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.