Cape Town - 101011 - Banking Fees - CAPITEC Bank has been found to have the lowest fees. Photo: Matthew Jordaan

Johannesburg - Capitec Bank, which had its credit rating downgraded by Moody’s Investors Service after the collapse of rival African Bank Investments Ltd, dropped to the lowest in four months in Johannesburg.

The shares fell 5.3 percent to 204.50 rand, the lowest on a closing basis since April 7 and the biggest decliner among the South African banks as of 10:07 a.m. in the city.

The stock has declined 1.6 percent this year.

South Africa’s Reserve Bank said August 16 it disagreed with Moody’s decision a day earlier to cut Capitec’s deposit rating two levels to Ba2 from Baa3, with the potential for further downgrades.

The risks of Capitec’s consumer-lending focus and lower likelihood of support from South African authorities to protect creditors after African Bank’s rescue were the main reasons for the downgrade, according to Moody’s.

Abil, which wasn’t a deposit-taking lender like Stellenbosch-based Capitec, was rescued by the central bank on August 10 after mounting losses at its furniture unit and the need for at least 8.5 billion rand of new capital caused its share price to plummet more than 95 percent.

Capitec isn’t exposed to furniture retailing and hasn’t needed to raise debt or equity in capital markets in the past year.

“We do not agree with the rationale given in taking this step,” the Reserve bank said in an August 16 statement on its website.

“Capitec follows a very conservative approach to risk and prudent provisioning practices and considerable diversification has been taking place in a steady manner in product, client and revenue streams.”


Bondholder Cuts


Moody’s shouldn’t assume the central bank won’t step in to back other financial institutions posing a systemic risk, it said.

The African Bank rescue package imposed a 10 percent “haircut” on bondholders, compared with the 40 percent discount at which the bonds were trading during the meltdown, SARB said, indicating it had helped the debtholders.

Moody’s is also incorrect when it says Capitec’s business model is similar to Abil’s, it said.

Greg Saffy, a Johannesburg-based analyst at RMB Morgan Stanley, agrees with the central bank that Capitec has a better diversified model, has provided more for bad debts and is better capitalised than Abil, according to an e-mailed note.

“That said, 40 percent of Capitec’s client base is shared with Abil,” Saffy said today, maintaining an underweight rating on the stock.

“It is the most exposed to the unsecured credit market when compared to the big four banks and is the least operationally diversified of the companies we cover.”


Capital Adequacy


Capitec’s total capital adequacy ratio is 40 percent and its liquidity coverage ratio is above regulatory minimums, according to RMB Morgan Stanley’s note.

“Capitec Bank is extremely dissatisfied with the extent of the review,” after a 30-minute phone call with Moody’s on August 14, the lender said in a statement.

“Despite assurances from Capitec Bank that our performance is according to plan, we feel Moody’s did not take this into account.”

Part of African Bank’s troubles stemmed from the 9.2 billion-rand acquisition of furniture retailer Ellerine Holdings in 2008, which prompted losses and writedowns after sales dropped.

Abil had to fund Ellerines at the cost of at least 70 million rand a month and raised money in debt and equity markets because it didn’t take deposits.

Capitec’s bad debt coverage ratio was 167 percent in February, the central bank said, while its capital adequacy “is well above the regulatory requirement.”

“It has a large cash holding and two thirds of funding comes from retail deposits,” the central bank said, adding that Capitec’s monthly financial data “indicate the continued good growth that the bank is experiencing.”

Capitec is due to give a trading update on September 10. - Bloomberg News