LONDON â 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, itâs back to the Old Firm this morning and David Shapiro joins us from Johannesburg. Itâs 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, itâs 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 â 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, theyâre on a high multiple. Theyâre trading at about 25 multiples versus the other banks, round about 8 or 9 so, thereâs a big difference in valuation and I think the worry is that if Capitec does slow down â I donât think the share price is going to collapse but I donât think itâs going to keep pace with the other banks but still, itâs 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. Theyâre very fleet footed, a very good system, and they havenât got, theyâre not dragged down by bricks and mortar. Theyâre 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 itâs not going into other banks. Itâs still an interesting story. Itâs one of Jannie Moutonâs major investments but in this stage, despite trying to keep it down, I donât think itâs going to go down. I still think itâs going to be one of the favoured investments on the JSE.
Thatâs so interesting so, now if we talk about the âbig 4â itâs 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 hadnât done my homework properly, I thought maybe this was just like African Bank, which I really didnât like for a long time. So, I went down, on Riaan Stassenâs 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.
The big 4 aren't anymore. Banks' mkt caps: FirstRand R305bn, Standard R266bn, Barclays R121bn, Capitec R105bn, Nedbank R102bn, Investec R95b
— David Shapiro (@davidshapiro61) September 8, 2017
These are guys with very spartan offices, low cost premises. All you have to do is just look at the way Capitecâs 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 donât see banks as, âweâve got your money and weâll decide what to do with it.â
Thereâs another bank in the UK called Metro Bank, which has got exactly the same strategy as Capitec, and thatâs growing at 60%. Thereâs still a huge amount of scope in the UK, and Capitec, although theyâre very big, they will keep telling us that theyâve only got a relatively small market share compared with where they think they should be.
I think thatâs the difficulty with the big banks is that they donât 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. Itâs about a half-an-hour and youâve got your loan. They have biometric testing, where they look into your eyes. Theyâre very advanced and very user friendly and they offer a very low range of services so, people feel comfortable in their offices. They havenât got marble halls and as you say, art on the walls, and their CEOs donât receive these huge, magnificent salaries (youâre dead right), they do run very lean.
I think theyâve got a good name in the market. Where theyâve 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 â 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 â 15%, youâve got to watch very carefully so, I think theyâre a wonderful operation, (a lean operation as you sayâŚ)
Sorry, Dave, how far are they behind #3? If theyâve now overtaken Nedbank, theyâre more valuable than Nedbank?
No, #3 is Barclays. Barclays is #3 and, theyâre at 119 so, theyâre 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, doesnât it?
It does.
The other Firstrand also came out with financial results this week.
Yes, and I think thatâs a reflection of the economy. Theyâre a much bigger bank. Theyâre bigger than Standard today, in terms of market cap, but itâs 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 canât, and theyâre not lending also, the African operations were under a lot of pressure. I think theyâre also finding what we find bad debts, I know theyâre 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. Itâs not the kind of result that you can get very enthusiastic about. Thatâs what banks do, they lend money and if nobody wants what they sell, of course theyâre going to slow down.
And of course, when the economy is under pressure people canât repay those loans that easily so, hence the bad debts. While the banks are struggling, with the exception of Capitec, thereâs 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. Whatâs going on with the whole Bitcoin story?
The latest cover of Fortune Magazine highlights what they call blockchain technology. Iâve got to be honest, itâs my weekend reading because Iâve got to find out what blockchain technology is all about and how they issue these coins. But Iâve got to tell you something that worries me, and Alec, weâve been around a long time and youâll 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, heâs got to buy Bitcoin. The same thing with a friend of mine that had phoned me earlier as well, theyâre all talking about Bitcoin. Yesterday, in Melrose Arch, I was sitting down having a sandwich and a chap comes up to me, heâs a personal trainer at the gym next door and he hands me his card. Heâs what he called a miner and what he does is he goes out and searches for people. In other words, I donât know what that means, but he sells Bitcoin, he gets people to invest and thatâs his business. Those, to me, are the signs, serious signs, of a bubble of people putting money into something they donât understand.
Remember that wonderful story, Dave, of Joe Kennedy, JF Kennedyâs 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. Thatâs how the Kennedy fortunes were made. They sold out very close to the peak. Are you getting that feeling?
