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A swing and a miss: Capitec on Viceroy’s latest report

Capitec warns that Viceroy’s campaign is expected to continue.

Capitec has dismissed Viceroy’s latest report, in which its reporting and lending practices and the South African Reserve Bank’s support for the lender are questioned. However, it has warned shareholders that Viceroy is likely to continue pulling punches for the foreseeable future.  

“Shareholders can expect the release of fresh attacks and false allegations over an extended period. Capitec consequently advises shareholders to use caution when reacting to such allegations,” the banking group said in a statement late Monday.

The Sens statement follows a new report by Viceroy, which suggests the central bank has yet to perform an “adequate regulatory inspection of Capitec” after it affirmed the safety and soundness of the lender last week.

Viceroy’s initial report on Capitec, released last Tuesday, recommended the bank be placed under immediate curatorship and caused its shares to fall almost 25% in intraday trade. This prompted the Sarb to release the following statement:

“The South African Reserve Bank (Sarb) notes a report by a US-based fund manager. As part of our mandate, we monitor the safety and soundness of all banks, including Capitec Bank Limited (Capitec). According to all the information available, Capitec is solvent, well capitalised and has adequate liquidity. The bank meets all prudential requirements.”

Almost a week later and the researchers have now questioned the Sarb’s show of support for the lender. To Viceroy, the Sarb’s use of “according to all the information available” suggests the central bank has yet to perform an “adequate regulatory inspection of Capitec”.

“The South African Reserve Bank has a responsibility to determine whether the information provided to them – and on which they base their regulatory decisions – is accurate. We do not think it is. The Sarb has, at this point, a responsibility to perform a full regulatory inspection of Capitec. Viceroy remains firm in its belief that this will result in [the] Sarb placing Capitec into curatorship,” it said.

Viceroy alleges that Capitec’s balance sheet, income and solvency numbers are unreliable and that it is under-representing losses “to pretend that uncontrollable loans are collectable and still accruing income”.  

Its claim is based on a loss rate of 1.5% per annum on 61 to 84 month loans extended by Capitec to the value of R13.69 million as per the bank’s 2017 annual report. According to Viceroy, the loss ratio is “astonishingly low” especially when compared with the loss rate on US prime credit cards, for which it pegs Bank of America’s rate at 2.5% and Citigroup’s at a similar level.

“Viceroy infers that it is impossible for the average American credit card holder to have similar credit risk as the top 7% of Capitec’s clients. We have extensive history and sophisticated models to support our results,” Capitec hit back.

In the detailed statement, Capitec also pointed out flaws in Viceroy’s methodology, calculations and use of data. It said Viceroy’s estimate that 1.3% of its 61 to 84 month clients are in arrears is too low and when taking the group’s strict write-off policy into account, should be 6.3%. Of the 6.3%, 40% were rehabilitated by February 28 2017, it added.

Speaking on condition of anonymity, one analyst at a prominent asset manager said Viceroy’s latest report “draws the wrong conclusion based on a wrong calculation and selective data”. The analyst’s calculations, shared with Moneyweb prior to Capitec’s statement, supported that of the bank.

Earlier on Monday, the bank issued another Sens statement, labelling Viceroy’s initial report, which claimed that the lender’s loan book is “massively overstated” and that it is fabricating new loans and collections, as “fundamentally flawed and misleading”.

After almost a week of studying the report, Capitec categorically denied and provided evidence against Viceroy’s allegations that its loan book is irreconcilable and misrepresented as well as refuted allegations of an overstatement of R11 billion, stating that no adjustment is required. It has also denied Viceroy’s claims that it rolls unpaid loans and charges initiation fees when rescheduling loans.

“The Viceroy report presents information that is not clearly comparable and fails to present information that is easily available in the public domain,” said Capitec.

Investment managers including Benguela Global Fund Managers, which raised concerns with Capitec around the rescheduling of loans prior to Viceroy’s initial report, have expressed satisfaction with its explanations.  

Futuregrowth Asset Management, which referred to itself as a funding partner of Capitec for over 15 years, also said that its own research has not caused it to be concerned about the lender’s solvency, asset quality or liquidity. “Whilst the unsecured lending sector is inherently risky, prone to excess, and works on the boundaries of responsible lending, it is our view that Capitec has been prudent in managing its lending book, and endeavouring to accord with sound lending practices. We believe that Capitec has adequately managed the industry risks and remains well capitalised,” said Andrew Canter, chief investment officer at Futuregrowth.  

After publishing its initial report, Viceroy acknowledged that it had taken a short position on Capitec.

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Accounting these days is an art but the bottom line stays the same. These bright guys most probably developed a program that compares historic figures in this sector and found some thing amiss in Capitec’s figures.Depending on the program and figures they used they could be correct.

These “bright” guys – LOL! What do you base this assertion on?

What Viceroy have accomplished was to sow the seed of doubt in peoples’ minds…”What if Capitec’s: too good to be true story” was just that!
Capitec grows…good times or bad times. It seems borrowers default and have challenges paying back their debt to every financial institution…EXCEPT to Capitec. Somehow their bad debt and arrear payments remain minimal…no matter how bad things are out there. Hmmm.

I don’t know…it just sounds too good to be true 🙁

Your right what makes them so bright, a disgraced social worker who was guilty of fraud now wants to investigate fraud. His 2 cohorts who are hardly out of nappies. lol

Lol, Let’s see. Bill Gates, Mark Zuckerberg, Larry Page developed ground breaking IT. There must be thousands of young bright minds out there that could develop a little app or program to pick up anomalies in a balance sheet and income statement pertaining to specific sectors.And who is to say this is not the case here?

