A collection of Futuregrowth thought leadership pieces, media articles and interviews.

FSB probes Viceroy for market abuse

02 Feb 2018




Capitec laid a complaint with the Financial Services Board, as the Treasury moves to alert overseas regulators


Pressure is mounting on Viceroy Research, the short-selling outfit that caused a collapse in Capitec’s share price this week, after the Financial Services Board (FSB) confirmed it was investigating possible market abuse and breaches of the Financial Markets Act. This came after Capitec laid a complaint with the FSB.

The Treasury, meanwhile, called on the FSB to alert the Securities and Exchange Commission in the US and the UK’s Financial Conduct Authority. Overseas regulators should consider whether Viceroy had “transgressed any of their market conduct” laws, it said in a statement on Thursday.

“We welcome any lawful investigations into impropriety in our report, which is publicly sourced. In the USA, Viceroy have and continue to work with regulators on numerous matters in which we have identified corporate impropriety,” Viceroy said via e-mail.

A growing chorus of voices, including S&P Global Ratings and bond investor Futuregrowth, have come out in support of Capitec since Viceroy, which targeted Steinhoff in a December report, set its sights on the bank.

In a report issued on Tuesday, Viceroy said Capitec should write off R11bn to truly reflect its bad debts and should be placed under curatorship. But the Treasury, which has been in “constant contact” with the registrar of banks since Tuesday, reiterated the Reserve Bank’s view that Capitec was well capitalised.

“This means that the funds of depositors are safe,” it said.

S&P said its BB rating of Capitec — a noninvestment-grade rating in line with SA’s sovereign rating — reflected its “strong capitalisation and conservative reserving, which is appropriate for high normalised credit losses. We also factor
in the bank’s good earnings stability for a monoline unsecured consumer lender,” S&P said. “To date, the bank has experienced only mild funding outflows and its liquidity remains sound.”

Similarly, Futuregrowth’s Olga Constantatos said Capitec had “adequate and conservative provisioning” despite economic headwinds and the considerable risks facing the South African unsecured lending market.

Futuregrowth, which manages nearly R175bn in fixed-income assets, made waves in September 2016 when it froze R1.8bn worth of funding to some of SA’s largest state-owned entities including Eskom and Transnet, over governance concerns. It has since resumed lending to some of these.

The asset manager has been a funding partner of Capitec for more than 15 years, with an exposure of R393m to the lender, or less than 0.2% of its assets under management.

It had not participated in recent bond auctions, as it did not see value at current yields given the challenging economic environment, Constantatos said. “The market has been a very keen purchaser of Capitec’s bonds,” she said.

Capitec’s nonperforming loans were more than two-times covered, with an arrears coverage ratio of 237%, relative to an average 66% among SA’s big four banks and 43% among other unsecured lenders.

“We have analysed trends in rescheduled loans and arrears and we don’t see any significant warning signs,” Futuregrowth investment analyst Melissa Moore said. Rescheduled loans accounted for 5.3% of Capitec’s loan book and were subject to a 51.9% provision.

Capitec’s share continued to pare losses, climbing 5.5% on Thursday to close at R845. It is 17.6% off last Friday’s closing price. The sell-off started on Monday — ahead of Viceroy’s Tuesday report. On Wednesday, Capitec CEO Gerrie Fourie bought R1.5m worth of stock. The bank has a market value of R98bn.

None of at least 12 analysts has changed their rating since Viceroy issued its report. Of these, four rate it a “buy”, three a “hold” and five a “sell”. Deutsche Bank, which has a target price of just R360 – about 57% below the stock’s current level, said: “While the market and the Viceroy report focuses on the asset side, the liabilities for any financial institution are always just as important. Capitec has a robust retail deposit base of R60bn and total equity of R17bn.”

Citi, which is targeting a share price of R1,200, echoed this, saying Viceroy’s report ignored Capitec’s transactional and deposit franchise, which contributed about 40% to operating income. Capitec’s rescheduled loans had reduced meaningfully over the last two reporting periods, it said.

Deutsche Bank has called for an independent probe.

Capitec chief financial officer Andre du Plessis said it would not be instituting an independent probe, but would refute Viceroy’s claims. “The rescheduling process will be in the public domain shortly and unpacked in detail,” he said.

Read the original article here.