ABIL share price taking a knock

There is still a lot of concern about the unsecured lending environment in South Africa. On Tuesday afternoon Capitec came out with a trading update which looked good but the company fell over 3% yesterday (it's down 2.8% again today) and African Bank fell 2.5%. There was also a meeting on Monday between Finance Minister Pravin Gordhan and the country's big bank chiefs to discuss banking in South Africa as well as this specific matter. The meeting looked at these banks surge into the unsecured market due to higher regulations in the secured lending space which is decreasing those margins and making unsecured more attractive.


Let's look at what Capitec had to say and then discuss some important points from the meeting. Capitec announced that headline earnings look to grow between 25%-35% for the half year ending 31 August 2012. This is good though? But Capitec is priced for perfection and this is well below last year's growth of 53%. This has spurred speculation that impairments have increased considerably. I would agree with that. It is understandable that impairments will increase as loans increase. It all comes down to the company's ability to manage these risks. Unfortunately there was not anymore detail in the update but the market certainly did not like it.


Now let's get to the meeting. href="http://www.treasury.gov.za/comm_media/press/2012/2012082702.pdf"
target="_blank">Here is the release from treasury, don't be scared, it's only 2 pages. Here is what it said about the unsecured lending space.


"The representatives of banks and the Minister noted the rapid increase in unsecured lending. The meeting agreed that the poorer households were at risk of getting caught in a debt spiral. Although some of this lending was by non-bank financial institutions, including retailers, banks could do more to ensure that they lend responsibly and do not contribute to household over-indebtedness.


While there are currently no systemic risks, the meeting noted and supported the close attention that unsecured lending is receiving from the SA Reserve Bank's Bank Supervision Department. There will be further engagement with financial and non-financial institutions on this issue so that South Africans are not over-indebted."


A few interesting points there. One is that the unsecured lending is not just from the banks. In JD Group's results we saw massive growth in their unsecured lending. This holds true for the likes of Truworths and Lewis. I think the other important thing to note is that everyone is well aware of the risks. This is not the same as the sub-prime mortgage crash which snuck up on the market unawares. Everyone learnt their lessons and our highly regarded banks actually walked away from the crisis with their reputations intact.


Regulation in this sector is good. It is more focused on transparency to make sure the banks do not take advantage of ignorant and uneducated people. We are still positive on this sector. We feel there is a lot of money to be made while banks have the ability and more importantly the willingness to manage this risk very carefully. As far as valuations are concerned most of the downside is already factored into Abil's share price which has come down heavily in the last month. We continue to add, taking advantage of this weakness.