Short seller targets âloan sharkâ Capitec
07 February 2018 Cape Town
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US research firm and short seller Viceroy Research has released a report to explain why âloan sharkâ Capitec should be placed into curatorship by the South African Reserve Bank (SARB).
The 33-page report explained that, based on its research and due diligence, Capitec is a loan shark with âmassively understated defaults masquerading as a community microfinance providerâ.
Viceroy has in turn been accused by Capitec of conducting a smear campaign in order to profit from extensive short selling of the South African lender.
It stated: âCapitec Bank Holdings Limited is a South Africa-focused microfinance provider to a majority low-income demographic, yet they out-earn all major commercial banks globally including competing high-risk lenders. We donât buy this story.â
âViceroy believes this is indicative of predatory finance which we have corroborated with substantial on-the-ground discussions with Capitec ex-employees, former customers, and individuals familiar with the business.
âViceroyâs extensive due diligence and compiled evidence suggests that indicates [sic] Capitec must take significant impairments to its loans which will likely result in a net-liability position. We believe Capitecâs concealed problems largely resemble those seen at African Bank Investments prior to its collapse in 2014.â
âWe think that itâs only a matter of time before Capitecâs financials and business unravel, with macro headwinds creating an exponential risk of default and bankruptcy.â
Viceroy explained that the report provides underlying information and analysis that it believes supports the following conclusions.
Reconciliation of loan book values, maturity profiles and cash outflows imply Capitec is either fabricating new loans and collections, or refinancing ZAR 2.5 billion to 3 billion (USD 200 million to USD 240 million) in principal per year by issuing new loans to defaulting clients.
Viceroy suggested that the legal documents it has obtained show Capitec advising and approving loans to delinquent customers in order to repay existing loans. It said that these documents also show Capitec engaging in reckless lending practices as defined by South Africaâs National Credit Act. Viceroy stated that this corroborates its loan book analysis.
According to Viceroy, Capitecâs loan book is massively overstated as a consequence of refinancing delinquent loans and that analysis against competitors suggested an impairment/write-off impact of ZAR 11 billion (USD 921 million) will more accurately represent the delinquencies and risk in Capitecâs portfolio.
Viceroy said: âLegal experts that we have spoken to believe that the outcome of an upcoming reckless and predatory lending test case in March 2018 will be used to trigger a multi-party litigation refund (class action). We believe that, at a minimum, Capitec will be required to refund predatory origination fees primarily related to multi-loan facilities; an estimated ZAR 12.7 billion (USD 1 billion).â
In a published rebuttal to Viceroyâs claims, Capitec stated: âWe believe that the campaign will continue for the foreseeable future. Shareholders can expect the release of fresh attacks and false allegations over an extended period. Capitec consequently advises shareholders to use caution when reacting to such allegations.â
It added: âOnly 7.3 percent of Capitecâs credit clients currently qualify for loans in excess of 60 months (3.6 percent qualify for 84-month loans). The scoring models for the 61 to 84-month loans currently target 12-month default rates of 4.2 percent in aggregate (2 percent for 84-month loans). The portfolios are naturally weighted to the larger amounts and consequently the longer-term and lower risk clients.â
The Republic of South Africaâs National Treasury also weighed in describing Viceroyâs actions as ârecklessâ.
According to the National Treasury, the way in which Viceroy released its report is âclear proof that it is not acting in the public interest nor in the interest of financial stability in South Africaâ.
The statement said: âWhilst the Treasury expects prudential and market conduct regulators in SA to consider all relevant reports in the public domain, and to act where any risks or transgressions in the law are identified, Treasury is of the view that the Viceroy report provides no basis to put any bank under curatorship.â
It continued: âThe National Treasury has been in constant contact with the Registrar of Banks since the report was released, and is satisfied with the assurance from the SARB that Capitec is well capitalised, liquid and solvent, and meets all prudential requirements. This means that the funds of depositors are safe.â
The National Treasury has requested that the financial services board considers whether it should initiate a market abuse investigation into the conduct of Viceroy.
