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CAPITEC BANK HOLDINGS LIMITED - Sens Announcement On Viceroy Report Of 30 January 2018

Release Date: 08/02/2018 17:44
Code(s): CPI CPIP     PDF:  
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Sens Announcement On Viceroy Report Of 30 January 2018

Capitec Bank Holdings Limited
Registration number 1999/025903/06
Registered bank controlling company
Incorporated in the Republic of South Africa
JSE ordinary share code: CPI ISIN code: ZAE000035861
JSE preference share code: CPIP ISIN code: ZAE000083838
("Capitec" or "the company")

SENS ANNOUNCEMENT ON VICEROY REPORT OF 30 JANUARY 2018

The structure of this SENS announcement is to summarise our
responses to each allegation in the 30 January 2018 Viceroy
Research Report (“Viceroy” or “the Report”). The 5 February
2018 allegations have been addressed on the same day. We
incorporated our previous SENS announcements on specific
issues by reference, where appropriate.

CAPITEC STATEMENT

•   A Viceroy Research Report was published publicly on 30
    January 2018 at 10:00 and leaked to at least one
    journalist the previous day
•   We believe we had to deal with this report as well as the
    Benguela Global Fund Managers’ letter, also leaked to the
    press, by providing factual information as necessary
•   We decided to publicly respond to these allegations and
    viewpoints on SENS announcements so that everyone in the
    market has access to all our responses
•   We believe with this final SENS announcement, we have
    responded in detail to all concerns and allegations
    levelled at Capitec
•   As stated in a previous SENS announcement, we believe
    that there will be further attacks by Viceroy in an
    attempt to substantiate their false claims
•   Shareholders are advised to use caution when reacting to
    such reports

CONCLUSIONS REACHED IN THIS REPORT

•   Capitec’s loans and advances are NOT misrepresented, as
    rescheduled loans are not treated as new loan sales
•   NO origination/initiation fees are charged on rescheduled
    loans as NO new credit is advanced
•   Rescheduling is a formal amendment to an existing loan
    contract and rescheduled loans are therefore NOT included
    in loan sales as NO new credit is granted
•   Origination fees are only charged on new loans advanced
•   When an existing loan is consolidated, loan sales only
    contain the amount of the new credit
•    Initiation fees comply with the National Credit Act
•    We DO NOT advance loans to clients who are in arrears
     with any of their Capitec instalments
•    The Report does not consider Capitec’s conservative
     write-off policy and approach to provisions when
     analysing our arrear balances. Comparing Capitec to other
     credit providers with different loan book granting, risk
     appetite and write-off strategies results in misleading
     conclusions. Based on detailed explanations provided in
     our previous SENS announcement on 5 February 2018, NO
     adjustment to the net loan book is therefore required


1.   BACKGROUND

     •   Capitec Bank

         Viceroy states that Capitec’s banking services are
         aimed at the low income market in South Africa. As
         noted on page 35 of the 2017 Integrated Annual Report
         (“IAR”) “Demographic segmentation, especially income
         segmentation, is not used to target a specific type of
         client. The focus is on providing essential banking to
         all clients, regardless of income level.”

         Capitec is a fully-fledged retail bank allowing
         clients to save, transact and borrow. [We will use the
         February 2017 figures in this report, unless otherwise
         stated, to align with the Viceroy Report.] The bank
         had 8.6 million active clients at 28 February 2017. We
         have diversified income streams with net transaction
         fee income contributing 37% of our total net income.
         Net transaction fees (non-lending income) covers 72%
         of our operating expenses. 1.4 million clients borrow
         from the bank with 53% of the balance sheet assets
         exposed to retail unsecured loans.

     •   History of micro lending in South Africa

         Viceroy completely disregards the beneficial role that
         the unsecured credit market plays in South Africa. The
         terminology such as ‘predatory finance’, ‘loan
         sharks’, clients referred to as ‘victims’ is
         deliberately inflammatory and derogatory.

         One example of the role of unsecured lending is that a
         large section of the South African population live in
         dwellings on communal land and townships with no title
         deeds. These people can only build or improve their
         houses by accessing unsecured finance. Supporting this
         assertion is the fact that there are only 1.7 million
         mortgages in South Africa. More than three-quarters of
         South Africans thus live in housing that is not backed
         by secured housing finance. The vast majority of South
         Africans do not have access to traditional secured
         lending to finance assets such as vehicles older than
         five years and white goods.
 
