PICK OF THE MONTH

Capitec

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