The Old Firm: Relentless Capitec; KPMG’s reality check; Bell Pott and a Bitcoin warning

LONDON — Your invitation to eavesdrop on my weekly chat with the vastly experienced David Shapiro, whose unrivalled market insights opens a window behind the latest headlines. This podcast focuses on the rise and rise of Capitec; Bell Pottinger’s demise; a reality check for KPMG and the SA Institute of Chartered Accountants after Forensics For Justice confirms the #GuptaLeaks emails are authentic; a 90 year old warning about the Bitcoin Bubble; and how Sanlam is leaving its rivals in the dust. All this with a dollop of fun, too. – Alec Hogg

Well, it’s back to the Old Firm this morning and David Shapiro joins us from Johannesburg. It’s been a big week for banking results but an even bigger week for Capitec. David, a guy I used to write for many years ago, Michael Lafferty, a specialist in banks around the world rated Capitec the best bank in the world in his most recent survey. It seems JSE investors are now starting to agree.

Not only JSE investors. I think global investors are beginning to agree so, Capitec now, its market value, and I actually Tweeted some time ago that it was bigger than Investec. As we open this morning, it’s now bigger than Nedbank, in terms of value. To get some kind of context around it, their results were slightly disappointing. Earnings are going to be up 15 – 18%. We know Capitec as a company that grows well over 20% so, things are getting tougher as they get bigger and of course, as they get bigger, risks begin to increase. Alec, they’re on a high multiple. They’re trading at about 25 multiples versus the other banks, round about 8 or 9 so, there’s a big difference in valuation and I think the worry is that if Capitec does slow down – I don’t think the share price is going to collapse but I don’t think it’s going to keep pace with the other banks but still, it’s a high growth bank. You know the bank very well. I know you followed them from their inception. They were based down in Boland or they came out of Boland Bank. They’re very fleet footed, a very good system, and they haven’t got, they’re not dragged down by bricks and mortar. They’re not dragged down by the legacy of the other banks so, they still remain a lot more nimble, but expensive. Still, the money flows in while it’s not going into other banks. It’s still an interesting story. It’s one of Jannie Mouton’s major investments but in this stage, despite trying to keep it down, I don’t think it’s going to go down. I still think it’s going to be one of the favoured investments on the JSE.

That’s so interesting so, now if we talk about the ‘big 4’ it’s Capitec rather than Nedbank. My story with them is interesting, Dave. I was always a little sceptical, given that they came out of the micro lending environment. Like many other people, I hadn’t done my homework properly, I thought maybe this was just like African Bank, which I really didn’t like for a long time. So, I went down, on Riaan Stassen’s very last day in office, as CEO. He gave me a couple of hours in fact, 2 or 3 hours so, I went down to Stellenbosch where they have their offices. I spent the day with him, with Riaan and with various members of their team, and I was blown away.

These are guys with very spartan offices, low cost premises. All you have to do is just look at the way Capitec’s top management live or how they operate at work, and how the other banks operate. You kind of got to say to yourself well, just take the rental alone is going to make a huge difference but the thing what really bit into me about them was that they see banks as retail operations. They don’t see banks as, ‘we’ve got your money and we’ll decide what to do with it.’

There’s another bank in the UK called Metro Bank, which has got exactly the same strategy as Capitec, and that’s growing at 60%. There’s still a huge amount of scope in the UK, and Capitec, although they’re very big, they will keep telling us that they’ve only got a relatively small market share compared with where they think they should be.

I think that’s the difficulty with the big banks is that they don’t know how to fight them off and, also word of mouth. You said simple but their operations is very simple. I think from the moment that you go into a Capitec bank to the moment you leave it. It’s about a half-an-hour and you’ve got your loan. They have biometric testing, where they look into your eyes. They’re very advanced and very user friendly and they offer a very low range of services so, people feel comfortable in their offices. They haven’t got marble halls and as you say, art on the walls, and their CEOs don’t receive these huge, magnificent salaries (you’re dead right), they do run very lean.

I think they’ve got a good name in the market. Where they’ve scored is that they started to take deposits as well. They started to fund themselves a lot cheaper than places like African Bank. African Bank – we had to go into the market to raise wholesale so, they also take deposits. I think they will continue to grow. I think over 20% is a bit rich but any bank that can grow 10 – 15%, you’ve got to watch very carefully so, I think they’re a wonderful operation, (a lean operation as you say…)

Sorry, Dave, how far are they behind #3? If they’ve now overtaken Nedbank, they’re more valuable than Nedbank?