        The Report contains the reference “carefully concealed
        high interest rates, hidden administrative fees,
        unannounced penalties for non-repayment, garnishee
        orders that could tap into a client’s income in order
        to repay a debt, and grossly exorbitant lawyer fees
        that were incurred for any trivial contract
        infraction”. Our approach to collections focuses on
        contacting clients and, as a last resort, follow legal
        process.

    •   The Board of Directors

        Viceroy alleges that ‘Capitec’s board is largely and
        unsurprisingly made up of several executives from both
        PSG and Steinhoff’.

        The statement above is false as there is no Steinhoff
        executive (or director) that serves on Capitec’s
        board. Piet Mouton is the only PSG executive that
        serves on Capitec’s board. Chris Otto, a non-executive
        director of PSG, has served on Capitec’s board as a
        non-executive director since the company’s inception.
        Markus Jooste served on Capitec’s board from 2011 to
        2012 when he retired from the board by mutual
        agreement due to a possible conflict of interest
        created by Steinhoff’s entry into the financial
        services industry when they bought the JD Group. The
        Capitec board members are listed in the 2017 IAR on
        pages 42-45.

        There is NO business relationship between the members
        of management of Capitec and Steinhoff.

        Related party transactions between Capitec and PSG are
        detailed in the 2017 IAR as note 31 on page 167. These
        transactions are at arm’s length and limited to PSG
        Capital acting as Capitec’s sponsor for the JSE and
        broker for employee share trust transactions. The
        amounts concerned are immaterial.

    •   Breakneck insider sales
        Capitec has grown significantly since inception. This
        has resulted in total assets at 28 February 2017 of
        R73.4 billion (2004: R510 million) and equity of R16.1
        billion (2004: R428 million). The Rand value of
        shareholding of individuals who started the business
        has naturally increased along with the growth in the
        bank.

        As noted in the Report, directors and management sell
        shares from time to time to diversify their investment
        portfolios. Founding directors of Capitec, which
        include Riaan Stassen (non-executive chairman),
        Michiel le Roux (non-executive director and previous
        non-executive chairman), Gerrie Fourie (CEO) and Andre
        du Plessis (CFO), however, all continue to hold
        significant interests in Capitec. Their combined
        shareholding in Capitec today amounts to 13% of
        Capitec’s issued capital.

    •   Jean Pierre Verster

        Jean Pierre Verster is an independent non-executive
        director and chairman of the audit committee. His
        appointment to the board of Capitec in 2015 was
        subject thereto, and as an absolute condition, that he
        would not trade in Capitec securities in his role as
        asset manager or have influence over trading decisions
        on Capitec shares. This was confirmed publicly and
        verified by his previous and current employer.

2.   KICKING THE CAN – RECEIVABLE OR NOT RECEIVABLE

     •   The Report concludes that our bad debt equates to over
         42% of our gross collectible principal per the loan
         book’s maturity schedule.

         The header above states that we write off 42% of the
         principal of loans receivable within the next year.
         The following flaws exist with this conclusion:

         • The Report uses the written-off balance (numerator)
           including fees and interest up to the point of
           write-off, but the capital due in the next year
           (denominator), excludes fees and interest for the
           following year.

         • The write-off balance (numerator) includes all the
           capital due in the following and all future years,
           whereas the denominator excludes all capital due
           beyond twelve months.

         This is demonstrated by way of an example:

         Assuming one loan had 30% of capital due in the
         following year, and the loan was written-off in the
         subsequent year, then the write-off percentage as
         calculated by Viceroy would be 100/30, or 333%.

         This incorrect calculation misleads the reader as to
         the asset quality of the bank.

         A representative calculation using disclosed
         financial information is to take write-offs - which
         includes all capital and income up to the point of
         write-off (numerator R5.447 billion) and divide that
         over total outstanding capital plus loan income for
         the following year (denominator R40.891 billion plus
         R14.362 billion). The answer equates to 9.8%, which
         is conservative, as some write-offs originate from
         sales in the following year. This also proves that
         the previous year’s provision as at 28 February 2016
         of 12.5% was more than adequate.

