Capitec has instructed its lawyers to lay a formal complaint with the Financial Services Board after what it called a “flawed and inaccurate” report was published by Viceroy Research on Tuesday, leading to a massive sell-off in its share price.
Viceroy’s report, titled Capitec: A Wolf in Sheep’s Clothing, made damning claims against the micro-lender, calling the bank a loan shark headed for insolvency.
The research report said that its analysis pointed to predatory lending practices from Capitec, where clients would be pushed to take out new loans to pay off the old ones, while being charged initiation fees and incurring other costs.
This, Viceroy said, was clouding Capitec’s true impairment liabilities on its loan book, which it said was sitting at around R11 billion and could push the bank to the brink of insolvency, much in the same vein as African Bank years before.
“We consider Capitec to be uninvestable,” it said, while calling for the Reserve Bank to step in and put the bank under curatorship.
Capitec’s share price tanked as much as 25% on the day, before pulling back. By 17h00 on Tuesday, the bank’s share price was back to just under R900, down only 4.7% from its opening price of R920.
In a conference call to investors on Tuesday, Capitec CEO Gerrie Fourie vehemently denied the claims made in the report, saying that the research group got many things wrong. Further, he said the first course of action was to instruct the bank’s lawyers to approach the FSB.
In a statement issued on the JSE late on Tuesday, the bank offered responses to seven of the key allegations in the Viceroy report:
Allegation that Capitec fabricates new loans and collections, or refinances up to R3 billion in principal per year by issuing new loans to defaulting clients
“With reference to the reconciliation of the loan book, we can confirm that the estimate in the Viceroy report does not accurately calculate client repayments,” Capitec said.
They use a figure net of fees on loan accounts based on assumptions regarding the amortisation and capital repayment profile of the loan book. Their estimate of capital repayments of R16.7 billion underestimates actual loan receipts net of fees of R18.6 billion (receipts less fees) by approximately R1.9 billion.
They also reduce write-offs by an estimate of the component of write-offs that originate from new sales in subsequent years. There is a logic flaw that loan sales should be reduced accordingly. Furthermore, the default rates that they calculate does not consider the fact that written off balances include fees and should be compared against the sum of actual receipts plus write-offs, the bank said.
Allegation of loans granted to delinquent customers to repay existing loans
What the Viceroy report is referring to is the court cases of 3 particular clients, Capitec said. They make no mention of Capitec’s comprehensive responses in each of these cases which addresses each of the allegations contained in Viceroy’s report.
“Our comprehensive responses are public documents and are available at court or from our legal department. Whenever we grant a loan, we do a comprehensive credit assessment based on the BAS principles (behaviour, affordability and source).”
Allegation of over-statement of Capitec’s loan book
Capitec said its impairment on loans are based on the probability of default. “Loans are written off at the earliest of when they are in arrears for 90 days or more, or legal hand-over occurs. As at 31 August 2017, our doubtful debt provision covers loan balances in arrears by 237% and 152% when including arrears loan balances rescheduled within the last 6 months.
“Any competitor analyses requires a further breakdown of their loan granting, pricing, write-off and provisioning policies to compare our approach and position on a like for like basis,” it said.
Assumption that court cases may result in a class action
The proposition of a class action is speculation of the highest nature and premature, Capitec stressed. The matter must still be heard and Capitec believes it has solid defences to the allegations, the bank said.
Capitec’s explanations in its answering papers in the court cases are not taken into account. The monthly loans were granted under an over-arching multi-loan agreement, concluded at the outset. Before concluding this agreement, Capitec concluded its standard comprehensive credit assessment.
This, the bank said, consisted of documentary and other information provided by the customer (including bank statements, payslips and answers to questions posed by Capitec), as well as information sourced externally from credit bureaux.
“Before each withdrawal under the over-arching multi-loan agreement, Capitec performed supplementary credit assessments. Capitec supplemented and updated the results of the underlying initial assessments, and its purpose was to check whether the customer still qualified for the proposed credit.”
Incorrect correlation between our credit facility and discontinued multi-loan facility
The credit facility operates the same way as a credit card except that the Capitec credit facility terminates after 9 months. “If the client applies for a new Capitec credit facility we do a new comprehensive credit assessment to see if the client qualifies for a new Capitec credit facility.
“The initiation fee is only triggered once the client uses the facility up to a maximum fee agreed with the client, that is within the NCA,” Capitec said.
“Monthly fee – this fee is raised as allowed in the applicable regulations of the NCA. There is a difference between availability and use of the facility and interest is charged as contracted with the client and the full amount used, including interest and fees, is repayable on a monthly basis,” it said.
Capitec Bank’s operations are significantly different to that of African Bank
Capitec said it is a fully fledged retail bank and has different sources of income, not only credit. It’s transactional business continues to contribute materially to its earnings as reported in our 1H 2018 results.
“Capitec Bank has a significant retail deposit book, unlike African Bank. The result of this is that Capitec has a low reliance on wholesale funding. Capitec Bank has a far more conservative approach to providing credit than African Bank. The provisioning of Capitec Bank is market-leading and significantly more conservative to that specifically of African Bank, as well as other unsecured loan books,” it said.
Opinions of former employees
“Employees who are no longer employed by an organisation can make claims that are false. It is patently untrue that Capitec has fired any employees ‘for not deceiving borrowers’. Amongst the many inaccuracies in the report another exists where it is claimed that our branch managers earn an average of R13,219 where the actual average is R22,000 per month,” Capitec said.
“We are proud of the journey that we have placed our employees on with the result that many employees are promoted within the organisation. We are concerned about the way in which Viceroy Research conduct their business and our attorneys have registered a formal complaint with the Financial Services Board.”