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Steinhoff’s much anticipated 2017 financial results are expected to give insight into the misdeeds that brought the giant retailer to shambles. Earlier this year PwC released their findings of its forensic probe into the activities of the group’s former executives. Joining CNBC Africa to unpack Steinhoff 2017 financial results is Fraser Perring, Founder, Viceroy Research.

What will Steinhoff’s 2017 FY results reveal?

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Steinhoff is coming under pressure today in parliament as the company aims for executives and directors who had pocketed millions of rands in an accounting scandal. The long-awaited release of the PwC forensic report on Steinhoff was released on Friday which accused Markus Jooste and other directors who had inflated the group’s profits and asset value through irregular transactions between 2009 and 2017. Fraser Perring, Founder of Viceroy Research joins CNBC Africa for more.

PwC’s report is a replica of Viceroy’s report: Perring

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It has been a year since the spectacular collapse of Steinhoff share price, both in its primary listing in Frankfurt and in its local exchange. Viceroy Research released a report that became a catalyst to the now infamous accounting irregularities at Steinhoff. Fraser Perring, Founder of Viceroy Research joins CNBC Africa for more.

Viceroy on one year after Steinhoff collapse, Nepi, Capitec

By: Viceroy Research
&nbsp;
On January 30, 2018 Viceroy Research released our report on Capitec citing a need for large impairments and regulatory intervention.
<img loading="lazy" decoding="async" class="aligncenter wp-image-19314 size-full" src="http://cnbc.africa/wp-content/uploads/2017/01/capitec_bank_from_capitecbank.co_.za_final.jpg" alt="Capitec rides tough lending climate" width="525" height="350" />
The issues expressed by Viceroy have been reflected in a letter from Benguela Global Fund Managers to Capitec also raising concerns about Capitec’s lending practices. This report presents the results of Viceroy’s further investigation into Capitec and a rebuttal of Capitec’s responses to Viceroy and Benguela.
<ul>
<li>Since the publication of our last report, Capitec has disclosed that an extraordinarily large portion of its subprime, highly indebted customers who miss payments on their loans are somehow able to find the money to “catch up” or “cure” their arrears. This is suspicious.
<ul>
<li>Numerous former Capitec staff and 5 prominent debt counselling firms with proprietary datasets on South African unsecured lending support our thesis that this “curing” method is how Capitec hides the disastrous underlying performance of its loan book. If a borrower in arrears is able to beg or borrow the funds from a secondary lender to pay down their arrears and make themselves “current”, Capitec immediately offers them a new, larger loan. The borrowers use this new, larger Capitec loan to pay off the secondary lender used to cover the arrears.</li>
<li>Analysis of tens of thousands of Capitec borrowers’ datasets within debt counselling firms show consumers were able to get new loans after paying down their arrears the day prior. Thus, we can state empirically that this practice is still occurring. We contrast this with the lending criteria of a Standard Bank or Absa where there is a “cooling off” period before a borrower formerly in arrears can seek a new loan – to prevent exactly this behavior. By offering upsized loans to people who have just cleared their arrears, Capitec management is able to say with a straight face that they do “not lend into arrears”. This is TRUE in fact – but not in substance.</li>
<li>While the borrower is getting more and more indebted and is still unable to pay their debts, lending to people who were immediately prior in allows Capitec to artificially generate “cures”, unsustainably increase its loan book, charge massive initiation fees and create a façade of quality within its consumer base.</li>
<li>Well over half (70% – 80%) of Capitec consumers in debt counselling were issued new loans prior to repaying their existing loans.</li>
</ul>
</li>
<li>Viceroy have obtained communications from Capitec Head Office dated 8 February 2018 to local branches advising that it has amended the number of allowable loans per customer. Reading between the lines, Capitec appear to be tightening or relaxing lending rules in order to achieve the greatest possible return as opposed to the consumers ability to repay those loans.</li>
<li>Viceroy has obtained evidence of Capitec intentionally abusing the debit order system to ensure its debits take priority ahead of other lenders.</li>
<li>Following the publication of our last statement several media outlets have reported on CEO Gerrie Fourie’s purchase of ZAR 1.5m of Capitec shares on the open market, presenting this as a show of faith in the company. We believe this is intentionally narrow-minded when viewed in the context of the net market sale of ZAR 49m worth of Capitec shares by Fourie in 2017. Collectively, directors sold ZAR 406m Capitec shares on market in 2017 alone.</li>
<li>We respond systematically to Capitec’s poorly constructed rebuttal of our prior report.</li>
</ul>
Capitec’s behavior has led to material overstatement of the quality of the book and substantial under-provisioning. We note the South African Reserve Bank (SARB) described Capitec as being liquid and solvent on the basis “of the available information”. Evidence suggests the available information is being deliberately distorted by Capitec management and we believe that as a matter of prudential supervision the SARB must investigate the lending practices at Capitec. We are providing this data to SARB and the NCR.
Viceroy continues to believe that Capitec is fundamentally uninvestable and reiterate our recommendation that an investigation by an independent body is launched in the face of the evidence presented in our research.
<a href="https://viceroyresearch.org/2018/02/14/viceroy-responds-to-capitec/">Read the full report, A rolling loan gathers no loss, here. </a>
&nbsp;

