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UPDATE 2-Bad loans slash Abil earnings in tough S. African economy

Helen Nyambura-Mwaura
Monday, 11 Nov 2013 | 7:36 AM ET

* Consumers struggle to repay debts as economy slows

* Bank's bad debt charges jump 89 percent

* Hire purchase furniture unit swings to loss

* Dividend cut by 85 percent

* Abil's shares down 45 percent this year

JOHANNESBURG, Nov 11 (Reuters) - African Bank Investments , South Africa's biggest provider of unsecured loans, posted an 88 percent plunge in full-year earnings on Monday as bad consumer debt mushrooms in Africa's largest economy.

Abil, as the bank is commonly known, blamed a series of problems in the weak South African economy which had led to its largely lower income customers struggling to keep up with repayments on their loans, or scaling back on new borrowing.

Most South African banks embarked in recent years on a binge of lending without collateral and are now suffering the consequences as the economy slows.

Abil, which had issued two profit warnings in recent weeks, said its bad debt charges had jumped 89 percent to 9.15 billion rand ($884 million) in the year ended September. Illustrating its problems, Abil's furniture subsidiary which sells items such as beds and sofas on hire purchase deals swung from profit to a heavy loss and is now up for sale.

Hit by higher fuel prices and inflation, overstretched South African consumers are cutting back on spending and many have run up increasing arrears on their debts, prompting the banks to rein in lending.

Harry Botha, an equity analyst at Avior Research, saw no improvement for some time. "I'm not too excited about the outlook over the next 12 months. It's going to be a tough economy, a tough consumer space. You are looking a two/three year recovery story," he said.

Abil's headline earnings per share tumbled to 45.1 cents in the year from 378.2 cents a year earlier, in line with the profit warnings. Headline EPS, which excludes some one-time and financial items, is the main measure of profit in South Africa.

It declared a final dividend of 5 cents per share, down from 110 in 2012, bringing the total for the year to 30 cents.

"CHALLENGING" ENVIRONMENT

Nearly a quarter of South Africans have no jobs in an economy where average household debt accounts for 75 percent of disposable income, and the country has also been rocked by strikes and violence in the important mining industry.

"Economic conditions in South Africa continued to be challenging during the past financial year, characterised by lower consumer confidence, pressure on disposable incomes, higher levels of indebtedness and labour market unrest in certain industries," Abil said in a statement.

"These conditions led to lower demand for credit products and durable merchandise, lower collections and concomitantly increasing arrears."

Abil is now changing its policies to increase credit loss provisions and to write off bad loans sooner. It is also raising nearly 5.5 billion rand in a rights issue priced at a hefty 38.7 percent discount, to shore up its balance sheet.

The bank's share price plunged nearly 28 percent in early trade on Monday as shares traded ex-rights, or without the right to participate in the offer.

Abil's interest income rose 21 percent to 11.96 billion rand as the banking unit wrote 11 percent more loans to 59 billion rand.

The furniture retail unit Ellerines lost 284 million rand after a profit of 249 million in the previous year. Abil is now looking to sell Ellerines barely five years after buying the hire purchase seller to plump up its loan portfolio.

Other South African banks have also indulged in the unsecured loans boom in the past few years to boost dwindling income, but have since been scaling back on the lucrative yet risky segment.

Abil shares have lost more than 45 percent of their value this year as the lender issued successive profit warnings.

In comparison, Johannesburg's All-share index is up 16 percent and Capitec Bank, Abil's main competitor in the mass market, has added more than 10 percent this year.

Unlike Capitec, Abil does not take deposits and relies solely on bonds for capital.