Will Viceroy’s Capitec report become a self-fulfilling prophecy?

A controversial report by Viceroy Research recommending that Capitec Bank be placed under immediate curatorship sent shockwaves through the market on Tuesday. By the close, the market appeared comforted by Capitec’s dismissal of the report, with shares in the bank largely rebounding from a 25% decline during intraday trade. However, there are concerns that the report has dented trust in the country’s fastest growing bank, which may cause clients to withdraw funds en-masse.

Read: Viceroy takes aim at Capitec

Activity on social media, showed concern among clients, particularly depositors. Capitec’s competitive interest rates, ranging from 5.10% on transactional and flexible savings accounts to as high as an effective interest rate of 9.38% on fixed deposits in excess of R100 000, are considered a major drawcard.

Just had a call from a very worried Capitec depositor. Wanting to know if there is any way she can get her money out. This is how a run on a bank starts. Viceroy’s call for Capitec to be placed in curatorship is highly irresponsible – to say the least.

— Karin Richards (@Richards_Karin) January 30, 2018

Simon Brown, founder of Just One Lap, told Moneyweb that concerned Capitec clients also reached out to him asking about the safety of their funds. “My biggest concern is not Capitec, it is people. Banking is about confidence – the biggest risk is that if clients become concerned and start drawing out money, then [the Viceroy report] becomes a self-fulfilling prophecy.” He said he advised clients not to act in haste.

According to Renier de Bruyn, investment analyst at Sanlam Private Wealth, panic withdrawals due to a collapse in confidence by depositors could cause a run on the bank. “This can collapse even an otherwise healthy bank due to the mismatch of the term profiles of a bank’s assets and liabilities,” he explained.

In response to questions from Moneyweb, he said Capitec clients shouldn’t be in a rush to withdraw all their funds following the report. But he added that the bank should be in a position to manage depositors’ concerns. “Their assets & liabilities are better matched than the other SA banks, so they would be able to manage a shorter-term liquidity squeeze quite well without hampering the bank’s day-to-day operations.”

He too appeared to have reservations about the report, pointing out that Capitec’s capital adequacy ratio of 35% is conservative relative to the industry and “well above” regulatory requirements. “Its balance sheet is also very liquid, with cash and liquid investments of R36.3 billion as at August 2017. This compares to retail savings deposits of R33.5 billion, R21.8 billion retail fixed deposits and R7 billion institutional funding,” he said.

Shortly after the contentious report was released, the South African Reserve Bank issued a statement, in which it said the bank is solvent. “As part of our mandate, we monitor the safety and soundness of all banks, including Capitec Bank Limited. According to all the information available, Capitec is solvent, well capitalised and has adequate liquidity. The bank meets all prudential requirements.”

Read: Capitec is solvent, says the Reserve Bank

In the report ‘Capitec: A wolf in sheep’s clothing’, Viceroy’s three-man research team claims that it is “only a matter of time before Capitec’s financials and business unravel, with macro headwinds creating an exponential risk of default and bankruptcy”.

Read: Identity of individuals behind Viceroy Research revealed

According to Viceroy, the bank is a “loan shark with massively understated defaults masquerading as a community microfinance provider”.  It claims Capitec is fabricating new loans and collections or re-financing R2.5 to R3 billion in principal per year by issuing new loans to defaulting clients. Its analysis leads it to believe that Capitec’s loan book is “massively overstated”, suggesting an impairment impact of R11 billion would more accurately represent the delinquencies and risk in Capitec’s portfolio.

In a detailed Sens statement issued around 25 minutes before the market close, Capitec dismissed Viceroy’s allegations, pointing out flaws in logic, assumptions and a lack of material information in the report. “We believe our corporate governance is strong and our communications and disclosures are, and always have been, transparent, clear and to the point. 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,” it said earlier in the day.

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