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Capitec slams Moody's downgrade

Cape Town – Capitec Bank Limited [JSE:CPI] (Capitec) said on Sunday the decision by ratings agency Moody’s Investors Service (Moody's) to downgrade it by two notches was a kneejerk reaction.

Capitec finance director Andre du Plessis told Fin24 that Moody’s assumed that because Capitec had similarities with African Bank, a part of African Bank Investment Limited [JSE:ABL]), such as unsecured lending and was similar in size, that Capitec should be painted with the same brush.

“We believe Capitec is very different, as we do transactions and deposit banking, which makes us less reliant on unsecured loans to make a success of the business.”

He said Capitec has a banking relationship with its clients. “This banking relationship provides greater insight into client activity and the financial health of clients.

“The insight also favours collection of debt and the better management of client debt exposure.”

‘Highly dissatisfied’

Du Plessis said Capitec was highly “dissatisfied” with the decision for a number of reasons.

Firstly, Capitec’s ratings were confirmed at the higher level by Moody’s as recently as May 12.

Secondly, Capitec said the downgrade was a reaction to the situation pertaining to African Bank, which is not applicable to Capitec Bank.

Thirdly, that despite assurances from Capitec Bank that their performance was according to plan, Moody’s did not take this into account when assessing the bank.

“Moody’s was invited to review additional information to be provided by Capitec Bank, but unfortunately declined this opportunity,” the bank said.
 
The effect of the downgrade means Capitec will pay more for money that they raise on the international market in future.

“It will really have a small effect on our bank,” said Du Plessis.

Financial results for the six months to August 31 2014 will be published on Sens on Monday. Capitec will provide a trading update on the results on or before September 10, irrespective of whether it is required in terms of the JSE listings requirements.

Communicate changes

Moving forward, Du Plessis said they would communicate with stakeholders, which they had been doing all along. “We can prove to anyone with issues that the business is very healthy,” he said.
“We must manage the situation over the rerating, which Moody’s could readjust after the results.”

He said he doubted Moody’s would come back now and say they were unfair. “We think it is unfair. They are an independent company and we have very little control over their view,” he said. “We put their view forward and we put our view forward and the investor has to make a decision.”

Asked if Capitec could change its banking model due to the fiasco at African Bank and now this downgrading, Du Plessis said they were continuously looking at their business model.

“We are always looking at our products we present to the market and manage the risk appetite,” he said. “There will be no changes right now, but if we see risk – let’s say African Bank doesn’t offer loans at the same level – then perhaps we would look at a change, but nothing should change immediately.”

“The business is healthy, we are growing according to our plan and our loan book is performing within our risk appetite,” the bank said. “We continue to make tweaks to our models as and when we see it fit. We are not taking unnecessary risk and have not opened our lending criteria whatsoever.”

Other reasons why Capitec said it was different to African Bank:

- “Capitec has a diversified source of income in respect of “transaction clients”. This source of income is on-going due to the 5.4 million active clients and 2.2 million “salary deposit” clients that have joined the bank, and contributed 32% of net income earned and covered 59% of operating expenses for the year to February 2014. The growth of this client base continues at over 100 000 per month and contributes to ongoing substantial growth in transaction income.

- “Capitec’s risk appetite in the unsecured lending environment was very conservative. We
monitor this via the credit bureaus on a continuous basis. The reason for this can be explained by the fact that we do not charge life and retrenchment insurance over and above the maximum interest rates allowed by the National Credit Act. We therefore price credit at lower rates and thus lend to lower risk clients. This has stood us in good stead in light of the current weakening economic environment.

- “Further to this, Capitec has applied a provisioning policy that has resulted in a coverage ratio of current bad debt of 167% at February 2014. Capitec’s conservative provisioning approach results in the bank providing on average, 7% of the value of any loan, immediately when advancing the loan. This percentage increases to 46% immediately if the loan goes into arrears and 74% for the second month in arrears. By the time a loan is three months in arrears, that loan, and any other loans that are linked to the client, are written off and provided for in full. This is applied, even if the other loans are fully up to date. Capitec has always been, and will continue to be, very conservative in granting credit given the young state of the industry.

- “We have a healthy balance of funding between wholesale and retail deposits, which we believe is a more stable model than sourcing wholesale funding only. We have acquired 67% of our funding requirements from retail sources. We are the only South African retail bank that is fully compliant with the Basel III liquidity regulations due to be complied with in 2018. Our liquidity coverage ratio (the short term measure of liquidity) at February 2014 was at 1 689% versus a requirement of 100%. Our Net Stable Funding Ratio which is a longer term ratio, with an emphasis on retail funding was at 132% at February 2014, versus a requirement of 100%.

- “Capitec does not have any exposure to a retail furniture business which ensures a singular focus on retail banking. Furthermore the bank does not have the complexity of controlling credit through an extended retail furniture platform, but controls the advancing of credit directly in every branch, via its centrally controlled system and credit models.”

- Fin24

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