Viceroy’s ‘predatory’ report
Questions are being asked about the motives behind research company Viceroy’s recent damning report on Capitec
THE report sent shockwaves through South Africa. Consumers were stunned – how could this be happening? Was there any truth to allegations that Capitec, one of the country’s top banks, was at risk of going bust? It felt like the African Bank saga all over again and the markets didn’t take long to react.
Investors couldn’t shed their Capitec Bank shares fast enough. They weren’t taking any chances in the wake of the damning report by Viceroy Research – the same outfit that in December lifted the lid on dodgy dealings at Steinhoff, triggering the retail giant’s share price to drop by a dramatic 85%.
And just as it did with Steinhoff, Viceroy didn’t pull any punches delivering its verdict about goings-on at Capitec.
“We believe Capitec is a loan shark with massively understated defaults masquerading as a community microfinance provider,” its report stated bluntly.
“We believe the South African Reserve Bank and the minister of finance should immediately place Capitec into curatorship.”
But after panic selling sent the share into free-fall, causing it to lose around 25% of its value, it became clear it was a false alarm. Banking regulators were quick to leap to Capitec’s defence, saying the bank was strong and stable and pronouncing the Viceroy report “seriously flawed”.
Now it turns out Viceroy may have had an ulterior motive for making its bombshell claims: pushing the share lower to cash in and make money.
Financial experts say while South Africans were panicking and selling off their Capitec shares, the authors of the scary 33-page report were probably laughing all the way to the bank.
WHO’S BEHIND VICEROY?
“A group of individuals that see the world differently.” That’s how Viceroy Research describes itself on its website.
The people behind the Americanbased company operated anonymously until last month, when Fraser Perring (44), a former British social worker, revealed himself and two Australians, Gabriel Bernarde and Aidan Lau (both 23), as the faces behind the firm.
But their activities extend far beyond research. The three are what’s known in investment jargon as “short sellers” (see box on the right).
Perring worked as a child-protection officer for the Lincolnshire County Council until 2014, when he was struck off the Health & Care Professions Council Register for failing to contact a child’s extended family to arrange alternate care, and then falsifying case records.
He later went to court and received £24 000 (then about R432 000) in part settlement. Although he had no formal training, he started dabbling in high finance and claims to have made more money in his first three months as a fulltime researcher than he earned during a decade in social work.
In 2016, Perring was introduced to the two young Australians by a mutual contact and they started working together. While studying engineering at the Royal Melbourne Institute of Technology, Lau had often collaborated on research projects with Bernarde, a former school classmate who studied accountancy at the University of Melbourne.
Both were interested in short trading and it’s believed that while Bernarde worked as an analyst at liquidator Ferrier Hodgson he may have caught wind of the problems at Steinhoff. By December last year, when explosive revelations brought the furniture retailer to its knees, Bernarde and Lau were working for Viceroy full time.
The research company has produced reports on international companies such as MiMedx Group, NeuroDerm Ltd and Syrah Resources. But it was its exposure of accounting irregularities at Steinhoff and now Capitec, South Africa’s secondlargest retail bank, that really made people sit up and take notice.
Although Perring has received death threats he sees no wrong in what he does.
“I love doing research,” he says. “I’m not very good at investing but I made a
few million and realised I had a talent for this. I believe a company’s right until you can prove them wrong.”
CAPITEC: THE SHOCKING CLAIMS
Viceroy’s report, titled Capitec: A Wolf in Sheep’s Clothing, accuses the bank of “predatory” lending practices, of exploiting people by granting ill-advised loans and lending money to “delinquent customers” to repay existing loans.
The report draws clear parallels between Capitec, which it says is “lending recklessly” and ultimately may have to write off R11 billion in ill-advised loans, and African Bank, which went bust in 2014.
Viceroy even goes so far as to recommend Capitec be placed under curatorship by the SA Reserve Bank (SARB).
Although leading analysts have dismissed Viceroy’s claims and Capitec’s share price has recovered, Perring is sticking to his guns. He claims to have inside information about goings-on at the bank and has promised to release more evidence of dodgy dealings.
WHAT EXPERTS SAY
Capitec CEO Gerrie Fourie has defended the bank, saying it has a track record of 17 years of transparency.
“We consider various factors before granting a loan, including past credit conduct, stable income validated by a payslip, monthly expenses and the ability to pay back loans as assessed on the client’s bank statements.”
According to the SARB, Capitec is solvent and well capitalised and has adequate liquidity.
“The bank meets all prudential requirements,” the regulator said in an official statement.
Meanwhile the treasury has questioned the motives of the explosive Viceroy report. “Viceroy isn’t regulated in SA and by its own admission has been trading [short selling] in Capitec shares ahead of the release of its report, and stood to benefit substantially from forcing the Capitec share price to fall by publishing its speculative report about the bank,” the treasury said in a statement.
Portfolio manager at Denker Capital Kokkie Kooyman says comparing Capitec to African Bank is unfair. While the two banks started trading in the same industry, lending to seemingly higherrisk borrowers, Capitec gradually developed its business away from that so loans to the lower-end market formed an increasingly smaller part of its business and are no longer the biggest driver of earnings.
“Capitec also has a strong balance sheet whereas African Bank didn’t towards the end. The two companies are quite different,” Kooyman adds.
On the other hand, Clark Gardner, CEO of Summit Financial Partners, maintains Capitec’s lending practices are a cause for concern. “Capitec does a lot of things we disagree with,” he says. “They create over-indebted consumers who can’t put food on the table at the end of the month and there’s suicide, broken homes, addiction, all created by this harm.”
But he says the Viceroy report is deliberately misleading. “Many of the allegations [made in the report] aren’t new. We’ve been making the allegations in terms of their immoral lending practices. All that’s happened in this report is that they’ve put it all together and exaggerated the consequences. It’s reckless to write a report like theirs where the consequences are so blatantly exaggerated purely to drive the share price down.” S