Viceroy responds to Capitec

By: Capitec Bank
Capitec Bank is deeply concerned about the integrity of a report by Viceroy Research.
<img loading="lazy" decoding="async" class="wp-image-20030 size-full alignleft" src="http://cnbc.africa/wp-content/uploads/2017/01/capitec.jpg" alt="Capitec H1 HEPS up 20 per cent" width="400" height="278" />
We received a copy of the Viceroy research report at 10 am this morning and at no time has Capitec Bank been approached by Viceroy for insight into our business. None of their allegations have been presented or discussed prior to their publication.
We believe our corporate governance is strong and our communications and disclosures are, and always have been, transparent, clear and honest.
We have reviewed the report and it is filled with factual errors and material omissions in respect of legal proceedings and opinions that are not informed by accurate information. 
We continue to study the report systematically and are still seeking clarity on some of the allegations.
However, in the instance of transparency and full disclosure, we are responding to the key allegations and inaccurate statements.
<ol>
<li>Allegation one: Capitec fabricates new loans and collections, or refinances up to R3b in principal per year, by issuing new loans to defaulting clients</li>
</ol>
With reference to the reconciliation of the loan book, we can confirm that the estimate in the Viceroy report does not accurately calculate client repayments. They use a figure net of fees on loan accounts based on assumptions regarding the amortisation and capital repayment profile of the loan book. Their estimate of capital repayments of R16.7 billion underestimates actual loan receipts net of fees of R18.6 billion (receipts less fees) by approximately R1.9 billion.
Viceroy also reduce write-offs by an estimate of the component of write-offs that originate from new sales in subsequent years. There is a logic flaw that loan sales should be reduced accordingly. Furthermore, the default rates that they calculate does not consider the fact that written-off balances include fees and should be compared against the sum of actual receipts plus write-offs.
<ol start="2">
<li>Allegation two: Loans granted to delinquent customers to repay existing loans</li>
</ol>
What the Viceroy report is referring to are the court cases of only three clients. It makes no mention of Capitec’s comprehensive responses in each of these cases which addressed the allegations. Our comprehensive responses are public documents and are available at court and from our legal department.  Whenever we grant a loan, we conduct a comprehensive credit assessment based on the BAS principles (behaviour, affordability and source).
<ol start="3">
<li>Allegation three: Over-statement of Capitec’s loan book</li>
</ol>
Our impairment on loans are based on the probability of default. Loans are written off at the earliest date by which they are in arrears for 90 days or more, or legal hand-over occurs. As at 31 August 2017, our doubtful debt provision covers loan balances in arrears by 237% and 152% when including arrears loan balances rescheduled within the last six months. Any competitor analyses requires a further breakdown of their loan granting, pricing, write-off and provisioning policies to compare our approach and position on a like-for-like basis.
<ol start="4">
<li>Allegation four: Court cases may result in a class action</li>
</ol>
The proposition of a class action is highly speculative, subjective and irresponsible as the matter has not been heard in court. Capitec’s solid rationale are not taken into account by Viceroy.
The monthly loans granted were under an over-arching multi-loan agreement, concluded at the outset. Before concluding this agreement, Capitec complied with a standard, comprehensive credit assessment. This consisted of documentation and other information provided by the customer (including bank statements, payslips and answers to questions posed by Capitec Bank), as well as information sourced externally from credit bureaus.
Before each withdrawal under the over-arching multi-loan agreement, Capitec performed additional, supplementary credit assessments.  This supplemented and updated the results of the underlying initial assessments, and the aim was to check whether the customer still qualified for the proposed credit.
The process consisted of the following:
