Viceroy comes up short on Capitec
JP Verster was right about African Bank and Steinhoff but disagrees with Viceroy’s latest report
It has been a hellish week for the mild-mannered Jean Pierre Verster. He’s searching for answers as he pores over numbers and his phone is ringing off the hook. He is the man in the middle of a perplexing clash between Capitec Bank and little-known Viceroy Research.
In his former position as an equities analyst at 36One Asset Management, he became known for his share-shorting savvy when he made R100-million for his hedge fund by betting against African Bank before its collapse in 2014.
More recently, in his position as a portfolio manager of Fairtree Capital, Verster’s analysis again saw him take a short position on Steinhoff International.
It paid off again.
In December last year, it became clear all was not well with the retailer: German authorities were looking into alleged accounting fraud, the auditors would not sign off the financials and the chief executive stepped down overnight after being with the company for 18 years. The shares plummeted, losing up to 90% in value at one point.
Another party that also saw the writing on the wall for Steinhoff was Viceroy, a obscure research company which, soon after the collapse of the share, released a report about the questionable health of the retailer.
Verster voiced his agreement with Viceroy’s Steinhoff analysis at the time, but this week the latest report from the research house hit a little closer to home when it suggested Capitec was “uninvestable” and should be placed under curatorship immediately. Viceroy acknowledged it had a short position in Capitec shares.
Verster, with his knack for shorting, has been a nonexecutive independent director the bank since 2015 and also chairs its audit committee. The Viceroy report calls on him in particular, commending him as an “excellent analyst”, to raise its concerns with the bank auditors and to “recognise Capitec’s resemblance to his previous African Bank short”.
In the report, Viceroy found Capitec’s financials unbelievable. It suggested bad debts in Capitec’s loan book must be much higher than reflected. By its calculations, when comparing it with its competitors, Capitec needs to write off R11-billion. It concluded Capitec was a predatory lender, charging excessive fees, and that it could be forced to pay significant damages in a pending class action.
But, unlike the Steinhoff case, Viceroy’s latest report has, so far, not found favour with Verster.
“One must appreciate that Viceroy did not cobble this report together in 24 hours and so it would be unfair to expect a comprehensive response to it in 24 hours,” he said. “What I can say is that, up until now, I have not been made aware of any significant issues that raise any serious concerns regarding Capitec or Capitec’s financials.”
Although very much still in the thick of unpacking the report, Verster said, what he has found so far, are some errors in the hard numbers of the report that are so glaringly obvious that it made him wonder if Viceroy itself has not been duped.
“I do not question that they think they are correct but, on the face of it, it seems like someone has fed them misinformation.”
With the Steinhoff report, it appeared that Viceroy had not worked on the numbers alone, he said.
Asked how it was that he agreed with Viceroy’s analysis of Steinhoff but not with that of Capitec, he said: “Whether someone is right or wrong is not about who makes the statement, it’s about the quality of information. On the Steinhoff facts, I agreed with them.”
He said he had noted with interest that the tone in the Viceroy report seemed to change when referring directly to him.
“There is no reason why people I have never met should handle me with such respect. It tells me someone involved here is someone who knows me.”
Verster said it is particularly tricky to respond decisively to the report because it is replete with “halftruths”. For example, the report seems to conflate the idea that Capitec reschedules loans for customers struggling to pay with the rolling over of old loans into new ones for other customers.
Rescheduling loans occurs when a customer is struggling to make payments and so the time over which they must pay is extended and the monthly instalment is brought down.
Jan Meintjes, the portfolio manager of Denker Capital, said Viceroy’s take is that, when a client falls into arrears, Capitec prefers to reschedule the loan rather than to show the arrears on the books. The accusation is that by rescheduling, Capitec will not just give the client a longer period to pay back the loan but will also issue an even larger loan, much of which will go towards paying off the initial debt.
Viceroy argues these rescheduled loans are then presented on the books as new loans that have never been defaulted on and so provisions for the loans (should they go bad) are not as great as they should be.
Capitec chief executive Gerrie Fourie said this is not the case at all.
“We have very strict rule on rescheduling,” he said in a call with analysts on Tuesday. “When a client’s loan is rescheduled, the bank keeps provisions for the loan for 12 months until there is evidence that the client is rehabilitated.” A client rescheduling a loan does not walk out of the bank with more debt and a loan origination fee is not charged.
He said Capitec reschedules some loans and rolls over others, in accordance with the National Credit Act, but that the two processes are separate.
Rolling over a loan, when a portion of the new loan is used to settle an older one, entails a full affordability review and an initiation fee. Fourie said new loans are not extended to customers who are in arrears.
But Viceroy is not the first to express concern over rescheduling. JP Morgan analysts also raised the issue when, in 2016, the company results showed a 75% surge in rescheduled loans. Recently Benguela Fund Managers wrote a
“I have not been made aware of any significant issues that raise any serious concerns concerning Capitec”