As per Fraser Perring’s warning, Viceroy’s claws are out once again.

This time, in a report published on Wednesday called “A rolling loan gathers no loss”, the research firm published its response to Capitec’s statements defending its business.

The back and forth might seem childish, but Viceroy are on a mission to take down what wasn’t too long ago named South Africa’s number one bank.

This time, Viceroy has claimed that it has evidence that “the bank’s loan book is not reflective of its true lending practices – and has accused the lender of abusing South Africa’s debit order systems,” reports Business Tech.

Perring, Viceroy’s founder, did warn us that evidence would be coming.

In the report, the firm explained how it was “highly suspicious that Capitec was able to display data that was counter to trends in the unsecured lending space; particularly how it could turn highly indebted customers who miss payments into ‘clean’ lenders”:

“Since the publication of our last report, Capitec has disclosed that an extraordinarily large portion of its subprime, highly indebted customers who miss payments on their loans are somehow able to find the money to ‘catch up’ or ‘cure’ their arrears. This is suspicious,” Viceroy said.

“Numerous former Capitec staff and 5 prominent debt counselling firms with proprietary datasets on South African unsecured lending support our thesis that this ‘curing’ method is how Capitec hides the disastrous underlying performance of its loan book.

“If a borrower in arrears is able to beg or borrow the funds from a secondary lender to pay down their arrears and make themselves ‘current’, Capitec immediately offers them a new, larger loan. The borrowers use this new, larger Capitec loan to pay off the secondary lender used to cover the arrears,” it said.

“Analysis of tens of thousands of Capitec borrowers’ datasets within debt counselling firms show consumers were able to get new loans after paying down their arrears the day prior. Thus, we can state empirically that this practice is still occurring.”

The report continued, saying this practice was “in contrast to the lending criteria of a Standard Bank or Absa” where a cooling off period is put in place before a “borrower formerly in arrears can seek a new loan”:

 “By offering upsized loans to people who have just cleared their arrears, Capitec management is able to say with a straight face that they do ‘not lend into arrears’. This is true in fact – but not in substance.”

“While the borrower is getting more and more indebted and is still unable to pay their debts, lending to people who were immediately prior in allows Capitec to artificially generate ‘cures’, unsustainably increase its loan book, charge massive initiation fees and create a façade of quality within its consumer base,” it said.

Viceroy, which makes money off shorting a company’s stock before releasing its reports, alleges that:

• 70% to 80% of Capitec consumers in debt counselling were issued new loans prior to repaying their existing loans;
• that the bank was changing its lending rules on the fly to achieve the best possible returns;
• and that it was abusing the debit order system to ensure its debits took priority over other lenders.

“Capitec’s behavior has led to material overstatement of the quality of the book and substantial under-provisioning,” it said.

And so the saga continues.

Read the full report here.

[source:businesstech]