Absolutely, because this hasnât been a bull market in a sense that weâve known, itâs been a grind. We talk about an 8 year bull market but it hasnât been. Itâs ground its way up. Itâs 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 â those are bubble proportions. I donât 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 thatâs going to be my weekend reading so, I canât really comment on it now, but it is the cover story of the latest Fortune Magazine â the technology behind Bitcoin.
Well, thereâs 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 thatâs 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 itâs done nothing for the gold price. Maybe those who, in the past, would have put their money into gold are now saying, âbut Bitcoin is so much easier.â You can buy it in SA and redeem it in London, and nobody knows where the money has gone.
Yes, youâre onto something. Letâs 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 weâre 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 â theyâre international. From my point of view, the stock exchange of the future, we donât need the JSE. That doesnât mean Iâm 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 donât have to be restricted to SA. I can buy any share in the world. Obviously, thatâs subject to Exchange Control but today theyâre fairly liberal, you can get money out. So, thatâs whatâs changing but thatâs only one element of business. I think itâs affecting everything. Itâs affecting every kind of business in the world today and itâs being changed and being challenged. So, yes, Bitcoin, why shouldnât the central bankers be challenged as well?
Indeed, but itâs interesting, just to follow on from that theme, information has now become very free as well. You actually canât do anything, anywhere in the knowledge that it will remain secret. Take what happened this week with Paul OâSullivan, a forensic investigator, he has now said that he has analysed Gupta Leaks (the emails). He has authenticated them. Theyâve sent us all the documentation that weâve 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 OâSullivan says, heâs done it before. Heâs checked the metadata, etcetera, and heâs used emails like this in court. Not just internationally but in Liberia, so itâs on the Continent. Now, David, that has got to have serious implications. At this point in time weâve had big companies, McKinsey, SAP, and most notably, KPMG â almost hiding behind the thought that well, maybe these emails were inauthentic. Maybe they, as Atul Gupta said, âNo, they arenât true.â That somebody is out to get him. I guess, KPMG and so on, theyâre 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 Iâve got to give credit to Iraj Abedian for also standing up in a big way and criticising them. Iâve 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 whatâs 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 Iâm 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? Iâve got say one thing and I know weâre Buffett fans and we always quote him, but thereâs a lot of wisdom in what he says. When he spoke about the board of directors as being âCocker Spanielsâ in most cases, and rather than âDobermans.â Thatâs the problem because when we appoint a director, we appoint a non-executive director, we pay him. Therefore, heâs not going to challenge what we say, (he or her), and thatâs 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. Weâve got to be a lot more careful about the people that we actually appoint into these positions and here you are, KPMG. What bigâŚ? 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, itâs more SA, but it is going to have widespread ramifications and implications for KPMG International. And McKinseyâŚ? What bigger firm could you have than McKinsey? So, I donât know. Youâve got to look back at KPMG and youâve got to look back at McKinsey and say, âwhat kind of people do you appoint?â Do they ever go through any kind of ethical⌠not ethical but whatâs 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? Iâm furious on this one, Iâm 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’sâ money but the interesting thing, and youâve 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 wasnât long ago that they were the biggest PR agency in London, (not long ago). Theyâve got 250 people who work there and today, the news in the Financial Times, is that theyâre 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, Iâve never loved their shares, etcetera, and I started to criticise the company. Juliette, who was the anchor of the program, said, âBy the way, do you know your sponsor is SASA?â 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 youâve had experience, and youâve 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 Iâm saying internally. You would say, âwould I really entrust my money with this man?â Â He always has a wonderful quote and he uses it when he goes into new areas, like Africa or into Asia. He says, âOne of the big problems when you meet director, you never know who youâre meeting. Whether itâs a Kebble or whether itâs a Rupert?â You donât know and youâve 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 heâs acting in his own, self-interest. Qualification â 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’sâ interests and Iâm very strong on this one.
But now, youâre a chartered accountant, and thereâs been some brilliant investigative journalism over the financial director or ex financial director of Transnet and then ex of Eskom, whoâs now I donât know if heâs been fired or suspended but it is so clear that heâs complicit in a lot of the rubbish that went on. Where is SAICA, the Chartered Accountant Associations there?
