Along with the rest of ZA Financial Twitter, I spent yesterday watching everyone else read and react to the Viceroy Research report on Capitec. Also this:

capitec share price 30 january 2018

By last night, the story had backfired on Viceroy, and Twitter was collectively accusing them of market manipulation. My favourite quote (at the time of writing) came from Pan-African Investments CEO, Iraj Abedian, in conversation with the Daily Maverick:

“We cannot subject the macrostability of the financial market to a group of unknown sangomas.”

I spent some time reading the report last night, going through the SENS response that Capitec issued late yesterday afternoon, and having a quick look at Capitec’s 2017 financials. And then my work colleagues did the same thing.

So here’s a post.

The Viceroy Background

So I knew that Viceroy Research wrote the report that blew open the Steinhoff saga just before Christmas – but somehow, I missed the fact that they’re (apparently) aiming to be the financial market version of ‘Anonymous’. Although they’re not very good at keeping their identities hidden. Moneyweb had a look at the metadata of the pdf documents published on their site, and the ‘author’ tag was still filled in.

According to Moneyweb, Viceroy Research is a three-man team, made up of a former social worker from the UK, and two 23 year old from Melbourne. Although the caveat is that they may be a front for other people doing the actual research.

Nonetheless, there is still the Steinhoff report – which turned out to be on the money. And specifically, on their money, because the standard Viceroy disclaimer ends with:

“As of the publication date of this report, you should assume that the authors have a direct or indirect interest/position in all stocks (and/or options, swaps, and other derivative securities related to the stock) and bonds covered herein, and therefore stand to realize monetary gains in the event that the price of either declines.” 

“The authors may continue transacting directly and/or indirectly in the securities of issuers covered on this report for an indefinite period and may be long, short, or neutral at any time hereafter regardless of their initial recommendation.”

So we have this unsuccessfully-anonymous-but-still-successful research team who are building a name for themselves with these shattering reports about companies. And we are explicitly told to assume that they’re planning to realise monetary gains in the event that the price of their research target collapses.


PS: I’m not sure that you can disclaim away insider trading infractions, but I suppose there’s no harm in trying, right? Unless you fail at it. 

The Viceroy Reports: Steinhoff v Capitec

This may seem like an odd place to start, but I think that we have to start here. Without the Steinhoff report, no one would be paying attention to this Capitec report.

It also happens to be where Viceroy starts:

“Capitec’s board is largely and unsurprisingly made up of several executives from both PSG and Steinhoff. PSG is Capitec’s largest shareholder and Steinhoff was, until recently, PSG’s largest shareholder.” 

“While this is not overly suspicious, we are cautious of incestuous management between these firms given Steinhoff’s poor corporate governance.”

Whatever Viceroy might say about their main beef being the Capitec business model – I don’t think that’s how it started. From the outside, it looks as though they were chasing down connections with PSG and Steinhoff – and Capitec is a nice and publicly-traded target.

But I think that it’s important to emphasise something else here:

  • The Steinhoff Report was mainly a story of underhanded corporate structuring (which authorities were already investigating); while
  • The Capitec Report is mainly a speculation on the quality of Capitec’s loan book.

It may sound pedantic – but there is a real difference. With Steinhoff’s corporate structures, Viceroy took a timeline of documented and public events, interpolated a narrative, and proved it with financial disclosures.

But in this Capitec story, Viceroy has taken actual financial disclosures, hypothesised some ‘missing’ disclosures, and then retrospectively created a narrative. It then ‘proves’ this narrative using unsettled court case submissions, references to the African Bank collapse, and hearsay from anonymous former employees.

Now, this doesn’t make them wrong – they may well be right!

But even though the Simpsons were right about Donald Trump becoming president – we don’t treat its creators as prophets. And in the same way, this particular Viceroy report seems to be more speculative than anything else.

The Capitec “Wolf in Sheep’s Clothing” Report 

So what were the main allegations? Fortunately, Capitec answered that question for me yesterday in their SENS response. Here is my (edited) list:

The chairman of the audit committee has a conflict of interest

Because Jean Pierre Verster is a portfolio manager at Fairtree, which bet against Steinhoff, in which Capitec indirectly held (or was held as) a vested interest through PSG, Viceroy feels that he has a clear conflict of interest and should resign.

Although in the same section, Viceroy concludes that because none of Fairtree’s portfolios hold a significant shareholding in Capitec, they’re right about Capitec (ie. JP Verster Fairtree agrees with them that Capitec is going bust).

