Capitec will still gnaw away at big four
Transactional banking catching up with unsecured lending
CAPITEC’S gravity-defying ascent over the past decade creates perspective for the 20% fall in price this year despite a trading statement last month that said headline earnings would grow by about 25%.
The company’s annual results will be released this week.
Analysts anticipate Capitec will stick to its knitting this year, continuing to steal retail transactional banking customers from its big four banking peers, while pricing for risk with a healthy margin in the unsecured lending space.
FT.com’s analyst consensus shows most analysts believe the stock will underperform in 2016, with most recommending a sell and none recommending a buy.
Scepticism is mostly based on the bank’s valuation rather than any flaw in its business model, according to Anchor Capital’s chief investment officer, Sean Ashton.
As a holder of Capitec shares, he has some sympathy with those who balk at the high multiples — about 20 times price to earnings and four times book value — but he said the business was well placed to continue growing north of 20% a year.
“Historically, those are high numbers for Capitec and that’s starting to price in a sustainable return-on-equity and growth picture. But what they’ve been very successful at achieving in recent years — and African Bank didn’t — was building out a transactional franchise.
“A lot of the incremental growth is coming from the buildout of customer numbers.”
Ashton said the lending aspect of the Capitec growth story was slowing, but the bank’s profitable credit scoring model still allowed it to price every product at about a 25% return on equity — which means Capitec’s performance will be similar.
If credit terms start to lengthen, lower impairments improve the bank’s return. Over shorter terms, Capitec has room to price for greater risk to maintain profitability.
Accordingly, in November last year, ratings agency Standard & Poor’s said Capitec had a stable outlook, believing its normalised credit losses would stabilise at about 11% throughout 2016, that loan growth would moderate and profitability would compare well with its sector peers.
But it is the transactional banking side that holds the key to Capitec’s future — growth in customer numbers and activity and breadth of product offering. Ashton said he could see no reason why Capitec’s ability to poach customers from the big four would slow.
“The growth is also coming from a less capital-intensive place than the past. Extending new loans is very capex-intensive, but if you have an established branch network and can push more customers through the same infrastructure, that’s capitallight growth.”
This growth would not be restricted to Capitec’s traditionally lower-middle-class client base as the bank’s cost-conscious fee structure continued to siphon customers from the professional space.
What they’ve achieved, and African Bank didn’t, was building a transactional franchise Management of risk enabled share to return nearly 60% last year, while index shed almost a fifth
Capitec’s narrower product offering left it with a structural advantage — it was not struggling with the same legacy IT infrastructure problems plaguing Standard Bank, for example, and it did not manage a mortgage loan book. A credit card offering is expected this year. This allowed it to price below the big four sustainably, Ashton said.
“This does introduce some business model risk, but they’ve already tested the waters for the evolution of other products. Market share gains in South Africa are enough to focus on without having to look offshore for expansion.”
Harry Botha, equity analyst at Avior Capital Markets, said that while Capitec could take control of its future with the launch of new products, its near future was still heavily linked with unsecured lending, in which the bank had been focusing on regaining market share.
“They’ve been growing well, managing risk and margins quite successfully in a high-risk environment,” he said. “In a purely unsecured lending space, Capitec will not be able to outperform by much — market-related growth will be salary inflation plus a bit of market share gains. So I would expect lending growth in high single digits.”
Capitec’s management of its risk enabled the share to return nearly 60% last year, while the sector index shed almost a fifth of its value.
A two-time winner of the Sunday Times Top 100 Companies rankings — based on rolling five-year periods of total investor returns — in 2010 and 2012, the bank is no stranger to outperformance.
With an executive team from the now-defunct Boland Bank, R250million in start-up capital from backers PSG, and former Boland Bank MD Riaan Stassen at the helm, Capitec was granted a banking licence in 2001, listed on the JSE in 2002, and took its first deposits in 2003.
The bank has been lending out money for a little more than a decade and completed its transactional website in 2007.
After listing for R2 a share in 2002, Capitec’s past decade has seen its share price rocket from R31 at the end of March 2006 to R573 this week.
It peaked at R607 at the end of November last year.
By comparison, over the past decade Nedbank’s share price has fallen from R10.45 to R8.91, Barclays Africa Group’s has risen from R90.50 to R116, Standard Bank’s has moved from R80 to about R130, and FirstRand has moved from R20 to R46.16.