No, #3 is Barclays. Barclays is #3 and, they’re at 119 so, they’re only less than R10bn, 10%, which is easy to catch, very easy to catch.

Wow so, they could and who would have thought that Capitec would be more valuable than the old Absa? It just boggles the mind, doesn’t it?

It does.

The other Firstrand also came out with financial results this week.

Yes, and I think that’s a reflection of the economy. They’re a much bigger bank. They’re bigger than Standard today, in terms of market cap, but it’s very difficult. Where the economy is slowing down, where businesses are flushed with cash and not borrowing, where individuals now are holding back and very nervous. They can’t, and they’re not lending also, the African operations were under a lot of pressure. I think they’re also finding what we find bad debts, I know they’re starting to increase and people are finding it more difficult to pay. So, the operation they increased their headline earnings by 6%, which is really nominal growth within this economy or slightly ahead. It’s not the kind of result that you can get very enthusiastic about. That’s what banks do, they lend money and if nobody wants what they sell, of course they’re going to slow down.

And of course, when the economy is under pressure people can’t repay those loans that easily so, hence the bad debts. While the banks are struggling, with the exception of Capitec, there’s almost the non-bank alternative called Bitcoin or cyber-currencies, have been flourishing up until this week, where the Chinese government decided to get involved. What’s going on with the whole Bitcoin story?

The latest cover of Fortune Magazine highlights what they call blockchain technology. I’ve got to be honest, it’s my weekend reading because I’ve got to find out what blockchain technology is all about and how they issue these coins. But I’ve got to tell you something that worries me, and Alec, we’ve been around a long time and you’ll recognise the signs. I went to my brother for lunch last Saturday and my nephew was there. The first thing he started to talk to me was about Bitcoin, he’s got to buy Bitcoin. The same thing with a friend of mine that had phoned me earlier as well, they’re all talking about Bitcoin. Yesterday, in Melrose Arch, I was sitting down having a sandwich and a chap comes up to me, he’s a personal trainer at the gym next door and he hands me his card. He’s what he called a miner and what he does is he goes out and searches for people. In other words, I don’t know what that means, but he sells Bitcoin, he gets people to invest and that’s his business. Those, to me, are the signs, serious signs, of a bubble of people putting money into something they don’t understand.

Remember that wonderful story, Dave, of Joe Kennedy, JF Kennedy’s father, and in 1929, he like most people in America had made a huge amount of money on the stock market, which had been in a bubble and his shoeshine boy, the guy who used to shine his shoes, started tipping him shares. He said well, he knew that when the members of the public were getting involved in some investment game, it was time to sell. That’s how the Kennedy fortunes were made. They sold out very close to the peak. Are you getting that feeling?

Absolutely, because this hasn’t been a bull market in a sense that we’ve known, it’s been a grind. We talk about an 8 year bull market but it hasn’t been. It’s ground its way up. It’s been very difficult to read. But when you get the elements of it, like this the Bitcoin and everybody just wants to come and throw money at it without understand – those are bubble proportions. I don’t get the same feeling about Amazon and Facebook and those tech companies, which are now starting to dominate and dictate economies. I think this is a different area of the market and a very worrying sign so, just be careful of it. The technology, apparently, is being followed. Their technology is very good and what the article in Fortune, highlights is how Marine Insurance and other insurers are using this technology, and that’s going to be my weekend reading so, I can’t really comment on it now, but it is the cover story of the latest Fortune Magazine – the technology behind Bitcoin.

Well, there’s two-sides to every story and the other side on this one is that the global geopolitical concerns have given more people an interest into how to preserve wealth that can be transportable beyond borders. In the old days the gold price, given all the nonsense that’s going on, would have surged.

Yes.

I remember a gold mining executive telling me the best thing that ever happened to his company was when Donald Trump got elected. But it’s done nothing for the gold price. Maybe those who, in the past, would have put their money into gold are now saying, ‘but Bitcoin is so much easier.’ You can buy it in SA and redeem it in London, and nobody knows where the money has gone.

