African Bank keeping afloat

That African Bank would swing to a loss for the year ended 30 September, 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.

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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 good

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 about 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.

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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 30 September.

The bad

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.

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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 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.

The worrying

African Bank contends 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 new loans sold for over 72 months.

This paints a clear picture of a consumer under significant stress.

This article first appeared on Moneyweb and was republished with permission.