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.