         The reference to ‘massive write-off’s’ on page 9 of
         the Report is refuted by the 9.8% default rate
         above.

•   Irreconcilable loan book

    The first SENS announcement released on 5 February
    2018 deals with this in detail.

•   Rolling of existing unpaid loans by issuing   new loans
    while collecting zero principal

    This has been dealt with in the first SENS
    announcement released on Monday 5 February 2018. We
    reiterate that we do not grant credit or facilities to
    any client if any Capitec loans or facilities are in
    arrears. We are comfortable that our average book
    growth of 10% per annum in the last three years
    supports our assertion of a healthy book with
    conservative granting appetite. For reference, average
    inflation over the past 3 years was 5.4%.

•   Rescheduled loans

    This has been dealt with in the written response to
    Benguela Global Fund Managers as noted in the SENS
    announcement of 1 February 2018. We reiterate that we
    do not charge initiation fees on rescheduled loans and
    do not include rescheduled loans in our loan sales
    calculations. The full report is available on our
    website at www.capitecbank.co.za/investor-relations.

•   The Report states that Viceroy finds it is literally
    unbelievable that a bank would be able to increase its
    balance sheet by more than half and only incur a 1
    percentage point increase in its non-performing loans
    in that environment, much less an unsecured lender.

    Capitec’s loan book grew from R18.4 billion (February
    2012) to R30.7 billion (February 2013) which is an
    increase of 67%. In Rand terms, impaired advances went
    from R932 million (February 2012) to R1.777 billion
    (February 2013) which is a 91% increase year-on-year.
    Viceroy creates an expectation with readers that the
    arrears rates should increase with the growth in the
    loan book. If arrears balances increase in line with
    book growth percentages, the arrears rates would
    remain static.

    It appears that the reference to the 1 percentage
    point increase was stated in a manner to mislead the
    reader. Viceroy directly states that “Capitec’s low
    arrears cannot be explained any other way: the company
    must be refinancing its own delinquencies” Viceroy
    does not seem to understand the simple explanation
    that Capitec’s arrears are low due to the strict
    write-off policy.

•   61 to 84   month loan products

    On page 13, 4th paragraph the Report says “Incredibly
    and suspiciously, 2013 was the first year Capitec
    introduced its 84 month loans, which instantly became
    its most popular loan product, accounting for a third
    of its loan book. Given the sudden popularity of the
    61-84 month loan product, it would be expected that
    these loans would become a larger part of the Capitec
    loan book over time. This was not the case.” Viceroy
    uses language such as “incredibly” and “suspiciously”
    to describe the logical and prudent actions of a
    responsible credit provider to limit long-term credit
    to only the lowest risk clients. Only 7.3% of
    Capitec’s credit clients currently qualify for loans
    in excess of 60 months (3.6% qualify for 84 month
    loans).

    A further important point to understand is that the
    book growth accelerates significantly, even at stable
    loan sales levels, when extending the product term.
    This trend reverses as the book matures. On launching
    an 84-month product for example, clients repay 1/84th
    of the amount advanced in the first month and the net
    book grows by the differential of 83/84th of loan
    sales. In month 2, repayments increase to 2/84th and
    book growth continues, but at a slightly reduced rate.
    If loan sales remain stable over the next 84 months,
    the value of capital repaid will steadily increase up
    to the point in month 84, when capital repayments
    match sales and book growth will cease. The book
    growth during the 2014 and 2015 financial years,
    despite the decreasing and flat loan sales,
    demonstrates this effect.

    There is nothing sinister or suspicious in the
    performance of the book. The flattening of the book
    growth was in line with our expectations and
    demonstrates that the repayments on the products are
    healthy. As disclosed on pages 29 and 30 of the 2017
    IAR, the product is performing in line with our
    estimates.

3.   CAPITEC’S CREDIT FACILITY ORIGINATION FEE

     •   Capitec credit facility’s origination fee resembles
         loan shark tactics

         Rationale for multi-loan product

         The market norm when we started the bank was a charge
         of 30% per month for 1-month loans. We initially
         reduced the pricing to 21.5% and later to 15%. The
         process to grant credit to clients on a monthly basis
         was time consuming and highly inefficient, costing
         them time and transportation costs to apply in branch
         for each loan. The multi-loan product was developed to
         provide the client with an accessible solution
         (branch, ATM, cellphone) and we passed through the
         benefits of the more efficient process by reducing
         prices.

