Why Standard & Poor’s is sticking with Capitec rating

As Treasury comes out to bat for Capitec, asking the Financial Services Board to consider a market abuse probe into the conduct of Viceroy Research, ratings agency Standard & Poor’s (S&P) is sticking by its assessment of Capitec’s credit risk at “BB” – reflecting those of its sovereign (SA) as well as the bank’s “strong capitalisation”. Business Day spoke to S&P’s primary credit analyst for banks in SA, Matthew Pirnie.

Were you asked to reassess your rating?

Ratings agencies can’t really comment until we’ve made [our information] public, so I thought it was best to write something and put it out. If Capitec had asked, we wouldn’t have done it – we don’t do things by request.

What is your opinion on Viceroy’s Capitec report? Do you agree with it in full or parts, or do you disagree with its conclusions?

I can’t reconcile the numbers they use with the data we have. And therefore, when looking at the financial side, it’s not similar to the data we have. In terms of the legal issues [potential classaction lawsuits], while we would look at any serious legal action, that wouldn’t be considered in our ratings action.

And in terms of the governance, we have our own criteria which checks governance of the institution and that’s appropriate for its rating level. I went through it, in detail, and asked the bank a number of questions around it … but my numbers looked fine and they continue to look fine. For us, the ratings look accurate where they are.

Are your numbers reliant on the bank or do you base the rating on your own research?

The ratings agencies almost entirely rely on the auditors for financial statements, but we can ask questions around the financial statements and we have data regarding their credit risk in a much more granular detail than non-ratings agencies have access to… In terms of the pure numbers, then we are reliant on the auditors and the bank to provide us with that data. Again, what we try and do is … check that it adds up.

So you wouldn’t feel that in backing its rating, S&P is exposing itself? I don’t think we’ve exposed ourselves any more than we would have done with the rating. The rating is where it is, we have exactly the same amount of data as we did before the Viceroy report came out – we don’t consider there’s anything new or important that would lead us to want to change that rating.

On the regulation of South African banks, it wasn’t mentioned in the report, but when Business Day spoke to Gabriel Bernarde, one of the Viceroy researchers, he was quite dismissive of the Reserve Bank and its oversight – alluding to the failure of African Bank

under the regulators’ nose. What is S&P’s view of SA’s regulators? Do you feel they’re on the ball?

We think the regulatory environment in SA is very in line with other Group of 20 countries: as appropriate as it should be for an advanced economy. And this isn’t the only country that’s had a bank failure in the last 10 years… Where were Viceroy in the States? Are they saying US regulators were rubbish when Lehmans happened, or Bears? Or the UK and RBS [Royal Bank of Scotland]? In terms of oversight, the Reserve Bank is in line with global norms and their oversight and monitoring of financial institutions seems appropriate, so we don’t have any concerns with the Bank. In fact, we consider it to be a good regulator in comparison to (other) emerging markets.

Viceroy repeatedly draws similarities to the failed African Bank, before it was placed under curatorship. In what way would you see Capitec as similar to African Bank Investments Limited?

We rate African Bank today but we didn’t rate African Bank beforehand… How is it different from African Bank then? Well, it’s materially different. It is an unsecured consumer lender, and that is where the similarity begins, but in terms of provisioning levels, it’s chalk and cheese in comparison to the amount of provisioning Capitec has today to the amount African Bank had at the time. It depends on what you want to look at and how you want to look at the numbers. Any way we look at it, we consider the coverage of expected and unexpected loss by the bank is robust.

Even one or two days overdue, they start raising a provision quite early. So African Bank had a shortfall of provisions — it had adequate capitalisation but you put the shortfall of provisions up against capitalisation and you soon saw there was a big hole in the capital levels.

And then from a liquidity and funding perspective, Capitec has retail deposits, African Bank never did — they relied on wholesale funding, and if you look at the revenue diversification, Capitec has significant diversification in comparison to what African Bank was. If you add those three things together then I would say drawing similarities between African Bank and Capitec is lazy at best.

WE THINK THE REGULATORY ENVIRONMENT IN SA IS VERY IN LINE WITH OTHER GROUP OF 20 COUNTRIES