ABIL debt downgrade

It's always difficult writing about a stock that you like which has done badly. It makes me feel like I am trying to put lipstick on a pig when absorbing bad news. But, if you just invested in stocks that were doing well you would be considered a momentum investor which is not always a good thing. Just ask those trying to ride the wave of the dot com rally. Sometimes, if you feel you are justified, you have to fight the crowd and take a contrarian view. That is often how the real money is made, when the situation is not what everyone from your hairdresser or in this case even Carte Blanche is telling you. And then the stock gets a massive rerating.


This morning we had another negative announcement from African Bank stating that Moody's have downgraded their global and national debt and deposit ratings by one notch. This was expected as the agency had already put the company on negative outlook in October last year. Again, I maintain my thesis on ratings agencies, they are just one piece in the valuation puzzle. Yes they are a factor investors have to consider when lending Abil money but they are far from the full story.


Leon Kirkinis had this to say about the downgrade: "African Bank deploys extremely conservative funding and risk management measures to its liability portfolio and we view the term wholesale funding as a strength and the more recent diversification into foreign markets is a step in reducing concentration. The robust and sustainable business model will continue to deliver high returns, through market cycles. Notwithstanding the downgrade, African Bank maintains its global investment grade rating, with a stable outlook."



Also don't forget that the company is trialling retail banking as a form of raising money which will improve their diversification even more. I am not too fazed with this announcement. It was expected and has happened to most of our banks following a downgrade on South African debt.


More importantly, and why African Bank are in fact up 2% today was a trading statement from Capitec which indicated headline earnings per share growth of between 32% and 36%. Wow that is huge and off what has exceedingly become a high base. Yes Capitec are a mixture of retail banking and unsecured lending but this is definitely good news for the sector.


As we have always said, the earnings have been growing and the book with which the earnings are made has also grown tremendously. But the share prices have not followed because people are worried about the future.
Capitec, once the darling of the JSE is trading at a similar level to where it was in May 2011. They too got downgraded from positive to stable by Moody's. This was not as severe as African Bank, probably on the basis that they have retail banking as an extra way to raise money.


Our thesis on these unsecured lenders remains the same. Most of the bad news is factored in. At these levels the potential for upside is much higher than the potential for downside. As the reaction to Capitec's trading update is showing. More good news like this could be the start of a rerating, who knows. So yes I put lipstick on the (shareprice) pig, but who says a good investment has to be pretty. Patience.