Eat­ing African Bank’s lunch

Financial Mail - - COVER STORY - Moyagabo Maake

Though it is some­times as­sumed that Capitec has over­taken African Bank as a provider of un­se­cured loans, this is not so.

African Bank ac­counted for R44.8bn in un­se­cured loans in 2015, fol­lowed by Capitec with R36.3bn, FirstRand with R24.3bn and Ned­bank with R17.8bn.

The largest provider of un­se­cured lend­ing was Bar­clays Africa with R92.2bn, fol­lowed by Stan­dard Bank’s R56.2bn.

But com­par­isons be­tween Capitec and African Bank are in­evitable as both rely on un­se­cured loans for the bulk of their in­come.

Pub­lished an­nual re­ports show Bar­clays’ per­sonal and mi­croloan book grew by 67.1% in the six years to De­cem­ber 2015. This was slower than Capitec’s 84.5% surge in gross un­se­cured loans and ad­vances but Capitec’s loan book is much smaller.

The two are not di­rectly com­pa­ra­ble, as Bar­clays op­er­ates in 12 coun­tries and Capitec only in SA.

Bar­clays earned just over half of its rev­enue last year from net in­ter­est in­come, which reached R32.5bn. It at­trib­uted this to a wider lend­ing mar­gin — an eight ba­sis point in­crease in in­ter­est rates in its home loans, per­sonal loans and in­vest­ment bank busi­nesses.

Capitec, on the other hand, earned nearly 96% of its R13.4bn in op­er­a­tional in­come from in­ter­est dur­ing the 12 months to Fe­bru­ary, out­pac­ing African Bank’s 79%.

Other than lend­ing, Capitec has a re­tail bank­ing divi­sion, which signed 582,000 new pri­mary bank­ing cus­tomers this year. Th­ese cus­tomers make reg­u­lar de­posits with the bank, and swelled the ranks of its 7.3m ac­tive clients.

But Capitec feels com­par­isons with African Bank are un­fair.

“Our busi­ness model has al­ways fo­cused on build­ing long-term re­la­tion­ships with clients in a full bank­ing model, which al­lows us to un­der­stand our clients and their fi­nan­cial po­si­tion bet­ter,” says Carl Fis­cher, its mar­ket­ing and cor­po­rate af­fairs ex­ec­u­tive. “This, cou­pled with a sub­stan­tial rev­enue stream of over R3bn in trans­ac­tion fee in­come, makes us more com­pa­ra­ble to the tra­di­tional banks in SA.”

Nico Smuts, an an­a­lyst at 36One As­set Man­age­ment, says African Bank and Capitec are of­ten com­pared be­cause of their re­liance on per­sonal loans as a pri­mary in­come source.

“Though the big four banks also have large per­sonal loan port­fo­lios in ab­so­lute terms, th­ese are small rel­a­tive to their to­tal as­set bases, which in­clude home loans, ve­hi­cle as­set fi­nance and com­mer­cial loans, among oth­ers,” he says.

An­nual re­ports show Capitec, along with FirstRand and Bar­clays, ramped up un­se­cured loan ex­ten­sion af­ter the old African Bank’s demise, while a cau­tious Ned­bank and African Bank (un­der cu­ra­tor­ship) pulled back. This marked a change from the boom years when growth in un­se­cured lend­ing at the ma­jor banks as well as Capitec and African Bank reached highs of 38%/year.

FirstRand spokesman Sam Moss at­tributes growth in its per­sonal lend­ing port­fo­lio to Di­rect Axis, its un­se­cured credit provider, and moves made by the FNB fran­chise.

“Di­rect Axis op­er­ates in very dif­fer­ent seg­ments from African Bank and serves the mid­dle to up­per end of the mar­ket,” she says. “Also, FNB grew credit cards, per­sonal loans and over­drafts [by cross-sell­ing to] the ex­ist­ing FNB trans­ac­tional cus­tomer base, also fo­cused in the mid­dle to up­per in­come seg­ments.”

Moss says the growth in this sec­tor of lend­ing does not in­di­cate any ad­just­ments in credit ap­petite. “In fact, we tight­ened credit ap­petite over that pe­riod.”

Bar­clays did not re­spond to ques­tions by the time of go­ing to print.

Ac­cord­ing to Smuts, three things kept the other banks from suf­fer­ing African Bank’s fate: a stable fund­ing base; con­ser­va­tive lend­ing cri­te­ria; and more con­ser­va­tive ac­count­ing prac­tices, which en­sured soured loans were iden­ti­fied early and pro­vi­sions made for them.

“Most large lenders con­tin­ued to run prof­itable un­se­cured credit or per­sonal loan books in re­cent years, though prof­itabil­ity and growth were gen­er­ally less im­pres­sive than in the boom years lead­ing up to 2012,” says Smuts.

“Had there been se­vere losses in th­ese per­sonal loan books, due to their size, the big four would have been bet­ter able to ab­sorb th­ese losses than a mono­line lender such as African Bank.”

Fis­cher de­clined to an­swer ques­tions on the re­cent per­for­mance of Capitec’s loan book, which shows loans resched­uled by cus­tomers in ar­rears rose 75% to R1.5bn. Some of those whose ac­counts were up to date also asked to resched­ule their ac­counts, amount­ing to R1.8bn.

But th­ese were for loans resched­uled for less than six months.

Fis­cher would not an­swer ques­tions on loans resched­uled be­yond that (or cer­tain other ques­tions), say­ing Capitec pre­ferred not to com­ment on “neg­a­tive” ques­tions.

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