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CAPITEC BANK HOLDINGS LIMITED - In Response To The Latest Set Of Allegations That Viceroy Research Group Has Released On Monday 5 February 2018

Release Date: 05/02/2018 17:42
Code(s): CPI CPIP     PDF:  
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In Response To The Latest Set Of Allegations That Viceroy Research Group Has Released On Monday 5 February 2018

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")

IN RESPONSE TO THE LATEST SET OF ALLEGATIONS THAT VICEROY
RESEARCH GROUP HAS RELEASED ON MONDAY 5 FEBRUARY 2018 IN
ITS ONGOING CAMPAIGN AGAINST CAPITEC

1. We believe that the campaign will continue for the
   foreseeable future. Shareholders can expect the
   release of fresh attacks and false allegations over an
   extended period.
2. Capitec consequently advises shareholders to use
   caution when reacting to such allegations.

We respond as follows with respect to the specific
allegations made in the 5 February 2018 release (“the 5
February report”):

Only 7.3% of Capitec’s credit clients currently qualify
for loans in excess of 60 months (3.6% qualify for 84-
month loans). The scoring models for the 61 to 84 month
loans currently target 12-month default rates of 4.2% in
aggregate (2% for 84-month loans). The portfolios are
naturally weighted to the larger amounts and consequently
the longer-term and lower risk clients.

With reference to the vintage graphs on pages 29 and 30
of Capitec’s 2017 Integrated Annual Report (IAR), a
technical matter described in the second paragraph on
page 29 of the IAR is that the numerator is the sum of
the principal amount advanced plus expected fees and
interest over the full loan term (up to 7 years of
interest and fees). The default rates as percentage of
the principal amount advanced is therefore approximately
100% higher and in line with our scoring models.

The vintage graphs demonstrates that these loans perform
at their targeted default rates.

Viceroy Research Group refers to the loss rates on “US
prime credit cards” in the last paragraph of the 5
February report, before Figure 3, but shows aggregate
credit card losses in Figure 3 and the following
paragraph. Viceroy infers that it is impossible for the
average American credit card holder to have similar
credit risk as the top 7% of Capitec’s clients. We have
extensive history and sophisticated models to support our
results.

The South African Reserve Bank, as part of their normal
oversight function, performs reviews of all areas
including detailed credit risk reviews on Capitec. They
are fully aware of the credit scoring models and the risk
targets that we set when we extend credit. We track
performance against these targets and update our models
as soon as any deviation occurs.

Independent industry experts have reviewed our credit
granting models. The conclusion of these reviews have
confirmed that the models are accurate and highly
predictive. The reviews and the related target default
rates for different risk groups are in line with our
disclosed results.

An important point to understand of an assessment of the
performance of credit providers is that where multiple
credit providers target the same group of clients, the
credit provider that has the best models to identify low
risk clients has a significant competitive advantage.

Suppose that there is a population of 10 000 clients and
that 5 000 of these clients are high risk, 4 000 are
medium risk and 1 000 are low risk. Suppose the default
rates are 20% for the high-risk group, 8% for the medium
risk group and 4% for the low risk group. Should all the
credit providers use the same risk groupings and make the
same product offer to these clients, clients would be
agnostic as to credit provider and the performance of all
providers would be similar. Should one competitor
identify the best 300 clients with a default rate of 2%
out of the low risk pool and offer them better terms, the
default rates of the remaining credit providers will
naturally increase to 4.9% [(1 000 x 4%-300 x 2%) /
(1 000-300)].

Furthermore, we have a sophisticated pricing for risk
model that quantifies the reduction in risk when low risk
clients, that qualify for long-term products, take up
loans with a shorter duration and we offer lower rates in
order to ensure that we provide competitive products to
these clients.

Consequently, our unique product structure, combined with
a highly evolved credit granting model and a
sophisticated pricing model has created a competitive
advantage that enables us to identify low risk clients
and offer them credit at rates for as low as 12.9% on an
unsecured basis over 24 months. This has enabled Capitec
to increase market share among lower risk and higher
income clients over time.

Capitec’s technology allows all Capitec clients with the
Capitec Banking App on their smartphones to view their
credit risk profile on the App and receive an indication
of the possible term and amount of credit that they could
possibly qualify for.

Regarding the arrears rates on 61-84 month loans, it
should be kept in mind that, as explained in detail in
our response to Benguela Global Fund Managers’ report
dated 1 February 2018, the provision model segments
clients based on risk characteristics. The provision of
7.6% against up to date clients is the portfolio
aggregate and the provision against up to date 61 to 84-
month loan clients is 5% due to the better risk profile
of these clients. The estimate of Viceroy Research Group
that 1.3% of 84 month clients are in arrears is therefore
too low, as the actual arrears percentage at 28 February
2017 on these products was 3.1%. Capitec’s strict write-
off policy should be taken into account. The percentage
of the 61 to 84 month clients that have rescheduled from
arrears is 6.3%, of which 40% rehabilitated by 28
February 2017.

Conclusion:
The arrears figures reported by Capitec on these loans
are accurate and in line with our risk appetite and
portfolio tracking results. The provisions raised against
these loans are conservative.


5 February 2018
Stellenbosch
Sponsor
PSG Capital

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