ABIL and Moody's

Yesterday we received a SENS announcement from African Bank with the details of a recent Moody's assessment. Although deposit ratings were unchanged the outlook was changed from stable to negative. Fair enough, following the recent write-down the business made a lot less money than was expected in this last half. Ratings agencies have to look at the businesses ability to pay back loans and if the business is less profitable then the risk increases. Here is what Moody's had to say:


"Moody's said that African Bank originated credit has remained within their expectation and was not the driver for this change in outlook. The Agency however indicated a concern that, based on ABIL's interim results released in May 2013, asset quality on furniture-related credit may deteriorate more than they had initially anticipated. This, together with potentially weakening profitability on the back of lower yields and increasing provisioning requirements precipitated a downgrade in their outlook for African Bank. The Bank's high capital levels continued to support the current ratings."


There are 2 things to look at here. Firstly, it is the furniture business (Ellerines) that is being singled out as a problem area. I have touched on this before when comparing Ellerines to Lewis. It is quite clear that although the furniture industry is tough at the moment, Ellerines are losing market share and need to up their game. Maybe they have put too much focus on using the stores as kiosks rather than on what is important, selling furniture. That is an internal issue however that needs to be fixed.

The second point to note is the potential weakening profitability from lower yields and increasing provisional requirements. I have also touched on this before, the interest rate environment is cyclical and it is something this business will always have to deal with. The market knows this and it is factored into the price. An increase in regulation is also to be expected as the industry has been in the lime light for a while now about a potential bubble.


I have often stated my opinion about ratings agencies. I feel they are way too reactionary and although they play a role in how to judge a potential investment, I feel that role has diminished somewhat after the financial crisis of 2008. African Bank was up 2.2% yesterday and we still feel it is extremely undervalued at current levels.