Viceroy uses dated data and its Capitec remedy is overkill
Viceroy Research has continued to call for Capitec to be placed into curatorship. The registrar of banks, housed within the South African Reserve Bank, has not reacted to the short-seller’s research (or should we say opinions) on the reasons for this call.
It may be worth examining the reasons for this.
In its latest salvo against the bank, Viceroy says it believes “Capitec should be placed under curatorship in order to protect its borrowers, who are comprised of the most financially atrisk demographic in SA”.
The continued call for a curatorship detracts from some valid points in Viceroy’s research — first raised by the Financial Mail in 2016 — about possible reckless lending at the bank and the financial burden it places on customers.
A study of the small banks crisis of the early 2000s and the Reserve Bank’s actions would tell you it intervenes in the interests of depositors. When banks such as New Republic and Saambou failed, the registrar stepped in to protect depositors, never borrowers.
In both cases, large-scale withdrawals placed pressure on the bank, causing a liquidity crisis that threatened to spread to the rest of the financial sector.
The collapse of African Bank Investments (Abil) in 2014, which resulted in its curatorship, muddied the waters somewhat, but curator Tom Winterboer has always made it clear that he was acting in the interest of depositors.
Many money-market funds were exposed to Abil’s bonds, and Winterboer said the curatorship — which has seen the bank rescued from oblivion — averted about 50% in losses for money-market depositors.
A curatorship would not solve the credit-risk issues that Viceroy sees in Capitec, which analysts have been making concerned noises about since 2016. It would be akin to prescribing cosmetic surgery for a pimple. Overkill.
Another problem that makes Viceroy’s analysis difficult to engage with are the sources of its data. It uses a bank statement dated January 2013 to illustrate how Capitec is abusing debit orders to jump the queue so its loans are paid first; a credit agreement commencing in June 2014; and an undated payslip.
The dates are important from a regulatory standpoint, as the market police have moved to plug loopholes in the rules governing fair play in the financial markets.
The National Credit Regulator introduced stiff affordability regulations and lowered caps on maximum interest rates. The regulations came into effect in September 2015.
In 2017, the Reserve Bank, which was concerned with the different ways in which banks reported restructured loans, released a directive instructing banks to change the manner in which they did this. When defaulted loans are restructured, banks cannot happily put them in their performing books and tell shareholders everything is going well.
The Reserve Bank now requires that banks observe former defaulters for at least six months to see if they are able to keep their account up to date, before their accounts are actually recorded as being up to date.
The directive had a devastating effect on loan-book performance at the various banks.
FirstRand Bank said its subsidiary First National Bank’s nonperforming loans for the year to June 2016 increased 21% to R953m. The increase would have been a milder 15%, were it not for the directive.
Rival Standard Bank experienced a 4.3% increase to R27.7bn after implementing the directive.
A glance at Capitec’s notes to its financial statements shows it followed the same policy since the directive.
If loans were in arrears and were then rescheduled or restructured, and subsequently stayed up to date for six months, the loans were booked under a line item called “current — rescheduled from arrears not rehabilitated”.
Viceroy Research says Capitec’s financial statements are unreliable and should not be trusted, effectively accusing the bank of lying.
So the problem now becomes this: if Viceroy’s conclusions (and it relies on the performance of Capitec’s longer-term loans of up to seven years, despite not trusting the financial statements) are correct, can Capitec be pursued for the sins of the past?
If so, how should this be done?