<ul>
<li>Customers asked to confirm that, ‘since you signed your last multi loan agreement, your income is the same or more’ and ‘since you signed your last multi-loan agreement, your expenses are the same or less’;</li>
<li>Capitec also makes a credit bureau enquiry to enquire whether the customer had any disqualifying legal statutes (insolvency, administration, etc);</li>
<li>Capitec also makes a credit bureau enquiry to determine the sum total of the customer’s current external obligations, i.e. whether in the period since the conclusion of the over-arching multi-loan agreement, the customer has taken up fresh debt from entities other than Capitec or settled existing debts with such entities (as far as credit from Capitec itself was concerned, this was checked and taken into account directly).</li>
</ul>
<ol start="5">
<li>Allegation five: Incorrect correlation between our credit facility and discontinued multi-loan facility</li>
</ol>
The credit facility operates the same way as a credit card, except that the Capitec credit facility terminates after 9 months. If the client applies for a new Capitec credit facility we do a new comprehensive credit assessment again to see if the client qualifies for a new Capitec credit facility.
The initiation fee is only triggered once the client uses the facility up to a maximum fee agreed with the client, which is within the National Credit act (NCA).
The monthly fee is raised within the applicable regulations of the NCA.  There is a difference between availability and use of the facility and interest is charged as contracted with the client and the full amount used, including interest and fees, is repayable on a monthly basis.
<ol start="6">
<li>Allegation six: There is a correlation between African Bank and Capitec Bank. </li>
</ol>
This is incorrect. Capitec Bank’s operations are significantly different to that of African Bank.  Capitec Bank is fully fledged retail bank and has different sources of income, not only credit. Its transactional business continues to contribute materially to its earnings as reported in our 1H 2018 results.  In addition, Capitec Bank has a significant retail deposit book, unlike African Bank. The result of this is that Capitec has a low reliance on wholesale funding.
Capitec Bank also has a far more conservative approach to providing credit than African Bank. The provisioning of Capitec Bank is market-leading and significantly more conservative to that of African Bank, as well as other unsecured loan books.
<ol start="7">
<li>Assumptions based on opinions of former employees</li>
</ol>
Employees who are no longer employed by an organisation can make claims that are false. It is devoid of all truth that Capitec Bank has fired any employees ‘for not deceiving borrowers’.
Among the many inaccuracies in the report, another exists, where it is claimed that our branch managers earn an average of R13 219 where the actual average is R22 000 per month. We are proud of the journey that we have placed our employees on with the result that many employees are promoted within the organisation.
We are deeply concerned about the way in which Viceroy Research conduct their business and our attorneys have registered a formal complaint with the Financial Services Board.
We want to reassure our customers that we are open for business and we welcome the statement from the Reserve Bank that we are solvent with adequate liquidly.

Capitec Bank Responds Quickly and Strongly Refutes Viceroy Claims

By South African Reserve Bank and Reuters
South Africa’s central bank said on Tuesday Capitec Holdings was “solvent, well capitalised and has adequate liquidity” in response to a research note by Viceroy Research suggesting the lender overstates financial assets and income.
<img loading="lazy" decoding="async" class="aligncenter wp-image-19314 size-full" src="http://cnbc.africa/wp-content/uploads/2017/01/capitec_bank_from_capitecbank.co_.za_final.jpg" alt="Capitec rides tough lending climate" width="525" height="350" />
The South African Reserve Bank (SARB) notes a report by a US based fund manager. As part of our mandate, we monitor the safety and soundness of all banks, including Capitec Bank Limited (Capitec). According to all the information available, Capitec is solvent, well capitalised and has adequate liquidity. The bank meets all prudential requirements.

