Capitec: go­ing strong

The bank has re­ported head­line earn­ings growth in the high dou­ble dig­its, and its best credit per­for­mance in three years

Financial Mail - - CONTENTS - Moy­agabo Maake maakem@bdlive.co.za

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.”

Ger­rie Fourie: Suc­cess story

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