Capitec loan books under scrutiny

Credit impairments will be on analysts' radar when Capitec presents its interim results for the six months ended August 31 on Tuesday.

Bradley Preston, chief investment officer at Mergence, said this week: "From Reserve Bank data it looks like Capitec is seeing an uptick in impairments," which were growing faster than gross advances.

Preston said he expected an increase in impairments but one offset by strong growth in deposits and transactional fees. "Where their cost growth comes out will also be interesting to see," he said.

The company said in a Sens statement this month that headline earnings per share were expected to be between 1487c and 1525c, or 17% to 20% higher than the same reporting period in 2015.

It remains to be seen whether Capitec will continue to attract customers with its low fees as more consumers try to save money. At the end of its previous financial year, its customer base stood at 7.3million.

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Alexander Duys, head of equities at Mvunonala, believed that Capitec would have to operate in a tougher environment. "Capitec boasts a strong business model that is well capitalised and complemented by a conservative provisioning policy."

Diversifying its product offering might help the bank attract customers, said Sasha Naryshkine, a director at Vestact. "If the broader product offering can continue to compete on price and service, I think that there is plenty of scope for their clients to adopt services from the bank."

The bank has partnered with South African Home Loans to offer mortgages and is planning to expand in the entry-level market, although Duys said this would not be a "material component of business in the short to medium term".

The bank's management is well aware that its customers are using personal loans to buy cars and will look at expanding into secured lending by offering vehicle finance, although when this will be part of the product offering is not known.

But when it came to venturing beyond unsecured lending, a barrier to growth would be the cost it added to the branch network, said Preston. "Capitec has stuck to a simple product offering that is quite easy to sell. Adding more complex products would require them to add more skills and costs to their branch network."

Duys said Capitec should be able to absorb most of the shocks it might experience in a difficult economic environment, adding that "Capitec remains very well positioned for strong growth over the medium to long term".

With the likes of Discovery venturing into banking, it will be interesting to see where that leaves Capitec. But Naryshkine said Capitec had nothing to worry about. "I think the two markets will be different. Investec is more likely to be in Discovery's crosshairs."

Earlier this year, ratings firm S&P Global Ratings maintained the bank's long- and short-term rating at BB+ and B respectively. The ratings agency said the outlook remained negative as it reflected the country's "slowdown in economic growth, high inflation, and the positive interest rate cycle, which is placing additional pressure on financial institutions' asset quality and earnings".