The independent team of researchers at Viceroy have taken aim at Capitec Bank, calling the financial institution a "wolf in sheep's clothing" and accusing it of "reckless lending practices".
Viceroy Research made headlines last year when it uncovered accounting irregularities at global furniture giant Steinhoff.
Now, in a 33-page report on Tuesday, Viceroy called on the South African Reserve Bank and finance minister Malusi Gigaba to immediately place Capitec into curatorship.
Jean Pierre Verster, independent director and chairman of Capitec's audit committee, is and/or was indirectly short Capitec through Steinhoff. We believe this is an oversight, and understand Jean Pierre is an excellent analyst on the short side. $CPI #JSE 1/2— Viceroy (@viceroyresearch) January 30, 2018
Viceroy – claiming to have information from the bank's financial records corroborated by interviews with ex-employees and former customers – believes it's "only a matter of time before Capitec's financials and business unravel, with macro headwinds creating an exponential risk of default and bankruptcy".
Here are five things you need to know about the investigation:
- Viceroy say the reconciliation of loan book values, maturity profiles and cash outflows imply Capitec is allegedly either fabricating new loans and collections, or refinancing about R2.5-billion in principal per year by issuing new loans to defaulting clients.
- Legal documents that Viceroy claims to have show Capitec is allegedly advising and approving loans to delinquent customers in order to repay existing loans. These documents reportedly show Capitec engaging in reckless lending practices as defined by South Africa's National Credit Act.
- The research team claims Capitec's loan book is "massively overstated". Viceroy's analysis against competitors suggests a write-off impact of R11-billion will more accurately represent the delinquencies and risk in Capitec's portfolio.
- Former employees told Viceroy that they consider the business to still be an "outright loan-shark operation", where fees are key. Some former employees reportedly believe they were fired for not deceiving borrowers and failing to meet rescheduling targets on impaired/defaulting loans.
- Viceroy believes the outcome of ongoing legal proceedings, massive loan-book impairments and income-statement impact will result in a loss-making, net-liability bank. They found that Capitec allegedly inflated its loan book and, despite operating in a notoriously high default and impairment sector of microlending, Capitec's default and impairment rates are well below the industry standard.
South Africa's microfinancing sector has been the graveyard of numerous Capitec competitors who chased the same meteoric growth Capitec now displays, largely due to low acceptance and mass delinquencies. $CPI #JSE 1/2— Viceroy (@viceroyresearch) January 30, 2018
News24 reported that Capitec's shares were trading down 7.8 percent on Tuesday at 10.30am, after earlier trading down by 10 percent. The bank tweeted that it has "taken note of the Viceroy report on Capitec Bank. We are currently in the process of investigating the report in detail and will respond appropriately".