Capitec resilience is egg on Viceroy’s face

ext week Capitec will release its latest results for the six-month period ending August 2021. The report will provide a snapshot of the bank’s performance during the trying times that have seen many South Africans and many of the bank’s clients struggle with Covid-19 turbulence. The results reported by its peers in the sector indicate that SA banks have navigated the crisis quite admirably.

As an interim picture rather than the full account of the bank’s performance over an entire year, next week’s report will not be as voluminous as the annual report. The reason for the difference is an intersection between practicality and usefulness. The preparation process for financial statements

particularly for regulated entities is notoriously laborious. When one considers the even more frequent internal reports that banks have to provide to the regulators, it is easy to see how draining the reporting process is for such institutions. But as companies that take public deposits, the public interest profile of banks is more elevated than that of other listed companies.

The ability to make information available in a useful manner to the public is a basic expectation for listed companies. The usefulness of the information is amplified when it is current rather than old and outdated. Beyond that, the need for transparency is balanced against considerations of market sensitivity and keeping your cards close. Within those considerations, the possibility of information gaps is wide. While the investor public may be keen to know exactly how much the investment bankers that drive profits make, such disclosures would make it easy for competitors to know what to offer as enticement for such bankers to jump ship.

In addition, as financial reports provide a retrospective snapshot, their utility is stronger for those keen on historical information rather than those seeking to map out future expectations. It is in this gap that the role of research reports becomes important. For investors keen to make a decision on the prospective rather than the retrospective, the insights contained in the research reports go a long way towards covering this information asymmetry gap.

When Viceroy published its report on Capitec in 2018, it was taken seriously, like all research reports. As a report that purported to unpack the granular details that Capitec’s financial statements had avoided, it naturally elicited interest from many stakeholders. The doom it predicted led some punters to revisit their exposure to Capitec. For regulators and investors who thought the regular reports they receive from Capitec were an accurate reflection of its state, the Viceroy report was troubling.

As it turned out though, the report was less than accurate and tended towards fabrication. Since then Viceroy has been fined R50m after thorough investigations tested the alleged information asymmetry and found it to be less pervasive than Viceroy stated. Viceroy insists its report was right and refuses to be “scapegoated” by the Financial Sector Conduct Authority. The problem for Viceroy, however, is that the information asymmetry that is inherent in published annual reports is always narrowed down by the passage of time as the sum of predictions and speculations used in preparing financial statements is tested against reality.

For Capitec, Viceroy’s estimation that its loan book was about to implode and sink the bank has been tested against the type of economic interruption that does indeed collapse debtor books. Capitec and all SA banks have survived that with some distinction. The insistence by Viceroy that its predictions remain accurate even in the face of reality means that rather than benevolent researchers keen to help us all bridge the information asymmetry, Viceroy did a better job of bridging the financial windfall for its stakeholders whoever they turn out to be.