Capitec Falls as Central Bank Disputes Moody’s Downgrade

Capitec Bank Holdings Ltd. tumbled in the first trading since Moody’s Investors Service cut its credit rating, saying it shares some of the same risks as the failed African Bank Investments Ltd.

The shares fell 4.9 percent to 205.50 rand in Johannesburg, the lowest in intraday trading since May 8 and the biggest decliner among the South African banks as of 12:53 p.m. in the city. The stock has declined 1.3 percent this year.

“The selling is less based on fundamentals and more on fear,” Rhynhardt Roodt, who helps oversee 5 billion rand ($471 million) as co-manager of the Investec Equity Fund, said in a phone interview from Cape Town today. “Over the longer term, it will be OK when people realize the companies are very different. We will see a reversal of these moves.”

South Africa’s Reserve Bank disputed Moody’s decision on Aug. 15 to cut Capitec’s deposit rating two levels to Ba2 from Baa3, with the potential for further downgrades. Moody’s cited Capitec’s consumer focus as a threat to investors and also said it suspects the central bank will be less willing to protect creditors now that it has shored up African Bank.

“We do not agree with the rationale given in taking this step,” the Reserve Bank said in an Aug. 16 statement on its website. “Capitec follows a very conservative approach to risk and prudent provisioning practices and considerable diversification has been taking place in a steady manner in product, client and revenue streams.”

Bondholder Cuts

Capitec isn’t involved in selling furniture and hasn’t needed to raise debt or equity in capital the past year. While the bank, based in Stellenbosch near Cape Town, attracts the same type of low-income customers as Abil with loans that don’t require collateral, it takes deposits and uses those proceeds to fund its lending, unlike its collapsed rival.

Abil was rescued on Aug. 10 after revelations of its financial difficulties nearly wiped out the value of its stock. Shares plunged more than 95 percent after it said it needed least 8.5 billion rand of new capital, in part to cover mounting losses at its furniture retailer.

Moody’s shouldn’t assume the central bank won’t step in to back other financial institutions posing a systemic risk, the central bank said. The African Bank rescue package imposed a 10 percent “haircut” on bondholders, compared the 40 percent discount on prices during the meltdown, SARB said.

Greg Saffy, a Johannesburg-based analyst at RMB Morgan Stanley, agrees with the central bank that Capitec has a more diversified model, has more provisions to cover bad debts and is better capitalized than Abil, according to an e-mailed note.

Shared Clients

“That said, 40 percent of Capitec’s client base is shared with Abil,” Saffy said today, maintaining an underweight rating on the stock. “It is the most exposed to the unsecured credit market when compared to the big four banks and is the least operationally diversified of the companies we cover.”

Capitec’s total capital adequacy ratio is 40 percent and its liquidity coverage ratio is above regulatory minimums, according to RMB Morgan Stanley’s note.

Capitec Bank said it was “extremely dissatisfied” with Moody’s review, adding that it had discussed the matter with rating agency in a 30-minute phone call on Aug. 14, the day before the downgrade. “Despite assurances from Capitec Bank that our performance is according to plan, we feel Moody’s did not take this into account,” the lender said in a statement.

Part of African Bank’s troubles stemmed from the 9.2 billion-rand acquisition of furniture retailer Ellerine Holdings Ltd. in 2008, which losses and writedowns after sales dropped. Abil had to fund Ellerine at the cost of at least 70 million rand a month and raised money in debt and equity markets because it didn’t take deposits.

Debt Coverage

Capitec’s bad debt coverage ratio was 167 percent in February, the central bank said, while its capital adequacy “is well above the regulatory requirement.”

“It has a large cash holding and two thirds of funding comes from retail deposits,” the central bank said, adding that Capitec’s monthly financial data “indicate the continued good growth that the bank is experiencing.”

Capitec is due to give a trading update on Sept. 10.

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