Capitec Bank, which makes unsecured loans mainly to low- and middle-income households – has defended its lending practices on Tuesday after research group Viceroy accused it of being a ‘loan shark’.
Shares in the bank tumbled as much as 20% before settling at R821 in mid-morning trade on the JSE, still 13% lower than its opening.
“Based on our research and due diligence, we believe that Capitec is a loan shark with massively understated defaults masquerading as a community microfinance provider. We believe that the South African Reserve Bank & Minister of Finance should immediately place Capitec into curatorship, Viceroy said in a statement, following the release of a report.
It said that while Capitec is a South Africa-focused microfinance provider to a majority low-income demographic, it out-earns all major commercial banks globally including competing high-risk lenders.
“We don’t buy this story. Viceroy believes this is indicative of predatory finance which we have corroborated with substantial on-the-ground discussions with Capitec ex-employees, former customers, and individuals familiar with the business,” the research group said.
“Viceroy’s extensive due diligence and compiled evidence suggests that indicates Capitec must take significant impairments to its loans which will likely result in a net-liability position. We believe Capitec’s concealed problems largely resemble those seen at African Bank Investments prior to its collapse in 2014.”
“We think that it’s only a matter of time before Capitec’s financials and business unravel, with macro headwinds creating an exponential risk of default and bankruptcy,” Viceroy continued.
Capitec put out the following statement on social media on Tuesday: “We have taken note of the Viceroy report on Capitec Bank. We are currently in the process of investigating the report in detail and will respond appropriately.”
Andre du Plessis, Capitec’s chief financial officer, however, told Bloomberg that 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.”
Viceroy meanwhile said it its report supported the following conclusions:
- Reconciliation of loan book values, maturity profiles and cash outflows imply Capitec is either fabricating new loans and collections, or re-financing R2.5 billion – R3 billion ($200m-$240m) in principal per year by issuing new loans to defaulting clients.
- Legal documents obtained by Viceroy show Capitec advising and approving loans to delinquent customers in order to repay existing loans. These documents also show Capitec engaging in reckless lending practices as defined by South Africa’s National Credit Act. This corroborates Viceroy’s loan book analysis.
- As a consequence of re-financing delinquent loans, Viceroy believes Capitec’s loan book is massively overstated. Viceroy’s analysis against competitors suggests an impairment/write-off impact of R11 billion will more accurately represent the delinquencies and risk in Capitec’s portfolio.
- Legal experts that we have spoken to believe that the outcome of an upcoming reckless and predatory lending test case in March 2018 will be used to trigger a multi-party litigation refund (class action). We believe that, at a minimum, Capitec will be required to refund predatory origination fees primarily related to multi-loan facilities; an estimated R12.7 billion.
- Viceroy’s investigations suggest that Capitec’s prohibited and discontinued multi-loan facility lives on, rebranded as a “Credit Facility”. Former Capitec employees have corroborated this. Despite its perception as an affordable lender, Capitec’s implied interest rates are significantly true of the maximum allowable rates in South Africa.
- South Africa’s microfinancing sector has been the graveyard of numerous Capitec competitors who chased the same meteoric growth Capitec displays, largely due to low acceptance and mass delinquencies. We see no operational difference between Capitec and its ill-fated predecessors, including African Bank.
- Former employees consider the business to still be an outright loan-shark operation, where fees are key. Some former employees believe they were fired for not deceiving borrowers and failing to meet rescheduling targets on impaired/defaulting loans.
- Jean Pierre Verster, chairman of Capitec’s audit committee, is/was indirectly short Capitec through Steinhoff. We believe this is an oversight, and understand Verster to be an excellent analyst on the short side. We encourage Verster to raise the concerns within this report to company auditors and recognize Capitec’s resemblance to his previous African Bank short.
“Given what we believe is a massive overstatement of financial assets and income, together with opaque reporting of loan cash flow and reckless lending practices, we believe Capitec is simply uninvestable and accordingly have not assigned a target price,” the think tank said.
Viceroy states clearly in its reports that its research is not to be considered fact, but merely presents an opinion based on publicly available information, with its own research in the mix. It said its reports should be viewed critically, and investors should also do their own research on the subject matter.