Financial Mail - Investors Monthly - - Contents - Stafford Thomas


Ev­ery so of­ten a com­pany des­tined to shake a sec­tor out of its com­fort zone roars onto the scene. Capitec, once an in­signif­i­cant mi­crolen­der, has done just that in re­tail bank­ing, ris­ing to be­come a JSE top 40 com­pany in its 14-year his­tory.

The growth story of Capitec, whose head­line earn­ings have dou­bled and share price risen over 150% in the past three years, is far from over. It has its sights firmly set on be­com­ing SA’s dom­i­nant re­tail bank, an ob­jec­tive it is well on the way to achiev­ing.

Its cus­tomer base is grow­ing apace, ris­ing to 6,2m ac­tive clients in its year to Fe­bru­ary 2015, 800 000 (15%) more than in the pre­vi­ous year and 3m more than three years ear­lier. The pace con­tin­ued in the six months to Au­gust, with the ad­di­tion of an­other 464 000 clients. More im­por­tantly, the bank is gain­ing large num­bers of cus­tomers who have their salaries de­posited into their Capitec ac­counts. Termed the pri­mary bank­ing mar­ket, it en­com­passes about 15,3m peo­ple.

“Peo­ple tend to use their pri­mary bank­ing ac­count to do most of their trans­ac­tions,” says Charl Nel, Capitec’s head of communications.

The lat­est Amps fig­ures to June 2015 re­flect strong gains by a ram­pant Capitec, its pri­mary bank­ing mar­ket share of 20,6% up from 18,9% in De­cem­ber 2014, 16,8% a year be­fore and 14% three years ear­lier.

Im­por­tantly, in the lat­est 12 months Capitec has made big gains in the mid- and up­per-in­come seg­ments, its two fo­cus ar­eas, where client num­bers grew by 11,6% and 14,7% re­spec­tively. Big­gest loser in the 12 months to June 2015 was Absa, its pri­mary bank­ing mar­ket share fall­ing from 29% to 26,7%. Stan­dard Bank’s mar­ket share dropped from 23,9% to 22,3% and FNB’s from 24,2% to 23,5%. Ned­bank eked out a gain, mov­ing from 10% up to 11,3%.

Capitec’s tar­get of a 25% mar­ket share by 2020 is look­ing con­ser­va­tive, as its pre­vi­ous tar­gets have proved to be. What makes its achieve­ment more im­pres­sive is that the bank’s move into main­stream re­tail bank­ing be­gan only eight years ago. It made its move armed with a busi­ness model de­signed to ap­peal to con­sumers who had grown hugely dis­con­tented with ex­ist­ing bank­ing ser­vices.

Capitec of­fered them what they wanted: sim­plic­ity and low, trans­par­ent fees.

Spear­head­ing its drive is its Global One ac­count, which at a fee of R5/month of­fers clients a trans­ac­tion ac­count and up to four ad­di­tional sav­ings ac­counts. It is also the only ac­count in SA pay­ing in­ter­est — 4,5% at present.

A key de­ci­sion in Capitec’s for­ma­tive years was choice of a tech­nol­ogy plat­form. It chose well. The bank’s state-of-the-art tech­nol­ogy plat­form places it at a big ad­van­tage over its ri­vals, who are ham­pered by legacy sys­tems. Im­por­tantly, the plat­form en­ables Capitec to de­liver the key el­e­ment of great cus­tomer ser­vice: all pro­cesses in real time.

Capitec’s tech­nol­ogy plat­form has also en­abled it to move rad­i­cally away from the tra­di­tional bank branch for­mat. “There are no back of­fices,” says Nel. “It cuts the costs of op­er­at­ing a branch sig­nif­i­cantly.” It also en­ables branches to be opened at well be­low the cost of tra­di­tional branches. “A Capitec branch costs R1m to open,” says Nel.

Capitec is build­ing on this ad­van­tage, adding about 50 branches an­nu­ally to its ex­ist­ing 691. There is also a new fo­cus in its drive to gain new cus­tomers. It has shifted its at­ten­tion from open­ing branches in smaller sub­ur­ban shop­ping cen­tres to do­ing so in big re­gional malls.

For good rea­son Capitec has earned a premium rat­ing, its cur­rent 22,8 p:e al­most dou­ble the av­er­age 11,8 p:e of ri­vals Stan­dard Bank, Absa, Ned­bank and FirstRand. Capitec’s rat­ing also ap­pears well jus­ti­fied by its growth po­ten­tial.

Not miss­ing a beat, in its six months to Au­gust Capitec de­liv­ered a hefty 25% rise in head­line earn­ings, in line with the 25,5% av­er­age in­crease in the pre­vi­ous three financial years. Given its on­go­ing mar­ket share gains, par­tic­u­larly in the mid- to up­per-in­come seg­ments, a pace of 20%-25%/year is within its reach in the three years to June 2018. It would con­tinue to set Capitec apart in the bank­ing sec­tor.

Based on INET BFA an­a­lysts’ con­sen­sus fore­casts, its four ri­vals seem set to grow earn­ings at an av­er­age of 12%/year over three years, al­most half the av­er­age an­a­lysts fore­cast for Capitec.

Oddly, an­a­lysts have a sell con­sen­sus rec­om­men­da­tion on Capitec while its ri­vals are af­forded either hold or buy rec­om­men­da­tions. It would not be the first time an­a­lysts have got their ver­dict on Capitec badly wrong. Shrug­ging off an­a­lysts’ neg­a­tiv­ity, Capitec’s share price — af­ter fall­ing in line with mar­ket weak­ness since May — is again on an up­ward tack with a new record high in sight.

❛❛ It has shifted its at­ten­tion from open­ing branches in smaller sub­ur­ban shop­ping cen­tres to do­ing so in big re­gional malls

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