         Discontinuation of multi-loan and starting of facility

         The multi-loan was not prohibited. Capitec ceased
         offering the multi-loan product because the
         requirements of Affordability Assessment Regulations,
         made under the NCA, which rendered the product
         uneconomical.
         The initiation fee on the credit facility is
         calculated differently to that of the multi-loan.

    In the example on page 17 of the Report, Viceroy
    assumes that the total initiation fee of 155% of the
    facility amount, which would amount to R7,729.20. This
    is incorrect as the actual maximum initiation fee
    could only be R644.10 or 12.9% of the facility amount.
    The initiation fee is not repeated once the cumulative
    drawdowns reach the maximum facility amount. All
    Capitec loan and facility pricing conforms to the NCA.

    It is common for banks to charge clients monthly fees
    for overdrafts, facilities and credit cards
    irrespective of use. The charge of R35 per month is in
    line with other credit providers and well below the
    NCA caps.

    Calculation errors on origination fees made by
    Viceroy:

    • Percentage of origination fees to total revenue

     On page 15 of the Report, Viceroy makes the
     following incorrect statement “While competitors’
     origination fees are immaterial (<1% of earnings),
     Capitec’s origination fees contributed + 21% of
     earnings in 2017”. This statement is misleading for
     the following reasons:

     • The <1% of earnings probably applies to larger
       banks where mortgages make up a large proportion
       of their loan book and income. On these products,
       the origination fees are charged once in 20 years.
       Viceroy has selectively changed the comparison for
       this purpose to that of secured credit providers
       only. Elsewhere they compare us against unsecured
       credit providers

     • They compare pre-tax origination fees with post-
       tax profit, net of operating costs and tax

     • Origination fees comprise 3.8% of Capitec’s total
       revenue

•   Number of credit facilities and facility loan book
    size

    Viceroy’s estimate is incorrect that 87% of the total
    number of loans issued by Capitec are credit
         facilities. Furthermore, this statistic is pointless
         as it is similar to comparing credit card
         swipes/transactions to mortgage advances.

         Furthermore on page 24 of the Report, Viceroy makes
         the misleading statement that “roughly 87% of
         Capitec’s loan book is comprised of the 12-month
         credit facilities”. In our 2017 IAR (page 26), we
         disclose that the credit facility makes up 0.3% of the
         total gross loan book.

     •   Revenue earned from origination fees on multi-loan and
         credit facility

         On page 21 of the Report there is an incorrect
         estimate that our origination fees on the multi-loan
         product for the 2010 financial year amounted to R720
         million. On page 16 of the 2010 IAR, we show that the
         total revenue on all 1-month loan products including
         the multi-loan, was R361 million for that year. In
         2017, the initiation fees on credit facilities were
         R97 million and are included in interest received. The
         estimates regarding the origination fee income of the
         multi-loan product on page 21 of the Report
         demonstrates that Viceroy purposely draws incorrect
         conclusions regarding the nature and revenue of the
         product.

     •   Conclusion on origination fees

         We do not agree with the statement that there is a
         legal risk on these products. Viceroy incorrectly
         quantifies the size of the book and the revenue from
         these products. The statement that our loan
         origination fees are a major boost to our returns has
         been incorrectly calculated and creates a false
         narrative. The Report states that we charge excessive
         and illegal interest rates on our credit facility,
         disguised as initiation fees. This is incorrect.
         Viceroy incorrectly concluded that Capitec’s pricing
         was excessive and illegal based on their incorrect
         understanding of the product in the example above. The
         NCR reviewed the product in detail and concluded their
         satisfaction with the product, including the fees and
         interest charged.

