Analysts sceptical on 'bit of malicious' Viceroy Capitec report

Cape Town - The report on Capitec released by Viceroy Research on Tuesday seems as if it could be "a bit of malicious research", because one knows the research group is acting in its own self-interest, Renier de Bruyn, investment analyst at Sanlam Private Wealth, told Fin24.

"Remember Viceroy is short selling shares. We saw that already in the Capitec share price performance before Friday. One can argue they have been selective in the information provided in their report," suggested De Bruyn.

He said the Viceroy analysts made some "obvious mistakes" and he expects Capitec's management will provide detailed explanations as promised to refute a lot of the assumptions or claims by Viceroy.

One such an example, in his view, is Viceroy claiming that Capitec has been "predatory" and unlawful in terms of the interest rate and initiation fees they charge clients.

"But we are quite confident that [Capitec's] management has been careful to comply with all the regulations in the industry. It was definitely their vision to drive down costs for clients long-term," said De Bruyn.

He pointed out that there is a case being brought by Summit Financial Partners against Capitec, which will be tested in court in March, but that the bank has up to now been successful in proving that it has not contravened the National Credit Act.

To come up with that number Viceroy compared Capitec and African Bank, but the comparison is not consistent, according to De Bruyn. He said Capitec has a very conservative write-off policy, which is very unique in the local industry.

Usually a bank considers a loan as non-performing after three missed instalments. Capitec writes off the full balance of a loan after three missed instalments. Therefore it does not have non-performing loans, only arrears.

"Analysts often compare the provision for arrears, which Capitec has at a much earlier stage [one to three months], with non-performing loans of competitors, which are only recognised after three months of missed instalments," he explained.

"Capitec's arrears to total book is much lower than the rate of Abil, for instance. The reason is because of the whole conservative write-off policy Capitec has compared to the rest of the industry. It does not carry so many non-performing loans on its books. Viceroy is, therefore, making the wrong assumption of Capitec 'hiding' something when they [Viceroy] are not comparing the same ratio."

De Bruyn furthermore said one must also take into account that some of the evidence Viceroy has brought against Capitec is based on affidavits by some customers accusing the bank of reckless lending and as having predatory pricing.

"My response to that would be that an organisation like Capitec is bound to have a few disgruntled customers as well as staff. It is very important to put these examples into the correct context of the bigger scheme of things. Capitec's response was that it views the Viceroy information as being presented very one-sided and that it [Capitec] would respond in detail," said De Bruyn.

He added that Sanlam Private Wealth had already some time ago advised its clients to sell Capitec, but this was not based on any of the claims in the Viceroy report. It was rather based on valuation grounds.

"The Viceroy report is also likely to raise some emotional responses from the public as it accuses the unsecured credit industry of charging predatory rates to struggling consumers," said De Bruyn. 

"We expect the industry to receive some political backlash over the next few weeks, especially Capitec - although we believe they operated within the law. The Viceroy report painted a grim picture of the greedy corporate taking advantage of suffering consumers."

Adrian Saville, chief strategist at Cannon Asset Managers told Bloomberg that Viceroy’s data “make sense and the numbers add” up.

Capitec could have concealed losses “as the report infers, by issuing new loans to delinquent customers... Viceroy needs to be held to account for any research it releases, just as Capitec needs to be held to account for its business practices".

David Shapiro, deputy chair at Sasfin Securities, said although he believed the [Capitec] share was too pricey, he always liked their business model. "I think we will suffer more pain when the US opens. It’s one of their favourite stocks."

Patrice Rassou, head of equities at Sanlam Investment Management Global said the Capitec restructuring-of-loan issue is known and clearly disclosed. They have not been found guilty of reckless lending yet. The valuation of Capitec was very elevated.

Michele Santangelo, a money manager at Independent Securities told Bloomberg that 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.

"I think the market is so panicked after Steinhoff, that originally you saw this over-reaction. It’s not to say that Capitec is the second Steinhoff," said Michael Porter, trader at Unum Capital.

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