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:
- 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.
- 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:
- Capitec Bank’s ratings were confirmed at the higher level by Moody’s as recently as 12 May 2014.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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%.
- 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
- 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.
- 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.
- Our performance remains in line with our annual plan and budget expectations.