🔒 David Shapiro assesses Capitec’s “perfect” £300m UK banking prospect

The fall from grace of Metro Bank, the first UK high street banking group in over 150 years, opens a big potential opportunity for Capitec, South Africa’s R150bn banking upstart. The Capitec executives have made no secret of their admiration for the operational excellent and management of their UK lookalike. As a result, they stayed away from even considering entering that offshore market. But with Metro Bank’s share price having collapsed from £40 to under £2, rumours of a takeover has been surfacing. SA’s favourite market commentator David Shapiro offers his perspectives on whether Metro Bank would be a suitable target for the Stellenbosch team. – Alec Hogg

A warm welcome to David Shapiro who’s going to be talking to us next time from New York. David you are still in South Africa at the moment but going tomorrow on one of your regular journeys to find out what’s happening in Trump land. I see Nancy Pelosi is starting proceedings to have Trump impeached. It’s going to be an exciting time when you’re in New York.
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It is exciting. I doubt it’s going to get through. Remember Clinton was impeached by the House but was laid off by the Senate and I think with the Republicans controlling the Senate that’s unlikely to go further. We don’t want to get into the conversation now, but Trump has a way of branding people. He’s now branding Biden as corrupt at a time where Biden is fighting for the presidency or fighting for the nomination of the Democrats. You start to get this message out in the same way as he did it with Hillary “Lock her up” He is doing the same with Biden, saying he is corrupt, however there’s no evidence around this. It becomes very dirty and difficult to understand. We watch it from the side and ask “Is this the President of the United States?” It is also difficult to know what kind of stand the Republicans should make. Are they really holding onto their jobs that they’ve got no moral values anymore to stand up for what is right?

I had a really good chat with Bernie Wolfsdorf. He is South African, and he’s has been voted the leading immigration lawyer in the United States seven times in the last ten years. His point is that Trump is a businessman and he’s applying business principles too much of what’s going on. He was talking particularly about the EB5 Visa which is an entrepreneur’s visa where you invest money in and you can become eligible for your green card. With hindsight we saw in South Africa how Mayer Kahn, who was our top businessman at the time, tried to run the police service. Now we’re seeing the difficulties that Donald Trump is having as a businessman trying to run a political office in the United States. Surely business should stick on one side and let the politicians do their thing.

That’s what we wish for. He’s trying to impose principles on something that doesn’t require principles. The whole impeachment process is around him pushing the Ukrainian president to investigate the son of someone who’s going to oppose him for the presidency. Now that’s business-type tactics and not political tactics. The USA is not at war with the Ukrainians and he’s not at war with his opponents but he is applying those kind of principles. He hasn’t really signed a big deal. Besides the tax reductions, we haven’t seen him do anything with North Korea. He hasn’t done a deal with China. He hasn’t done any big deals as well. One wants a president who sets decent principles that can teach your kids and your grandchildren to follow and not the kind of principles that he stands for. There are so many Trump supporters as well as detractors.

Let’s move on to the UK and Metro Bank. When Gerrie Fourie from Capitec was on one of his visits to London at the time that I was there, we got together and had a good chat. I asked him when he was going to invest in the UK and he replied probably never as the UK have a bank called Metro Bank, and I started investigating and it was a fantastic operation. In fact we put Biznews with Metro Bank. They’re that good. They low cost. The branches are open longer. They’re very efficient and in a different league to the other banks in the UK. It was started by an American called Vernon Hill. Anyway what’s happened to Metro Bank is that the city has fought back. Fortunately, we sold it out of our portfolios at £30 a share. It’s now below £2 a share today. What is going on?

One of the problems in building a bank is you need critical mass. In other words you need a very wide spread of deposit holders and people who need loans. What happens is that according to bank rules, the bank can lend out up four to eight times what they have. If someone has placed a deposit and now wants withdraw it, the bank may have to call in those loans. Also you need certain capital requirements against the loans that you met and the deposits. So that’s where these smaller banks fall foul. They come under a lot of pressure and as soon as there’s a run on the bank or large withdrawals, they start to lose the deposit base so they have to bring in the loans. If you go back to the crisis in 2008 and 2009 that was the big issue with banks – worries about a run on the banks. What is a run on the banks mean? Deposit holders take out their money and it means that you have to call in the loans and people are not in a position to repay the loan. That’s where Metro Bank went wrong, it was against that kind of backdrop.