The 33-page report explained that, based on its research and due diligence, Capitec is a loan shark with âmassively understated defaults masquerading as a community microfinance providerâ.
Viceroy has in turn been accused by Capitec of conducting a smear campaign in order to profit from extensive short selling of the South African lender.
It stated: âCapitec Bank Holdings Limited is a South Africa-focused microfinance provider to a majority low-income demographic, yet they out-earn all major commercial banks globally including competing high-risk lenders. We donât buy this story.â
âViceroy believes this is indicative of predatory finance which we have corroborated with substantial on-the-ground discussions with Capitec ex-employees, former customers, and individuals familiar with the business.
âViceroyâs extensive due diligence and compiled evidence suggests that indicates [sic] Capitec must take significant impairments to its loans which will likely result in a net-liability position. We believe Capitecâs concealed problems largely resemble those seen at African Bank Investments prior to its collapse in 2014.â
âWe think that itâs only a matter of time before Capitecâs financials and business unravel, with macro headwinds creating an exponential risk of default and bankruptcy.â
Viceroy explained that the report provides underlying information and analysis that it believes supports the following conclusions.
Reconciliation of loan book values, maturity profiles and cash outflows imply Capitec is either fabricating new loans and collections, or refinancing ZAR 2.5 billion to 3 billion (USD 200 million to USD 240 million) in principal per year by issuing new loans to defaulting clients.
Viceroy suggested that the legal documents it has obtained show Capitec advising and approving loans to delinquent customers in order to repay existing loans. It said that these documents also show Capitec engaging in reckless lending practices as defined by South Africaâs National Credit Act. Viceroy stated that this corroborates its loan book analysis.
According to Viceroy, Capitecâs loan book is massively overstated as a consequence of refinancing delinquent loans and that analysis against competitors suggested an impairment/write-off impact of ZAR 11 billion (USD 921 million) will more accurately represent the delinquencies and risk in Capitecâs portfolio.
Viceroy said: âLegal experts that we have spoken to believe that the outcome of an upcoming reckless and predatory lending test case in March 2018 will be used to trigger a multi-party litigation refund (class action). We believe that, at a minimum, Capitec will be required to refund predatory origination fees primarily related to multi-loan facilities; an estimated ZAR 12.7 billion (USD 1 billion).â
In a published rebuttal to Viceroyâs claims, Capitec stated: âWe believe that the campaign will continue for the foreseeable future. Shareholders can expect the release of fresh attacks and false allegations over an extended period. Capitec consequently advises shareholders to use caution when reacting to such allegations.â
It added: âOnly 7.3 percent of Capitecâs credit clients currently qualify for loans in excess of 60 months (3.6 percent qualify for 84-month loans). The scoring models for the 61 to 84-month loans currently target 12-month default rates of 4.2 percent in aggregate (2 percent for 84-month loans). The portfolios are naturally weighted to the larger amounts and consequently the longer-term and lower risk clients.â
The Republic of South Africaâs National Treasury also weighed in describing Viceroyâs actions as ârecklessâ.
According to the National Treasury, the way in which Viceroy released its report is âclear proof that it is not acting in the public interest nor in the interest of financial stability in South Africaâ.
The statement said: âWhilst the Treasury expects prudential and market conduct regulators in SA to consider all relevant reports in the public domain, and to act where any risks or transgressions in the law are identified, Treasury is of the view that the Viceroy report provides no basis to put any bank under curatorship.â
It continued: âThe National Treasury has been in constant contact with the Registrar of Banks since the report was released, and is satisfied with the assurance from the SARB that Capitec is well capitalised, liquid and solvent, and meets all prudential requirements. This means that the funds of depositors are safe.â
The National Treasury has requested that the financial services board considers whether it should initiate a market abuse investigation into the conduct of Viceroy.
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