I donât know. They have to stand up. They have to make a noise. Theyâve got to set standards. They canât allow it to continue like this. I think thatâs where theyâre 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 werenât 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 â theyâre gone, theyâre finished. The company has imploded and Iâm sure the Financial Times wouldnât have said that theyâre going into administration on Monday if it wasnât 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 âbig 4.â Youâve got Ernst & Young, Deloitteâs, Price, and KPMG â thatâs it. They do all the major audits so, youâre talking about a huge business here but that doesnât get them off the hook. I think SAICA has to stand up and has to make investigations. I agree with you. Iâm a member of SAICA, non-paying because Iâm over age, I donât 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 youâve got to turn away from business. Do you know what I mean? Sometimes youâve just got to turn away and say, âI donât want this business.â
Thatâs 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 itâs starting to escalate now.
It is, indeed. Letâs finish on a happier note, David.
Yes, okay.
Yes, letâs finish on a happier note because I think weâre going to be talking about these Bell Pottingerâs and KPMGâs and SAPâs for a while to come but in this week as well, we had results from Sanlam and thatâs such an interesting company. Itâs 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, itâs 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?
Itâs exactly that. Alec, Iâm 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, â85% of the children of your clients will not deal with you.â In other words, they will want to do things differently, 85%, thatâs 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. Weâre not going to do them because they think differently and thatâs the way Sanlamâs doing it. Sanlam is thinking, âhow willâŚâ and when I say, âthe childrenâ I mean, âhow will young people today or how will young professionals conduct their financial affairs in the future?â Itâs going to be completely different from the way that we did.
Weâre not going to call in the Sanlamâs salesman, like the man from Prudential, with his briefcase and dressed in a suit and so on. Itâs going to be, âwe want to do it ourselves, we want to do it over the internet, and we want to have a selection.â In other words, âwe want to be able to choose where we want to go,â and I think thatâs where Sanlam is starting to point and I think youâre going to find a lot more businesses like that dictating and dominating financial industry into the future. Itâs going to be almost like the Amazon of the retail space and I think theyâre starting to plan for it and put in position. Theyâll start to make a few acquisitions, some of them will fail, some of them will do well, but their strategy is absolutely spot-on.
Itâs extraordinary isnât it, that you had the âbig 3â in the past, Sanlam, Old Mutual, and Liberty. Liberty seems to have imploded in many respects. It hasnât imploded but itâs really gone backwards. Old Mutual is imploding, they made all these acquisitions. Now theyâre 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 youâve 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 itâs now paying off. I think Ian Kirk is a very smart thinker. Heâs not being helped by the economy at the moment. Itâs not in his favour and thatâs 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 itâs 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, theyâve got quite a big business in India, for instance.
Well, thatâs a massive market. How you get into India⌠I donât know? When I say, âplay India.â We donât know how to invest in India. Itâs growing, itâs reforming, but itâs 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. Thereâs one billion people, who are now starting to grow, and growing 5, 6, 7, and 8%. The middle class is starting to rise. Theyâre intelligent â thereâs a lot of intelligent people there. Itâs got to be an area that you focus on so, theyâre right. Donât confuse emerging markets. Thereâs 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. Itâs only the 7th biggest province in India, but itâs got 50 million people. Itâs got almost as many people as in SA, and the whole Hyperloop now, has now picked up there and theyâre 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. Weâve got the ingenuity, weâve got the understanding in SA, weâve really got a relatively small population, when you start comparing it with something like this and it shouldnât be too easy to turn the boat around.
Yes, it should be easy.
Oh, sorry, it shouldnât be too difficult, my apologies.
Yes, we just need to change attitudes, thatâs all. Weâve got everything we need here. Weâre just being dragged down politically, and it was in the SA Chamber of Commerce and Industryâs gauge, weâre down at levels of⌠People donât 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 donât want to spend because they donât know what their future is going to be under Trump. Itâs here, the same thing. Nobody knows what the future holds for us and itâs 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 weâve produced. As I say, everything is in place here itâs just attitudes. Itâs a sighâŚ
If you ever doubt that just have a look at the Elon Musk story. Hereâs 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, heâs changing the world in the US. Weâve 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 thatâs what weâre seeing in the world and indeed, in SA right now.
Itâs coming but I canât top that story. I canât top the Elon Musk story â thatâs it.