Shifting the furniture

African Bank Investments Limited will sell its furniture unit and raise cash in a rights offer to boost its balance sheet, South Africa's largest unsecured lender announced yesterday.

The bank has helped pioneer unsecured credit - loans not backed by collateral - by focusing on lower-income customers.

But it is now showing signs of fatigue as borrowers struggle to make payments, their finances hit by a slowing economy, unemployment and waves of strike action.

Abil, which warned that earnings at its main banking unit were likely to worsen in the second half, said it would look to sell its Ellerines furniture business, which it bought in 2007 as a vehicle for selling couches and armchairs on credit. The bank, which does not take deposits and relies on the bond market for funding, said it would raise up to R4-billion with a fully subscribed rights offer to improve its capital position.

"They've shored up their balance sheet and investors will take confidence in that," said Simon Fillmore, chief executive of Independent Securities.

"Ellerines has been its Achilles heel for six or seven years so to indicate they are going to sell that is quite positive."

Abil shares initially tumbled as much as 13% but recovered as investors welcomed the asset sale and fundraising, closing nearly 5% stronger on the day. The stock has lost nearly half its value since May, when Abil reported a 26% drop in first-half profit and wrote off R445-million in bad loans, sparking concern about its finances. Cash flow accounts for 16% of the bank's average net operating assets, according to Reuters data, well below the industry median of 50%. Its debt to equity ratio, a measure of a company's borrowing, is at 300%, compared with an average of 107% at six other South African banks, the data shows.

Analysts are concerned about the possibility of higher bad debt across the banking sector, especially from consumer loans.

South African household debt is equal to more than 75% of disposable income, data from the Reserve Bank shows.

"It says times are tough. We can see that coming through with the high credit losses," said a banking analyst who is not authorised to speak to the media. "Funding costs are rising and it is putting a lot of pressure on non-deposit-taking banking institutions that do not have access to retail deposits as a form of cheap funding."

Abil, facing a R300-million regulatory fine after an industry-wide probe into possible reckless lending, said loans in the April-June quarter grew by 19% to R60.3-billion year-on-year, slower than the 25% growth achieved in the previous period.