Capitec’s response to Viceroy’s report speaks to a mature leadership under intense market scrutiny
By Rob Worthington-Smith
17 February, 2018
In this article, I argue that what and how companies communicate not only says something about the maturity of their leadership, but can also assist shareholders and the public gain confidence in a company’s ability to survive attack and sustain value through crises.
As we enter reporting season for the banking industry, it is worth analysing Capitec’s recent experience at the hands of an aggressive short-seller, both in terms of how the company responded and in terms what it said. In my view, Capitec’s response to the accusations it received was prompt, informative and respectful to its stakeholders. The same day the infamous report was published, Chairman Riaan Stassen, CEO Gerrie Fourie and Financial director André du Plessis, responded to each issue in detail, both in writing, as well as through press engagements and investor calls. When reconciliation accounts were produced to explain apparent anomalies, none of the original reporting in Capitec’s 2017 Integrated Annual Report could be shown to be misleading or inaccurate. The company also emphasised that transparency and timing of reporting are important values and walks the talk by publishing its annual report within a month of year end, where the industry standard is three months.
Regarding the content of its response, Capitec was careful to deal with each point made against the company, rather than either to deflect the criticism, or resort to ad hominem attacks on its adversary. When added to the support it received from the South African Reserve Bank and various ratings agencies, there appears little reason to doubt the key points Capitec’s leadership made in their responses of 5 and 8 February. The summarised SENS announcement made by the bank (and paraphrased here below), explained its business practices and how its leadership responds to the inherent risks in the unsecured lending market:
- Capitec only reschedules loans where clients are up to date with payments, and no new credit is advanced on rescheduled loans,
- No origination, or initiation fees are charged on rescheduled loans, only on new loans in accordance with the National Credit Act,
- Using its access to national credit databases, Capitec only grants new loans to clients that are not in arrears with their loans,
- Credit is granted in line with affordability assessments based on the most conservative view of alternative sources of information (including PAYE information and the client’s bank statements) and a conservative view of living expenses,
- Capitec showed how, by granting loans only to clients less over-indebted than its competitors, it was able to achieve a significantly better performance on its loan book,
- Capitec showed it has a conservative and strictly applied provisioning and write-off policy, explaining the bank’s low arrears performance,
- Loan products and the affordability assessments upon which they are are based are centrally controlled. A workflow systems guides Capitec’s branch staff, whose sole function is to assist clients. Branch staff have no credit granting discretion, thus maintaining the quality of the loan book within the bank’s modelling parameters,
- Capitec’s branch managers earn on average two thirds more than claimed,
- Capitec’s employee turnover for 2017 was 14.8%, compared with an industry average of 20.5%,
- Capitec’s Basel Liquidity Coverage Ratio is 1178%, compared with the 100% prescribed.
Considering the above, Capitec appears to have responded maturely, both when the crisis hit, as well as in its ongoing behaviour. This is backed up in the quality of its 2017 Integrated Report, which contained almost all of the information being contested.
So much for Capitec’s response to the crisis. Of interest to the case is the behaviour of its attacker, Viceroy, as well as any other interested and affected parties.
Capitec’s case was actually strengthened by various own-goals scored by the short-seller. The fact that Viceroy’s report was designed to support its own short position reveals an obvious conflict of interest. Some of the accusations it made were blatantly designed to mislead the reader, such as that Marcus Jooste, having been a member of Capitec’s Board (he resigned five years ago), was evidence of “incestuous management” between Capitec and Steinhoff. Further, the language used in the original report, as well as in follow-up accusations, was inflammatory, including words like “massively”, “extremely”, “drastically” and blatantly”. In general, the tone of the accusations revealed strong bias against Capitec, which inevitably weakens its case.
Both the South African Reserve Bank (SARB) and S&P Global Ratings released bulletins supporting Capitec’s fundamental strength and prudence in managing its reserves. Support from such important stakeholders becomes a powerful ally to the bank’s case, but can only be achieved through consistently responsible behaviour that builds reputation and trust over time. Countering this rosy view is the contention that the SARB in particular was strongly motivated to protect the entire banking industry.
