Kokkie Kooyman: Capitec downgrade unwarranted and dangerous

With the flurry of events that led up to African Bank’s curatorship and suspension on the JSE the issue of contagion has been bandied about at length. African Bank’s unsecured debt book and devastating losses have played a substantial role in unhinging African Bank’s position, the knock on effect of which has resulted in the same question being asked of Capitec. Is Capitec in the same trouble, a potentially sinking ship, taking investor’s money with it? Market experts are all of the same consensus – Capitec is a different bank, with a different substantially more effective operating model. Kokkie Kooyman of SIM Global unpacks the difference between the two banks, and explains why contagion should not be a factor that plays a role in investing decisions. – LF 

ALEC HOGG: Welcome back to Power Lunch. Joining us on the line, to continue with our discussion on Abil is Fund Manager and Chief Executive of SIM Global, Kokkie Kooyman. Kokkie thanks; I’m sure you’ve been working through your numbers, given what happened on Friday evening with Moody’s putting out its announcement, downgrading Capitec credit by two notches. It seems rather unusual.

KOKKIE KOOYMAN: Yes, I think very unusual and, in my opinion it is both unwarranted and, in fact, even dangerous.

ALEC HOGG: Now the Reserve Bank was very quick to react on Saturday morning, which I guess, for the Reserve Bank is quick, within 12 hours, a very strong statement. Would Moody’s take the Reserve Bank seriously? Will they take what Capitec said in defence seriously?

KOKKIE KOOYMAN: Look, a rating agency, obviously has to be independent, so they will listen to all the parties and should, and I think do, come to their own conclusion. If you read the Capitec statement they released, it does seem, and I think so as well, that Moody’s acted too hastily and that they should have had further discussions or done more work. Obviously, they’ll say that they came to certain conclusions themselves and their obligation to clients was to warn clients that the risk, in their opinion had increased.

ALEC HOGG: Well, some clients believe it and the share price is down by five percent this morning. With your stress testing, what are you finding? Are there similarities between Capitec and Abil, indeed similarities sufficient to warrant this kind of a downgrading?

KOKKIE KOOYMAN: I think not. There are three differences. The one certainly is, firstly Capitec’s capital levels are considerably higher than African Bank’s was. Their reserving levels are also very good, and their reserving policy was considerably more conservative than that of African Bank and obviously, they didn’t have a furniture chain like Ellerines that was needy. What you can’t see, at this stage, is obviously the effect of a deterioration in their client base. The economy has slowed down a lot. Unemployment has gone up, so clients obviously, have difficulty, especially in their market segment to pay their loans, and that to a large extent affected African Bank because they were, underprovided for the environment. It does seem, when you look at all the numbers and the history, and I looked at the last ten years, that it is true.

Capitec has consistently been more aggressive in providing and more ahead of the curve, so based on the history I think Capitec is well provided and if the economy does deteriorate, it should ride it quite well.

GUGULETHU MFUPHI:  Kokkie, going back onto African Bank and these stress tests and analysts that you’ve conducted, is the sad story or the breaking point, the Achilles’ tendon maybe, of Abil, the Ellerines acquisition?

KOKKIE KOOYMAN: It’s actually fascinating that a 2008 acquisition and the rights issue they did, destroyed a lot of value and put them on the back foot, and I think often investors and even management themselves don’t realise how much time, management time just gets taken up by something like that. Leon Kirkinis was obviously spending a lot of time trying to get Ellerines right and in discussions there, where taking time away from what was happening in his own book, but underlying, I think, the structural problem that African Bank had was that a provision policy was not conservative enough for what happened. Now, in an economy that is still growing and the market is sound, the Provisioning Policy was fine but it was found that suddenly when it deteriorated, and I suppose the strikes were the trigger – and you can say that was unforeseen, but then the provisions were not adequate.

Now, obviously what caused the death spiral in the share price, and it seems that Coronation were very, large sellers of the shares which obviously also affected confidence, so in the end, when they then came with the proposal for a ten or an eight-and-a-half billion rights issue, and the CEO resigned; the market lost confidence. I think that’s really, with a large shareholder not prepared to stand behind the bank and the CEO resigning and you needing a very, large rights issue that, I think, the Reserve Bank did, absolutely the right thing then, to step in.

ALEC HOGG: Kokkie, just very quickly; those shares that some people bought last week, there’s quite a lot of discussion about them, having value or not having any value. Now, clearly the shareholders have supposedly lost everything, so have the subordinated debt and even the senior debt has got a ten percent write-off.   Are those shares going to be worth, people who bought just before Abil went bust, will they get anything back for their stock?

KOKKIE KOOYMAN: Unfortunately, a lot of it is now, hidden and we won’t be able to see but I do think that if you bought shares at 50 cents, then at the point of suspension and what’s happened subsequently, there will be value of more than 50 cents. It depends on the deterioration further in the economy. It depends on the costs that are loaded by all the banks and so, being involved and, especially Tom Winterboer, and he brings in ex-Ellerines bleeding has been stopped. That will help and then, obviously what people must realise is they will only unlock that value if they subsequently follow a rights issue. African Bank does need capital, so it’s going to come with a rights issue, and we don’t even know what the mechanism will be but the fair thing would be to give the shareholders who had shares – the first option to follow their rights. You’re going to have to put in more capital, to be able to unlock that value.

ALEC HOGG: So start saving now. That was Kokkie Kooyman, the Funds Manager, and CEO of SIM Global.