Timely response to Viceroy report averts SA banking crisis
● South Africa might have experienced a major banking crisis at the close of the week if authorities had not moved swiftly to assuage panic around Viceroy Research’s report titled Capitec: A Wolf in Sheep’s Clothing.
On the back of the international report, which questioned the bank’s lending practices, panicked depositors started withdrawing their money as Capitec’s CEO, Gerrie Fourie, and his team tried to extinguish fires. The Reserve Bank stepped in quickly to back the bank, saying it was sufficiently capitalised with adequate liquidity.
Capitec’s executive committee met as early as Monday when the microlender’s shares came under pressure, falling 8%. The activity came a day before a report by the US-based analysts hit markets, which would see the bank’s shares fall as much as 25%.
The short-seller said it did not buy Capitec’s growth story and that it was effectively a “loan shark” that had massively overstated its loan book to the tune of R11-billion.
Fourie spent the week managing the crisis, which at some point had the hallmarks of the collapse of fellow Stellenbosch-based Steinhoff last December.
“We were concerned about what happened to our share price . . . It’s not only about Capitec, it’s about other banks too. It’s about the private sector and the whole South African economy. [The report is] negative. It creates a lot of uncertainty with people,” he said.
By the end of the week many voices had come out in support of Capitec, slamming Viceroy for acting irresponsibly by calling for the lender to be put under curatorship.
The result might have been quite different if the central bank and Capitec had failed to communicate, said Jannie Rossouw, head of the Wits School of Economic and Business Sciences.
“You can contrast the effective communication from the Capitec team with the lack of proper engagement from Steinhoff. If the board of Steinhoff had to run Capitec, South Africa would have had a major systemic banking crisis by Friday afternoon.”
Benguela Global Fund Managers, which had written to Capitec questioning its rescheduling of arrears loans two weeks before the release of the Viceroy report, distanced itself from the report.
“It is totally unfair to challenge a company’s business practices without giving it the right of reply,” said Zwelakhe Mnguni, the fund managers’ chief investment officer.
Kokkie Kooyman, portfolio manager at Denker Capital, said Viceroy may have looked into the PSG Group-controlled Capitec after it had correctly called Steinhoff.
The Jannie Mouton-founded PSG owns more than 24% of Capitec, which after this week’s woes, closed 8.6% firmer on Friday at R917.55.
Steinhoff this year sold its stake in PSG to recover R7.1-billion to boost its liquidity after billions were wiped off its market capitalisation amid a scandal related to “accounting irregularities”.
Piet Mouton, PSG CEO and son of Jannie, was adamant that a Viceroy report on another of his companies, namely its private education business, Curro, would now have little effect.
“Even if Viceroy was to zero in on Curro or whoever else, I believe their credibility has most likely already been shattered,” he said.
“The Steinhoff debacle has resulted in a significant loss of investor confidence in South African companies in general and I think Viceroy is being opportunistic by taking advantage.”
On Friday Viceroy defended its report, Bloomberg reported.
Despite flaws in Viceroy’s Capitec report, Kooyman said it had raised important questions around the bank’s rescheduling of loans.
“In investments you have to go on the basis of trust so one does a lot of work in talking to management, looking at ratios
Contrast effective communication from Capitec with the lack of proper engagement from Steinhoff Jannie Rossouw Wits School of Economic and Business Sciences
and comparing with peers. But if management sets out to defraud investors they can do it for quite a few years before investors actually see it. You are just never 100% sure,” Kooyman said.
SA was likely to be on the cusp of a growth spurt with the election of Cyril Ramaphosa as ANC president after a “helluva bad phase”. With the expected rebound and with Capitec being SA’s best-growing bank, the question was whether its shares were overpriced.
“After [the release of the Viceroy report] Capitec is still 20% too expensive but a lot of investors are prepared to pay that,” Kooyman said.
The Viceroy report said Capitec was lending recklessly and faced the same fate as African Bank, but JP Morgan analysts said in a note to clients that Capitec’s business model had withstood intense scrutiny after African Bank’s 2014 collapse and that it had come out stronger.
Banking may be back in vogue at the moment with a US president seeming to deliver on a promise to ease regulation. This has benefited big businesses such as the JP Morgans of this world. It’s been a rather torrid decade for the world’s leading lenders. Donald Trump’s predecessor came into the White House faced by a possible collapse of the American and global economy flowing from the greed of Wall Street bankers. In response, layers of regulation were added to banks in an effort to regain credibility in the global financial system.
That still-necessary burden of regulation, meant to curb the excesses of the world’s major lenders, made the investment case for banks just that more difficult to sell. While South African banks weren’t lumped in the same category as their more esteemed colleagues in the US and Europe, they too weren’t necessarily a favourite pick for fund managers in search of growth in emerging markets.
On the corporate front, South African banks weren’t in the strongest position either, with Standard Bank, the largest by assets, scaling back its rather ambitious expansion plans quite dramatically. Of the big four, FirstRand, through its digital push in its retail bank, FNB, and Nedbank, through its move into the black emerging market, were the real good-news stories of the sector.
Barclays Africa or Absa’s assimilation into Barclays plc culture, and now its attempts at finding its own culture after the UK lender sold down its controlling stake, have long muddied its prospects. Its biggest problem, though, has no doubt been the breakout story in the banking sector locally and globally, namely the performance of the Stellenbosch-based Capitec. This has eaten into Absa’s client base and hit its share-price performance over the past 10 years. Capitec has gained an astronomical 2 800% in 10 years. By comparison, Apple has grown its valuation by only 632% over the past decade.
FirstRand managed only 352% growth in that period, despite dragging many consumers into the modern age of banking.
Such a performance from Capitec has drawn much attention to the business practices of its founders. Just how did they manage to deliver such levels of growth in a slowing economy that in truth began to tail off at the end of 2012, the year of the Marikana massacre? In the years immediately after Marikana, African Bank, which was seen as a similar lender to Capitec, albeit without deposits, would collapse. African bank was by all intents and purposes servicing the same clients, which caused many to question Capitec’s prospects at the time.
But here we are, more than five years later, and Capitec still stands and still manages to report earnings growth, despite the reservations of many, including myself.
So when US-based short-sellers, Viceroy, tried to poke a hole in Capitec’s story, a hole that proved quite profitable, there were many willing to buy the story. Using credibility gained from its Steinhoff exposé a couple of months ago, the report zeroed in on the bank’s lending practices, effectively calling the bank a “loan shark”, claiming it had massively overstated its loan book to the tune of R11-billion. Fortunately, a rather well-rehearsed Reserve Bank, given the banking crisis that South Africa has seen in the past two decades, managed to quell the fires.
Whatever the merits of Viceroy’s panned report, Capitec and its executive now know, if they didn’t before, that there’s a certain scepticism about its story. The only way to reassure markets that theirs is a sustainable story is to answer all the questions posed by Viceroy, especially as the country’s growth story gets back on track this year.
If so, Capitec’s share price may be set to rise even further, which will surely raise the anxiety levels of even long-standing investors.
Fortunately, a well-rehearsed Reserve Bank managed to quell the fires