Boxing above its weight
It survived the small banks crisis and is thriving
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 kulula.com 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