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Cape Town - There are serious questions to be raised as to why the National Credit Regulator, the Financial Services Board, and even SA Reserve Bank did not sound enough alarm bells into 2012 as African Bank Investments' bad loan book was being built up, said emerging markets analyst Peter Attard Montalto.
He said such questions are necessary to remain credible around the sound and conservative regulation of the wider banking system amid the implosion this week of African Bank [JSE:ABL] (Abil).
African Bank has lost some 95% of its market capitalisation this week after the announcement of poor results highlighted the need to raise some R8.5bn of additional capital.
Losses resulted from its Ellerine Holdings furniture retailer as well as additional problems from its pre-mid-2012 excessive loan extension book.
While non-performing loans (NPLs) are well provisioned at around 68%, the issue here is the ever-eroding capital base, particularly from the Ellerine drag, which raises the need for additional capital, said Montalto.
Montalto said research firm Nomura views Abil as systemically interesting, but given its size and links to the banks, it's not "too big to fail".
He said it is hard to see how Abil shareholders will want to bail the company out, given their core holdings have now been wiped out.
"Fundamentally, time and shareholder support could have allowed a slow restructuring of the pre-2012 book, but time has now run out and shareholder support looks difficult, with the PIC (Public Investment Corporation) even saying there is not a sufficient plan or management team in place at the moment."
On Ellerine he said the furniture retailer has now been played into the equivalent of insolvency to find a buyer, but it looks more like a fire sale now.
Drawing comparisons with the other tier 2 unsecured debt-focused bank Capitec Bank [JSE:CPI], Montalto said the failure of Abil is about over-hype within the unsecured credit market and a business with no diversification.
"While Capitec has much better risk profiling and provisioning of clients debt plus a larger amount of deposit funding, making it a more sustainable business, Abil does not.
"This raises serious questions on why the regulators did not sound enough alarm bells into 2012 as the bad loan book was being built up," he said.
Referring to increasing talk about splitting Abil into a good bank and bad bank, Montalto said he thinks the Sarb would be willing to provide liquidity to such a good bank.
"The good bank would combine Abil's pre-2012 performing loans and almost all their post-2012 loan book together with their (small) deposit base and interbank financing, which, in our view, would be much smaller.
"NPLs and the bulk of market financing would be in the bad bank, but would, in our view, necessitate some kind of debt write-down. The probability of such a write-down occurring is difficult to gauge in reality, however."
