Viceroy still a thorn in Capitec’s side

● Viceroy Research may have lost this round in its running saga with Capitec, but the country’s fifth-biggest bank should brace itself for further onslaughts as the short seller is likely to remain a thorn in its side.

“We have persisted in public critique of Capitec because we believe it is still materially overvalued and continues to present misleading analysis to the public,” Viceroy said on Friday in response to questions.

“We are not satisfied with Capitec’s response and will present a further statement in due course. Capitec continues to sidestep our questions and deliver statements with divergent interpretations of our questions.”

In January Viceroy urged the Reserve Bank to place Capitec under curatorship, claiming it would collapse as a result of reckless lending. In an open letter to Capitec’s audit committee this week, it said the bank’s financial results, released in March, reflected “deteriorating business conditions”.

Capitec’s share price fell marginally within an hour of the letter’s release but recovered quickly thereafter. Viceroy’s January report, however, led to a decline of about 25% before stabilising. The research house has a short position on Capitec and stands to benefit from a fall in its share price.

Giving his presentation at Capitec’s AGM on Friday, CEO Gerrie Fourie highlighted the bank’s growth and said they had learnt lessons from Viceroy’s campaign.

Capitec’s audit committee chairman, Jean Pierre Verster, gave Viceroy a dressing-down for its “broader interaction” with the bank on Thursday. “You chose to start off with launching a public campaign, appealing to regulators with strongly worded and emotive demands and then only writing a letter to the board at a later stage … in our experience you would have gained a lot by first engaging with management,” Verster said.

Verster denied that Capitec issued a large number of new loans to credit-hungry customers and that “so long as a client is current with their loan, they are theoretically able to gain an extension”, as claimed by Viceroy.

The market appears by and large to have dismissed Viceroy’s highly publicised research, a rare feature in the local market. But Viceroy’s relentless attacks on Capitec would not be out of place in the US, where such public spats are commonplace.

American investor and hedge fund manager William Ackman placed a $1-billion (about R12-billion) bet that Herbalife’s stock would tumble to zero in 2012, claiming the company was operating a pyramid scheme that would fail regulatory scrutiny.

Though Herbalife denied Ackman’s claims, he remained aggressively critical of the company. In 2013 he famously got into a fight with Carl Icahn during a CNBC interview in which Icahn labelled Ackman a liar.

For years Ackman stuck to his guns but finally admitted defeat and withdrew from his short position on Herbalife in February.

“It does look like we’re likely to hear negative commentary from Viceroy for a while, but that’s what makes the market. Some people are positive on the stock and some are negative on the stock for various reasons. Usually these views are just not expressed as loudly as they are now,” said Patrice Rassou, head of equities at Sanlam Investment Management. Kokkie Kooyman, portfolio manager at Denker Capital, said he was surprised that Viceroy had not backed down.

“They are flogging a dead horse and I think they’ve already lost the credibility they had,” he said, adding that Viceroy’s latest letter showed the “level of inexperience” of its members, two of whom are in their 20s.

Though the unsecured lending market is inherently risky, Capitec’s investors had “done a lot of homework. They’ve done more homework than Viceroy has, so the facts they’re revealing aren’t new,” Kooyman said.

Deputy governor of the Reserve Bank and Prudential Authority CEO Kuben Naidoo said the regulator remained satisfied that Capitec was sound and well-capitalised.

“As a regulator we would certainly be concerned about persistent criticism of any financial institution, especially if that criticism comes from outside the country by individuals who have never engaged with the regulator at any point in time and who have admitted that they have financial positions in the market that could potentially be profitable if the share price moves significantly.”

But Viceroy was more upbeat about how its research had been received, saying that it was assisting the Financial Services Board with inquiries related to Capitec.

We’re likely to hear negative commentary from Viceroy for a while Patrice Rassou

Head of equities, Sanlam Investment Management

“We do not believe the market has dismissed us or our thesis and we will be publishing a further report on a South African listed company in the near future.”

Clark Gardner, CEO of financial wellbeing firm Summit Finance Partners, which is suing Capitec on behalf of clients for reckless lending, said he did not believe Capitec had misled investors but welcomed Viceroy’s questions because answers to them would help shed light on the bank’s culture.

