NASTASSIA ARENDSE: Viceroy released their report on Capitec, which had an immediate negative impact on the shares of the bank and its major shareholder, PSG. The market obviously is wary of the potential consequences, given Viceroy’s previous analysis into Steinhoff. The founder of Viceroy, Fraser Perring, was interviewed by Moneyweb’s Warren Thompson.
FRASER PERRING: The main issue that we found was that most of the competitors have been battling since the financial collapse of African Bank. And we started digging during or after Steinhoff about the consumer lending position, and we noted a number of … impairments. Capitec however doesn’t appear to have the same level. You could argue that their protocols are better.
However with the same customers and the same demographic and amazingly while others were suffering Capitec was issuing longer-term loans. You can call them rejuggling, refinancing, but in a subprime market it’s very difficult to forecast long-term loan. And specifically we are talking a 61-84 month loan book. Amazingly, that made up nearly 100% of the growth from 2013 onwards, while short-term lending is in decline. We backed up the data there and we believe that they’ve been rejuggling or refinancing into a loan book to avoid the impairment other lenders within the same industry have suffered.
On top of that there’s also the positive guarantees given, which wasn’t touched on in Bloomberg today that you have … where we believe that capital will be significantly impacted once the initiation of the depositor guarantee scheme is implemented, if it ever is.
We also looked at the legal document that we obtained, which shows reckless lending. We are quite clear that the shall we say systems for approval were very lax, and once the outcome of those court cases which we were led to believe were happening … it’s likely that Capitec is going to have to rebate a significant proportion of their initiation fees. We don’t believe that its balance sheet can actually maintain the delinquencies.
WARREN THOMPSON: Two things struck me. Do you cite these clients that were given advance loans where they were essentially in default and they went back to Capitec, obtained a loan, which was larger than what they owed the bank. Were these around a particular time? The research seems to indicate around the 2013/14 year, and I think you allude to that with respect to the loans that increased in duration during the same period. Are we talking current or are we talking a particular point in time where this was taking place?
FRASER PERRING: At the moment we are seeing that the trend is still continuing in terms of refinancing. It will take another year of accounts to see whether that validates. But we can essentially state that from 2013 to 2017 the maturity profile of Capitec’s lenders has just … This contradicts part of their business model and also the evidence supported with our on-the-ground research with former employees and also borrowers.
WARREN THOMPSON: So you say essentially what Capitec is doing to make itself look good is recycling the loans to these impaired creditors by granting them new loans and then essentially treating them as new loans so that they don’t appear to be deteriorating?
FRASER PERRING: That’s correct. They are pushing through a … I’ll give you an example. Our analyses of African Bank, which I’m sure most of your listeners will know, was split into a Good Bank and Bad Bank from 2013 onwards. African Bank became shall we say a more prudent lender as a result. Amazingly, African Bank with a prudent mindset will have prior delinquencies and impairments than anything than Capitec. Essentially Capitec was outperforming all of the subprime, besides being in same geographic, the same client phase and the same industry. …. We believe it’s these long-term loans that are avoiding the need for any form of delinquency or impairment. They are kicking the can [down the road].
WARREN THOMPSON: Just to contrast that, having looked at Capitec, a large degree of the loan issuance is automated. So in particular when you refer to some of these clients that were granted loans when they were already in default with the bank, what percentage of those loans are still being done by agents versus the automated process that Capitec uses at many of its ATMs and branches?
FRASER PERRING: Possibly we didn’t go into facts about the automation. We’ve had varying feedback. Essentially the relevant shall we say creditworthiness or affordability check on the borrowing – we’ve had to limit it to that. And that was on the automatic banking. The consultants … spoke to they essentially were trying to avoid impairments. And … have left the company six months or longer [ago].
WARREN THOMPSON: Frame this for us in terms of Capitec’s balance sheet, where the last reported gross loans were R68 billion to the 2017 financial year. I’m looking at this one table that you provided. How big is the problem with respect to these loans?
FRASER PERRING: We’ve estimated it at somewhere in between R11 billion and, if you include all of the liabilities, it could be up to somewhere in the region of R25-30 billion.
WARREN THOMPSON: That is almost half of its current loans – outstanding gross loans you reckon are fictitious?
FRASER PERRING: No, not of the gross loans. The gross loans I would say we are looking at somewhere in the region of 10 to 15%. But with the other liabilities added on in terms of rebates for initiation fees and also mis-selling or reckless lending we think those liabilities will stack up to round about R25-30 billion in total.
WARREN THOMPSON: You think there is no equity value in Capitec. You in fact ask the Reserve Bank to look into this specifically, because it should be put under curatorship. Because of this, short the share as well.
FRASER PERRING: Yep, that’s correct. We fully disclose that. Likewise because we short a share we still have a duty to publish factual and accurate information.
WARREN THOMPSON: The other thing that I would argue that makes Capitec a little bit different from African Bank is that it has more diverse revenue streams and a very large depositor base. But you think that this recalculation or re-estimation of the loans will be big enough to essentially render it insolvent.
FRASER PERRING: Looking at the deposits alone, it doesn’t actually give security on the impairments of the loan. So essentially that money is spoken for by the depositors. So who is ultimately liable for the loans? So yes, we consider Capitec to be entirely uninvestable.
WARREN THOMPSON: Just one other question. This is now the second South African company that you have focused on. Is this market particularly interesting, are there some general reasons why you’ve been targeting South African companies? Do you find perhaps the regulatory environment is lax, or the way in which companies account and prepare their financials is dubious in general?
FRASER PERRING: I’m just saying at the moment regulators globally are constrained because of budget cuts and the like. What we noticed with the two companies in South Africa is that typically they seemed to have been getting away with it for long periods of time. So were the regulators lax, or are some of the analysts? Some analysts we have spoken to have raised concerns about Capitec over the years, and have avoided investing. Ironically … that they stand by their opinion. So as a market we are always focused on longstanding irregularities, irrespective of which country. It just so happened that South Africa had two companies that we did end up researching, namely Steinhoff and Capitec.