Capitec's shares drop 5% after rating downgrade - CNBC Africa

Capitec's shares drop 5% after rating downgrade

Southern Africa

by Reuters 0

Shares of South Africa's Capitec Bank sank more than 5 per cent on Monday. PHOTO: Getty Images

This is after a Moody's rating downgrade that cited concerns about the bank's exposure to risky consumer lending.

The ratings agency's move came after South Africa's central bank had to launch a 1.6 billion dollars bailout of African Bank Investments (Abil), which ran into trouble as bad debts soared among its core market of low-income borrowers.

In a statement, Moody's cited "heightened concerns regarding the inherent risks of Capitec's consumer-lending focus", adding that challenges in the unsecured market could weigh on the bank's financial performance.

(READ MORE: Capitec Bank's view on its Moody's rating change

Moody's cut Capitec's financial strength rating to "D" from "D+" late on Friday and downgraded its bank deposit rating by two notches. It also put Capitec on review for further downgrades.

The South African Reserve Bank said over the weekend that it disagreed with the rationale for the cuts, saying that [DATA CPI:Capitec] did not follow the same business model as Abil, which relies almost exclusively on unsecured lending.

Capitec said that it was "extremely dissatisfied with the extent of the review and its conclusion".

(READ MORE: Reserve bank disputes Moody's downgrade of Capitec

"The business is healthy, we are growing according to our plan and our loan book is performing within our risk appetite," it said.


The lender is expected to publish results for the first six months of the year on Sept. 29 and give a trading update on or before Sept. 10.

Unlike Abil, Capitec has a diversified business and makes a sizeable chunk of its revenue from transaction fees. Abil, meanwhile,funds liquidity chiefly through bonds.

Capitec's provisioning policy also means that it had a bad-debt coverage ratio of 167 perc ent in February, it said in a statement on Monday.

The bank faces tough times but it has a much stronger capital base and stricter provisioning policies than Abil, said Tracy Brodziak, head of research at Old Mutual Equities.

"We would expect to see an increase in bad debts, but I think it is completely manageable for Capitec, whereas African Bank has been very aggressive in its accounting and had quite lax policies in terms of granting of loans," she said.

Old Mutual Equities holds an indirect stake in Capitec but had no exposure to Abil because of concerns around its business model and risk, Brodziak added.

Abil relentlessly pushed its unsecured loans to low-income earners for years but high levels of household debt, unemployment and rising inflation have pressured borrowers into defaulting.