Eating African Bank’s lunch

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.