4.   LEGAL PROCEEDINGS

     Viceroy accuses Capitec of advancing excessive credit,
     reckless lending and rescheduling existing loans in order
     to disguise delinquencies and, in the process, earning
     fees to which it is not entitled.
     In so doing, Viceroy relies on a press report (figure 11,
     p 10 of the Viceroy report), selective extracts from
     legal proceedings against Capitec (figures 12 and 13, p
     11; figures 14 to 17, pp 11 - 12; figure 25, p 16;
     figures 28 to 30, p 19; figure 32, p 20; figure 33, p 21
     and figure 35, p 22) and social media (figure 23, p 15).
     At least one extract (figure 33, p 21) has no relevance
     whatsoever to the conclusions and inferences drawn by
     Viceroy in its report. In respect of the other three
     court cases referred to (a) the allegations by
     complainants, in the selective extracts relied upon by
     Viceroy, do not support the conclusions and inferences
     drawn therefrom; (b) Viceroy failed to disclose that
     Capitec has filed extensive answering papers in those
     court cases; and (c) Viceroy failed to disclose Capitec’s
     answers in those papers to the allegations (in the
     extracts relied upon by Viceroy). Viceroy also did not
     take into account nor divulge (except in respect of an
     unnamed case, which allegedly will be heard in March
     2018) in its report that none of the three cases from
     which it had quoted have been heard and pronounced upon
     by the court. Moreover, Viceroy did not see it fit to
     ask Capitec for its comments on any of the allegations as
     quoted, and its conclusions and inferences drawn
     therefrom.
     As a result, Viceroy ignored the most basic tenet of any
     objective and impartial research, namely to present
     balanced and even-handed findings. Nonetheless, Viceroy
     saw it fit to opine that one of the court cases against
     Capitec will trigger a class action against Capitec
     resulting in a massive liability.
     Capitec refrains from answering the allegations in the
     extracts relied upon by Viceroy, and the conclusions and
     inferences drawn therefrom by Viceroy. The reason is
     that it will be neither practical nor appropriate for
     Capitec to attempt to summarise and contextualise the
     content of voluminous court papers. Such papers are
     however available on request from Capitec’s legal
     department.

5.   CAPITEC’S IMPOSSIBLY LOW ARREARS

     •   Accusation that the loan book is overstated by R11
         billion
    The first SENS announcement released on 5 February
    2018 deals with this in detail. Furthermore, a
    comprehensive review was done and released on Friday 2
    February 2018 on rescheduling of loans and the
    treatment of provisions. This review was done for
    Benguela Global Fund Managers and is available on our
    website www.capitecbank.co.za/investor-relations

•   Difference in arrears performance between Capitec and
    other credit providers

    • Credit granting

     The allegation that Capitec granted multi loans
     without a credit risk or affordability assessment is
     untrue.

    • Viceroy falsely alleges that Capitec grants credit
      to clients that are in arrears with their Capitec
      loans.

     The statement is false. Capitec does not issue loans
     to clients that are in arrears at Capitec. Staff do
     not have the discretion to override this rule.

    • Viceroy falsely alleges that Capitec disregards the
      instalments of new and existing debt in its
      affordability calculations.

     The statement is false. The Capitec system always
     takes into account instalments of any internal or
     external credit agreements. Instalments for all
     Capitec loans and all credit listed on the credit
     bureau are taken into account in the affordability
     assessment. The consultants also review the bank
     statements to identify new debt (inflows from credit
     providers or instalments) that is not yet on the
     credit bureau. Where clients settle internal or
     external debt with new debt, the system always
     settles the old debt directly to the relevant loan
     account at the relevant credit provider. Capitec is,
     therefore, certain about the settlement of the old
     debt. The system consequently disregards the
     instalments on debt directly settled by the system
     during the loan granting process in the
     affordability calculation, as no additional
     instalments will be due on these loans. The new
     debt is taken into account to ensure the client can
     afford the monthly repayment.
• Granting credit to clients that have existing debt

 During the loan application process, Capitec
 presents the maximum loan amount, maximum term and
 maximum instalment to the client. Within those
 constraints, the client may select any combination
 that suits the client best.

 Capitec encourages clients to take up credit for
 shorter periods of time and smaller amounts, through
 a pricing model that discounts the interest rate in
 instances where clients select a term that is
 shorter than the maximum that they qualify for. This
 is due to the manner in which the pricing for risk
 model reacts to the lower default rates observed for
 such clients.

