Sweet sim­plic­ity

Finweek English Edition - - Companies & Markets - BRUCE WHIT­FIELD brucew@fin­week.co.za

CAPITEC ????? IS CHANG­ING THE WAY its se­nior man­agers, in­clud­ing its CEO, are paid. The group is vir­tu­ally do­ing away with short-term in­cen­tives and fo­cus­ing rather on higher fixed re­mu­ner­a­tion and longert­erm share op­tions as a means of driv­ing growth.

Chair­man Michiel le Roux points out in its lat­est an­nual re­port that the board had be­come con­cerned the short-term bonuses paid to CEO Rian Stassen and his man­age­ment team would “be­come more sig­nif­i­cant than was in­tended”. Armed with am­ple ev­i­dence from the fi­nan­cial cri­sis that gen­er­ous short-term bonuses are prone to dis­tort be­hav­iour, the re­mu­ner­a­tion com­mit­tee chose to rather up salaries, min­imise bonuses for short-term tar­gets and align man­age­ment in­ter­ests with share­hold­ers’ longer-term am­bi­tions for wealth cre­ation.

For ex­am­ple, Stassen’s 2009 fixed pay com­po­nent al­most dou­bles to R4,3m but his bonus has been slashed by three­quar­ters to just more than R502 000. The re­sult: a mod­est 2% in­crease in over­all pay year-on-year. How­ever, the value of op­tions granted is done in mul­ti­ples of an­nual salary and will ma­ture in equal tranches over three, four, five and six years. Op­tions also have to be ex­er­cised within six months of ma­tu­rity to en­sure ex­ec­u­tives aren’t only re­warded for per­for­mance but also run the risk of be­ing pe­nalised for short­term fail­ure as well.

“Our scheme en­sures man­age­ment will be re­warded for a high share price over many years. The best way to en­sure that isn’t to in­dulge in risk but build an ex­cel­lent com­pany,” says Le Roux.

Well funded and un­con­strained by the lim­its of bedding down a tricky fur­ni­ture re­tail book, Capitec has been grow­ing its lend­ing and its geo­graph­i­cal reach. As a re­sult it’s tak­ing on more risk. It added nearly half a mil­lion new clients last year, grew the value of loans by 22% to R6,3bn and added 32 branches, with an ad­di­tional 40 planned over its cur­rent fi­nan­cial year.

But that’s re­sulted in the dou­bling of its bad debts – from R231m to R468m. As a per­cent­age of gross loans ex­tended, bad debts are up from 8,3% to 9,1%. “Bad debts are higher than we would like them to be,” says Le Roux. Bad debts are writ­ten off af­ter three months – a move the group de­scribes as “con­ser­va­tive but re­al­is­tic”. Once its clients are in trou­ble, prospects for re­coup­ing the out­stand­ing bal­ance are re­mote.

The re­port does is­sue a cau­tion­ary note: warn­ing that its clien­tele is par­tic­u­larly vul­ner­a­ble to los­ing in­come due to strike action and lay­offs. Those are two ar­eas it an­tic­i­pates will worsen from cur­rent lev­els.

How­ever, Capitec is stick­ing to its knit­ting. There may be a temp­ta­tion to launch more com­plex of­fer­ings and get into the po­ten­tially lu­cra­tive credit card, mort­gage and ve­hi­cle fi­nance space – but not now. It’s a nar­rowly de­fined mar­ket and fo­cuses ex­clu­sively on one that’s largely ig­nored by its larger peer group. (Plus it’s pric­ing is at­trac­tive, as shown in the an­nual Fin­week Bank charges re­view.)

“The Capitec Bank model is a very old­fash­ioned one. We bor­row long and lend short. We avoid com­plex prod­ucts. We have plenty of cap­i­tal. We man­age ar­rears zeal­ously,” writes Le Roux. It’s in man­age­ment’s best in­ter­ests to do so.

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