Capitec branch. Picture: Sunday Times
Capitec branch. Picture: Sunday Times

Capitec has proved that it is easy to eat the big banks’ lunch. Dismissed earlier as just another grey microlender, Capitec now offers bank accounts as well as loans to 10.5-million people, 18% of the SA population.

For several years it has had more main-banked clients than Nedbank, and it is now catching up with Absa, Standard Bank and FirstRand.

Capitec CEO Gerrie Fourie says he is very happy to see that the Capitec base continues to grow at the rate of 109,000 clients a month. In the six months to August the bank’s fee income was enough to pay off 90% of its operating costs. The fees make up 47% of its net income.

Gerrie Fourie. Picture: Freddy Mavunda
Gerrie Fourie. Picture: Freddy Mavunda

Even in a subdued climate Capitec’s earnings were up 20% to R2.46bn.

The higher transactional fee income is useful, as it helps the bank to not be so dependent on interest income from loans. However, it also leaves Capitec vulnerable — clients can move to potentially cheaper options that come onto the market, such as TymeDigital and Bank Zero. But for now clients are getting used to working on the Capitec platforms; there was a 27% increase in self-help transactions — mainly through the app — a 14% rise in ATM use and a 4% fall in teller interactions.

Neelash Hansjee, an analyst at Old Mutual, says Capitec is one of very few financial institutions that live and breathe the emerging middle class, and it has built up a franchise on the back of providing the right products for this sector.

Fourie says the bank has pulled back on its lending, particularly in the economically vulnerable small-and tiny-business sector. Overall the market is better year on year, with the proportion of credit-active consumers under judgment down to 5% this year from 10% in 2015.

In contrast with the image of reckless lending perpetuated in the infamous Viceroy reports, Capitec turns down 70% of credit applications, and, as a further 5% are not taken up by the clients, just a quarter of borrowing applications lead to loans. The quality of the book improved, as arrears of up to three months decreased by 10% and the number of recovered bad debts was up 14%.

Jan Meintjes, a portfolio manager at Denker Capital, says any weaknesses in the loan book would have been exposed in the change to the IFRS 9 accounting standard, which looks to the future to identify potential bad debts, rather than backwards, at historical experience. "Capitec’s customer base is maturing, with more repeat customers who have a good credit history," says Meintjes.

But the bank is moving away from its usurious money-lending roots. Almost 40% of its loans carry interest rates below 22.7%, and its best clients are charged 12.9%.

Fourie says Capitec provides the most flexibility on loan terms in the market; they can be any length, up to 84 months. The bank has also almost doubled its credit card client base to 361,000 in just 12 months, and it accounts for 30% of new credit cards issued in SA. Through these cards Capitec has gained access to a more affluent client base; the maximum limit is R150,000.

While the overall loan book increased by 3%, the credit card book was up 54%.

The bank now has a retail deposit base of R66bn to fund this. Less than R6bn comes from the capital markets, and most of the newcomers will be relying mainly on expensive wholesale funding for years to come.

But it is the new funeral plan joint venture with Sanlam that is stirring the competitors. It launched successfully in May. This contrasted with the poorly executed launch of a similar venture by African Bank and Metropolitan, which is still going through teething problems. But Old Mutual, which rarely acknowledges competitors, promised to reinvigorate sales of insurance products through its Old Mutual Finance network.

Fourie, taking a leaf from Outsurance, gives an example of a client who used to pay R845 at a competitor paying R338 at Capitec.

Fourie says any further product expansion, whether into more complex insurance products or banking products such as vehicle finance and home loans, will be gradual. Many Capitec loans are already used to buy second-hand cars, and the bank distributes for SA Home Loans. "We still only account for 5% of the SA credit market, so there is plenty of room for growth in our sector," says Fourie.

It also owns 40% of Creamfinance, an online microlender that operates primarily in Central Europe and Mexico and will provide some currency diversity.

If Capitec wins its bid to buy business bank Mercantile, it will present a serious challenge.

It can’t let the Sandton-based lender carry on as it is, as the return on equity is a feeble 9.5%, and it could take years to integrate the bank, which has very little overlap to Capitec’s core business.

Meintjes says the Capitec share is one, like Transaction Capital, that always appears expensive (Capitec trades at an eye-watering six times book) but is genuinely recession proof.