Jury still out on Capitec’s health state
Questions over how small bank is thriving while Abil is diving worries analysts, writes
THERE is a glaring anomaly in the unsecured lending space.
The two major players that provided similar loan products to the same now-ruined market have come out bearing very different scars.
African Bank, the biggest lender, is teetering as rampant consumer indebtedness has sent its bad debts rocketing. This led Abil to record its very first loss, a whopping R3.1-billion, last month.
Yet Capitec, its closest competitor and the second-largest unsecured lender, appears to be relatively unscathed. For the year to February, Capitec’s headline earnings rose 27% to R2-billion.
Experts attribute Abil’s plunge to its “overly aggressive lending” at the peak of the unsecured credit cycle, roughly between April 2012 and March last year.
But a Business Times analysis shows Capitec was by far the more aggressive lender in the collapsing market, raising questions on why its bad debt seems to be much lower.
During that peak period, African Bank lent R25.47-billion, almost the same as Capitec’s R25.38-billion in new loans. But because Capitec’s book was half the size of African Bank’s at that stage, Capitec was actually growing its loan book at double the pace of its rival.
Yet from April 2012 to this March, African Bank recognised “net impairments” for bad debt of R19.8billion, compared with Capitec’s impairments of R6.64-billion.
The divergence between the baddebt formation of the two companies is remarkable — even taking into account Capitec’s smaller loan book.
The enigma has sparked a heated debate, with some analysts asking if Capitec has been “kicking the can down the road” by rolling its bad debt into longer-dated loans.
Three of four analysts interviewed were negative about Capitec’s prospects due to the lack of clarity on the extent to which it had rolled its troubled shorter-dated loans into far riskier longer-term loans.
In an interview last week, African Bank’s chief financial officer, Nithia Nalliah, was at a loss to explain how Capitec could have come out of the turmoil with such a “clean” book.
“I can’t comment on Capitec. It may well be that management is that much superior,” said Nalliah. But he said: “Our shareholders are asking questions [about them], and are saying that Capitec doesn’t provide suitable transparency.”
Capitec, on the other hand, argued that the worst is over as its impairments for bad debt have begun to taper. When asked about this anomaly, Capitec cited its vastly superior risk modelling, conservative provisioning for bad debt and its sharper insight into consumer borrowing, for which it thanks its retail bank.
But analysts aren’t entirely convinced, given that since 2012 Capitec massively increased its book by extending the term and value of its loans.
Until 2010, Capitec offered a maximum loan of R120 000 over 60 months. But in May 2012, at the peak of the unsecured lending boom, Capitec began offering clients loans of up to R230 000 with a payment term of up to 84 months.
This meant the bank was wading into unchartered territory, looking
That is a full-blown experiment. That is not global best practice at all, it is very far from it
for growth through loans which competed directly with the secured loans provided by the big four: FNB, Standard Bank, Absa and Nedbank.
This altered the complexion of Capitec’s loan book. By February last year, 36% of Capitec’s loans fell into the 61-month to 84-month category, from 0% the year before. By this February, that number sat at 40%.
Over the past two financial years, Capitec issued R16.25-billion in loans dated over 60 months, while Abil issued R5.58-billion. But only 13% of Abil’s new loans fell into the longest repayment period in the “high volume, poor quality” business period.
Carl Fischer, Capitec’s communications head, argued that Abil had “substantially more longer-term loans”, given its larger loan book.
“We were coming off a substantially smaller book,” said Fischer.
“When you are extending your term it doesn’t mean that you are doing it on the same basis . . . we grew into the longer-term product far more cautiously,” he said. But some analysts are sceptical. “At the peak of the bubble, Capitec was growing its book faster than anyone. So they are now sitting with the highest proportion of loans written during the worst vintages,” said Mathew Warren, an analyst at First Avenue Investment Management.
Extending loan terms also introduced a huge risk of the unknown to Capitec’s book, said analysts.
“Forty percent of [Capitec’s] book is greater than five-year loans, and that is a full-blown experiment. That is not global best practice at all; it is very far from it,” said Warren.
Capitec has essentially taken a gamble on the health of the economy, which is a risk given the 0.6% fall in economic growth in the first quarter.
“If there was another recession, that would decimate Capitec’s book,” said Warren.
It is too early to know whether Capitec’s models have worked for its longer-dated loans.
Riaan Stassen, former Capitec CEO, conceded this last year when he said the bank was preparing for “consolidation” as consumer indebtedness hit unsustainable levels.
“I buy that with the change that we have had comes risk . . . there is always a risk that problems can be disguised in growth, and that is why we want to go into a consolidation phase for 12-24 months, to make sure that that is not the case,” he told Moneyweb.
This apparent recognition of risk led to Capitec pulling back radically on lending over the longer period, reducing new loans advanced during its past financial year.
Cynics ask to what extent Capitec may have “consolidated” problematic shorter-term loans into longer loans, effectively “rescheduling” debts and postponing the problem.
Asset manager Cadence said: “The result of extending the term of the loan book is twofold: firstly, loans that appear to be nonperforming can be consolidated into longer-term loans, which attempt to rehabilitate nonperforming clients, thus masking arrears levels.
“Secondly, arrears are suppressed, making provisions look overly conservative.”
Contrary to Capitec’s stance as the “paragons of prudence”, Cadence argued that the bank had the lowest levels of provisioning against its debtors’ book as compared with those of competitors after Abil put through a R2.5-billion general provision this month.
Capitec’s provisions for bad debt now sit at 10.8% of its debtors book, according to Cadence. This is less than any other unsecured lender or retailer, such as Lewis (18.6%) Truworths (12%), and far less than African Bank’s 25.8%.
If Capitec does have a “mystery black box”, it would be in the form of sketchy, shorter-dated loans being stretched into longer periods.
Warren said: “There is a term in banking called extend and pretend . . . instead of taking the hit that is coming now, you extend additional credit, and pretend it will be paid back.”
But Fischer disagreed. He said Capitec never “consolidated” debt into longer-term loans to rehabilitate bad loans. “We do consolidate, but the basis is on affordability,” he said.
But analysts are unanimous in their concern about Capitec’s book.
Even the most bullish of them warns that trying to get a sense of Capitec’s risks is virtually impossible, owing largely to its lack of disclosure on which loans have been consolidated.
“It’s as clear as mud,” one analyst said.
Capitec, however, maintained that all is fine. Said Fischer: “We are not concerned in any way. We are seeing a flattening off of things. We are comfortable where we are but it’s still early days …
“We believe the ballooning of bad debt has already happened, and we are cautiously optimistic that the worst is over.”