Mind the hype

The story is good but the com­pany is stretched

Finweek English Edition - - Front Page -

CAPITEC IS A PHE­NOM­E­NON. And it’s priced like one. The listed re­tail bank trades on a mul­ti­ple of 19 times, re­cently breach­ing the sig­nif­i­cant look­ing but ul­ti­mately mean­ing­less level of R100/share. Vol­umes are thin, but de­mand for the avail­able stock is con­sis­tent. It’s a share pri­vate in­vestors are fall­ing over each other to buy and will seem­ingly pay al­most any­thing for it.

It’s a David in a mar­ket of Go­liaths and in­vestors are cap­ti­vated by its story. Head­line earn­ings per share to end-Fe­bru­ary grew 44% as its ma­jor com­peti­tors saw prof­its con­tract, pri­mar­ily as a re­sult of bal­loon­ing im­pair­ments. With a branch net­work now al­most the size of Ned­bank’s it em­ploys more than 4 100 staff and serves more than 2m clients, with no plans to hold back on its ag­gres­sive growth strat­egy.

It made an av­er­age 12 000 loans/day last year, amount­ing to R8,6bn, up a stag­ger­ing 38% in a sin­gle year. And it’s ex­panded its of­fer­ing to in­clude loans of up to R100 000 over 48 months, grad­u­ally en­croach­ing on the turf of South Africa’s big­ger play­ers. It’s in­no­va­tive in its sim­plic­ity, us­ing bio­met­rics and a so­phis­ti­cated technology plat­form to de­liver sim­ple, low-cost trans­ac­tion ca­pa­bil­ity to its cus­tomers.

It doesn’t hurt its mar­ket­ing ma­chin­ery that its name ap­peared ear­lier this year along­side those of Ap­ple and Ama­zon.com on a Credit Suisse list of “Great Brands of To­mor­row” – which main­tains nom­i­nees will out­per­form their re­spec­tive mar­kets over the next three to five years as they build and lever­age brand eq­uity to grow in size, scale and prof­itabil­ity.

Capitec is at­tract­ing a grow­ing sup­port base, not only of in­vestors but also de­pos­i­tors, drawn by its prom­ise of higher in­ter­est rates, while a grow­ing body of clients are lured by a vastly su­pe­rior fee struc­ture for day-to-day trans­ac­tional ser­vices. While many South African con­sumers re­gard their banks as bloated, greedy and un­help­ful, Capitec is build­ing a brand that es­pouses ex­actly the op­po­site.

Why, then, is there dis­com­fort about the stock? Af­ter all, it grew earn­ings to R437m, with a re­turn on eq­uity of 32% – up from 27% a year be­fore. Man­age­ment says its lend­ing cri­te­ria are stricter than ever, us­ing its technology plat­form to weed out po­ten­tially bad pay­ers from its good clients. The re­sult, it claims, is a re­duc­tion in im­pair­ments from 14,5% to 9,8%. Its fi­nan­cial back­ers aren’t concerned. Fund­ing more than dou­bled dur­ing the year, from R3bn to R7bn, and the group main­tains its abil­ity to pay all de­pos­i­tors on de­mand – should it ever be re­quired.

The dis­com­fort comes in the form of its cov­er­age ra­tio – ef­fec­tively, a mea­sure of just how much fat the group has on its bal­ance sheet. If you mea­sure the level of pro­vi­sions it takes rel­a­tive to its ad­vances, things be­gin to look a lit­tle bit tight and a grow­ing band of an­a­lysts are ques­tion­ing whether it’s suf­fi­ciently con­ser­va­tive when it comes to its pro­vi­sion­ing pol­icy.

Capitec had a cov­er­age ra­tio of 17% in 2006. That’s grad­u­ally shrunk to 7%. By com­par­i­son, African Bank has steadily main­tained a cov­er­age ra­tio in the high teens over the same pe­riod.

Most South African banks are overly con­ser­va­tive and pro­vide for more than they re­al­is­ti­cally ex­pect to write off. They in­evitably col­lect a pro­por­tion of those doubt­ful ad­vances. For ex­am­ple, in the year to De­cem­ber 2009 Absa fi­nally wrote off 35% of its im­pair­ments, Ned­bank 48%, Stan­dard Bank 29% and FirstRand 61% (ad­justed for the full year), African Bank 54% and Capitec 129%. Only once since list­ing has the amount of money fi­nally writ­ten off by the group been lower than 100% of the pro­vi­sion – that was in 2006.

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