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Capitec Rebounds as Investors Query Concealed Losses Allegations

Capitec CEO Says Viceroy Report ‘Very Inaccurate’

Capitec Bank Holdings Ltd. ended the worst four-day rout in 16 years on Thursday after S&P Global Ratings said its assessment on South Africa’s largest unsecured lender is unaffected by a report that it may be concealing losses.

The stock gained as much as 8.7 percent, after sliding 25 percent in the previous four days. Chief Executive Officer Gerrie Fourie also said that he bought 1.5 million rand ($126,000) of securities on Wednesday because they were “good value,” while saying that customer numbers have remained stable and clients “very supportive.”

Viceroy Research said Tuesday that Capitec may be hiding losses by refinancing loans that customers were unable to repay. Capitec denied the accusations, describing the analysis as inaccurate and aimed at profiting from a drop in the share price. Viceroy -- led by a former U.K. social worker and two young Australians -- hasn’t commented after saying late on Tuesday it will respond to Capitec’s criticism. It hasn’t returned an email seeking comment.

Here’s some views on the developments:

Nolwandle Mthombeni, an analyst at Mergence Investment Managers, spoke by phone from Cape Town:

  • “When share prices drop low enough, you will have people starting to find the opportunistic entry point to buying,” especially with it been perceived as oversold and the allegations untested.
  • The issues cited by Viceroy aren’t new and management has addressed them.
  • “I’ve met with the Reserve Bank quite a few times on the matter and they’ve always been comfortable around how Capitec is conducting their business.”
  • “There may be some ethical questioning regarding what they’re charging” customers on interest rates for loans, but it still “seems above board.”

Leandro Gastaldi, a money manager at Cape Town-based hedge-fund manager Blue Quadrant Capital Management, commented via email:

  • While Viceroy may have “overhyped the impairment issue,” it is well known that Capitec restructures loans in arrears.
  • “While this is not illegal, it may encourage management to overextend the company”
  • There is a high risk of being invested in Capitec:
    • “The company is significantly overvalued. We doubt that through a full-cycle Capitec can generate the kind of growth and return on equity to justify such a rating.”
    • “Capitec’s business model is still inherently risky, being mainly an unsecured lender, and largely untested in a true recession or higher-rate environment.”
    • Viceroy “may have a point” on fees being charged for loan origination and servicing. Capitec seems to have gone from “making very little” money on loan fees to probably making roughly 3% of the loan book in 2017.”

Wayne McCurrie, a money manager at Ashburton Investments Management Co., which overseas more than 140 billion rand ($12 billion) in assets, said by phone:

  • Viceroy said Steinhoff International Holdings NV “were crooks and they were right, so they’ve now got a reputation in the market. Capitec is significantly more regulated than a retailer. The chances of them doing something that Viceroy accuses them of, is significantly less.”
  • “Capitec is totally, utterly denying this, whereas Steinhoff confirmed it.”
  • “Eventually we will get an answer as to who’s right. Until then, we’re going to see share price volatility.”
  • “I’m actually very surprised that Capitec hasn’t announced an independent inquiry. That’s a sure way to get on the front foot.”

Deutsche Bank AG analyst Stefan Swanepoel, who has a sell recommendation on Capitec, said in a note:

  • An independent probe into Capitec’s lending practices “is probably the best manner to deal with issues raised and to address any concerns that the markets and the funders may have” over Viceroy’s report
  • While Capitec management answered some of the questions raised by Viceroy “there are aspects of the report that management were unable to reconcile”
  • Has 12-month price target of 360 rand, which has been in place since Sept. 2016

Charles Russell, an analyst at Citigroup Inc.’s Global Markets unit, who has a buy recommendation on Capitec, said in a note:

  • In terms of lending practices, Capitec adheres “to the highest-level rigor in underwriting.”
  • “An area where we have previously expressed concern, being loan rescheduling, has reduced meaningfully over the last two reporting periods. The amount of times a customer may be rescheduled and the maximum term extension has reduced.”
  • “From a credit-quality perspective, the bank is extremely well-provided,” with 120% coverage for arrears and rescheduled loans.

Arqaam Capital Ltd. analysts Jaap Meijer and Leen Antonios, who have a buy rating on Capitec:

  • “We do not anticipate accounting restatements. We disagree with a lot of points” raised by Viceroy “and the report contains a lot of factual errors.”
  • Still, Arqaam expects “the report to have some commercial impact” and is taking a “slightly more cautious approach” by increasing its estimates on through-the-cycle credit-loss ration to 11.7% from 10%, while reducing its asset and deposit growth forecasts by 2% for fiscal 2018
  • It also lowered its target price to 1,074 rand from 1,257 rand

— With assistance by Renee Bonorchis, and Dana El Baltaji

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