Capitec sees future in SMEs
Acquisition aids move into ‘neglected’ sector of business banking
● Capitec’s move into business banking, cemented by the acquisition of Mercantile Bank at the end of 2019, is gaining momentum — customers in this segment surged 33% in the year ended February.
The growth in business banking customers to 90,000 may come off a low base but CEO Gerrie Fourie believes there are good growth opportunities for the bank in the often neglected small and medium enterprise (SME) sector.
In an interview following the release of the group’s full-year results this week, Fourie made it clear the strategy is not to rush the process but to build out steadily, putting in place the “fundamentals for growth in this segment over the long term”.
“We believe there are opportunities. We believe that if you look at the fees [in the business banking segment], they are expensive and complex and people don’t understand them,” he said.
“Go talk to SMEs and whenever you ask how their business banking is, you don’t get a good answer.”
Fourie believes SMEs and “even the informal market” hold the key to unlocking the growth potential of SA. “That’s where employment and growth in South Africa can make a big difference. That is why we want to focus on the SME and smaller market.
“If you look at the last 15 years, the government, which used to do a lot of the employing, is not any more, while the private corporate sector has become leaner and is not appointing more people at the moment. That is why we need to get the SME market growing and unlock opportunities for entrepreneurs to appoint people and to grow.”
But that doesn’t mean that Capitec, which was launched 20 years ago with its disruptive business model, will neglect its core re- tail segment. Fourie said the retail banking segment — with 15.7-million customers — will remain the focus area. And while it may be reporting slower customer growth than business banking, the 14% increase in customer numbers in the retail segment still represents 2-million new clients.
“That is the dangerous thing about percentages,” he said.
“If you are growing off a small base it is very easy to say the percentages are high. For us it’s not about simply growing the business banking, for us it’s about putting the fundamentals in place, making certain we have a unique client service that we can scale.
“Whatever clients we get, that is a bonus.”
Fourie said the focus is to grow Capitec’s retail offering and make sure the service model and scalability are ready at business banking before Mercantile Bank is rebranded.
“We will probably only rebrand in the middle of next year, when we are happy that we can handle the volumes,” he said.
Anchor Capital fund manager Liam Hechter agrees that the SME market has possibly been neglected and underserviced.
“That’s probably the angle or gap that Capitec sees for its next leg of growth.”
He said Capitec’s record in terms of servicing a part of the market neglected by its peers has been exceptional.
“You think about them going into lowerend banking, where the focus of their peers in South Africa wasn’t necessarily there. They are up to 15.7-million retail banking customers and that happened on the big banks’ watch because they probably weren’t paying as much attention to that space.
“So if they [Capitec] can cross-pollinate that across to business banking, where they are focusing once again on SMEs through Mercantile, as opposed to mid-sized businesses and corporates, they probably see a niche market that is underserved at the moment,” Hechter said.
Capitec is also steadily moving into other segments traditionally dominated by the big four banks, such as home loans.
However, Fourie said Capitec’s move into the mortgage market in partnership with SA Home Loans in November last year is more a long-term play aimed at retaining relationships with its customers than a core focus area. It has received 24,000 home loan applications.
“Let’s say you are a 25year-old who banks with Capitec and all your accounts are with Capitec and now you get married and you want to buy a home. You already have a loyal relationship with us and we don’t want to send these customers to other banks and so we offer this product to the client.”
Fourie said the mortgage market is one that “we will grow in much later”.
FNB portfolio manager Wayne McCurrie said though business banking and the mortgage segment are difficult areas in which to take on the big banks, the larger players are a “bit envious” of the relationship Capitec has with its customers.
“I think Capitec clients really like them, which gives them an edge.”
But it’s still a big task to take on the big banks in home, motor and business finance, McCurrie said.
“The big banks know what they are doing there, like Capitec knows what it’s doing in the microloans market.”
Capitec’s full-year results show that while annualised basic headline earnings were down 27% to R4.6bn due to the effect of the pandemic, the performance during the last six months of the financial year was strong, with an 18% increase in headline earnings to R3.9bn.
The group also declared a final dividend of R16 an ordinary share, compared with the 755c delivered in the first half of the previous year.
McCurrie said the big dividend is a “very big statement from Capitec”.
“It says we are fully liquid, are well provided for, have no capital issues and are over the virus and bad loans.”
Ashburton chief investment officer Patrice Rassou called Capitec’s results very strong and said the second-half increase in headline earnings showed the bank was “very conservative” in the first half in terms of provisioning for bad debts.