African Bank slumps, sees FY earnings down 63 pct

By Helen Nyambura-Mwaura JOHANNESBURG (Reuters) - South Africa's biggest mass market lender African Bank Investments warned on Wednesday its full-year profit might fall by almost two-thirds, dragged down by higher provisions for bad debts and a loss at its furniture unit. Abil, as the bank is known, has felt the squeeze as its target market of low-income borrowers struggle to repay their loans amid sluggish growth and chronically high unemployment in Africa's biggest economy. South African banks have boosted unsecured lending in recent years, attracted by huge margins, but most of them are now pulling back as borrowers default in increasing numbers. Abil said it expected full-year headline earnings to slide by 58 to 63 percent, compared with a 34 percent fall predicted by analysts. The bank's shares fell as much as 7 percent after the announcement but clawed back some ground in later trade to 15.09 rand, down 5.6 percent. "This is a bit of a shock to the market although they have come out with a lot of bad news recently," said Adrian Cloete, an equity analyst at Cadiz Asset Management. "This is definitely worse than the market expected." The bank, which posted a 26 percent decline in first-half earnings, said it would set aside more cash to cover bad loans, which could shave as much as 500 million rand off its earnings. Abil also said it expected a headline loss of 200 million rand at its Ellerines furniture unit, which it bought as a way to extend more credit to low-income shoppers but is now looking to offload. Capitec Bank, Abil's main competitor in unsecured loans, expects to post earnings up to 22 percent higher. Unlike Abil, Capitec takes deposits and can rely on transactional income. It also holds higher provisions for bad debt and is quick to declare loans as non-performing. Abil said last month it would raise up to 4 billion rand via a rights offer to shore up its balance sheet. Shareholders approved the move this week but the issue has yet to be priced. Abil said its recent share price decline - its stock is down about 54 percent this year - was also costing it money due to hedges related to its long-term incentive plan. Every one rand change in the share price resulted in an additional charge of 16 million. Abil gave no further details on the hedge or the nature of the plan, although long-term incentive share plans are frequently used for executive remuneration.