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Four key questions on Viceroy's Capitec report answered

Jan 30 2018 12:21
Jan Cronje

Cape Town - On Tuesday, a US-based research group and short seller produced a 33-page report into SA bank Capitec [JSE:CPI], one of SA’s best performing and lauded banks.

The report caused Capitec's share price to drop by 20% at noon. By 14:00, however, its shares had recovered somewhat to trade down 9.3%. 

But who is Viceroy Research, what does its new report say, and why is it being taken so seriously by investors? 

1. What does the report say?

The new report alleges that Capitec’s “meteoric growth” has been built on a poor foundation.  It claims that the bank has started “advising and approving loans to delinquent customers” in order to repay existing loans. 

As a result, it says the bank may have to write off a total of R11bn in loans. With a market capitalisation of R95bn, this write down would equate to 11.5% of its total capitalisation.  

The group made an explicit connection between Capitec and African Bank, which was placed under SA Reserve Bank (SARB) curatorship in 2014.  

“South Africa’s microfinancing sector has been the graveyard of numerous Capitec competitors who chased the same meteoric growth Capitec displays, largely due to low acceptance and mass delinquencies," read the report. "We see no operational difference between Capitec and its ill-fated predecessors, including African Bank in order to repay existing loans”.

The group has also called for Capitec to be placed under curatorship by the the SARB. SARB, however, on Tuesday said that Capitec is solvent, well capitalised and has adequate liquidity.

2. What does Capitec say?

Capitec said in a note to shareholders at about noon, that it only received the research report at 10:00 on Tuesday.

The lender advised shareholders that it had not been approached by Viceroy for insight into its business and "none of their allegations had been discussed, tested or verified with management".

Capitec said "on the face of it, the report is filled with factual errors, material omissions in respect of legal proceedings against Capitec and opinions that are not supported by accurate information".

"We believe our corporate governance is strong and our communications and disclosures are, and always have been transparent, clear and to the point.

The bank said it was reviewing the report in detail and will respond to it in detail later on Tuesday.

Capitec's chief financial officer, Andre du Plessis, also told Bloomberg that the allegations were “totally unfounded” and he was not worried about them.

Du Plessis also denied the company was refinancing loans to conceal its losses. 

The bank also tweeted at 10:50 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".

3. What or who is Viceroy?

Viceroy Research was almost unknown to South Africans before the Steinhoff saga.

To recap, on December 5, the Stellenbosch-headquartered furniture conglomerate's CEO Markus Jooste stepped down amid an accounting scandal. This caused its share price to tank.

The next day, Viceroy Research published a report on Steinhoff that they claimed had been in the works for weeks, into alleged financial irregularities at Steinhoff. 

The group was at the time anonymous, only referring to itself as a "group of individuals that see the world differently".

Later, in mid-January, its founder was interviewed by Bloomberg in New York.

Fraser Perring, a short seller, at first operated alone before he partnered with Gabriel Bernarde and Aidan Lau at Zatarra Research, two young researchers from Australia and started anew with a firm they called Viceroy Research.

Viceroy later confirmed it was investigating another SA firm, which given their apparent success in unraveling Steinhoff's irregularities, briefly caused panic on the JSE

4. What is a short seller, and how does Viceroy make money? 

On the whole investors make money on stock exchanges when the price of stocks rise, but some investors can make money when the price of stocks decrease, a practice known as short selling.  

While Viceroy didn’t specifically say in its most recent report if it owned any Capitec shares, it told readers they could assume it would make money when the price of the stock decreases. 

“As of the publication date of this report, you should assume that the authors have a direct or indirect interest/position in all stocks, and/or options, swaps, and other derivative securities related to the stock, and bonds covered herein, and therefore stand to realize monetary gains in the event that the price of either declines,” it stated.

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steinhoff  |  viceroy  |  capitec  |  jse  |  investing


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