 2021 target of 25%). Despite the higher interest rates it pays customers, this is cheaper than many other sources. The bank says its cost of funding was 8.57% (nominal) as at September 30.
The bank’s focus on cost discipline is a positive sign. Retrenchments are never easy, but African Bank began a Section 189A process in October, which outgoing CEO Basani Maluleke (her resignation was announced on January 25) – notes will “likely result in the reduction of approximately 300 positions” across its 3 700 employees.
New loans are down 37% year on year, with most of the contraction coming in the second six months as a result of “tightened credit underwriting” in August. As at March, it had disbursed R4.2 billion in new loans, versus R6.8 billion for the full year. This has not just impacted interest income (broadly flat versus 2019) – the bank says this has resulted in a 3.9-percentage point drag on its non-performing loan ratio.
The bank will all but certainly miss its non-interest income target of R500 million by 2021, given that the figure for 2020 is R387 million (excluding collection fees charged to Residual Debt Services for the legacy book). Contrast this to the net interest income for the year of R1.255 billion. However, the bank has seen fit to publish a target for 2023 of R750 million from non-interest income. Key to this will be the uptake of its transactional account.
This account (MyWorld), launched in 2019, continues to “steadily” attract customers with growth being affected by the pandemic. The bank has disclosed for the first time that 26% of the 368 000 accounts opened to date are inactive and unfunded. Transaction metrics suggest that many of the sign ups in the six months between March and September are active, transacting clients. Sustaining this will be critical, especially as it grows this segment to critical mass. Its ‘digital’ channel, including transactional banking, made a R454 million operating loss in the year.
Maluleke’s surprise resignation on Monday is not entirely worrying.
The bank is in a sound position (from a capital point of view), and it is likely she has been headhunted for a far larger role in the market than the painstaking process of diversifying African Bank into something more than just a lending business (which used to have a furniture business attached). It is still not great news though.
African Bank contends that 86% of its loan disbursements are currently to low-risk customers (in the “best five of 22 risk bands”). The book is still deteriorating, however.
The average size of loans disbursed in the second half is R35 187, a noticeable increase on business written in the six months before lockdown. Close to 60% of loans sold were over R100 000. In the second six months the average term of disbursements was 57 months, with more than half of new loans sold for over 72 months.
This paints a clear picture of a consumer under significant stress.
There is no real change in the percentage of disbursements used to settle existing African Bank debt (around 11% or 12%). But this means that a tenth of its loan book is constantly being rolled over.
The bank’s credit loss ratio rocketed from 7.5% in September 2019 to 11.7% in September 2020.
It says this resulted “initially from the weakening macroeconomic environment and [was] exacerbated by the adverse impacts of the Covid-19 pandemic”.
Non-preforming loans are up from 35.2% of the book to 41%. That means R41 out of every R100 lent out has resulted in Stage 3 loans, or those which have “defaulted but have not yet reached write-off”.
As at September 30, these total R11.6 billion and “remain on balance sheet” as they “have all had receipts in the last eight months before the reporting date”.
|September 30, 2019 (restated)||September 30, 2020||% of book as at September 30, 2020|
|Stage 1||R10.075 billion||R8.532 billion||30%|
|Stage 2||R9.205 billion||R8.187 billion||29%|
|Stage 3||R10.454 billion||R11.609 billion||41%|
|Total book||R29.734 billion||R28.328 billion||100%|
|Written-off||R12.720 billion||R15.185 billion|
African Bank’s credit impairment charge is R3.4 billion for the year, which is R1.2 billion (or 58%) higher than in 2019. On net revenue of around R6 billion, this is a material increase (and the reason for the full-year loss).
Whether the situation deteriorates further from this point is anyone’s guess ….