Sasfin’s impairment charges double
Group CEO Michael Sassoon suspects fraud by borrowers is partly responsible as company headline earnings plummet 37%
Sasfin, the banking group that lends to business owners, almost doubled its impairment charges in just one year.
In what the group’s CEO Michael Sassoon suspects was partly a result of fraud by borrowers, Sasfin lost R144.1m to impairment charges in the year to June 2018 compared to R81.4m in 2017.
Companies incur impairment charges when it is likely that some of the money lent to customers will not be fully repaid. The high level of Sasfin’s impairment charges sent the company’s headline earnings tumbling by 37% to R122.1m and the return on shareholder’s equity decline from 11.5% to 8%.
But of most concern was the company’s credit loss ratio which has more than doubled in the past five years.
At 197 basis points, it is more than double that of Nedbank, Standard Bank and Absa. It is also close to doubling FNB’s.
However, Sasfin’s higher credit loss ratio can be explained by the fact that it plays in a riskier environment, lending to both small and unstable as well as big businesses.
“Traditionally we have done well to serve this market. We have grown while maintaining a healthy credit ratio. The challenges really started in the past 12 to 24 months. We are still committed to lending to these businesses and we think we can do so in a risk-conscious way, but it will require high-touch engagement,” said Sassoon.
While many of the business owners defaulted because of limited accounting capabilities, in many instances, he said he suspected fraud.
It is likely that some of the companies overstated their assets and debtors book to access bigger loans than they would have qualified for and then struggled to repay them.
“We strongly suspect and believe that there was fraud on behalf of the borrower. We are strengthening our fraud detection team. The field survey team, which actually goes out to check the debtors and physical stock on our clients’ premises will do more of that.”
The banking division, which contributed more than 80% of group operating earnings in 2017 was the hardest hit, reporting a more than 100% surge in impairments.
While acknowledging that Sasfin’s credit loss ratio was higher than tolerable, the division’s executive director, Linda Fröhlich, said Sasfin’s mission was to contribute to society by going beyond the normal bank to enable growth of its clients’ businesses.
“In a tough SA economy the future of the economy is in growing businesses. Yes, we had a very disappointing year.… But it also talks to the health of the economy,” she said.
The equipment financing unit accounted for most of the impairment. Sasfin has an equipment finance book of R5.3bn on the rental equipment finance side and R1bn on capital equipment. It lends to businesses across the industry and size spectrum.
Fröhlich said it was the first time since she came to Sasfin 17 years ago that impairments exceeded what management had budgeted for.