Capitec falls as Viceroy report casts doubt over bank's finances
Capitec Bank Holdings plunged the most since 2002 after short-seller Viceroy Research said the lender may be concealing losses by refinancing loans that customers were unable to repay.
Viceroy Research said in a report Tuesday that Capitec, which makes unsecured loans mainly to low- and middle-income households, may be concealing losses by refinancing loans that customers were unable to repay. Capitec may have to write down its loan book by R11-billion — equivalent to 14% of the bank’s assets — to “more accurately represent delinquencies and risk,” the report said.
Shares of the lender declined as much as 20%, and were 18% lower as of 11:19 a.m. in Johannesburg. The benchmark index dropped the most since November 2016.
Capitec Chief Financial Officer Andre du Plessis said the allegations by Viceroy, which wrote a damning report about accounting irregularities at Steinhoff International Holdings NV, are unfounded.
He denied the company is refinancing loans to conceal losses and said he hadn’t seen a copy of the report.
“It’s very surprising that someone writes a report who knows nothing about us,” Du Plessis said in an interview. “There’s a total lack of understanding of what we do.”
“They basically labeled Capitec as a loan shark, with massively understated defaults masquerading as a community micro finance provider,” Michele Santangelo, a money manager at Independent Securities, said. “None of the analysts who cover Capitec or PSG have even pulled any of these or seen any of these red flags, so it’s going to be interesting to go through the report in more detail and see if everything can be substantiated.”
Capitec traded at 768.64 rand, headed for the lowest close since June. Capitec’s largest owner, with a stake of more than 30%, is investment firm PSG Group, which fell 16.8% to 213 rand. The benchmark gauge dropped as much as 2.2%, while an index of South African banking stocks was 3.8% lower, retreating for a third day.
It’s very surprising that someone writes a report who knows nothing about us.Andre du Plessis, Capitec’s chief financial officer
While Viceroy didn’t disclose whether it has a position in Capitec’s securities, it said readers of the report should assume that the authors could profit if the bank’s share price declines. Viceroy operated anonymously until earlier this month, when Fraser Perring revealed himself and two other colleagues — Gabriel Bernarde and Aidan Lau — as the faces behind the firm.
Perring, 44, was a U.K. social worker before turning to shorting stocks on a full-time basis in 2012.
The way Capitec restructures loans “is known and clearly disclosed,” said Patrice Rassou, the head of equities at Sanlam Investment Management in Cape Town. The quantum of a “writedown will depend on whether they are struggling to collect their non-performing book.”
Founded in 1999, Capitec has grown to become South Africa’s sixth-biggest publicly traded bank by assets, increasingly competing against the largest financial institutions as it branches into consumer banking.
Capitec is the second South African company to come under scrutiny from Viceroy, which highlighted concerns with the accounting policies of retail giant Steinhoff in December. Its report came less than a day after the company announced an investigation into its finances that led to the resignation of its chief executive officer and chairman.
The stock slumped more than 80% in the wake of Steinhoff’s announcement.
Capitec relies mostly on savings from its customers to fund lending. The bank’s retail deposits more than doubled in the last three years, soaring to R55.4-billion at the end of August up from R26.6-billion, according to its financial statements. Deposits increased 27% in fiscal 2017 alone, outpacing the 10% expansion in loans, which grew to R45.1-billion.
The rapid growth of deposits allowed Capitec to cut its debt to 7 billion rand from 11.1 billion rand in the same period. Its biggest rival, African Bank Investments Ltd., went bankrupt in 2014 after posting record losses, causing funding from bond investors to dry up, while the lender didn’t have a deposit base to fall back on.
About 6.3% of Capitec’s gross loans and advances were past due at the end of fiscal 2017, a number Viceroy says isn’t credible given that other unsecured lenders such as Bayport Financial Services South Africa Ltd. have rates of around 30%.
Bad-loan impairments jumped 37% to R5.45-billion in the 12 months through February last year, according to Capitec’s latest annual report. The increase was caused mainly by changes to its rescheduling policies, in which customers were prevented from rolling over loans for a second or third time if their risk was too high, the lender said.
Viceroy said there could be about R2.5-billion to R3-billion of defaulted loans payable in 2017, but instead refinanced through new loans. The lender’s total loan book stood at R45-billion at the end of February.
No one at Viceroy called Capitec to test their allegations, the lender’s CFO said in an emailed response to questions. “We disclose all our figures of rescheduling in a transparent way,” Du Plessis said.“When we reschedule a loan we do not release the provision.”
The company has “absolutely” no plans to take any additional writedowns because it already does a detailed analysis of its book at a weekly credit committee, he said. “If any portion of any loan is missed the provisioning percentages are fully disclosed in our financial statements. Loans are written off at 90 days.”
“We take all bad news on the chin as and when it becomes known to us,” Du Plessis said.
The report also argued that Capitec may have to refund fees charged on loans if it loses a lawsuit brought by Summit Financial Partners, which helps consumers work their way out of debt. Summit in 2016 accused Capitec of breaching the National Credit Act, which says that banks engages in “reckless lending” if they issue loans beyond what a customer can afford or don’t check whether clients fully understand the terms of the loan.
A spokesman for Summit Financial didn’t respond to an email or message left at his office seeking comment on Monday. Hearings into the court case are due in March.
Capitec CEO Gerrie Fourie has vowed to fight the suit. Capitec assesses whether customers can repay loans and charges a proportional initiation fee for the service, he said at the time.