The South African Reserve Bank (SARB) notes the decision by Moody’s Investors Service (Moody’s) to downgrade Capitec Bank Limited (Capitec) by two notches, and place it on review for a further downgrade. While the Bank respects the independent opinion of rating agencies, we do not agree with the rationale given in taking this step.
Two reasons are given for the rating action: a lower likelihood of sovereign systemic support based on decisions recently taken in relation to African Bank Limited (African Bank), and heightened concerns regarding the risk inherent in Capitec’s consumer lending focus.
With regard to the first point, it is important to reiterate that the approach taken by the SARB to any resolution to address systemic risk will always be based on the circumstances and merits of the particular prevailing situation. Decisions will also be informed, as was the case with African Bank, by principles contained in the Key Attributes for Effective Resolution Regimes proposed by the Financial Stability Board (FSB), which have the objective that a bank should be able to fail without affecting the system. This is in keeping with evolving international best practice.
In the case of African Bank bond holders and wholesale depositors are taking a 10 per cent haircut, which is generally regarded as being very positive given that the trades following the announcement of African Bank’s results were taking place at around 40 per cent of par. Therefore in fact substantial support was provided, not reduced. Moreover, all retail depositors were kept whole and are able to access their accounts fully.
The Moody’s statement justifies the rating action further on the basis that Capitec follows a similar business model to African Bank. This is incorrect, the two lenders do not share the same business model. While both are active in the unsecured segment of the market, 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.
As part of its regular supervisory engagement, the Bank Supervision Department recently conducted a review of both the provisioning methodology and level of impairments in Capitec Bank and found both to be acceptable. Impairments stand at around 6 percent, with a coverage ratio of bad debts of 167 percent as at February 2014. Capitec’s capital adequacy stands at 40 percent, well above the regulatory requirement. It has a large cash holding and two thirds of funding comes from retail deposits.
The South African banking sector remains healthy and robust, and Capitec’s publically available data on the BA900 returns, which are submitted monthly and published on the SARB’s website, indicate the continued good growth that the bank is experiencing.