Talk about having your conflict of interest and eating it.

Conclusion: why are we even talking about this? 

Capitec fabricates new loans and collections, or refinances up to R3b in principal per year, by issuing new loans to defaulting clients.

Viceroy does some heavy-handed calculations to reconcile Capitec’s loan book – and can’t reconcile the numbers. They conclude that there are R3 billion of loans missing (or something). Here’s their calculation:

Viceroy calculation of Capitec loan book

In Viceroy’s defence, having now looked at the Capitec Annual Report, Capitec does not lay all this information out neatly. You’ve got to hunt a bit.

But when I do this reconciliation myself, I don’t actually see the problem. Unless I’m being stupid (it happens a lot), here’s my quick back-of-the-matchbox calculation:

capitec loan book reconciliation

For me, there are two problems with the Viceroy calculation. First, they want to talk about ‘gross’ values of the loans (ie. excluding any bad debt impairments), but then want to take bad debts into account in their reconciliation. That feels inconsistent*.
*Full disclosure though: I briefly tried to reconcile using gross values, but realised the flaw. At that point, the logical step was to use the net values, and I never went back to see if I could make the recon work using gross values.

The second problem: there are a bunch of assumptions made about current year principal and pro-rata of debt and other things, but no mention of interest income and loan fees earned (which would be capitalised into the loan book). At least, that’s what it looks like.

For what it’s worth, my standard rule of thumb is: if I can’t make a reconciliation work in a set of audited financials in a regulated industry, it’s almost certainly because I’m miscalculating something. But perhaps that’s just me.

The more pressing issue though: if a part-time finance blogger could take an hour or so out of his day-job to read the financials and prepare a recon that works (at least, on the face of it), then this Viceroy report is in need of some self-doubt.

Conclusion: I’m open to correction, but I think that there are some flaws in that Viceroy calculation. ALTHOUGH – Capitec could do better on their disclosure. Come now.

Capitec is a loan shark, and loans are granted to delinquent customers to repay existing loans

Well, the truth is that microlending is not a pretty business.

But the National Credit Act does try to control for this – and Capitec does have to toe that line. From what I can tell, the numbers that Viceroy uses are all in line with the NCA, so that’s not the problem. And the allegedly-extortionate interest rates charged by Capitec pale in comparison to the annualised numbers that you’ll see from other payday lenders (and real loan sharks).

Instead, the accusations in the Viceroy report come from a series of court cases that are currently underway.

Those have not been settled though, so it’s currently a case of “She said, Capitec said.”

Conclusion: Capitec is certainly not the worst of the loan sharks. And as for the delinquent customer case – I’d bet that any microlender will have some of these kinds of stories lurking in the background. These are human systems, and these kinds of bad situations are almost inevitable outliers. Is it a widespread problem though? I’m not sure – but I think that’s doubtful. We’re talking about a heavily-regulated fully-fledged bank here.

Capitec’s loan book is overstated

At this point in the report, the Capitec loan book goes from missing R3 billion of new loans, to being allegedly overstated. The Viceroy analysts take the African Bank loan write-down ratios, and apply them to the Capitec loan book.

The trouble is that Capitec is a retail bank, where African Bank was not. African Bank was really just a lender – because unlike Capitec, it did not hold the bank accounts of its borrowers. The new African Bank is trying to emulate Capitec in having a retail banking arm. That, in itself, makes this historic comparison questionable.

But more importantly, this is about the only justification that is given.

Conclusion: Viceroy may be right – but at this point, it’s really just a speculative assertion

Of course, there are other accusations in the report – questions about operating costs, and the future sustainability of the lower-income consumer market, and allegations from former staff members.

But I can’t quite believe that anyone would publicly attack the structural integrity of a key retail bank with little more than anecdotes and bank-of-the-envelope calculations.

This story isn’t over

At this point, I expect that the news cycle is going to swing between vilifying Viceroy and Capitec for a while. Stories will emerge from the woodwork to both credit and discredit both sides.

Part of me wonders whether Viceroy won’t turn out to be right. And not because their logic is sound, or because their argument is a good one – but simply because they used their Steinhoff-status to launch a social media fishing expedition.

But I hope that they are wrong. Because even if they are right, they don’t deserve the credit with this kind of report.

Short-sellers have an important job to do in markets – but they should do it with more facts and less aspersions.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at Also, check out the RA podcast on iTunes: The Story of Money.