A mountain to climb
Charles Russell
#themes: Challenger bank, turnaround story
Event: African Bank reported its FY25 results, with profits down 47% from FY24. This included a difficult 2H25, with earnings of only R72m, down 79% on 2H24, and including a R590m loss in Personal Bank. This was supplemented by a fair value adjustment R572m for the full-year in Business & Commercial (B&C) Bank, which we view as difficult-to-repeat revenue.
The bad news: The most influential miss came in the form of gross advances growth in Personal Bank (largely driven by unsecured personal loans) in a year that African Bank referred to as “cleaning up the Balance Sheet”. The 13% decline in this key metric not only negatively affected NII growth (down 5%), but also substantially impacted NIR growth (down 7% when including insurance) as several volume-driven line items like insurance premium revenue and origination fees were impacted. As a positive, there was a corresponding improvement in NPLs (down to 23.4%), with less of the high-risk advances.
The good news: We were encouraged to see total deposit growth of 23% (versus SBGS forecast of 15%), and particularly the 16% growth in Retail deposits (up R3.0bn). It is an important strategic objective to grow their Retail deposits, as it diversifies African Bank away from its prior wholesale-funded model, and generates the cheapest form of deposits that can benefit the NIM.
Catalysts for growth: We have adjusted our earnings model and are now forecasting 44% earnings growth in FY26e to R394m, recognising that there is a low base effect to this growth rate. African Bank is hoping to reach R2.5bn earnings and 15% ROE by FY28e in order to execute an IPO. While our forecasts come in lower than their expectations, we highlight the following areas as the major catalysts that need to work if African Bank is to achieve its goals: (1) a turnaround in loan growth in Personal Bank; (2) strong growth in the insurance income, driven by new business volumes and the nascent funeral cover product; (3) transactional income to improve with greater usage of African Bank’s transactional products in both Personal and B&C Bank; (4) further reductions in the Expected Credit Loss ratio; and (5) strong growth in B&C loan growth, driven by the new digital and SME lending strategies.
Valuation: After finalising our new forecasts, we have adjusted our FVVR range downwards to a range of R7bn-R15bn (previously R11bn-R17bn). The low end of the range uses our calculated sustainable ROE of only 10.9% (using our forecast for FY28e), which is well below the 15% targeted by management. This justifies a Price-to-book (PB) multiple of only 0.55x on the FY26e tangible NAV of R12.4bn. The upper end of the range is calculated off a PB multiple of 1.2x for the banking sector, seen as the long-term sustainable multiple for the sector.
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