Capitec results get lukewarm response from the market
Questions asked about income crunch as loans in arrears rise
CAPITEC’s attempts to whitewash its interim results as pleasing received a lukewarm response in the market yesterday. The share closed 0.36% higher at R202 after falling 1% after results were released. The shares have recovered from a low of R179 in the past 12 months, but still show negative growth over the past six months. The chief financial officer said he was not worried the group was becoming more reliant on fee income.
CAPITEC’s attempts on Wednesday to whitewash its latest interim results as “pleasing” received a lukewarm response in the stock market yesterday.
The shares closed 0.36% higher at R202 after falling 1% after the results were released. The shares have recovered from a low of R179 over the past 12 months, but still show negative growth over the past six months.
Chief financial officer André du Plessis said he was not worried that the group is becoming more and more reliant on fee income.
With transaction fee income negligible only four years ago, it now forms 30% of income. The group’s drive to increase this form of income saved the day against the background of a strategy to curtail lending.
“We have not reached the ceiling yet,” Mr du Plessis said.
Growth in transaction fee income is linked to the behaviour of customers. More and more are using debit cards, which puts Capitec in a position of earning fee income in the less risky and higher-income segment.
“We still see many opportunities with transaction fee income without increasing costs for customers,” he said.
But the group is clearly cutting back on lending, raising the question if this will not eventually lead to an income crunch. The value of loans advanced over the period was 26% lower at R9.5bn, with the number of loans advanced 15% off at 1.6-million. Net loans and advances were 29% higher at R29.4bn, reflecting lower growth than in the past.
It is expected that impairments are set to worsen in the second half of the present financial year as loans in arrears have climbed 67% to R1.78bn at the interim stage. Arrears as a percentage of gross loans and advances — which includes default loans of three months — have increased to 5.5% from 4.4%.
Prudently, Capitec has increased provisions for doubtful debts by 70% to R3.1bn with the ratio of doubtful debts to gross loans and advances as a percentage rising to 9.8% from 7.6%.
But this acts as a drag on capital, which would normally have been used for lending, thereby ultimately improving the return on equity (ROE) for shareholders. Capitec nevertheless remains well capitalised at a capital adequacy ratio of 39% even though ROE fell to 23% from 28%.
Mr du Plessis said it would be unrealistic to expect Capitec to be immune from negative economic developments, such as strikes and job losses. “We already decided last year to curtail lending.”
He said the results were not linked to the retirement of CEO Riaan Stassen. Mr Stassen, CEO since 2000, will be replaced at year-end by Gerrie Fourie, operations head. “Riaan is financially independent at 60, and already considered retiring at 55,” Mr du Plessis said.
Although Capitec emphasised continuity with Mr Fourie’s appointment, he could face challenging times. Mr Stassen remains a nonexecutive director, with Mr du Plessis emphasising the intention was to benefit from Mr Stassen’s experience.
Management described the 20% headline earnings per share growth as “pleasing” and cited the rights issue in November last year as the reason for the lower growth compared to the past.
Some analysts, notably at Renaissance Capital, have noted an earlier deterioration in Capitec’s financial position in the year-end results to February, released end March. They are busy updating their analysis.
Capitec’s interim results to end August showed little change from the trend evident at year-end, with income slowing and bad debts rising considerably. This makes the group vulnerable to a classic jaws ratio where bad debts rise quicker than income, as has happened recently with players in unsecured lending, such as African Bank.