Capitec has issued a detailed statement in response to Viceroy's latest jab, condemning the short-seller for starting with a "strongly-worded" and "emotive" public campaign that let misunderstandings fester.
Viceroy earlier in the week launched a fresh attack on the bank in the form of an open letter to Capitec's audit committee, in which it claimed Capitec is "continuing" to mislead investors.
It also claimed "deteriorating business conditions" and misleading accounting practices. Its major concerns related to the issuance of loans at Capitec, which it said were unsustainable.
It had "straightforward" questions, it said, to which it wanted "straightforward" answers.
In an open letter of its own, Capitec detailed its disappointment in Viceroy, saying it is expected of all market participants "to behave in a responsible manner that [would] enhance the public's trust in the functioning of public markets."
"In assessing the way you [Viceroy] have chosen to engage with Capitec, we have come to the conclusion that you should have engaged differently, which would have avoided a lot of the misunderstanding which has characterised the whole affair thus far," wrote Jean Pierre Verster, chairperson of Capitec's audit committee.
Viceroy "chose to start off with launching a public campaign", Verster added, "appealing to regulators with strongly-worded and emotive demands and then only writing a letter to the board at a later stage, followed by the latest letter to the audit committee, all the while refusing to meet face to face with Capitec management".
A public campaign should only have occurred "when all other avenues [had been exhausted]", Verster argued.
As for "straightforward" questions and answers, Verster said a detailed explanation is more realistic.
"Many of the six questions you [Viceroy] pose are quite technical in nature, which is to be expected given the complexity of banking and accounting disclosures," the letter read.
The bank committee provided a comprehensive appendix responding to each of Viceroy's questions regarding its banking practices.
The audit committee could justify management's analysis that Capitec loans are trending towards the long-term, Verster said. According to Capitec, Viceroy's analysis took into account data that was not relevant or skewed the results, such as credit card debt.
Viceroy also did not take into account the reclassification of loans that were subject to consolidation between the <6 months and >6 months categories, Verster said.
Internal consolidations occurred only where clients with existing Capitec loans had passed a full credit assessment, he added. Only 3.3% of loan sales for the second half of the financial year went to 'Frequent Maximum Borrowers', he said.
Viceroy had also raised a concern over Capitec decreasing bad debt provisions while bad debt was increasing.
This increase in bad debt was "backward-looking", Verster argued, while the bad debt provision was "forward-looking". "It is a common occurrence for one to increase while the other one decreases (or vice versa) at turning points in economic cycles," said Verster.
"It would be more useful if you had analysed the bad debts on a six-monthly basis, rather than an annual basis, to see the recent improvement in the loan book performance more clearly."
The short-seller had made errors in its calculations on Capitec's debt 'curing', the statement read. "Your analysis muddles 'flow' amounts with period-end balances, a fundamental error you have made before."
The audit committee is "comfortable with management's analysis of loan book quality", Verster added.
According to Viceroy's report, 70% to 80% of Capitec's consumers in debt counselling were issued new loans prior to repaying existing loans.
Further, it said, tens of thousands of Capitec borrowers' datasets within debt counselling firms show consumers could get new loans after paying down their arrears just a day previously – rather than having a "cooling off" period between loans.
"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 [debt] 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," the report says.
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