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Viceroy Research Group Report On Capitec – Detailed Response To The Main Issues Raised In The Report
Capitec Bank Holdings Limited
Registration number 1999/025903/06
Registered bank controlling company
Incorporated in the Republic of South Africa
JSE ordinary share code: CPI ISIN code: ZAE000035861
JSE preference share code: CPIP ISIN code: ZAE000083838
("Capitec" or "the company")
VICEROY RESEARCH GROUP REPORT ON CAPITEC – DETAILED
RESPONSE TO THE MAIN ISSUES RAISED IN THE REPORT
We refer to previous announcements on SENS advising
shareholders of concerns about the integrity of the
report by Viceroy Research Group on Capitec (“the Viceroy
report”). We will continue to respond in more detail and
as a whole to all the allegations made as we work through
the report.
In this announcement we address the following incorrect
conclusions of the Viceroy report that are both
fundamentally flawed and misleading:
1. Irreconcilability of our loan book value – we confirm
that our loan book reconciles and DENY any
misrepresentation of the loan book;
2. Loan book overstatement of R11 billion due to
suggested impairment/write-off amounts - we confirm
that there is NO overstatement and that NO adjustment
is required;
3. Rolling existing unpaid loans by issuing new loans and
initiation fees charged on rescheduled loans – we DENY
the accusation that we roll unpaid loans and confirm
that we do NOT charge initiation fees when
rescheduling loans.
1. Accusation that our loan book is irreconcilable
The reconciliation of our loan book is incorrectly stated
in the Viceroy report. We breakdown the actual movement
of our loan book as follows:
R’m 2017 2016 2015
Opening gross loans 40,891 36,341 33,690
Loan sales(i) 27,226 24,228 19,417
Instalment excluding
settlement(ii) (253) (699) (473)
Total lending income 14,362 12,837 11,287
3rd party insurance cost(iii) 214 - -
Repayments(iv) (32,983) (28,689) (23,787)
Write-offs(v) (5,447) (3,981) (4,395)
Recoveries(vi) 1,125 854 602
Closing gross loans 45,135 40,891 36,341
(i) New credit granted; only the amount of the separate
new credit and excludes all rescheduled loans
(ii) For early internal settlements, where a subsequent
loan is taken, the last repayment does not lead to an
outflow
(iii) Third party loan insurance through Guardrisk is
an option to our clients since 6 May 2016. We reflect
the income net of cost. The cost represents the third
party reinsurance costs
(iv) Debit orders, and cash repayments and early
settlements (normally occurs when another credit
provider takes over the loan)
(v) Earliest of when the client’s account is handed
over to external debt collectors or a loan is past 90
days in arrears (CD3+)
(vi) The cash received on doubtful debts previously
written off
Conclusion: Our loans and advances reconcile and are NOT
misrepresented by including rescheduled loans through the
issuance of new loans as alleged in the Viceroy report.
Rescheduling is further discussed under section 3 below,
but we confirm rescheduling is NOT included in the loan
sales figures above. We furthermore confirm, that we DO
NOT advance loans to clients who are in arrears with
their Capitec instalments.
2. Accusation that we overstate our loan book with R11
billion due to suggested impairment/ write-off amounts
2.1 The Viceroy report presents information that is not
clearly comparable and fails to present information that
is easily available in the public domain. We believe this
intentionally creates the false impression that Capitec’s
arrears rate is understated compared to two other credit
providers mentioned in the Viceroy report.
Capitec’s arrears analyses, compared to the other credit
providers, are different in terms of our granting,
pricing, write-off and provisioning policies. The other
credit providers’ arrear loan balances include
contractual delinquency (“CD”)3+/4 and higher. We,
however, write-off a loan at the earliest of when the
loan is past 90 days in arrears (CD3+) or the client’s
account(s) are handed over to external debt collectors.
The omission of these facts, along with statements in the
Vicery report alluding to Capitec having ‘impossibly low
arrears’ and ‘massive write-offs’ furthers its cause of
creating doubt and uncertainty about Capitec, instead of
creating an understanding of our conservative provision
model.
