Box­ing above its weight

It sur­vived the small banks cri­sis and is thriv­ing

Finweek English Edition - - Companies & markets - BRUCE WHIT­FIELD

SMALL BANK CAPITEC is prov­ing it’s pos­si­ble to com­pete with South Africa’s Big Four and sur­vive. Not only did it sur­vive the small banks shake-out in 2002 but Capitec has also con­tin­ued to thrive at the lower end of the bank­ing mar­ket.

Its re­sults for the year to end-Fe­bru­ary 2007 show a strong per­for­mance across key bank­ing sec­tor mea­sures. Head­line earn­ings per share rose 35% to 222c and its an­nual div­i­dend swelled 78% to 60c. Costs grew 21% but were con­tained rel­a­tive to in­come growth. It’s ef­fi­ciency ra­tio dropped from 66% to 60% and its ROE was raised to an im­pres­sive 26%.

Capitec is ef­fec­tively to bank­ing what 1Time or ku­l­ are to air­lines: a no-frills, sim­ple of­fer­ing de­signed to ap­peal to the mass mar­ket.

While the air­lines have re­lied on mul­ti­mil­lion rand mar­ket­ing cam­paigns to build their brands and up their load fac­tors, Capitec has been con­tent to al­low word-of-mouth and rep­u­ta­tion to be the key fac­tors be­hind its growth. So far – with­out tra­di­tional ad­ver­tis­ing cam­paigns and big bud­get pro­mo­tions – the group, which was founded in 1999 and listed on the JSE six years ago, has at­tracted more than 1m clients.

It’s been achieved with­out any

fancy TV ad­ver­tis­ing – a favourite tool of the Big Four. How­ever, it has started run­ning its first TV cam­paigns, the first be­ing flighted in Fe­bru­ary this year. It will see Capitec spend around R20m in an above-the-line cam­paign on both TV and in print to drive greater num­bers of clients through its 280 branches’ doors. The group is an­tic­i­pat­ing big things from the mar­ket­ing drive and plans to open an­other 65 branches this year and in­tends hav­ing more than 700 ATMS coun­try­wide by March next year.

Its se­cret? Sim­plic­ity, ac­ces­si­bil­ity and price. It has no fancy prod­ucts and fewer costly plush fur­nish­ings in its branches. It’s been a strat­egy that’s paid off hand­somely for in­vestors, but an­a­lysts say the share has run hard and on a price:earn­ings mul­ti­ple of al­most 17 cur­rently there’s bet­ter value to be found in the Big Four.

Much will de­pend now on the group’s abil­ity to grow its fran­chise with­out un­do­ing the ground­work it’s laid over the past eight years. It has am­bi­tious growth plans but only a frac­tion of the re­tail foot­print of its big­ger com­peti­tors. It’s worked hard in open­ing branches at sites tra­di­tion­ally avoided by the Big Four, ei­ther due to se­cu­rity con­cerns or the fact that mar­gins weren’t high enough to sus­tain full ser­vice bank­ing. Capitec branches also re­main open longer.

“Our ATM net­work has grown more quickly than our branch net­work,” says CEO Ri­aan Stassen. “Ac­ces­si­ble bank­ing means that we place our bank fa­cil­i­ties close to where our clients live, shop, com­mute and work.”

Sim­plic­ity is the key at Capitec. There are no con­vo­luted pric­ing op­tions. Cus­tomers re­ceive the same prod­ucts and ser­vices re­gard­less of whether they earn R1 000 or R10 000/month.

That sim­plic­ity means it has fewer than eight staff per branch – con­sid­er­ably lower, and cheaper, than its com­peti­tors. With an av­er­age loan amount of R1 180, it’s clearly po­si­tioned at the lower end of the re­tail bank­ing mar­ket. Im­pair­ment rates to re­pay­ments have al­most dou­bled over the past year from 2,85% to 4,12%.

Per­sonal loans are the main­stay of the group, which nowa­days of­fers loans with fixed term pay­ments of up to 24 months. Longer- term loans make up about 39% of its book. Stassen says one par­tic­u­lar ad­van­tage of its longer-term loans is that they re­main on the books longer and gen­er­ate in­come for a longer pe­riod. Longer-term loans also put less stress on the group’s branch in­fra­struc­ture, as it means fewer clients make reg­u­lar vis­its to its branches.

Sim­plic­ity is the key. Ri­aan Stassen


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