How adventurous can the banks get?

2014-06-29 15:00

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Both Capitec and African Bank are targeting less wealthy consumers, but it has turned into a bumpy ride for the latter, while the former blazes ahead

Comparisons between Capitec and African Bank are inevitable. The former has broken new ground and introduced banking to a whole new market, while the older African Bank has tried to do the same, but with less success. Nevertheless, both banks look set to grow.

Whether Capitec is on the same course as African Bank is still a matter of debate. But the mood in the markets is that Capitec’s planned foray into home loans is good for the Stellenbosch-based outfit and that its counterpart can also start to feel better about its prospects.

At the retail bank’s annual general meeting last month, Capitec boss Gerrie Fourie said it would pilot home loans in a joint venture with SA Home Loans throughout branches in Gauteng from July 7. This would then be rolled out across the country.

It appears to have calmed nerves somewhat about its exposure to unsecured lending.

Although City Press calculations show Capitec has a R1.6?billion cushion between its gross loan book and its total retail deposits, the unsecured space has been dogged by negativity recently.

This led another financier, Transaction Capital, to sell its majority stake in unsecured lender Bayport Financial Services back to its founders, Bayport Management Services, because “negative sentiment around the unsecured lending sector” caused the market to ignore Bayport’s above-average performance, according to the rationale the group issued when the deal was announced.

But Patrice Rassou, head of equities at Sanlam Investment Management, does not see Capitec bowing out of unsecured lending altogether. “I doubt that Capitec will bow out of the lending space as the level of competition has dropped,” he said.

“The business remains very profitable. But it’s true that they are diversifying their income sources by building up their transactional-banking offering.”

African Bank, on the other hand, appeared to lend more to customers than it had in funding. In its last reported financial year, it had R54.5?billion from deposits, listed bonds and other long-term funding.

But it advanced close to R59?billion to customers in credit cards, and at its African Bank branches and Ellerines furniture stores. It recently announced a R4.4?billion loss for the six months to March, mainly blamed on the high number of nonperforming loans on its balance sheet.

In December, it concluded a R5.5?billion rights issue to prop up its balance sheet, although this did not put it ahead of its rival, Capitec.

At the end of last month, credit ratings agency Moody’s downgraded most of this funding to junk status and placed it on review for further downgrades. This prompted fears that investors would pull out their money and run.

But chief financial officer Nithia Nalliah sent out a statement to say no foreign investors could ask to redeem their bonds early owing to the downgrade.

“That is because there are no covenants dealing with a downgrade and, therefore, there is no default,” he said. “Debt funders are, therefore, only able to redeem on the specified bond maturation date.”

Nalliah said the loan book was funded by a combination of conventional funding and shareholders’ equity.

Credit advances in Ellerines declined 15% – good news as bad debts in that division were significantly worse than the traditional African Bank loan book, according to Rassou. It went in blind on Ellerines, said Rassou. Miyelani Mkhabela, executive director at Antswisa Management Group, agreed.

“Their investment strategy had a flawed forecast,” he said. “Advisers had little focus on risk and research, which led the bank to go all out with closed eyes.”

In February, African Bank appointed Mano Moodley, a director at electronics products maker Ellies Holdings, as chief executive of Ellerines. He was joined by Alan Schlesinger, a serial nonexecutive director who also served on the board of the Shanduka Group founded by Deputy President Cyril Ramaphosa as nonexecutive chairman.

Much was made of their turnaround record. Moodley was instrumental in turning around the Edcon group’s CNA retail chain from a lossmaking unit; Schlesinger improved the Relyant group’s operational performance before its merger with Ellerines, years before the African Bank group bought it.

The outlook for the two banks is mixed. Whereas African Bank got a decisive vote of confidence through the Public Investment Corporation (PIC) and Sanlam Investment Management, which appeared to capitalise on its weaker share price by increasing their holdings from 14.8% to 15% and 4.8% to 5%, respectively, Capitec is tightly held by the Mouton family’s PSG Group, so market confidence is difficult to gauge.

Capitec’s other largest shareholder, as disclosed in its annual report, is the PIC.

Mkhabela does not see Capitec going the same way as African Bank. “Capitec uses a different strategy. It seems to be working attractively for their growth, though they must have a close eye on the home loan market?...?unsecured appetite needs to be [tamped].”

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