 There are various circumstances where clients may
 return later to take up additional credit,
 including:

 • Instances where clients use credit to fund
   projects such as home improvements or studies
   (self and/or for their children) and the funds are
   needed over a period of time as the project or
   studies progresses.
 • Clients may become aware of the amount of credit
   that they qualify for and return when they
   identify opportunities to use the funds, such as
   identifying a special offer on white goods or a
   vehicle at a low price.

   Take an example where a client qualifies for a
   maximum term of 63 months, a maximum instalment of
   R3 000 per month, leading to a maximum loan amount
   of R101 000. Should the client decide to buy an
   item for R20 000 and selects to repay the debt
   over 24 months, the instalment would be about
   R1 000 per month.

   Should the above client later come across an
   opportunity to buy a second hand vehicle for
   R75 000, he will only be able to afford a loan of
   R65 000, as the R1 000 instalment reduced the
   amount available for a second loan to R2 000.
   Clients find this difficult to accept, as he
   qualified for more than R100 000, but the
   conservative and sensible choice to repay the
   first item over a short period, now limits the
   client to total credit of only R85 000. The client
       could miss the opportunity to buy the vehicle. The
       client could go to another credit provider, borrow
       R95 000, settle our loan of R20 000 and buy the
       vehicle with the remaining R75 000.

       Capitec offers the client exactly the same
       solution, on condition that he meets our credit
       risk and affordability requirements. We allow the
       client, in this case, to consolidate the R20 000
       existing loan to a new loan over 60 months. The
       total credit over 60 months will therefore be R95
       000 (initial R20 000 plus R75 000 new credit).
       There will be one monthly fee and the initiation
       fee would only be charged on the additional R75
       000. The client’s total instalments amount to
       R2 800 and we are comfortable that the client can
       afford the debt. Refer to the 5 February 2018 SENS
       announcement for more examples.

       Our scoring models do react to instances where
       clients repeatedly take up credit and where a
       client’s debt to income ratio becomes too high. In
       such instances we limit the term and amount of
       credit offered to clients or we decline the
       application for credit.

       There is nothing sinister or reckless in this
       approach and the bold statements in the Viceroy
       report that Capitec operates recklessly, rolls
       debt and hides defaults are completely unfounded.
       When Capitec reports loan sales, we report the net
       amount of debt issued and we exclude the
       consolidation loan from loan sales. Refer to the 5
       February 2018 SENS announcement for examples.

     • Our full credit risk management process, including
       credit granting is discussed in detail on pages 58
       to 63 of our 2017 IAR. We believe that our
       analytics gathered over the last 17 years is of
       high quality. This is further enhanced with the
       information that we obtain from our banking
       clients.

•   Viceroy ignores logic in drawing conclusions regarding
    the impact of pricing on credit performance

    Viceroy shows that another bank (bank one) sometimes
    has lower pricing than Capitec, but that another
    credit provider is substantially more expensive. They
    provide no pricing for a second bank and no credit
    performance for bank one. From the above they conclude
         that Capitec should perform similar to competitors
         (bank one) while our analytics based on credit bureau
         information show that Capitec is less expensive and
         performs better due to it being more conservative. We
         have analysed the pricing presented by Viceroy and it
         appears that this is outdated and there are
         calculation errors in some of the information.

         In our experience, the affordability computation is
         more critical in order to ensure that clients are not
         over indebted. Capitec has always maintained
         conservative buffers in its living expense
         calculations and this is an important reason why
         Capitec has outperformed many competitors from a
         credit risk perspective. Viceroy appears not to have
         attempted to understand how the different credit
         providers perform their affordability computations.
         Consequently we do not believe they are sufficiently
         informed to express an opinion regarding the
         operational processes of the various credit providers.

6.   STATE OF THE MARKET

     •   Current financial stability assessment by the central
         bank

         On page 28 of the Report, Viceroy stated that they
         believe the projected appetite for the market for
         ‘microfinance’ is drastically being overestimated.

         Capitec has continuously reduced its appetite for
         credit in the current economic and political climate.
         This has been communicated formally in integrated
         annual reports, interim results releases and investor
         presentations. Gross loans and advances for the 2017
         financial year grew by 10%, compared to the 13% growth
         in 2016 and 8% in 2015. This is nothing new and is
         publicly available.

