Johannesburg - Shares of Capitec Bank [JSE:CPI] sank more than 5% in early trade on Monday after a Moody's ratings downgrade that cited concerns about the bank's exposure to risky consumer lending.
The ratings agency cut Capitec's financial strength rating to "D" from "D+" late on Friday and downgraded the bank's bank deposit rating by two notches.
It also put Capitec on review for further downgrades.
The cuts come after the SA Reserve Bank (Sarb) launched a R16.92bn ($1.6bn) bailout of unsecured lender African Bank Investments [JSE:ABL] (Abil) this month, which was toppled by surging bad debts among its core market of low-income borrowers.
In a statement, Moody's cited "heightened concerns regarding the inherent risks of Capitec's consumer-lending focus", adding that challenges in the unsecured market could weigh on the bank's financial performance.
Sarb said over the weekend it disagreed with the rationale for the cuts, saying Capitec did not follow the same business model as Abil.
Capitec said in a statement it was "extremely dissatisfied with the extent of the review and its conclusion".
"The business is healthy, we are growing according to our plan and our loan book is performing within our risk appetite," it said.
Capitec shares were down 4.6% at R206.15 by 13:19 GMT, having dropped by as much as 6% in early trading. Shares of the bank were down 5.2% at R204.75 at 10:13.
Diversified business
The lender is expected to publish results for the first six months of the year on September 29 and give a trading update on or before September 10.
Unlike Abil, Capitec has a diversified business and makes a sizeable chunk of its revenue from transaction fees. Abil, meanwhile, funds liquidity chiefly through bonds.
Capitec's provisioning policy also means that it had a bad-debt coverage ratio of 167% in February, it said in a statement on Monday.
The bank faces tough times but it has a much stronger capital base and stricter provisioning policies than Abil, said Tracy Brodziak, head of research at Old Mutual Equities.
"We would expect to see an increase in bad debts, but I think it is completely manageable for Capitec, whereas African Bank has been very aggressive in its accounting and had quite lax policies in terms of granting of loans," she said.
Old Mutual Equities holds an indirect stake in Capitec but had no exposure to Abil because of concerns around its business model and risk, Brodziak added.
Abil relentlessly pushed its unsecured loans to low-income earners for years but high levels of household debt, unemployment and rising inflation have pressured borrowers into defaulting.
Other South African banks were also drawn into the high-margin lending bandwagon but have recently pulled back as it became apparent that South Africans are struggling to repay loans.
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* This article has been updated.