2.2 It is our understanding that the Viceroy report
concludes that Capitec’s provision and write-off balance,
as a percentage of our gross loans and advances, is
significantly less than the percentages disclosed by the
other credit providers. The Vicery report suggests that
our provision and write-off balances should therefore
essentially be doubled i.e. a further R5.9 billion
doubtful debt provision and R5.4 billion write-off amount
is required.
If we apply our write-off policy to the arrears loan
balances of one of the other credit providers by
excluding CD4 and higher arrear balances as disclosed in
the Viceroy report, their arrears would decrease by 67%.
Alternatively, to compare our gross loan book to that of
the other credit providers on a like for like basis, CD4
and higher needs to be excluded from the loan and
impairment balances.
Below we illustrate the effect of the above using the
write off and doubtful debt provision methodology as
disclosed by Capitec for the year ended 28 February 2017,
as well as applying the methodology of the other credit
providers to our disclosed financial information.
Loan book analyses (R’m) Capitec Other credit
providers’
methodology
applied to
Capitec
Total gross loans
(grossed up for other credit
providers) 45,135 50,582
CD4 and higher
/write off(vii) - (5,447)
Gross loans (net of
CD4 and higher
/write off) 45,135 45,135
Balance sheet impairment (5,930) (5,930)
Amounts written off(vii) - (5,447)
Total impairment (5,930) (11,377)
Total impairment as
% of total gross loans 13.1% 22.5%
(vii) In the case of Capitec, we write-off CD3+ but the
other credit providers include CD4 to CD9 (a further 6
months) in their figures. We therefore added the Capitec
6 monthly write off amount to reflect as CD4 and higher,
added it to gross loans and added it to impairments.
The analysis above illustrates why our percentage of
13.1% is so much lower than the adjusted 22.5% to compare
Capitec to other credit providers. The adjustment results
in an increase of 72% of the total impairment percentage
of total gross loans.
Conclusion: The Viceroy report analysis does not take the
different approaches and the conservatism of Capitec’s
write off policy of CD3+ into consideration. NO
adjustment to the net loan book is therefore required.
3. Accusation that we roll existing unpaid loans by
issuing new loans and that we charge initiation fees on
rescheduled loans
Capitec does not roll unpaid/arrears loans into longer
term new loans to disguise poor asset quality. The
process of originating new debt and consolidations is
different to rescheduling existing loans.
Below, by way of examples, we unpack the instalments,
interest, fees and loan sales as recognised and disclosed
in our audited annual financial statements on a new
(3.1), consolidated(3.2) and rescheduled loan (3.3). For
ease of reference, all the examples refer to a R100 000
loan over a term of 60 months at an interest rate of 14%
(net annual compounded monthly(nacm)).
3.1. New loan
The origination of new debt follows the credit granting
process which incorporates the comprehensive assessment
of the clients’ behaviour, affordability and source of
income, using amongst other sources, credit bureau, bank
statements, and payslip information. This is explained in
further detail in our 2017 integrated annual report on
page 59 to 63.
New loan example:
Loan amount 100,000
Once-off initiation fee (including VAT) 1,197
Principal 101,197
Payment 2,355
Monthly service fee 68
Monthly instalment 2,423
3.2. More than one loan or consolidation
When existing clients apply for further credit, a full
credit assessment is conducted. If a client qualifies for
further debt, credit can be extended as a further credit
agreement in addition to the current debt or the client
can have her/his existing debt consolidated into a new
credit agreement. This option is only available for
clients if instalments are UP TO DATE (not in arrears on
any of their Capitec debt) and clients that have a
satisfactory credit risk rating (including external
spending, other loans and repayment behaviour).
Important to note:
• Initiation fees are only charged on new loans or the
amount of the separate new credit. All initiation fees
comply with the National Credit Act (NCA)
• No loan or facility will be granted to any client if
any Capitec loans/facilities are in arrears
• Only the amount of the separate new credit is included
in loan sales
Consolidated loan example (Existing Capitec loan client
as above):
After 30 months, the client wants to consolidate her/his
loan. The client has a new need, purpose or goal (e.g.
home renovation). Since the original loan has been taken,
the client has had a promotion or increased inflationary
salary as an example. The client’s outstanding balance at
the end of 30 months is R59,314 on the current Capitec
loan and wants an additional R50,000 (at 14% interest
over 30 months). The client has the option whereby
(3.2.1) the additional loan remains a separate loan or
(3.2.2) the loan is consolidated with the current
outstanding loan balance.