         Capitec monitors credit risk performance on a daily,
         weekly and monthly basis. Whenever we identify changes
         and trends, we analyse the cause thereof and take this
         into account by adjusting our credit scoring and
         provisioning models as often as needed. As an example,
         we identified in the beginning of 2016 that small
         employers were starting to pay staff (our clients)
         late, which affected our clients’ repayment
         performance. We adjusted our credit offer to those
         clients accordingly which affected our clients’
         repayment performance. This can be seen in the
         reduction in loan sales in the shorter duration
         products during 2017.

         The fact that Capitec has 8.6 million active clients,
         allows us to analyse the financial health of the
         client and identify and monitor trends. We use this to
         inform and support our credit granting appetite and
         identify risk areas and opportunities.

     •   Deposit Insurance Scheme (DIS)

         The Report states that Capitec has a DIS funding
         obligation of R2.402 billion that will place ‘further
         strain on its cash reserves’. The conclusions arrived
         at by Viceroy are incorrect based on the following
         considerations:

         • Based on the proposed ‘covered deposits’ of up to
           R100 000 per client per bank, a significant
           proportion of Capitec’s deposits will not be covered
           and will not attract a funding obligation.
         • The funding obligation of 5% per the Report is
           incorrect and is still in the process of being
           finalised.
         • The insurance fee is unknown and will differ from
           the funding requirement. The estimate regarding the
           impact on Capitec’s book value is speculative.
         • The R2.402 billion is inaccurate. However, this
           still remains insignificant compared to Capitec’s
           surplus cash reserves of R26.5 billion as disclosed
           in our 2017 IAR on page 22 and will have no impact
           on our loan book growth.
         • Capitec retains a very conservative liquidity
           policy, which resulted in a Basel Liquidity Coverage
           Ratio of 1187% at 30 November 2017, way in excess of
           the 100% prescribed.

         SARB and National Treasury are in a process to submit
         a formal public proposal for a DIS. This process has
         yet to be completed. The SARB paper published in May
         2017 has undergone numerous iterations.

         We have calculated the impact based on preliminary
         discussions with SARB and National Treasury. We
         confirm the results are significantly less than
         alleged by Viceroy.

7.   NUMBER SKIPPED
     The Report jumps from section 6 to 8, neglecting a
     mysterious paragraph 7.

8.   IMPOSSIBLE COST STRUCTURE

     •   Capitec uses a modern Microsoft Windows based system
         with carefully designed workflow that guides and
         supports branch staff through all client interactions.
         Staff are able to focus on client service instead of
         processes that involve filling out, capturing and
         reconciling forms. Branch support is fully
         centralised, which means that branches have no back
         office and all branch staff, including branch
         managers, are client facing. Branch staff have no
         credit granting discretion and all exceptions are
         centrally managed and monitored by a central
         specialist team.

     •   One example in which the centralised system helps to
         manage risk is the manner in which we compare loan
         applicants’ biometrics (finger prints) to the
         Department of Home Affairs database. We do this to
         decrease application fraud.

     •   Capitec does not offer business banking and
         consequently there is no need for specialists to
         analyse balance sheets and income statements and
         assess credit risks for businesses. All of the above
         facts are readily available in our IAR and are well
         known to investors and clients (e.g. 2017 IAR page
         36).

     •   The report states that a Capitec branch manager earns
         R13,219 per month. The actual figure is R22,000 per
         month.

     •   The conclusion that Viceroy reaches on page 33 in the
         8th paragraph regarding staff quality is untrue. The
         numerous service quality awards that Capitec’s staff
         have received such as Ask Africa and Orange, as well
         as the market share that Capitec was able to obtain in
         a fairly short period supports the assertion that
         Capitec’s staff are well-trained, highly motivated and
         very client service oriented. The staff profile is
         young and dynamic and the assessment criteria for
         selection of new staff is strict.

9.   CHANNEL CHECKS
    In the February 2017 financial year, our employee
    turnover was 14.8% versus a financial industry average of
    20.5%.

    We have a specialist team that responds and follows up on
    social media interactions.


8 February 2018
Stellenbosch
Sponsor: PSG Capital

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