Picture: Freddy Mavunda
Picture: Freddy Mavunda

There was an air of the calm before the storm in Capitec’s year-end results to February, which will almost certainly be the last good set of numbers before the financial devastation of the Covid-19 pandemic becomes clear.

Capitec has treated the coronavirus as a post-balance sheet event on the advice of its auditors, says CEO Gerrie Fourie.

Yet it has chosen to scrap the final dividend "after extensive deliberation" on what Covid-19 might do to business this year, erring on the Reserve Bank’s guidance rather than shareholder demands.

Capitec’s executives have also waived 2020’s cash bonus, and there’ll be no increases in management fees this year.

Gerrie Fourie: Mercantile has adopted Capitec’s tougher provisioning regime. Picture: ALAISTER RUSSELL
Gerrie Fourie: Mercantile has adopted Capitec’s tougher provisioning regime. Picture: ALAISTER RUSSELL

In what feels a lifetime away, Capitec continued its much-envied growth in headline earnings, up 19% to R6.3bn.

It again raked in the most new customers of any bank: 200,000 clients a month, which is still twice the rate of newcomer TymeBank.

Fourie says, reasonably enough, that it is too early to measure the financial impact of the pandemic.

"It did not affect the level of credit repayments or of premiums for our funeral policies in March yet," he says.

But it has already had requests for financial help from a third of its business banking clients in recently acquired Mercantile Bank, and 80,000 of its 1.2-million retail borrowers.

And Mercantile has so far waived rental payments on the point of sale devices offered to shopkeepers.

Capitec knows a lot about adapting already, and it is certainly no longer the controversial microlender it was a decade ago.

Fourie says three-quarters of the growth in net income was driven by products which are not term loans.

For example, Capitec now has an 8.1% market share of retail deposits, which grew 22% last year to R87.5bn.

It has almost 600,000 credit card users, with a book of R5.4bn and a 4.4% share of industry balances.

And its most successful diversification has been its funeral plan: a joint venture with Sanlam, which has already issued 1.1-million policies. With R413m in net income, funeral policies are poised to overtake credit cards as a profit contributor within two years.

Nonetheless, 55% of net income, or R10.1bn, is provided by lending.

Capitec is, however, getting better at managing this book, with bad debt recoveries increasing almost threefold to R1.3bn.

The credit loss ratio of 7.2% was well down on the previous year’s 8.6%, but still looks huge relative to other banks, whose losses are about 1%.

"That’s not a fair comparison," says Fourie. "If you could carve out the area where we compete with the big banks, we would look competitive."

Capitec is nonetheless fishing in a richer pond, with more than half of its unsecured loan sales now to people earning more than R20,000 a month — the only part of the retail credit industry showing any real growth.

To attract these better-quality loans, Capitec has reduced average interest rates from an eye-popping 28% in 2017 to less than 24%.

Capitec was about to open its giant new central head office just outside Stellenbosch — which will cost R900m — to conduct next month’s AGM from there.

But in the wake of Covid-19, it had to renew the lease on all 13 premises it used before.

That means it now carries a double head office cost, similar to the one which has held back growth at Investec Bank in London.

As for the dividend decision, Nolwandle Mthombeni, banks analyst at Mergence Investment Managers, says the call was unexpected. Capitec, she says, is the most highly capitalised of the listed SA banks, with a capital adequacy ratio of 31%.

Still, while Capitec’s policy is to pay out 40% of its earnings, Mthombeni says investors would not have been buying Capitec for yield anyway. After all, it has a trailing dividend yield of 1.8% compared with well over 10% from Nedbank and Absa.

Capitec’s share price has not been immune from the sell-off in bank shares either and it is now down in line with the banking index, year to date.

Mthombeni says that a large proportion of Capitec’s credit clients work in the retail sector, which is likely to see substantial retrenchments. Fourie says 27% of Mercantile’s business clients believe that they cannot survive a one-month lockdown without laying off staff, and 56% are already considering retrenchments.

In this light, the Covid-19 pandemic makes last year’s acquisition of Mercantile seem distinctly ill-timed.

It was argued that the deal would be a springboard into the business banking market, in particular the 131,000 formal medium-sized companies in SA.

In addition to its 4,000 business banking clients, Mercantile has a strong position in merchant services, providing point of sale devices to 28,000 merchants as well as payment services, foreign exchange and rental finance.

Yet these are the businesses at the frontline of the lockdown, which economists fear could end up costing more than 1-million South Africans their jobs this year.

That is likely to have a serious impact on Mercantile’s credit impairment charge, which in the period more than doubled to R114m.

Fourie argues that this mainly reflects the fact that Mercantile adopted Capitec’s tougher provisioning regime.

Its headline earnings for the four months were a modest R3m but it should benefit from Capitec’s cheaper long-term funding, though there are no plans to rebrand the business for another two years.

Fourie could not resist a dig at Discovery’s claim to be the first behavioural bank. "We have given almost R3bn back to customers for good behaviour, with R2.3bn interest paid on savings and almost R500m in savings through reduced digital bank fees."

Capitec plans to move further upmarket with its access facility: a revolving credit product with no set term; it is also entering the vehicle finance market through the back door.

Along with WeBuyCars, it offers credit specifically to buy cars older than five years.

This is the area in which the traditional vehicle finance market does not operate. (The first Capitec-backed vehicle was a 2010 VW Touareg for R190,000.)

Capitec has been written off as a house of cards several times before.

But its ability to continue delivering superior returns can help explain why its market cap is now double that of Nedbank and Discovery, and 50% larger than that of Absa.

It sits on an earnings multiple of 20, whereas FirstRand is on eight. Yet FirstRand is much more diversified, and it isn’t that far behind the Stellenbosch scrapper when it comes to customer satisfaction.

Nobody can predict who is going to emerge from the coronavirus crisis as a relative winner, but bank customers are likely to continue voting with their feet. That stands Capitec in good stead.