Viceroy Research has doubled down on its damning report issued against Capitec late January, saying that it has evidence the bank’s loan book is not reflective of its true lending practices – and has accused the lender of abusing South Africa’s debit order systems.
Capitec’s stocks traded 2.5% lower on Wednesday following the publishing of the report, down to R822 from an opening of R849.
The share price dropped in excess of 25% in the wake of Viceroy’s previous report, but recouped most of those losses in the weeks following, after the bank got support from the Reserve Bank, the National Credit Regulator and analysts.
In a new note published on Wednesday, Viceroy published its response to Capitec’s statements defending its business.
The research group – which makes money on shorting a company’s stock before releasing its reports – said that it was highly suspicious that Capitec was able to display data that was counter to trends in the unsecured lending space; particularly how it could turn highly indebted customers who miss payments into ‘clean’ lenders.
“Since the publication of our last report, Capitec has disclosed that an extraordinarily large portion of its subprime, highly indebted customers who miss payments on their loans are somehow able to find the money to ‘catch up’ or ‘cure’ their arrears. This is suspicious,” Viceroy said.
“Numerous former Capitec staff and 5 prominent debt counselling firms with proprietary datasets on South African unsecured lending support our thesis that this ‘curing’ method is how Capitec hides the disastrous underlying performance of its loan book.
“If a borrower in arrears is able to beg or borrow the funds from a secondary lender to pay down their arrears and make themselves ‘current’, Capitec immediately offers them a new, larger loan. The borrowers use this new, larger Capitec loan to pay off the secondary lender used to cover the arrears,” it said.
“Analysis of tens of thousands of Capitec borrowers’ datasets within debt counselling firms show consumers were able to get new loans after paying down their arrears the day prior. Thus, we can state empirically that this practice is still occurring.”
The report said that this was in contrast to the lending criteria of a Standard Bank or Absa where there is a “cooling off” period before a borrower formerly in arrears can seek a new loan – to prevent exactly this behavior.
“By offering upsized loans to people who have just cleared their arrears, Capitec management is able to say with a straight face that they do ‘not lend into arrears’. This is true in fact – but not in substance.”
“While the borrower is getting more and more indebted and is still unable to pay their debts, lending to people who were immediately prior in allows Capitec to artificially generate ‘cures’, unsustainably increase its loan book, charge massive initiation fees and create a façade of quality within its consumer base,” it said.
Viceroy alleged that 70% to 80% of Capitec consumers in debt counselling were issued new loans prior to repaying their existing loans; that the bank was changing its lending rules on the fly to achieve the best possible returns; and that it was abusing the debit order system to ensure its debits took priority over other lenders.
“Capitec’s behavior has led to material overstatement of the quality of the book and substantial under-provisioning,” it said.
Capitec did not immediately return comment on the latest report, but previously published a detailed response to the claims made by Viceroy.
It said that it expected a lengthy campaign full of “false allegations” to be made by Viceroy and other groups, and warned shareholders that it would go on for some time.
“Capitec consequently advises shareholders to use caution when reacting to such allegations,” it said.
The bank has maintained that the SARB an independent industry analysts review and have reviewed the bank’s credit risks, and confirmed that its models are accurate and predictive.
The bank has also pointed out several flaws in Viceroy’s research and reasoning, which can be read here:
Viceroy previously noted that the South African Reserve Bank described Capitec as being liquid and solvent on the basis of “the available information”; however, it says the Reserve Bank got it wrong.
“Evidence suggests the ‘available information’ is being deliberately distorted by Capitec management and we believe that as a matter of prudential supervision the SARB must investigate the lending practices at Capitec. We are providing this data to SARB and the NCR,” it said.
“Viceroy continues to believe that Capitec is fundamentally uninvestable and reiterate our recommendation that an investigation by an independent body is launched in the face of the evidence presented in our research.”