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African Bank forecasts return to profit by 2017

Johannesburg - African Bank Investments [JSE:ABL], the unsecured lender that collapsed last year amid record losses, said the business created out of the bank’s viable assets will make a profit in 2017.

The newly created banking group will start operating in February and is expected to post a loss for the fiscal-full year ending September next year of R336m, Tom Winterboer, the lender’s administrator, said in a presentation to reporters in Johannesburg on Wednesday.

That will be followed by a profit of R542m in 2017. “This is the base case. We’re quite excited by the numbers,” he said.

African Bank failed in August 2014 as bad debts rose and funding dried up. The South African Reserve Bank (SARB) stepped in with a rescue plan that has put senior bondholders in line to recoup 90% of their investment and left subordinated debt holders facing a 62.5% loss.

Shareholders in the bank, which included government pension fund administrator the Public Investment Corp, Coronation Fund Managers and Allan Gray, also a fund manager, may still lose everything.

African Bank, which was the country’s biggest provider of unsecured credit, also released a 129-page information memorandum on Wednesday detailing the offer to creditors.

If its plan is approved, which African Bank said is likely following discussions with large investors, and signed off on by the Minister of Finance, its operational assets will be transferred into a so-called good bank that will start on February 1.

An initial public offering can probably only be planned after the new entity has a track record of about three years, according to Winterboer.

“On listing, if there’s an over-subscription, previous shareholders will get preferential treatment,” which won’t include preferential pricing, Winterboer said. “It’s unfortunate.”

SARB invests

Until the IPO, the central bank will be a 50% shareholder in African Bank and the PIC, as the government pension administrator is known, will hold 25%, with the rest of the shares taken up by South African banks, Winterboer said.

“We wouldn’t expect SARB’s support to cost taxpayers money because the central bank’s lending is being done on a commercial basis. The intention would be with a listing for SARB to sell or it could sell to another party,” he said.

To bolster its business model, African Bank will reduce the size and the term of loans, while cutting costs and narrowing the write-off period on bad debts to six months from 10.

The new bank will have an opening cash balance of R20.5bn and shouldn’t need to approach debt markets for financing until late 2018, according to the lender. The bank plans to publish results in December for the year ended September 2015, he said.

Today’s information memorandum has been delayed since May and the start of the new bank was originally pegged for next month. The June proposal by South Africa’s Department of Trade and Industry to cut the maximum interest rate on unsecured credit was partly to blame for the missed deadlines, according to David Gard, a member of Winterboer’s team.

“When the interest rate proposals came out we were quite concerned,” Winterboer said, having indicated that the changes may mean an 8% reduction in the maximum interest for unsecured loans. “We will lend less, but write offs will also be lower.”

Big job

To rescue the lender and create the good bank, Winterboer and his team have had to get banking laws changed, appoint new directors, fire some staff, negotiate with investors, produce financial results and arrange a sale of the lender’s Standard General Insurance Investors have until October 9 to comment on African Bank’s information memorandum and a final document is planned for October 26, after which the Minister of Finance will be asked to approve the plan by December 8.

Two more non-executive directors will be announced before then, bringing the bank’s board to 10, according to Winterboer.

“From February 1 the curatorship will continue on the residual bank,” he said. “The executives are starting to take over the running of the good bank. The CEO Brian Riley is already running the bank on a day to day basis.”


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