Capitec strategy pays off, bad loans plunge

Bank’s credit losses improve Headline earnings rise 17% to just more than R2bn

Capitec’s lending policies, which were tightened two years ago, have started to pay off for the bank, as it unveiled its best credit performance since 2014 in a weak economic environment.

Loans in arrears rescheduled during the six-month period plunged 15% to R1.4bn as Capitec prevented customers from restructuring their loans for a second or third time.

Credit losses also improved as the new policy, which it put in place during February 2015, bore fruit, and it extended loans to higher quality customers, resulting in slower growth in loans and advances.

“We have always advanced and priced loans according to the individual-risk profiles of our clients. We continuously verify and update the trends in the marketplace,” said Capitec chief financial officer André du Plessis. “Where we see stress, we cut back, while we open up in areas where we see opportunities. Pricing is continuously updated, which gives us the opportunity to provide unsecured credit at interest rates from as low as 12.9% per annum.

“It has been quite clear lately that the very low-income earners and small and tiny employers are taking strain.”

Capitec’s rescheduled loans in arrears had risen steeply since it started recording them in its 2014 interim results, peaking at 41% in 2016, when they reached R1.7bn. The number plunged for the first time in this interim period.

Accounts that were up to date but rescheduled nonetheless, fell 32% to R1bn. The bank previously drew flak from analysts for allowing customers to reschedule these accounts.

Total arrears declined 2% to R2.5bn, which was only a fraction of its R46.5bn loan book. Headline earnings rose 17% to

just more than R2bn. Customers who no longer meet Capitec’s lending criteria are effectively being phased out.

“Only clients that meet the criteria at point of loan application would get a loan,” Du Plessis said. “All credit provided by Capitec is done on fixed interest rates, so even if interest rates change, it will have no effect on the client. The loan would run out with the payments the client makes.”

The bank also collected higher transaction fees as customer numbers swelled to 9.2million. Most of these had switched from the big-four retail banks — Standard Bank, FNB, Absa, and Nedbank — and were attracted by Capitec’s new credit card offering. “We now have 200,000 credit-card clients. It has always been the strategy of the credit card roll-out to attract quality clients. We have 4.1-million banking clients, 1.3-million credit clients — close to 80% overlap with the banking clients — and the rest are savings clients,” Du Plessis said.

Savings clients contributed R33.5bn in deposits.

Jaap Meijer, MD of research at Arqaam Capital, said Capitec remained the only South African bank to achieve high double- digit bottom-line growth in the current economic environment.

“[This is] helped by product launches, improved transactional income, higher market share among lower-risk clients, robust credit metrics and an even wider gap between credit loss ratio and expected loss.”

Simon Brown, founder of JustOneLap and a Capitec shareholder, was delighted with the results. “Debts are not blowing out, the cost-to-income [ratio] is well ahead of competition and client base continues to power ahead.”

One sour note in the Capitec results was the steep number of loans it had written off, mainly due to customers in debt review.

“Many clients are being targeted by advertising campaigns and go into debt review,” Du Plessis said.

“The debt counsellor’s fees are high and are paid first and only thereafter do clients resume paying off their debts.

“Often, they do not understand the consequences, or in some cases, it would be better for them to repay the outstanding balances, because they don’t show signs of cash pressures. They would then maintain their good credit history.”