Formidable Capitec rewards the faithful few

‘REGRETS, I’ve had a few, but then again, too few to mention,” crooned Frank Sinatra through the ’70s. If he’d been a South African investor during the past 15 years, he could have chalked up significant regret.

Like most of us, he would have missed the investment opportunity of the century: Capitec.

At its low during the 2001 smallbanks crisis, which saw the demise of Saambou, the acquisition by Nedbank of BoE and recapitalisation of the enlarged group by Old Mutual, you could have picked up a share in fledgling Capitec for 64c.

This week, it traded around R580: a gain of 906 times the original investment. The full-year dividend of R10.55 is more than 16 times higher than the share’s all-time low.

Those who bought the shares in those dark days of uncertainty and kept the faith have been handsomely rewarded. There can’t be more than a handful of them.

A R1 000 investment in 2001 with dividends reinvested would be worth around R1-million today.

Sinatra fan or not, one of PSG CEO Jannie Mouton’s regrets is the unbundling of the group’s stake. In his 2010 annual report, he said the 2003 decision was necessary as PSG faced a potential hostile takeover by an unnamed player. But it burned him that the group saw its interest decline from 58% to below 35% to around 28% today.

Voted “best bank in the world” in the inaugural banking advisory group Lafferty’s 2016 Bank Quality Rankings, Capitec has evolved into a formidable operator. Slowly. Steadily. Patiently.

It trades on a demanding multiple of 22 times earnings. However, it steadily delivers earnings growth higher than its internal goal of 25% with a solid return on equity — a key measure of bank profitability — of 27%, where its large peers are struggling to deliver anything within 10 percentage points of that.

Sure, it’s had the wind at its back since African Bank was put into curatorship two years ago, but it has not wasted the opportunity. Last year it added a million new customers and, if it can manage to maintain its 150 000 new customers a month in the first quarter of this year, it will smash last year’s record. What is its secret? It’s built from scratch, organically, and has kept its business model deceptively simple. Retail deposits provide a cheap source of funding for its microloans business, which still generates 60% of revenues, down from 80% five years ago thanks to its focus on transactional banking.

At a time when the so-called big four are cutting back on staff and branches to cut costs, Capitec is expanding aggressively.

It plans to add up to 80 new branches to its existing network of 720 by year-end and grow its ATM presence by 900 to 3 000 countrywide.

It’s a tightly focused, dominant player in microloans and, with any real recovery in African Bank at least two years away, no immediate prospect of a threat from Postbank, and the “big four” increasingly conservative in their lending, Capitec has a pretty open playing field. For now, at least. Traditional banks are gun-shy of microloans. But Capitec is granting considerably more loans now than at any other time in its history. With GDP growth below 1%, that might appear suicidal, but Capitec has an air of unshakeable confidence. It is cutting back on vulnerable sectors such as iron ore and lending less to people working in small companies struggling to pay wages on time.

Long-term investors will continue to be handsomely rewarded by Capitec. New investors will not have it so easy. Its 7.3 million customers are transacting more and using more products, with a credit card set to launch later this year to supplement retail banking — but the “easy money” on Capitec has been made.

A prolonged slowdown or economic shock could easily dent its polished business model. But it has proved sufficiently nimble in the past to avoid crises and the longestablished management team seems to have a knack of dodging traps into which others have fallen.

Whitfield is not a shareholder and regrets not buying shares at 64c