Yes, you’re onto something. Let’s put it this way, the world that we knew and that we have known in the last couple of decades is going to change. I think the world in the next 10, 15, 20 -odd years is going to be completely different from the world that we’re in now, in terms of technology. Technology is advancing at such a rapid pace. When I say technology, the ability to communicate, to do cross-border transactions. The internet has changed everything so, dramatically that there are no borders. Companies no longer have domains – they’re international. From my point of view, the stock exchange of the future, we don’t need the JSE. That doesn’t mean I’m against Nicky Newton-King in any way, but I can sit here through various platforms that are always advertised on Bloomberg or CNBC, etcetera, use TaxoBank, or UBS, or any of those. I can sit here and deal anywhere in the world at the press of a button and that gives me access to the world. I don’t have to be restricted to SA. I can buy any share in the world. Obviously, that’s subject to Exchange Control but today they’re fairly liberal, you can get money out. So, that’s what’s changing but that’s only one element of business. I think it’s affecting everything. It’s affecting every kind of business in the world today and it’s being changed and being challenged. So, yes, Bitcoin, why shouldn’t the central bankers be challenged as well?

Indeed, but it’s interesting, just to follow on from that theme, information has now become very free as well. You actually can’t do anything, anywhere in the knowledge that it will remain secret. Take what happened this week with Paul O’Sullivan, a forensic investigator, he has now said that he has analysed Gupta Leaks (the emails). He has authenticated them. They’ve sent us all the documentation that we’ve published on BizNews about this. That means that suddenly somebody working in the Gupta Empire, whose computer had contained all of this information has now sold that whole decrepit enterprise, including the cabinet ministers, including all kinds of corruption. He sold them all down the river unknowingly, just simply by having a computer here.

Paul O’Sullivan

Paul O’Sullivan says, he’s done it before. He’s checked the metadata, etcetera, and he’s used emails like this in court. Not just internationally but in Liberia, so it’s on the Continent. Now, David, that has got to have serious implications. At this point in time we’ve had big companies, McKinsey, SAP, and most notably, KPMG – almost hiding behind the thought that well, maybe these emails were inauthentic. Maybe they, as Atul Gupta said, “No, they aren’t true.” That somebody is out to get him. I guess, KPMG and so on, they’re now going to have to now wake up to the reality that the implication in this whole Gupta Story is real and they need to address it.

Of course, they need to and I’ve got to give credit to Iraj Abedian for also standing up in a big way and criticising them. I’ve just been following some of his Tweets and I say that, because if you Iraj, he was always middle of the road. He kind of initially, leaned towards government. He was a government advisor, and suddenly completely the other way. But I think, what it shows… Alec, we rely on these people. We rely on boards of directors. We rely on the integrity of those people who run places. We rely on the lawyers, on all these professional people, like your doctor. I think auditors particularly and when your auditor turns a blind-eye to issues like what’s come out with the KPMG scandal. Then of course, they must face the consequences. But the big question is, how do we choose these people? Do you understand what I’m saying?

Yes.

How do we choose CEOs? How do we choose the people who sit on our boards? What kind of interrogation do we go into, to make a man a director? I’ve got say one thing and I know we’re Buffett fans and we always quote him, but there’s a lot of wisdom in what he says. When he spoke about the board of directors as being ‘Cocker Spaniels’ in most cases, and rather than ‘Dobermans.’ That’s the problem because when we appoint a director, we appoint a non-executive director, we pay him. Therefore, he’s not going to challenge what we say, (he or her), and that’s one of the big failings of non-executive directors of appointing directors. Even with King, even with the King Codes and that. I still question the need for non-executive directors, in general because very few of them actually stand up and challenge.

The same thing applies with auditors or any of the professionals. We’ve got to be a lot more careful about the people that we actually appoint into these positions and here you are, KPMG. What big…? How did KPMG grow? From Anderson, you remember it absorbed Anderson, and Anderson came down on the Enron scandal. Suddenly, I know this is not their international branch, it’s more SA, but it is going to have widespread ramifications and implications for KPMG International. And McKinsey…? What bigger firm could you have than McKinsey? So, I don’t know. You’ve got to look back at KPMG and you’ve got to look back at McKinsey and say, ‘what kind of people do you appoint?’ Do they ever go through any kind of ethical… not ethical but what’s the word?

Due diligence, yes. What was it, probity?

Due diligence, yes. What do you do? What do you look at their character? How come they were bought so easily? I’m furious on this one, I’m absolutely furious on this one.

I can hear that but from a personal experience. When I served on the Phumelela Board, which was the horse racing company, before I was appointed. They invited me to serve there and before I was appointed I had to go through what is called probity, because it is a gaming or gambling related stock. You have no idea. They wanted to almost know the blood type of our dogs. It was really in depth and very strong. You wonder why that applies only to licensed or government licensed organisations and not more generally? If you become a director of a public company well, you could influence the public’s’ money but the interesting thing, and you’ve now put your finger on KPMG and SAP, is one who are right in the middle of this, (McKinsey), but also in the middle of this whole Gupta Scandal is Bell Pottinger.