“Capitec has been primarily a payday lender which yields its super profits on the back of desperate consumers. Capitec does in fact attempt to hide behind its more respectable products such as the transactional banking services and term loans,” he said.

To Capitec’s credit, however, its executives were approachable and had initiated pro-consumer projects to relieve over-indebtedness, Gardner said.

It is hard to say how much longer Viceroy can keep up its campaign, but as Zwelakhe Mnguni, chief investment officer at Benguela Global Fund Managers, puts it: “The limit with any analysis, whether negative or positive, is always the truth.”

If there’s one tree to shake in corporate South Africa, it’s that of banking — and in particular unsecured lending. By its very nature, lending in our context, because of high unemployment, sluggish economic performance and growing inequality, is a risky business. As such, even though South Africa has one the best-regulated banking sectors in the world, we are prone to the occasional wobble in financial stability, some worse than others, such as the case with African Bank four years ago. The only way regulators can reduce this risk is by legislating that the big four don’t play in the unsecured lending market, but this would mean the bulk of South Africans would be rendered even more vulnerable to loan sharks such as “Laqasha” in the 1980s sitcom ’Sgudi ’Snaysi . So it’s a risk we simply have to carry.

For a short-seller looking to shake things up, it’s fertile ground to look for a company that is perhaps most exposed to the borrowing habits of a country with the highest unemployment rate among those tracked by Bloomberg. The company in question is Capitec, and it has found itself an investor banking on a share collapse that will reap rich rewards for New York-based Viceroy.

Broadly defined, a short-seller sells shares in the hope that the price of those shares will decline, and when they do, the short-seller profits by buying back the shares at a lower price.

This week, Viceroy yet again questioned Capitec executives about their lending practices, claiming that the bank was concealing losses by refinancing loans its customers were unable to repay. “We have persisted in public critique of Capitec because we believe it is still materially overvalued, and continues to present misleading analysis to the public,” Viceroy said.

The attacks have stung, if you consider that one of the bestperforming stocks in the past decade has seen its shares fall more than

19% this year, compared to a JSE banking index that is only some 3.5% weaker.

If we know anything about short-sellers, the attacks, no matter how much they are rebutted by management, just won’t go away until the sellers make a profit — or realise that they can’t. US hedge fund investor

Bill Ackman closed his firm’s money-losing short position in what he considered, and I am sure still considers, an illegal pyramid scheme,

Herbalife, some five years after launching his attacks.

Between 2012 and 2013 the nutrient drinks group was coming under fierce attack, its shares wobbling in the process. It’s a company that I still don’t understand, running for the hills just at the time when one of my health-conscious relatives tried to recruit me as a Herbalife distributor. I must admit I did enjoy that one shake, but the thought of a garage full of cans to sell with no customers in sight was the stuff of nightmares. Standing on his soapbox as a “shareholder activist” with a billion-dollar short position against the company, Ackman proved a thorn in the side of Herbalife. It was only this year that Herbalife seemed to win the battle.

While there may still be some lingering doubts about Herbalife’s business model, management, along with the backing of big-name investor Carl Icahn, fended off the concerns raised by finance media-darling Ackman. Despite having to fend off dissenting voices over the past six years, Herbalife’s stock has more than doubled.

Because of Ackman’s position, he had a stomach for a long fight.

It’s a similar battle that Capitec now faces. Just how they win out over Viceroy is dependent on support from PSG, its controlling shareholder, and the general South African market that is hostile to practices of offshore short-sellers.

But there are factors that Capitec is simply not in control of, and that’s the performance of the South African economy. The company needs the economy that has languished in low, single-digit growth for years to translate the positive feelings around the “new dawn” into better conditions in the real economy. Job cuts such as the 2 000 planned in AngloGold Ashanti only feed the monster of uncertainty around Capitec’s prospects.

African Bank’s collapse was as much about the platinum meltdown after the Marikana tragedy in 2012 as it was about poor management.

How they win over Viceroy is dependent on support from the market