Capitec: going strong
The bank has reported headline earnings growth in the high double digits, and its best credit performance in three years
Rumours of Capitec’s demise due to its exposure to the highly volatile unsecured lending market were greatly exaggerated.
Despite desperately weak consumer sentiment, the bank has just reported its best credit performance in three years.
For the six months to August, arrears as a proportion of gross loans and advances fell to 5.4% from 6% as customer accounts in arrears declined 2% to R2.49bn and recoveries rose marginally.
Rescheduled loans — long a bone of contention for analysts critical of Capitec, who said this allowed the bank to avoid taking the pain of soured loans sooner rather than later — nose-dived: arrears rescheduled in the sixmonth period plunged 15% to R1.4bn, while paid-up accounts rescheduled during the same period dropped 32%.
“We were more ‘strict’ on clients who wanted to reschedule while their outstanding balances were up to date and their free cash was not under pressure,” says finance chief André du Plessis.
“We were furthermore more ‘strict’ on second and third reschedules on clients whose payments were in arrears.”
This is not a new policy.
Capitec tightened its lending criteria in February 2015 in response to an economy which decelerated from growth of 2.5% to 1.7%, putting consumers under pressure.
Du Plessis says low-income earners — Capitec’s traditional market — and the small and micro enterprises that tend to employ them have been “taking strain”.
Despite this, Capitec was the only “big six” bank this reporting season to announce headline earnings growth in the high double digits, 17%, outpacing Standard
Bank’s 12%. Firstrand, Nedbank and Barclays Africa mustered just 6%, 5% and 6.7% respectively. Investec is expected to release its interim results in November.
John Storey, Jpmorgan’s head of SA equity research, says Capitec’s growth story is decoupled from the challenging macroeconomic backdrop to some extent.
“Competition is expected to increase, with the launch of Discovery Bank and [Commonwealth Bank of Australia’s] low-cost banking offering in SA,” he says.
Insurer Discovery, which got a provisional licence from the Registrar of Banks, is in the process of setting up its bank, partly backed by R2bn in cash set aside for new ventures.
The Commonwealth Bank of Australia’s Tymedigital, which is 10% owned by Patrice Motsepe’s African Rainbow Capital, has scored a full licence, and plans to launch in the middle of 2018. But Storey believes Capitec has strong competitive advantages due to its “entrenched” funding model, capital position, low cost structures, brand acceptances and continued investment in infrastructure, systems and people.
Capitec is enjoying average deposit growth of R1bn per month, with growing acceptance of the Capitec brand. Its number of clients swelled to 9.2m during the six-month period – raising total retail deposits 28.7% to R55.4bn by the end of August.
It is slowly weaning itself off funding from large institutional investors — known as wholesale funding — which comprised just R7bn, as growth in loans and advances was backed by a larger share of fixed retail deposits and profits.
“Retail deposits growth continued to surpass that of wholesale, posting a 25% increase for call deposits and 36% for fixed deposits, compared to a 16% decline for wholesale,” says Jaap Meijer, MD of research at Arqaam Capital. “Retail deposits now represent 89% of total deposits.”
This phenomenal deposit growth, mostly at the expense of the “big four” banks, according to Du Plessis, has led to a 29% boost in transaction fee income, which covers more than 70% of the bank’s operating expenditure and accounts for 35% of total revenue.
“We think further client gains will come through competitive pricing structures and growing brand acceptance,” says Storey. “Capitec’s ability to continue to grow primary bank client relationships is important, but so too is attracting higher-income/middle-market clients to the platform.”
Storey says the bank has already made substantial investments in attracting this segment of the market, but gains from this are likely to lag its spending.
“However, the idea is that those middle-market primary bank clients will use the Capitec banking platform a lot more, driving increased volume and revenue opportunities over time. Further product roll-out through the credit card offering and a potential insurance offering should also help with client retention and acquisition strategies.”
Du Plessis says Capitec has signed up 200,000 credit card customers, a key strategy in attracting high-quality clients. The credit card book, launched just a year ago, accounted for R1.3bn of the bank’s R46.5bn loan book.
“In everything we do, we do not differentiate our offer based on income of clients,” he says.
“I therefore would not like to share the internal statistics [on the number of middle-income or high-income clients].”
Capitec CEO Gerrie Fourie previously said the bank was considering offering insurance products with a partner, without divulging further details.
Thus far, Capitec has started to offer its credit life insurance products — previously part of every loan — separately. But it is involved in a standoff with the National Credit Regulator over the latest rules governing the product.
Credit life regulations allow credit providers the option to retain the cost of an insurance premium at the level it was on the inception of the loan, even though the outstanding balance decreases over the life of the loan.
Capitec does not want this, even though it could be beneficial to credit providers and insurers.
“Capitec charges credit life on the declining balance, specific to the risk of every individual client, because it is the only correct way as far as we are concerned,” says Du Plessis. “It is furthermore in the best interest of the client.
“Unfortunately the regulations allow either way — inception value or declining value — so some banks and credit providers charge fees on the inception value because it is beneficial to them, to the detriment of the client.”
Meijer says there has been no impact from the new regulations either way.
“The fees previously charged were below regulatory limits implemented on August 9 and thus clients and earnings should not be adversely affected.”