Johannesburg - African Bank Investments [JSE:ABK] is slowing down its lending after years of rapid growth, the first sign South African banks may be turning more cautious about lucrative, but high-risk loans to increasingly indebted consumers.
African Bank, also known as Abil, helped pioneer the booming South African market for unsecured lending - highly profitable, though risky, credit that is not backed by collateral.
Abil, which fell short of expectations with an 18% rise in full-year profit on Monday, is now seeing competition from South Africa's big banks, which are also lending to low-income consumers.
"We have cut back slightly on our credit and more importantly we're being more selective about who and how much we give following the excessive supply in the market," Chief Financial Officer Nithia Nalliah told Reuters.
The central bank has said it is not unduly worried about the rise in unsecured loans, but some analysts disagree. Unsecured credit surged 21% to $43bn in the year to June, according to central bank data.
The loans have helped underpin consumer spending, especially among the poor. However, there is also vast potential for default, given that South Africa's household debt stands at 76 percent of disposable income.
"The fact that they are aware of the dangers of the unsecured lending is positive," said Viv Govender, analyst at Vunani Private Clients.
"People have been nervous about this sector as a whole. There's been talk about the possibility of a bubble in unsecured lending."
Abil's non-performing loans total nearly 28% of its R50bn loan book, Nalliah said. Yet it is still making money, as its average interest rate is just below 21%, well above the central bank's benchmark rate of 5%.
Abil also owns furniture chain Ellerines, where it sells dining room sets and sofas on credit, and offers personal loans inside its stores.
Loans have grown at an annual rate of 25% in recent years, but the company sees that slowing to about 15%.
Abil plans to raise R15bn this year, a third of it from international markets, Nalliah said. It issued 125 million Swiss francs in a four-year bond earlier this month.
Abil missed market expectations with diluted headline earnings per share at 342.5 cents in the year to end-September, compared with 291 cents a year earlier.
A poll of 12 analysts had expected earnings to increase 25% to 362 cents, according to Thomson Reuters data.
Earnings were held back by growing competition.
Headline EPS, which excludes some one-time and financial items, is the main measure of profit in South Africa.
The company increased dividends by 5% to 195 cents, higher than the 183 cents expected in the poll of analysts.
Interest income rose 36% to R9.9bn and non-interest income rose 12% to R3.3bn.
Helped by the higher dividend, shares of Abil were up around 3% at 12:45. However, they are down about 10% so far this year, compared with over 15% growth in the benchmark Johannesburg Top-40 index.