Now, it wasn’t long ago that they were the biggest PR agency in London, (not long ago). They’ve got 250 people who work there and today, the news in the Financial Times, is that they’re being put into liquidation on Monday so, that is the Gupta Curse, really hitting hard.

Well, who takes on a client like the Guptas? I had better backtrack because I was sitting on a television program one day. It was a time when Oak Bay was being listed and I was asked about Oak Bay and the host was an Uranium Company and I gave a whole history about Uranium, I’ve never loved their shares, etcetera, and I started to criticise the company. Juliette, who was the anchor of the program, said, “By the way, do you know your sponsor is SASA?” I had absolutely no idea and we subsequently dumped them but how they were ever chosen or how they became clients of ours, I had no idea so, I have to put that on the record. But overall, you have to choose your clients. I think when you’ve had experience, and you’ve had a lot of experience.

Again, just bringing up the history. There were guests that used to come onto your show, who were representing companies and as they walked in the first question you would ask, and I’m saying internally. You would say, ‘would I really entrust my money with this man?’  He always has a wonderful quote and he uses it when he goes into new areas, like Africa or into Asia. He says, “One of the big problems when you meet director, you never know who you’re meeting. Whether it’s a Kebble or whether it’s a Rupert?” You don’t know and you’ve got to make those judgement guesses and I think through short interviews you can get a comfortable feeling that the man is acting on behalf of you or whether he’s acting in his own, self-interest. Qualification – passing a board exam or just passing, is not really a qualification to sit on a board and represent other people, or look after, or act as a guardian of other people’s’ interests and I’m very strong on this one.

But now, you’re a chartered accountant, and there’s been some brilliant investigative journalism over the financial director or ex financial director of Transnet and then ex of Eskom, who’s now I don’t know if he’s been fired or suspended but it is so clear that he’s complicit in a lot of the rubbish that went on. Where is SAICA, the Chartered Accountant Associations there?

I don’t know. They have to stand up. They have to make a noise. They’ve got to set standards. They can’t allow it to continue like this. I think that’s where they’re failing at the moment.

David, I say this because Bell Pottinger, essentially, was brought down by the PR Association in London. They had a hearing. The DA (Democratic Alliance), very smartly, decided to, they weren’t going to win much in SA so, they attacked them in their home ground. They put a complaint against the PR organisation. They had their say, Bell Pottinger had their say, and Bell Pottinger were expelled from the organisation, the harshest sanction that has ever been levied and here we have, within a week – they’re gone, they’re finished. The company has imploded and I’m sure the Financial Times wouldn’t have said that they’re going into administration on Monday if it wasn’t true. So, is it that what those bodies are supposed to be and yet, maybe they are the Cocker Spaniels, when they should be Dobermans?

Yes, you have to understand why. KPMG is one of the ‘big 4.’ You’ve got Ernst & Young, Deloitte’s, Price, and KPMG – that’s it. They do all the major audits so, you’re talking about a huge business here but that doesn’t get them off the hook. I think SAICA has to stand up and has to make investigations. I agree with you. I’m a member of SAICA, non-paying because I’m over age, I don’t have to pay for my membership any more but dead right. Also, it comes down to KPMG, it comes down to McKinsey. I know they have big targets and they had big budgets to meet but sometimes you’ve got to turn away from business. Do you know what I mean? Sometimes you’ve just got to turn away and say, “I don’t want this business.”

That’s a very good point.

We do it all the time here. Really, and you sell your soul and KPMG are going to find that out now, and I think it’s starting to escalate now.

It is, indeed. Let’s finish on a happier note, David.

Yes, okay.

Yes, let’s finish on a happier note because I think we’re going to be talking about these Bell Pottinger’s and KPMG’s and SAP’s for a while to come but in this week as well, we had results from Sanlam and that’s such an interesting company. It’s been doing some interesting acquisitions. It bought control of BrightRock, which is an innovative, disruptive insurance business, who seem to be doing very well. It just bought into EasyEquities. They spent R100m to get 30% of that so, it’s almost breaking the mould but what did you, first of all, think of the results and what do you think about the strategy of the company, at the moment?

