Capitec thriving, not just surviving
In its short life Capitec has shocked the big four and sent Viceroy packing, so the digital newbies hold little fear for it
Compared with the Steinhoff and Resilient shipwrecks, Capitec Bank has coped remarkably well with criticism from short seller Viceroy.
After Viceroy accused it in January 2018 of some aggressive accounting around its personal loans, its share price fell almost 28% over barely a week to R785 a share. It has now bounced back, to R1,185 a share as the FM went to press.
Harry Botha, banking analyst at Avior Capital, says Capitec critics failed to consider the bank’s credit risk relative to its profitability. "They are very disciplined in terms of their return on equity target when issuing a loan."
And Capitec is moving towards lower-risk customers, through its Global One credit card and longer-dated loans.
No less than 60% of new credit is granted to customers earning R15,000 a month or more, and 70% of credit applications are declined.
Capitec CEO Gerrie Fourie says even though loan growth has been muted he is confident the bank will repeat the success of the previous three years when it announces results for the year to February on March 27.
At the half-year stage, EPS were up 20%, when the big four banks averaged about 5%. Capitec continued its evolution from microlender to retail bank, with transaction fee income accounting for 47% of the total. Transaction fee income is also equivalent to 90% of operating expenses.
But, having been a disrupter when it entered the market, Capitec could be on the receiving end this year with the launch of the new digital banks — TymeBank, Bank Zero and Discovery.
Capitec is increasing its investment in machine learning and artificial intelligence to improve credit risk as well as to enhance the customer experience.
Stanlib’s head of financials, Louis Chetty, says because Capitec’s fees are low — often lower than the interest paid every month — he would be surprised if many of its clients defected to the newcomers.
"And none of the would-be competitors has a strategy in place to take on Capitec in personal loans," says Chetty.
Fourie says 85% of transactions have moved to self-help options, with 3-million users of the smartphone app and 4.5-million using USSD (the technology behind the SMS).
"But we believe that [because of] low levels of financial literacy, our 850 branches remain invaluable for more complex queries. Our staff are free to focus on these."
And it will take some time for the new banks to offer products such as funeral policies.
The Capitec branches have proved an ideal distribution channel for these policies (a joint venture with Sanlam) and Fourie says the bank is selling 3,000 a day.
With 10.5-million clients (18% of SA’s population), Capitec has plenty more room to grow.
"We aim to move aggressively into the SME market, looking at businesses with turnovers of R100m or less," Fourie says.
Business banking fees are still very high in SA, perhaps double those in retail, Botha notes.
Capitec is in the process of buying business bank Mercantile, for a price that Dubai-based Arqaam Capital expects will be less than 1.5 times net worth, or about a quarter of Capitec’s current market valuation.
The transaction has yet to be approved by the Competition Commission, but it would certainly boost earnings.
Chetty says Capitec remains an attractive share as it is just starting to gain traction in the insurance and small business markets, yet many institutional fund managers have steered clear of it.
Arqaam says Capitec’s price-to-book ratio is a hefty 6.1 and there are quality operations in India, Turkey and Brazil on much lower ratings.
Even sister company PSG Asset Management sold its holding in Capitec about 18 months ago and has not bought any back.
"With hindsight we could have made a quick gain," says Shaun le Roux, manager of the PSG Equity Fund, "but the share only went from extremely expensive to very expensive in emerging-markets terms."
Le Roux says the fund still benefits from Capitec as it holds PSG Group shares. PSG owns 30.6% of Capitec, and the bank makes up 60% of the value of the share, which also includes operations such as education groups Curro and Stadio and wealth manager PSG Konsult. Agricultural group Zeder is the only large holding in the group that is underperforming.
And PSG also trades at a 15% discount to the sum of the parts. If that discount widens further, no doubt the controlling Mouton family will take action.