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Property Talk

Property Talk

Author: Andreas Wassenaar
Date: 2014-08-15
The financial markets have been abuzz with the dramatic implosion of unsecured lender African Bank (Abil) over the last week. When things go wrong for a bank they go spectacularly wrong. For a while the markets and financial commentators have been questioning Abil's business model and the sustainability thereof.

Their disastrous purchase in 2008 of Ellerine Furnishers, which had required a minimum monthly funding support by Abil of R70m, came to a head on 7th August when it was placed under business rescue.

Gill Marcus, Governor of the Reserve Bank announced to the media on Sunday afternoon that Abil had been placed under curatorship with immediate effect.

It is seldom that a large South African bank fails and when this does happen it is instructive to learn the lessons and apply the knowledge gained. The Reserve Bank's rescue package was to isolate the "good" Abil lending book of R26bn and recapitalize it by R10bn through a consortium of the major banks including Absa, Capitec, FirstRand, Investec, Nedbank, Standard and the Public Investment Corporation (PIC).

The PIC administer the billions from the government service pension fund and were one of the largest shareholders in Abil. The "bad" Abil lending book of R17bn would be bought by the Reserve Bank for R7bn with the collection on the bad book set to continue.

Retail depositors represent less than 1% of Abil's creditors and Marcus reassured the retail depositors through the media that their money is safe. The American's would refer to the "bad" lending book as "toxic assets", a term we have become familiar with in the media after the global financial crisis of 2008.

It was the American Reserve Bank's strategy to buy up toxic assets and to isolate them from the rest of the banking system to avoid contagion. In our South African case with Abil the risk of contagion to other banks is exceptionally low and highly unlikely.

The problem with unsecured lending is that it does represent a significant 12% of total bank credit exposure and points to deeper economic problems such as high unemployment and the strain that a high debt to disposable income ratio of around 75% places on households.

Abil's maximum loan size was R180,000 and serviced mostly poorer, black customers through aggressive lending. Now worth less than R500m the company was valued at over R21bn at its height. It is good news that the Reserve Bank has taken decisive action to safeguard the 3,2 million Abil clients and ensure their access to finance.

The big losers in this fiasco are the large investors. The PIC and Coronation Asset Management both had large stakes. If you own a Coronation Unit trust fund I would recommend you urgently check the exposure your fund may have had to Abil.

Financial commentator Magnus Heystek makes the point that Coronation had been active buyers of Abil shares until very recently (amazing how wrong the professionals can be) and that US hedge fund manager David Stemerman has been saying from New York for a while that Abil has been the best "short" sell in the world. When considering all of this my property investments on the North Coast look a whole lot better.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.