3.2.1. Additional loan remains separate
Monthly instalment on existing loan 2,423
Additional loan amount 50,000
Initiation fee (including VAT)
on additional R50 000 (as per NCA table) 1,197
New loan principal 51,197
Payment 2,033
Monthly service fee on additional loan 68
Monthly instalment on additional loan 2,101
Total monthly instalment 4,524
3.2.2. Consolidation loan
Consolidated loan amount (59,314 + 50,000) 109,314
Initiation fee (including VAT)
on additional R50,000 1,197
Total loan principal 110,511
Monthly service fee on consolidated loan 68
Monthly instalment on consolidated loan 4,456(viii)
(viii) The benefits of a consolidated loan are:
• the client saves on the extra R68.40 monthly service
fee charged on the additional loan (R4,524 – R4,456)
• restricting bank charges to one debit order only
• convenience to the client of only having to manage one
loan
Conclusion: On consolidation of an existing loan, loan
advances/ sales only includes the amount of the separate
new credit i.e. the additional loan amount as referred to
in the example of R50,000, with the related initiation
fee.
3.3. Rescheduling
Rescheduling is aimed at assisting clients whose
circumstances have changed since taking up credit and to
manage part of the collection process. Rescheduling is a
process applied by most mature credit providers.
Where clients have existing debt and are experiencing
difficulties in repaying instalments or anticipate that
they will experience difficulties, the bank will consider
the merits to reschedule the debt based on prescribed
criteria. The client is evaluated on specific rules to
evaluate whether the client qualifies for the loan to be
rescheduled.
Rescheduling supports the rehabilitation of clients by
improving the collection potential on such financially
stressed, or potentially financially stressed clients.
Important to note:
• NO origination fees are charged on rescheduled loans
as NO new credit is advanced
• Rescheduling is a formal amendment to an existing loan
contract and rescheduled loans are therefore NOT
included in loan sales as NO new credit is granted
• Provisions in place at the time of rescheduling, are
NOT released. As the client repays the rescheduled
loan instalment (actual cash repayment or successful
debit order payment), 1/12th of the provision in place
compared to an up to date, rehabilitated rescheduled
client, is released per month until the client is
fully rehabilitated. This is based on statistical
evidence and conservatism. If the remaining term of a
rescheduled loan is less than 12 months the period of
release is decreased over the remaining term.
• Should the client fall one day in arrears on the
rescheduled loan, the client will be immediately
included in CD1 (contractual delinquency 1 month), but
on an increased provision percentage that reflects the
escalated risks.
• A comprehensive review was done and released on Friday
2 February 2018 on rescheduling of loans and the
treatment of provisions. This review was done for
Benguela Global Fund Managers and is available on our
website www.capitecbank.co.za/investor-relations
Rescheduled loan client example
After month 30, a client misses the 31st instalment and
is in arrears. The client reschedules the loan by
extending the remaining term with 6 months to 36 months.
NO initiation fee is charged when the loan is
rescheduled.
Outstanding balance on existing loan 59,314
Initiation fee on reschedule 0
Payment (over 36 months)(ix) 2,027
Monthly service fee on existing loan (x) 68
Monthly instalment on rescheduled loan 2,095
(ix) The payment decreased from R2,355 (see 3.1 above) to
R2,027 by stretching the remaining period from 30 to 36
months
(x) This fee is payable for up-to-date or rescheduled
loans – therefore NO additional fee is payable
Conclusion: The statement that Capitec charges initiation
fees on rescheduled loans is false. Rescheduling is an
amendment to an existing contract and rescheduled loans
are therefore NOT included as new credit granted or loan
sales.
5 February 2018
Stellenbosch
Sponsor
PSG Capital
Date: 05/02/2018 12:23:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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