South African Reserve Bank Responds to Viceroy Report on Capitec Bank

If one word dominated South Africa’s markets this week – it was Viceroy.
The short sellers, based in New York, who describe themselves as a “group of individuals that see the world differently”, have been blamed for <a href="http://cnbc.africa/videos/2018/01/09/why-aspen-is-not-the-next-steinhoff/">driving down the share price of Aspen</a>, Africa’s biggest generics drugmaker and that of real estate investment trusts such as <a href="http://cnbc.africa/videos/2018/01/11/resilient-falls-victim-to-viceroy-expose-rumours/">Resilient Reit</a>, Nepi Rockcastle, Fortress Reit A and B.
Viceroy Research shot to fame in South Africa <a href="https://viceroyresearch.org/2017/12/06/steinhoffs-skeletons-off-balance-sheet-entities-inflating-earnings-obscuring-losses/">over its report on Steinhoff’s accounting irregularities</a>. It then sent the rumour mill to spin when it revealed it would release another report on a South African company in 2018.
<blockquote class="twitter-tweet" data-lang="en">
Viceroy will be flying out the gates in 2018, and we won&#8217;t be slowing down.
We are working on European, South African, and US names for Q1 2018, while continuing to expose <a href="https://twitter.com/search?q=%24MDXG&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$MDXG</a> lies. <a href="https://twitter.com/hashtag/staywoke?src=hash&amp;ref_src=twsrc%5Etfw">#staywoke</a> <a href="https://t.co/8sUhnLwsgx">https://t.co/8sUhnLwsgx</a>
— Viceroy (@viceroyresearch) <a href="https://twitter.com/viceroyresearch/status/946709350554488834?ref_src=twsrc%5Etfw">December 29, 2017</a></blockquote>
<script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
The plunge in the share price of <a href="https://www.businesslive.co.za/bd/companies/healthcare/2018-01-09-aspen-says-it-has-nothing-in-common-with-steinhoff-as-share-price-slumps/">Aspen resulted in its CEO Stephen Saad calling for an inquiry</a> into market manipulation. The Financial Services Board’s Tembisa Marele in an emailed statement to CNBC Africa confirmed that it is engaging with the country’s bourse – the JSE &#8211; on this matter.
The JSE is “reviewing trading activity and will refer any concerns to the FSB for its consideration. The specific mandate of the FSB in this area, according to the FMA (Financial Markets Act) is to investigate cases of insider trading; price manipulation; and false reporting. This engagement with the JSE will determine what case, if any, the FSB ought to look into,” says Marele .
In response to emailed questions from CNBC Africa Viceroy has hit back:
<h3>Q&amp;A With Viceroy</h3>
CNBC AFRICA Question: Following news that Viceroy plans to release a report on another SA company rumours have surfaced that it could be Aspen or several listed property companies such as NEPI or Resilient. Our financial regulator and bourse are now investigating alleged market manipulation. How do you respond to allegations that you are behind the market manipulation?
Viceroy Answer: Viceroy encourage [sic] people not to speculate on the identity of any companies we are researching &amp; we advise caution in trading on gossip. Viceroy complies with the laws and have not released research or discussed our focus prior to publication.
We will not provide any further details on our focus as, without our full report, this may constitute market manipulation.
Frankly, the speculation of widespread fraud on the JSE is reflective of a system where regulators are struggling with a lack of funding, allowing bad people to abuse the system, the people and the government. We are most willing to assist regulators in this regard where we can.

Viceroy Research

What will Steinhoff’s 2017 FY results reveal?

PwC’s report is a replica of Viceroy’s report: Perring

Viceroy on one year after Steinhoff collapse, Nepi, Capitec

Viceroy responds to Capitec

Capitec Bank Responds Quickly and Strongly Refutes Viceroy Claims

South African Reserve Bank Responds to Viceroy Report on Capitec Bank