UPDATE 3-Investors dump South Africa's Abil bank as

problems mount | Reuters

(Recasts with retail business rescue, adds comment fromeconomist and lawyer)
By David Dolan and Ed Cropley
JOHANNESBURG Aug 7 Investors fled African BankInvestments on Thursday, as the South African
lenderfaced a $790 million hole from a flood of unsecured loans gonebad and its furniture retail
business applied for creditorprotection.
The bank, widely known as Abil, shocked the market onWednesday when it said it needed to raise
8.5 billion rand ($790million) in new capital after warning of a massive annual loss,after which its
chief executive quit.
On Thursday its furniture retailing arm - which Abilacquired in 2008 in a disastrous attempt to sell
sofas on credit- applied for temporary protection from creditors.
Any attempt by the bank to raise the funds to survive looksnear-impossible - Abil needs several times
more capital than itis currently worth. Its stock plunged to a record low of 20African cents on
Thursday and ended the day at 50 cents, valuingit at $102 million. It was a precipitous fall for a
companyworth more than $2 billion at its height.
"Equity investors have thrown in the towel. It's literallyuninvestable," said one Johannesburg-based
trader, who declinedto be identified. "The South African consumer credit bubble hasburst."
The bank's troubles stem from its reliance on unsecuredlending - high-margin loans not backed by
collateral - which itmarketed aggressively to low-income borrowers. But those clientshave been hit
by rising unemployment, food and fuel costs, andAbil has been slammed by their bad debts.
South African Finance Minister Nhlanhla Nene said he was"keeping an eye" on Abil, but said there
was no sign of broadercontagion to the banking sector, which is widely regarded asbeing well
capitalised and sound.
"There has been no indication that other South African bankshave been affected negatively by Abil's
trading update, which isour major concern," he told reporters.
"UNIQUE BUSINESS MODEL"
South Africa's central bank said on Wednesday that theproblems at Abil were largely due to its
"unique business model"- it is closer to a payday lender than a traditional bank andrelies on bond
markets, not deposits, for funding.
While Abil's problems were unlikely to have a direct impacton the rest of the country's banking
sector, regulators werelikely to act quickly to stave off concerns for its peers, saidKevin Lings, chief
economist at Stanlib.
"There may well be some support, in some form," he said."The support would be highly conditional
and it would either belooking to help it as a going concern or looking to wind theentity down."

In recent years South African banks turned to unsecuredcredit - such as personal loans - to offset
weak demandelsewhere. But most commercial banks have reined that lending inas weaker economy
prompted more customers to default.
There was no sign of panic at an Abil branch in the workingclass Johannesburg neighbourhood of
Randburg at midday onThursday. There was even a small trickle of customers cominginto the branch
to fill out new loan applications.
"Everything is fine, it's business as usual," said themanager, who declined to give her name.
Posters in the windows of the branch advertised mobile phonedeals with new loans. "Credit that
works for you - apply today,"one read.
Godfrey Mashele, a 38-year-old employee of a mobile servicesfirm, said he intended to keep paying
off his 3,000 rand creditcard debt regardless of the news.
"I've heard they've lost money with their customers notpaying. But I'll be carrying on paying down
my debt, it's on amonthly debit order," he said.
BUSINESS RESCUE
Abil's furniture retailing arm said on Thursday it hadapplied from temporary protection from
creditors, or "voluntarybusiness rescue" under South Africa's Companies Act.
The process allows a company that still has commercialprospects an opportunity to potentially
rehabilitate itself,said Brandon Irsigler, a director at law firm Norton RoseFulbright.
"This is a middle path between debtors not being able torecover their money and forcing an
otherwise viable businessinto liquidation to the detriment of everybody," he said.
Leon Kirkinis, who resigned as Abil's chief executive onWednesday, built the bank into one of South
Africa's best knownlenders by targeting low-income borrowers with expensive credit- a previously
untapped market of people who had beentraditionally ignored by banks during the apartheid era
thatended in 1994.
But critics said those lending practices were unsustainable.
"The question now is how much the loan book is really worthand if that is enough collateral for
equity holders after thebond obligations have been fulfilled." said Nic Norman-Smith,chief
investment officer at Lentus Asset Management inJohannesburg.
"Based on the current equity valuation, the market is sayingthat there will be very little - if anything
- left."
Abil said on Wednesday it would cleave off its bad loans inan attempt to create a ring-fenced "good
bank".
Its bad loans comprise nearly a third of its 60.1 billionrand book, while it had 47 billion rand worth
of bonds andlong-term debt on its balance sheet as of the end of March.
The Johannesburg Stock Exchange said it saw no reason tohalt trading of Abil's shares "at this

moment". ($1 = 10.7310 South African Rand) (Aditional reporting by Wendell Roelf in Cape Town
and StellaMapenzauswa in Johannesburg; Editing by Sophie Walker)
http://www.reuters.com/article/safrica-abil-idUSL6N0QD36120140807