It’s exactly that. Alec, I’m going to come from a different angle. I was at a seminar a year or two ago, and at that seminar it was mainly financial planners or our industry and they said and this applies to me. They said, “85% of the children of your clients will not deal with you.” In other words, they will want to do things differently, 85%, that’s massive. In other words, the biggest challenge that I have or my firm, or SASFIN has here, is to keep the clients or to woo the children of our clients. We’re not going to do them because they think differently and that’s the way Sanlam’s doing it. Sanlam is thinking, ‘how will…’ and when I say, ‘the children’ I mean, ‘how will young people today or how will young professionals conduct their financial affairs in the future?’ It’s going to be completely different from the way that we did.

We’re not going to call in the Sanlam’s salesman, like the man from Prudential, with his briefcase and dressed in a suit and so on. It’s going to be, ‘we want to do it ourselves, we want to do it over the internet, and we want to have a selection.’ In other words, ‘we want to be able to choose where we want to go,’ and I think that’s where Sanlam is starting to point and I think you’re going to find a lot more businesses like that dictating and dominating financial industry into the future. It’s going to be almost like the Amazon of the retail space and I think they’re starting to plan for it and put in position. They’ll start to make a few acquisitions, some of them will fail, some of them will do well, but their strategy is absolutely spot-on.

It’s extraordinary isn’t it, that you had the ‘big 3’ in the past, Sanlam, Old Mutual, and Liberty. Liberty seems to have imploded in many respects. It hasn’t imploded but it’s really gone backwards. Old Mutual is imploding, they made all these acquisitions. Now they’re hiving them off, unbundling them. And Sanlam has just steadily kept to its course. Changed direction here and there, and just got stronger and stronger.

Absolutely yes, and you’ve got to hand it to management for doing that. They were never infatuated to go and do big deals offshore or run away and do things like that. Their ambitions were kept under control and it’s now paying off. I think Ian Kirk is a very smart thinker. He’s not being helped by the economy at the moment. It’s not in his favour and that’s not his fault, but I think their thinking is right. Every financial organisation has to kind of relook at the way that they do business and what it’s going to look like, in 5, 10, 15, or 20 years down the line.

The investment Sanlam is making outside of SA, into emerging markets, they’ve got quite a big business in India, for instance.

Well, that’s a massive market. How you get into India… I don’t know? When I say, ‘play India.’ We don’t know how to invest in India. It’s growing, it’s reforming, but it’s very fragmented and very difficult just to buy one kind of company in there. I think China is a lot easier because of government control. Their economy is controlled by government, by the authorities, but India is a very difficult place to play but if you can find a niche in there and you can find an area. There’s one billion people, who are now starting to grow, and growing 5, 6, 7, and 8%. The middle class is starting to rise. They’re intelligent – there’s a lot of intelligent people there. It’s got to be an area that you focus on so, they’re right. Don’t confuse emerging markets. There’s emerging markets and emerging markets and I think the Asian emerging markets seem to offer a lot better return than other emerging markets.

David, my newsletter this morning, and closing off with India, was about the province of Andhra Pradesh. It’s only the 7th biggest province in India, but it’s got 50 million people. It’s got almost as many people as in SA, and the whole Hyperloop now, has now picked up there and they’re going to be installing it between two big cities. Taking the transport time from an hour down to 6 minutes, and that was all thought up and championed by Elon Musk so, it just shows. We’ve got the ingenuity, we’ve got the understanding in SA, we’ve really got a relatively small population, when you start comparing it with something like this and it shouldn’t be too easy to turn the boat around.

Yes, it should be easy.

Oh, sorry, it shouldn’t be too difficult, my apologies.

Yes, we just need to change attitudes, that’s all. We’ve got everything we need here. We’re just being dragged down politically, and it was in the SA Chamber of Commerce and Industry’s gauge, we’re down at levels of… People don’t want to do anything. If you go to America, while I was there, you find the same thing is happening with the Spanish speaking people, the Mexicans, all those immigrants. They don’t want to spend because they don’t know what their future is going to be under Trump. It’s here, the same thing. Nobody knows what the future holds for us and it’s all politics. If we could just swing the politics around. Just have a look at how well our businessmen have done globally. Just have a look at what we’ve produced. As I say, everything is in place here it’s just attitudes. It’s a sigh…

If you ever doubt that just have a look at the Elon Musk story. Here’s a boy from Pretoria, who went through his schooling in SA. In a different world, he would be doing all of his amazing stuff in SA. Now, he’s changing the world in the US. We’ve got the raw material, and how about this for a bright note to end on, David. Whenever you have a rejuvenation, you do go through turbulence before you get to a far better end result. Perhaps that’s what we’re seeing in the world and indeed, in SA right now.

It’s coming but I can’t top that story. I can’t top the Elon Musk story – that’s it.

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