A Capitec Bank branch in Braamfontein, Johannesburg. Picture: SUNDAY TIMES
A Capitec Bank branch in Braamfontein, Johannesburg. Picture: SUNDAY TIMES

Most people opening a new bank account, and many who are fed up with the big four, are turning to Capitec. In the first quarter of 2019, in spite of new competition from TymeBank, it added a further 720,000 customers.

Almost half of them are in the 21-35 age bracket and were likely to be opening their first bank account, and about a quarter are aged 20 or younger. Just 28% are 36 or older.

Capitec now has 11.4-million clients, more than Nedbank, and is catching up with Absa, Standard Bank and FNB. Its 19% increase in headline earnings in the year to February 2019 to R5.29bn trumped all its rivals.

With its higher dependence on unsecured lending, Capitec was hit by the new IFRS 9 accounting standard, which requires earlier recognition of bad debt. Capitec CEO Gerrie Fourie says this will push up the cost-to-income ratio from historic low levels of 36%. There will also be further capital expenditure on machine learning to improve the loan-granting procedures and client service in general. But he expects the ratio to remain in the 38%-40% range, well below that of the big banks.

Fourie does not want to get left behind on technology. Capitec has 2.2-million smartphone-based clients. There are a further 4.1-million on the (SMS-based) USSD service, but they are steadily migrating to smartphones. Yet 3.5-million digital clients also use the branch network at least once a month.

In the branches the use of self-service terminals has doubled, and the use of dual-note recyclers (ATMs which take cash deposits) is up 55%. There are hefty discounts for clients who buy funeral policies on the app too; they pay R25 for every R10,000 of cover, compared with R40 in the branches. Nevertheless 80% of 500,000 sales have been through the branches.

Capitec has 300 branches that are open on Sunday, a day on which other banks are closed. Its research showed it is the most convenient day to do business for most of its clients. It even has branches that are open until 10pm.

Fourie says a key indicator for the bank is the 26% growth in net transaction fee income to R6.46bn, which now covers 86% of operating expenses.

Next year, with the growth in funeral policy sales, it could increase to more than 100%.

Harry Botha, banking analyst at Avior Capital, says transactional revenue growth is the most important driver of earnings growth at the moment. "Meaningful credit growth is hard to achieve in the low-growth SA environment."

Stanlib head of financials Louis Chetty says he doesn’t take much notice of boasts about new client figures, as all banks do this and many clients are inactive. But an increase of 29% in retail savings to R45.1bn and of 14% in fixed deposits to R26.2bn indicates that Capitec is building a competitive retail franchise.

It remains a bank for the young and low paid, given that it has just a 6% market share of people earning more than R20,000 a month.

Still, it should attract more affluent clients on the back of Mercantile, the business bank it bought recently. It will focus on companies with turnover of between R5m and R100m a year and should acquire the personal business of the clients in many cases.

Fourie claims it is a coincidence that Capitec is cutting its fees just as the new banks open their doors. Its monthly fee has been reduced from R5.75 to R5, and the fee for electronic payments from R1.60 to R1. The charges are still higher than that of TymeBank. But Fourie says there can never be free banking, and there is a cost to regulation, compliance and security.

However, Capitec is the only retail bank to offer a good interest rate, at present 5%, on transactional accounts, soon to be matched by Discovery Bank.

And Capitec does not have to rely on microlending for growth anymore. Fourie says 78% of loan applications are never processed, which indicates how conservative it has become when it comes to lending.

Still, the loan book remains the most controversial part of the business. Fourie says that bad-debt levels cannot be compared with those of the big banks, which are involved predominantly in secured lending products such as home loans and vehicle finance.

Capitec’s credit impairment charge of R4.5bn compares with a R6.3bn charge from the much larger Absa in its financial year.

It is no accident that last year’s infamous Viceroy report focused on the risks from Capitec’s lending practices, which sometimes seem light years from its shiny banking halls. Fourie says that over the past three years the proportion of loans of one year or shorter has fallen from 30% to 10% and the share of loans granted to people who earn more than R20,000 a month has doubled to 48%. It has a 109% provision for doubtful debt, a hefty R10.4bn.

As it is, almost 10% of the loan book is made up by the Global One credit card, which has helped to spearhead the growth of Capitec in the affluent market and potentially to reduce its risk profile.

Chetty says it will be more convenient for the bank’s borrowers to use Capitec as their transactional bank as well. Hopefully, this will protect Capitec from an exodus to TymeBank and Bank Zero just to save money.

But the new banks are clearly targeting Capitec’s customers

TymeBank CEO Sandile Shabalala has indicated that he is anxious to start offering loans later this year so he can compete with Capitec on its own terms.