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Capitec Bank’s view of its Moody’s rating change
Capitec Bank Holdings Limited
Incorporated in the Republic of South Africa
Registration number 1999/025903/06
Registered bank controlling company
JSE share codes: CPI - ISIN : ZAE000035861
JSE preference share code: CPIP ISIN code: ZAE000083838
("Capitec")
Capitec Bank Limited
Incorporated in the Republic of South Africa
Registration No. 1980/003695/06
Company code: BICAP
(“Capitec Bank” or “the bank”)
CAPITEC BANK’S VIEW OF ITS MOODY’S RATING CHANGE
On 15 August 2014, Moody’s Investor Service (Moody’s)
downgraded Capitec Bank’s international deposit ratings to
Ba2/NP from Baa3/P-3 and its national scale ratings to
Baa1.za/P-2.za from A2.za/P-1.za. All ratings with the
exception of the short term No Prime ratings were also placed
on further review. The reasons for the downgrade, according to
Moody’s are two-fold:
1. Their view of a lower likelihood of systemic support from
the South African authorities following the recent
decision of the South African Reserve Bank (SARB) to
include a bail-in of senior unsecured bondholders and
wholesale depositors as part of the restructuring plan
for African Bank.
2. The lowering of the bank’s baseline credit assessment due
to their heightened concerns regarding the risk inherent
in Capitec Bank’s consumer lending focus.
MOODY’S REVIEW AND PROCESS
The bank was informed of this decision, following a short
telephone review of 30 minutes, on Thursday 14 August 2014.
Capitec Bank is extremely dissatisfied with the extent of the
review and its conclusion. The reasons for this
dissatisfaction are:
1. Capitec Bank’s ratings were confirmed at the higher level
by Moody’s as recently as 12 May 2014.
2. Capitec Bank feels that the downgrade by Moody’s is a
reaction to the situation pertaining to African Bank,
which is not applicable to Capitec Bank.
3. Despite assurances from Capitec Bank that our performance
is according to plan (which is discussed further below),
we feel Moody’s did not take this into account when
assessing the bank. Moody’s were invited to review
additional information to be provided by Capitec Bank,
but unfortunately declined this opportunity.
4. Financial Results for the 6 months to 31 August 2014 will
be published on SENS on Monday 29 September 2014. Capitec
Bank will provide a trading update on the results on or
before 10 September 2014, irrespective of whether
required in terms of the JSE listings requirements.
KEY DIFFERENCES BETWEEEN CAPITEC BANK AND AFRICAN BANK
Although the market is well versed in the differences
between Capitec Bank and African Bank, we believe it is
opportune to stress these again:
1. Capitec Bank has a banking relationship with its clients.
This banking relationship provides greater insight into
client activity and the financial health of clients. The
insight also favours collection of debt and the better
management of client debt exposure.
2. Capitec Bank has a diversified source of income in
respect of “transaction clients”. This source of income
is on-going due to the 5,4 million active clients and 2,2
million “salary deposit” clients that have joined the
bank, and contributed 32% of net income earned and
covered 59% of operating expenses for the year to
February 2014. The growth of this client base continues
at over 100 000 per month and contributes to ongoing
substantial growth in transaction income.
3. Capitec Bank’s risk appetite in the unsecured lending
environment is very conservative. We monitor this via the
credit bureaus on a continuous basis. The reason for this
can be explained by the fact that we do not charge life
and retrenchment insurance over and above the maximum
interest rates allowed by the National Credit Act. We
therefore price credit at lower rates and thus lend to
lower risk clients. This has stood us in good stead in
light of the current weakening economic environment.
4. Further to this, Capitec Bank has applied a provisioning
policy that has resulted in a coverage ratio of current
bad debt of 167% at February 2014. Capitec Bank’s
conservative provisioning approach results in the bank
providing on average, 7% of the value of any loan,
immediately when advancing the loan. This percentage
increases to 46% immediately if the loan goes into
arrears and 74% for the second month in arrears. By the
time a loan is 3 months in arrears, that loan, and any
other loans that are linked to the client, are written
off and provided for in full. This is applied, even if
the other loans are fully up to date. Capitec Bank has
always been, and will continue to be, very conservative
in granting credit given the young state of the industry.
5. We have a healthy balance of funding between wholesale
and retail deposits, which we believe is a more stable
model than sourcing wholesale funding only. We have
acquired 67% of our funding requirements from retail
sources. We are the only South African retail bank that
is fully compliant with the Basel III liquidity
regulations due to be complied with in 2018. Our
liquidity coverage ratio (the short term measure of
liquidity) at February 2014 was at 1 689% versus a
requirement of 100%. Our Net Stable Funding Ratio which
is a longer term ratio, with an emphasis on retail
funding was at 132% at February 2014, versus a
requirement of 100%.
6. Capitec Bank does not have any exposure to a retail
furniture business which ensures a singular focus on
retail banking. Furthermore the bank does not have the
complexity of controlling credit through an extended
retail furniture platform, but controls the advancing of
credit directly in every branch, via its centrally
controlled system and credit models.
PERFORMANCE OF CAPITEC BANK
1. Publically available data on the BA900 returns submitted
monthly and published on the SARB’s website indicates the
continued good growth and support of retail depositors.
2. The business is healthy, we are growing according to our
plan and our loan book is performing within our risk
appetite. We continue to make tweaks to our models as and
when we see it fit. We are not taking unnecessary risk
and have not opened our lending criteria whatsoever.
3. Our performance remains in line with our annual plan and
budget expectations.
Stellenbosch
18 August 2014
Sponsor: PSG Capital (Pty) Limited
Debt Sponsor
Rand Merchant Bank (A division of FirstRand Bank Limited)
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