Not time to get defensive about SA’s world-class banking system
• The risky business of microloans for consumption inevitably leads to a debt trap
The viceroy of India had absolute power and certainly didn’t consult his subjects before making decisions, at least until the 1930s. Many of us might see the same imperialist arrogance in the new Viceroy, which is on the radar with its reports on Steinhoff and Capitec.
It is tempting to dismiss Viceroy’s “wolf in sheep’s clothing” report as malicious and designed to help it make a killing from short selling. I deplore its attitude of refusing to check facts or give a right of reply to Capitec before publishing.
However, this is no time to get defensive about our banking system. I know that much of our technology is well ahead of the UK, where cheques are — amazingly — often still sent by regular mail. Capitec’s branches are clean and simple, and the account management is excellent. It has attracted deposits from clients considerably more affluent than it would have expected in its early days.
But most of us are shielded from the raw engine of Capitec, which is providing microloans. How these loans are sold and how the staff are incentivised to push volumes I don’t know.
Yet microloans in SA are a world away from Grameen Bank in Bangladesh, where predominantly female clients put the loans to work in microbusinesses. Here, many loans go towards consumption, leading inevitably to a debt trap.
Microlenders often show poor judgment when they grant loans — 10,000 Amplats employees were granted loans during the infamous strike. Even JSE darling Capitec has to set aside 17% of its loan book as bad debt reserves.
Viceroy didn’t have to stir the pot to justify taking a short position. The share is up 327% since August 2014, when main rival African Bank went into curatorship. And Capitec trades at ridiculous price to net worth of 5.3. Even a good business in the banking sector does not justify such a rating.
Lending is an inherently lowquality business. Ultimately, it does not have too many levers when it comes to collecting unsecured credit. Often the only way to show a decent return on equity is through proprietary trading, perhaps the only activity that is even more risky than unsecured lending.
I suppose the South African banking system is world-class in the sense it has had its share of bank collapses. In the UK, there was Northern Rock, Lloyds Bank and the Royal Bank of Scotland, in the US there was the savings and loans crisis, with too many casualties to name.
In my career, I have seen Nedbank collapse twice and TrustBank only surviving with Sanlam’s help (which in apartheid years was a kind of proxy nationalisation). Plus, of course, microlenders such as African Bank, UniFer and Saambou. Certainly Saambou, a former building society with decent assets, was called a high-quality business, though perhaps without the same halo as Capitec.
To say there is no operational difference between Capitec and African Bank is patently wrong, and reduces Viceroy’s credibility. Capitec has a large retail deposit base, which African Bank never had. Kokkie Kooyman, SA’s top banking analyst, believes Capitec will be around in its current format for many years. It is hard to contradict such an expert, but it is curtains for any bank that still looks the same in five or 10 years.
Capitec needs to bring in black African directors. At the moment, the board resembles a winemaker’s cooperative.
The incestuous nature of the PSG-Steinhoff group makes it an easy target. It was shielded in the past by the strong reputation of Christo Wiese as a wealth creator, a reputation now on the wane.
Perhaps being based in Stellenbosch, they inhabit a world that stands still. Like Discovery, it needs to evolve.
In fact, the new Discovery Bank will have the chance to eat Capitec’s lunch. Like it or not, the Capitec brand has been damaged and something has to stick. Whether initiation fees are always charged or only sometimes, it is an unacceptable extra burden for clients.
Viceroy’s claim that Capitec needs to write off another R11bn of bad loans has to be an exaggeration, but Capitec would have gained some credibility if it had said this would be thoroughly reviewed. These things can be self-fulfilling.
As Marc Beckenstrater of Prudential put it, when the price of beer shares goes down, people don’t drink less beer, but when bank shares fall, they start to lose confidence and withdraw business. It is tempting for borrowers to consider not repaying a bank they believe might be going out of business.
People from the same school as Kooyman and I believe that talking to management is essential in analysing companies. We hope we can filter out the double talk and separate the wheat from the chaff.
So it is quite a cultural change to come across Viceroy, which does not believe in talking to managements at all, convinced they speak with forked tongues.
Perhaps because we are a small community in SA, we want to keep a cordial relationship even when we disagree. Journalists no longer routinely check back stories with their sources, but when we need to, we check against other sources. Viceroy, by contrast, flies by the seat of its pants, unless its standards are particularly low when it comes to emerging markets.
It certainly picked one of the most highly rated shares in SA, one that has been priced for perfection. That is rather different from Steinhoff, with its often poor-quality furniture chains and confusing strategy.
Kooyman says further financial stress in SA would hurt Capitec. But it doesn’t look as though the trifecta of a weak rand, higher interest rates and higher inflation will take place soon — in fact the opposite has been true since Cyril Ramaphosa came into the governing party’s hot seat.
VICEROY DOES NOT BELIEVE IN TALKING TO MANAGEMENTS, CONVINCED THEY SPEAK WITH FORKED TONGUES