The share price was £3.80 a week ago, it’s now £1,80.

Clearly worries about its solvency, about whether they can survive any kind of run. When problems at a bank start, even if it’s a rumour, people don’t want to be caught and they withdraw their money and there is limited guarantees that governments or banking institutes can actually provide against any kind of run. Though it has happened many times in history, that’s a backdrop to new banks. It’s very difficult to build the critical mass that the Barclays and the Lloyds have built over the years. That applies to our banks as well, such as Nedbank and Standard Bank that have been there for over 100 years.

So what about Capitec going in now and making a bid for this? They love the operations of the business. They’ve got the capital, R100bn. That’s plenty.

They are experienced solid people, but they must know what they’re getting into. Capitec at the moment are gaining more deposits as their name in the market increases. That’s the source of their strength. It’s not on the loans but it’s on the deposit side. They are now starting to attract a lot of people who put money in. They don’t have to go into the market and borrow money. They can finance their loans from their own deposits.

I under estimated them, they have a market cap of R146bn. Close to £8bn. The market cap at the moment of Metro is £300m. So they could comfortably swallow it. FirstRand recently bought Aldermore in the UK for £1bn, three times and Aldermore is not a patch on Metro Bank, surely it’s a screaming opportunity?

That you would have to discuss with Capitec. Capitec today is bigger than Absa, Nedbank and Investec.

If you think that First Rand could afford to buy a bank for a billion pounds, Capitec is not far behind FirstRand in market value. It should be able to comfortably swallow a bank of £300m. It’s got a similar process. They think they can learn a lot from Metro Bank. Anyway it’s just one of those “what ifs”. Another “what if” is Sasol, any updates?

Share prices are coming back. We’ve had no updates, we waiting for the results to come out. From there we’ll be able to decide on management. The shares are down quite significantly. I think that’s more to do with the oil price. They’re down 4.6% but it’s still a concern and management has got a lot to address. What we should do, which we don’t do anymore, is attend the AGMs. One thing that the Americans don’t do is they don’t let management off the hook. We saw with WeWorks now. The founder has been kicked out, exactly right. We saw this Uber as well.

His name is Kalanick. He didn’t make the IPO and Adam Neumann is not going to make the IPO either. He cashed in $700m of his stake a month before they were supposed to go public.

I don’t like these types of companies. I love what they stand for, innovation and entrepreneurship but it reminds me of that old saying that the first pioneers got scalped. It was the people who came in the fourth and fifth waves that actually made the money and it’s the same thing even here in South Africa with the gold miners who came later and picked up the pieces were the ones who made the money. This is the turmoil you get with innovative business in capitalism.

We touched on Investec. They are very good at coming to the party as the second or the third, for instance development property. Their stock is under huge pressure.

They are down another 6%. Those results were far worse than the market was expecting. It highlights the strain that they’re taking in the UK. The other issue is Hendrik du Toit whose asset management side are splitting off and that’s going to weaken the base of Investec. One would have done better using their services than investing because they have hardly done anything in the last several years.

It’s down 6% today. Its down 10% in the since 20 September. It’s a bit like WeWork. I was a WeWork fan, which was a fantastic product, but you wouldn’t want to buy their shares.

If you had bought Investec shares five years ago you would be back where you started. You haven’t made any money out of it and yet look at all the effort that’s gone into running the bank.

David this is why you should be investing in Biznews Premium because there I go onto the Wall Street Journal and I can tell you the last time the share was this price was in 2013. Isn’t the question now buy them now because they are at 6 year’s ago prices?

No, the trend is heading down and structurally there are issues there. We have to work out where Brexit is going. We had Trump talking at the UN, Johnson being absolutely smashed by the High Court’s in the UK, and now the impeachment story. A lot of these are playing on the global economy. We have to work out whether there is a strategy that will get them better. Against that you’ve got the two environments in which they operate which is the UK and South Africa. At the moment it’s still very bleak.

David Shapiro who is our man on the market, South Africa’s favourite investment commentator. We will be talking to him next from New York.

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