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Warning against overreaction to banks' downgrade

Cape Town - Moody's was too late in downgrading African Bank and now overreacted in downgrading Capitec as a result, Kokkie Kooyman, global fund manager of Sanlam Investment Management Global, told Fin24 on Tuesday.

"The international ratings agency Moody's downgrade of Capitec by two notches on Monday does bring about the risk of depositors taking fright and that is a very dangerous situation," said Kooyman.

He immediately added that he thinks the downgrade is unwarranted.

Even the SA Reserve Bank (Sarb), which launched a R17bn bailout of African Bank, defended Capitec, saying it disagreed with the rationale for the cuts, because Capitec does not follow the same business model as African Bank.

"Moody’s quotes the deterioration of the ability of Capitec's clients to repay loans as a reason. That is true, the SA consumer is under pressure and results of furniture stores like Lewis Stores highlight that," Kooyman explained.

"I have no doubt about it that I think Capitec will experience higher bad debts."

What Kooyman does find disappointing, though, is that Moody’s did not take into consideration the fact that Capitec has consistently been very conservative in both its policy in terms of writing off bad debts and also providing for doubtful debts.

"In addition, Capitec is very well capitalised, so it should be able to withstand a deterioration in its debtor’s book," said Kooyman.

Asked what the impact of the downgrade of Capitec could have on the rest of the banking sector, Kooyman said it certainly will focus the attention of rating agencies on the deterioration of the consumer and hence the so-called "big four” banks.

Moody's on Tuesday did indeed announce that it downgraded the credit rating of four more South African banks, namely Standard Bank, Absa, FNB and Nedbank by one notch to Baa1.

"This is unfortunate, as South Africa’s own credit rating is under pressure due to our trade deficit and an increasing government debt burden," said Kooyman.

His take on Capitec's share price initially taking a beating on Monday before pulling back towards the close of the day, is that the markets have become very volatile.

"I would certainly not call a 4% fall a beating," Kooyman emphasised.

"Due to the collapse of African Bank, investors will definitely reconsider their exposure to unsecured lenders. The fear in the back of fund managers' minds will be a repeat of African Bank."

If that, in his view, unlikely event was to happen, he expects fund managers would find many clients would not understand.

"So, to reduce risk, fund managers that have a large Capitec holding will certainly be considering whether to trim their holdings a bit, but Capitec is a very well managed bank," said Kooyman.

"Its low cost business model will enable it to keep taking market share from the “big four”. So, I would see any large fall in the Capitec share price as a buying opportunity."

NOW READ: Capitec recovers after downgrade

- Fin24

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