The South African Reserve Bank (SARB) has also waded in, saying it does not agree with the rationale behind rating agency Moody’s decision. In a statement it highlighted the differences between Capitec and the beleaguered African Bank Investments Limited (Abil) that the central bank was forced to rescue from complete closure last week.
Late on Friday, Moody’s downgraded Capitec by two notches and placed it on review for a further downgrade.
The ratings agency said the decision reflected two elements. Firstly, it believed the likelihood of support from South African authorities to protect creditors was lower. This was after SARB included a bail-in of senior bondholders and wholesale depositors as part of its restructuring of Abil. It effectively sees these investors take a 10% reduction, or “haircut”, in the value of the money they were owed by the unsecured lender.
Secondly, Moody’s expressed heightened concerns over “the risk inherent in Capitec’s consumer lending focus, owing to weaker economic growth, reduced consumer affordability and high consumer indebtedness that are leading to higher credit costs for the bank”.
Both Capitec and Abil have been active in the unsecured lending market – loaning money to lower-end consumers with no collateral but charging higher interest rates to accommodate the risk of default.
In Abil’s case, its methods and business model, combined with tough economic conditions for already highly indebted consumers, resulted in a rapid spike of non-performing loans on its books. It released a shock trading update on 7 August announcing an expected R7.6-billion loss, sparking a collapse in its share price and SARB’s intervention.
In March, Moody’s downgraded the African Bank’s credit rating to below investment grade but with a stable outlook. This changed after its collapse when it downgraded the lender again on Tuesday and placed it on review for a further downgrade.
Credit rating agencies measure the credit worthiness of any company or entity that issues debt to raise money through instruments like bonds.
The better the rating, the less likely the company is to default on repayments or the full redemption of the debt.
Capitec said it was “extremely dissatisfied” with the extent of the ratings review and its conclusion, which took place during a 30-minute telephonic interview on Thursday.
“We believe it’s a total kneejerk reaction,” said Andre du Plessis, finance director at Capitec. It was in response to developments at Abil – a situation that was not applicable to Capitec, he said.
Moody’s last confirmed its ratings at a higher level as recently as 12 May, according to Capitec.
In a press release, du Plessis stressed the differences between Capitec and Abil.
It included Capitec’s banking relationship with its clients, giving it greater insight into their activities and financial health.
Capitec had a diversified source of income thanks to its 5.4-million transactional clients that included 2.2-million “salary deposit” clients that had joined the bank. This contributed 32% of net income and covered 59% of operating expenses for the year to February 2014.
Its risk appetite in the unsecured lending environment, which it monitored on a continuous basis, was “very conservative” he said. It also did not charge life and retrenchment insurance over and above the maximum interest rates allowed by the National Credit Act and as a result priced credit at lower rates and thus lent to lower risk clients. This had stood it in good stead in the light of the current weakening economic environment.
Retail deposits formed less than 1% of Abil’s business, while it sourced almost all of its funding through bond issues as well as wholesale funding via corporate and money market funds.
Du Plessis said Capitec, however, had a “healthy balance” between wholesale and retail deposits, acquiring 67% of funding from retail sources, which it saw as a more stable model.
In addition, du Plessis told the Mail & Guardian that Capitec did not have any major debt maturities in the next 18 months after which these were still “very much spread over time”.
The African Bank’s debt had started maturing and because the business was not doing well debt holders had wanted to pull back, argued du Plessis. This was not the case with Capitec which “had a policy of being extremely conservative with our liquidity”.
The SARB, it appeared, backed Capitec.
In a statement, SARB spokesperson Hlengani Mathebula said that while the central bank “respects the independent opinion of rating agencies, we do not agree with the rationale given in taking this step”.
In response to Moody’s view of lower support for creditors, SARB said “any resolution to address systemic risk will always be based on the circumstances and merits of the particular prevailing situation”.
“In the case of the African Bank, bondholders and wholesale depositors are taking a 10% haircut, which is generally regarded as being very positive given that trades following the announcement of the African Bank’s results were taking place at around 40% of par,” said Mathebula.
“Therefore, in fact, substantial support was provided, not reduced. Moreover, all retail depositors were kept whole and are able to access their accounts fully.”
The assertion that Capitec and the African Bank shared the same business model was incorrect.
“While both are active in the unsecured segment of the market, Capitec follows a very conservative approach to risk and prudent provisioning practices and considerable diversification has been taking place in a steady manner in product, client and revenue streams,” he said.
As part of its regular supervisory engagement, the central bank’s supervision department recently conducted a review of both the provisioning methodology and level of impairments in Capitec Bank and found both to be acceptable.
According to the SARB, impairments stood at around 6% with a coverage ratio for bad debts of 167%, Capitec’s capital adequacy stood well above the regulatory requirement at 40%. It also has a large cash holding and two thirds of funding comes from retail deposits.