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A breakout year in
ABIL's history |
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| Introduction |
The 2007 financial year was a breakout year in the history of
ABIL and the domestic credit market within which it
operates, with the full enactment of the National Credit Act
(NCA) in June 2007. The anticipation of the NCA and the
implementation of the regulations from 1 June 2007, had a
significant impact on the credit market. Credit supply
intensified substantially in the run-up to the effective date as
competitors positioned themselves for the stricter
affordability rules, while many companies found the
implementation itself tough in terms of system changes,
training and compliance requirements.
ABIL had been preparing itself for the new dispensation for
the past two years, and was able to make the transition
without any disruption to its business. More importantly, as
a result of the work done over this period, the group was
ready to participate in the opportunities that were expected
to flow from the NCA. We have already gained significant
benefit from extending our loan sizes beyond R10 000 and
our terms beyond the 36-month limit previously imposed by
the Usury Act Exemption Notice, as evidenced by our
substantial advances growth for this financial year. A large
proportion of our target market remains under geared as a
result of the artificial barriers that developed in the credit
market over time. The process of extending larger loans
with longer terms for our lower risk clients is expected to
remain a phenomenon of this business over the medium
term. Our preparatory work for the introduction of the NCA
also covered a thorough review of the potential impact of
the NCA and the opportunities it would present to our
competitors. This review culminated in our offer to acquire
Ellerine Holdings Limited which will afford the group the
opportunity to leapfrog its growth and expansion strategy
over the next three to five years. The Ellerines transaction is
dealt with in more detail in this report. |
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| Key drivers of this year's results |
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Sales growth of 31% with larger loan sizes
and longer average terms resulting in
advances growth of 41%. |
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Overall yields declined by almost 5% as
the effect of the price reductions continues
to feed through. |
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Credit quality and bad debt charge in line
with the group's stated targets. |
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Operating cost control continues to create
operational leverage. |
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| Headline earnings per share |
Ordinary dividends per share |
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Continued refinement of the risk differentiated underwriting
models and cost control allowed the group to further reduce
pricing for all clients, resulting in significant volume elasticity.
The lower risk clients were able to benefit from increased
average terms and larger loan sizes. At the same time ABIL
tightened the credit and affordability criteria to higher risk
clients against a backdrop of increased credit supply to
certain segments of the market, resulting in increased
decline rates to these clients. This, together with the
unlocking of the opportunities that the NCA presented,
resulted in a strong 4th quarter, with sales of new loans up
53% over the same quarter in 2006.
As previously communicated, the group has been driving a
strategy of bringing down the cost of credit to its clients.
This process, which began in 2005, involved, firstly, the
refinement of the group's underwriting models from 3 to 8,
then 25 and now 50 discrete risk bands. Within each of
these risk bands, products are tailored with regard to price,
term, loan size and affordability variables. Coupled with this,
the pricing models have been developed to take into
account not only the default probability, but also the cost
absorption and associated weighted average cost of capital
for each risk band. The objective of both of these strategies
is to remove as much cross-subsidisation from the
underwriting models as possible.
ABIL's customers have responded positively to these
improvements, and therefore, whilst the overall yield earned
on the advances book has been reduced by 4,6%, the
gross advances book has grown by 41% during the year,
resulting in an 18% growth in the total revenue earned by
the group. As a consequence of the growth, cost efficiency
has further improved, creating room for further price cuts,
whilst non-performing loans and the bad debt charge have
remained within the group's targeted levels. |
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| Return on assets |
Return on equity |
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| Economic profit |
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