Insight from ABIL investor presentation

So yesterday I went to the African Bank investor presentation. I covered the operational update yesterday but wanted to get some more insights into the macro environment and how African Bank, who are the industry leaders in South African micro-lending, saw the industry and how they were dealing with the so called bubble that so many people are talking about.


As mentioned yesterday Abil have now increased their loan book to above R50bn, that is 36% higher than last year. The likes of Capitec as well as the big four banks have also been aggressively growing their Micro-lending book. This has resulted in a growing contribution of unsecured lending to the total credit book of debtors in SA, up from less than 5% in 2007 to just under 10% today. It's still growing fast as unsecured lending now contributes nearly 40% of total new credit granted.


Because there has been a decrease in mortgages some may suggest that there has been a credit swap out from mortgages to the unsecured space but African Bank have found this to not be the case. They have concluded that the growth in this space has been driven by supply side factors. Credit is always in demand, especially unsecured because no collateral is required. This, on top of the fact that secured lending has been so hard to come by since the financial crisis. So the big growth in SA has come from the SA banks ramping up their supply.


The returns on unsecured credit are very high and banks are more confident in their abilities to manage the risks that come with such lending. African Bank's strategy to use Ellerines kiosks as sales points is a perfect example of the supply being pumped into the market. So at this stage, the banks can decide how big they want their books to be, which gives them more room to manage risk. African Bank's approval rates have reduced from 75% to 69%. That would of course also be a function of more applications from their ever increasing accessibility.

Another trend they have picked up on is the increased lending from higher income groups. This would be a function of current clients increasing their salary base. This is good news because these clients would be lower risk with potential for bigger loans. As an analyst friend pointed out at the presentation, once a client is locked in he will continue to use Abil for his lending requirements as his/her salary and standard of living increases. Nearly 80% of loans come from existing clients.


For the economy however, higher income groups tend to spend more on less productive consumer goods which is not good news. So is this growth sustainable? As competition increases loan sizes may decrease. And yes the bank admits that such a fast uptake will have to slow down and may have some repercussions. But they are well aware of this and have implemented and are implementing systems to manage their risk. The third part of the presentation showed us what these strategies were but I will not bore you with those details.


I am satisfied that African Bank have "things" under control. Their management team who have a great reputation are all in high spirits and it seems like a good place to work. They have been innovative in their roll out, have been building up a good credit rating in Europe in order to raise capital in low interest rate environments and are even considering taking deposits, starting with their staff as a test in September. We continue to add to the stock.