They’re very bright guys, their first report was a warning for investors and those with savings invested with Capitec to get their money out. They were right on the money about Steinhoff and they’re right about Capitec. There’s still the class action reckless lending case looking in March. I doubt that they will get off Scott free. Only a fool will believe in the model of taking money from the rich at low interest rates and giving it to the poor at high interest rates is sustainable. Not even the rich could afford to pay back loans at 30%, most businesses would have to close at those rates as has been proven so many times so how can the poor who earn less afford it?

“Accounting these days is an art…”
After the Steinhoff debacle, I would rather believe that accounting these days is a combination of dithering, guesswork and coin flipping.

When one has something like 40 analysts,international rating agencies and banks, regulatory bodies, coming out in support of Capitec and their numbers, and against A rogue short seller cum analyst’s research recommendations and wild allegations (retired social worker and 2 young Australians). Viceroys motives must be viewed with great suspicion.
It is time for Capitec to go on the offensive. Till now they have handled this extremely damaging and vindictive report with great prudence, but surely enough is enough?

Have you read the story of the Emperor and his new clothes.

It to a small child to point out that he was actually naked while the rest of his Kingdom admired his clothes

And your point is…? Your comment is not relevant in this context

Couldn’t agree more! Future Growth, to name but one, will not be misled – not even by a bank.

Still operating off a gmail account,according to website.Would one really want to trust their opinions .Dont think they going to be around for too long,they got lucky with Steinhoff,but now seem to be on sniffing expeditions as they run out of road

Viceroy Aknowledged it had taken a short position on Capitec-What a surprise.

Where there’s smoke, there’s fire. Especially where Accounting is involved.

I’m amazed at how much support Capitec is getting.. Where is the lynching that Std Bank or any of the other “big banks” would have got?

Would you trust the average South African on the street with your money? Expect them to pay you back on time and with interest? I sure as hell wouldn’t. That’s why I can’t understand how anyone can trust Capitec’s business model of micro lending.. It’s not like we have had a culture change since African Bank went under.

and Pompies, they are obviously bright enough to get the attention of the entire investment world.. They have exposed companies trying to cover their dirty tracks.. Of course they are bright. What is your claim to “brightness”?

UJ offers one year certificate courses in accounting. Could help you understand the difference in business and accounting models of Capitec vs African Bank.

Thanks Joe, most kind of you to mention. I already have post graduate degrees in Finance though. Is there something special about this course? I.e. specializing in graft?

Look, I could be wrong, but when you are constantly restructuring debt and lending to individuals that are not financially educated and don’t have much to lose, one has to question how sustainable it is (irrespective of what “model” you use) and how accurately the actual value of the company is reflected. The fact that Capitec is the “darling” of a lot of South Africans due to their low rates etc also leads one to suspect that there is more a hope that Capitec is not a troll as opposed to a definite conviction that they are not one.

That said, Viceroy does know that Capitec has a questionable model that is likely to raise doubt in reasonable investors minds, so perhaps they did take a chance to improve their returns on their own positions.

As with all things, time will tell..

I hate (love) to be that guy, but that’s completely the opposite of what “pulling punches” means.

How anyone can give credence to what a disgraced social worker who was dismissed for exactly the same thing he wants to investigate along with 2 Australians who are barely out of nappies, is beyond me. This Steinhof debacle was not pure luck but due to inside information. You don’t have to be a “rocket scientist” to know that if you were to investigate JSE/FTSE/NYSE you would probably find irregularities although not illegal they might be termed by some people as morally reprehensible. These people are opportunists and not some latter day “Robin Hoods”. In my opinion Capitec should start legal proceedings against them, before they find their next victim. You probably find there is someone pulling the purse strings behind Viceroy and just using them as a front.

What is interesting Bill is that both Steinhoff and Capitec was sold of quite aggressively a few days before the respective notes were published, which supports your view. I think the JSE/FSB must have a look at the trading in the run up to the Viceroy research. Viceroy obviously speaking to SA fund managers – a few of which have had their knives in for what they refer to as the “Stellenbosch Mafia” for a long time.

My opinion, some Southern Suburbs and/or BEE fund managers are either the driving force behind the whole thing or they are at the very least feeding Viceroy “research”.

I believe this is quite correct.

At R100 per share Capitec was expensive, even at R60 it is expensive – so there is a lot of scope for shorting and if you can scare nervous investors and initiate a sell off you can make a packet.
The same unfortunately also applies to some of the property stocks with valuations in the stratosphere.
Grossly over valued prices will drop to a level that again offers value i.e the bubble gets pricked.

I’m no analyst but based purely on viceroys opportunistic criticism of SARBs support of Capitec, it’s almost obvious it’s all about a quick buck from taking short positions. There’s NO grounds for the aspersion they try to cast on SARB – almost feel sorry for the 3 idiots

The truth of the matter is that the whole financial industry has become so complex that very few have enough knowledge of its workings to be able to make sound investment decisions. The space is therefore open to all sorts of ill informed commentary including manipulative self serving claims, used to manipulate markets for the sake of trading profiteering. Consequently “blind” trust becomes a large factor in much of investment decisions into this sector. I am reminded of Michael Hudson’s scathing book “Killing the Host”, in which he sets out the huge adverse effects that the “FIRE” (Finance, Insurance and Real Estate), sectors of the economy have on fiscal health, in which he calls for fundamental reformation of the whole group and its regulation. The fundamental structure of the whole industry needs to be reformed to avoid the adverse effects it is having on real economies and individuals the world over. The book is a must read for all, in this world rapidly being captured by financial predation.

why are they solely obsessed with Capitec?Could that mean that, counterintuitively, they think it’s a good stock?Why not look at other banks, like Investec. (Noseweek’s website has much to say about them)

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