Viceroy Research targets Capitec Bank over lending practices

The short seller who wrote a damning report about accounting irregularities at Steinhoff International Holdings NV has found a new target in Capitec Bank Holdings, South Africa’s best-performing stock over the last decade. The shares fell the most in more than 15 years before paring losses.

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 ($920 million) – equivalent to 14% of the bank’s assets – to “more accurately represent delinquencies and risk,” the report said.

Andre du Plessis, Capitec’s chief financial officer, said the allegations are “totally unfounded” and he’s not worried about them. He said he hadn’t seen a copy of the report.

“It’s very surprising that someone writes a report who knows nothing about us,” he said in an interview. “There’s a total lack of understanding of what we do.”

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 UK social worker before turning to shorting stocks on a full-time basis in 2012.

Shares Drop

Shares of Capitec fell as much as 20%, the most since June 2002, before paring losses to trade 0.9% down at R935 as of 10:06 a.m. in Johannesburg. The securities declined 4.1 percent on Friday and 8% Monday. Before the selloff, the stock had risen about 30-fold since 2008.

The way Capitec restructures loans “is known and clearly disclosed,” said Patrice Rassou, the head of equities at Sanlam Investment Management in Cape Town. “They have not been found guilty of reckless lending” and the quantum of a “write down will depend on whether they are struggling to collect their non-performing book.”

The valuation of Capitec, with a price-to-equity ratio of more than 20 times and price-to-book of more than six times means the stock was “very elevated and yet many sell side analysts were positive on the stock,” Rassou said.

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’s largest owner, with a stake of more than 30%, is investment firm PSG Group Ltd. Steinhoff, in turn, was the second-biggest shareholder in PSG until last week, when it cut its shareholding to 2.5% from 16%.

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.

Deposits Surge

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 R7 billion from R11.1 billion 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%.

‘Smoking Gun’

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.

“This type of loan renewal would be concerning, but not a smoking gun, at any other commercial bank,” Viceroy said in the report. “However, Capitec being a retail microfinance lender, carrying forward small, unsecured retail loans represents much higher credit risk.”

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.

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.


Read: How Steinhoff’s 50 year legacy was reduced to tatters in just two days

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