Another actor on the South African banking stage has not been so reliable. The National Credit Regulator’s (NCR) responsibility is to support the development of an accessible South African credit market industry through regulatory oversight. This includes investigating complaints and ensuring the industry remains fair, transparent, and, among other aspects, responsible and sustainable. However, from reading the NCR’s documentation on its website and its annual reporting, it appears to have learnt nothing since the African Bank debacle. Back then, the NCR dragged its feet long after it became aware of probable misconduct by African Bank. Even after the National Consumer Tribunal (NCT) imposed a R300 million fine on African Bank for reckless lending, the NCR quietly settled on R20 million and played a confounding role in the subsequent Myburgh Commission of Enquiry. Since then, the NCR has shown little understanding of the role it should play in regulating the banking industry. Tellingly, its annual reporting on investigations into reckless lending has actually deteriorated over time. In the high-stakes game of unsecured lending, it is vital that the rules are clear and that participants’ behaviour is closely monitored by a trusted and watchful authority. The evidence suggests that we are being failed by key government agencies assigned this responsibility.
While the banking industry is particularly vulnerable – and crucial considering its role in the economy, other industries also encountered challenging situations in 2017. In addition to the Steinhoff debacle, Aspen was caught manipulating prices in its European markets, while EOH was accused of being party to collusive practices relating to the SASSA contract. Both companies were dismissive in their responses to insinuations from the media, providing little or no substantive argument to support their cases. On the other hand, Life Healthcare reported, well in advance, its concern with how the termination of its Esidimeni contract was being handled by the authorities. When the tragedy came to light, it was able to recount truthfully the role it played, and managed to do so without making counter-accusations that would impair its relationship with government.
These companies’ experiences illustrate the importance of being properly prepared well in advance of a crisis. This preparation starts with the Integrated Annual Report, every company’s foremost opportunity to present its case to shareholders and all interested and affected parties.
Central to Integrated Reporting is the concept of material issues, a prioritised list of risks, societal concerns, or regulatory developments that may affect the company’s ability to create value for shareholders. Or, put another way, these issues are the early warning signs of possible events that might precipitate a crisis – at least for those caught unawares.
Which brings us back to Capitec. The company has, knowingly and purposefully, tackled a tough market niche in the lending industry. On the one hand, it provides access to finance for most of the population, i.e. those with no collateral to back their loans. On the other hand, lenders of last resort are often associated with exploitive lending practices. Of course, any bank’s foremost priority is to stay in business, avoiding the fate of African Bank, which failed to manage its growing loan book responsibly. These are amongst its most material issues.
It stands to reason therefore that both Capitec’s shareholders, and society at large, want to see a mature leadership team in charge of the bank – a team that understands its material issues, holds itself accountable, tracks its performance and drives a strategy that ensures the long-term sustainability of its business.
My reading of Capitec’s 2017 Integrated Report finds it is both transparent and informative in responding to these issues, though it could have presented a clearer narrative for the lay reader and could have provided less room for mischief makers to spin an alternative narrative. Its lending practices show prudence, but more effort could be made to illustrate the financial health of its customers and show how it is improving levels of financial literacy. All in all, a reasonable report that gives the reader confidence in the quality of Capitec’s leadership.
This is at least the third banking crisis that Capitec has had to face. In each case, the company has emerged stronger and its leadership the wiser for the experience. On the balance of probabilities, and given the pace of mobile technology development, the next retail banking crisis (or disruption from new competitors) is not far away. The leadership of those banks now authoring their Integrated Reports for their shareholders might ask themselves whether they are as well prepared as Capitec. Does the reporting bank engage sincerely with its customers, employees and regulators? Are key issues clearly described, appropriately monitored and driven with leadership accountability? Is it clear that corporate strategy responds to these issues and challenges? These are the key questions to answer in a year of keen anticipation for more mature leadership in business as in government.
* Rob Worthington-Smith is the founder of FarSightFirms.com. The FarSight model analyses leadership maturity based on the IIRC’s Integrated Reporting Framework, an international standard designed to guide companies towards better reporting of their value creation story. In the SA asset management market, FarSight has an exclusive working partnership with Legae Securities.