Can high-flying Capitec ride out storms?

28 May 2017 - 02:00 By PERICLES ANETOS
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Capitec grew rapidly on the back of unsecured loans available at branches.
Capitec grew rapidly on the back of unsecured loans available at branches.
Image: CAPITEC

The story of Capitec's rise to challenge the country's big four banks on a strategy of no frills and cheap services has perhaps been one of the most successful corporate stories in recent years.

Listed at R1.70 a share 15 years ago, today the bank that was championed by PSG owner Jannie Mouton sits at R795 a share.

Since its listing on the JSE in February 2002, it has outperformed Apple, the most valuable company in the world, which, in that time, launched game-changing technology such as the iPod, iPad and iPhone.

Much of Capitec's growth can be attributed to the growth of the unsecured credit market in South Africa.

The bank even paid homage to this in its latest financial results, where it started its historical timeline with the change in the country's laws that allowed an unsecured credit market to take hold.

Capitec's market cap of more than R91-billion is about R30-billion less than that of Barclays Africa Group - which is said to be the biggest victim of the bank's market share grab.

Capitec is said to have also benefited from African Bank's collapse in August 2014, with many of its clients moving across.

Capitec's shares have more than tripled in value since then.

But with the South African economy stuck in a low-growth environment on the back of low business and consumer confidence, some are starting to question its long-term prospects.

An analyst, who did not wish to be named in line with company policy, said the bank's model put it at risk if South Africa slipped into a recession.

"The bank would not be profitable if it was not for the loan book. If you look at the growth since 2012, [ it] has been mainly driven by massive growth in the loan book."

He said the company's business model meant it lent to riskier clients most vulnerable to an economic downturn.

The group's sensitivity to bad debt was immense, the analyst added.

Should South Africa be on the receiving end of another ratings downgrade this week by S&P Global Ratings, some economists have raised the prospect of the country moving into recession.

A downgrade of South Africa's bonds would result in a macro deterioration in the consumer space.

Capitec's most recent annual results reported a 37% increase in write-offs from the previous year.

The bank said the increase was due to the change in accounting standards and market deterioration.

At the same time, it increased its net loan impairment expense, an allowance and provision for losses due to bad debts, to R5.1-billion - almost the equivalent of its income before tax of R5.2-billion.

Chief financial officer André du Plessis said the group was not concerned about the size of the debt and the impact an economic downturn may have on it.

"All our loans are granted on specific risk-based models and priced according to a predetermined return on equity.

"We set clear targets and measure same on a daily basis against these targets.

"All of our credit products performed in accordance with the bank's risk appetite," he said.

In terms of the group's ability to deal with a downturn in the economy, Du Plessis said the bank monitored the performance of its loan book daily and took "corrective" action with every negative event, even changing the granting criteria of future loans if required.

Du Plessis said the group's unsecured loan book was funded mainly with local debt and the assets and liabilities were matched, meaning that interest rates were fixed and the term of the loans and deposits had the same maturity.

He said the bank had adjusted the affordability calculation of its clients applying for loans which would take into account potential increases in food, transport and electricity costs in case of a potential further rating downgrade.

Patrice Rassou, head of equities at Sanlam Investment Management, said things could get worse, but the economy had been under pressure for a while now and Capitec had survived.

He said the bank had proved that it could navigate tough times.

Rassou said that even though South Africans had been exposed to higher food inflation and increases in petrol and transport costs in the past year or so, they were still able to repay their debts.

The problem for Capitec would come if the country experienced extreme economic stress which would not only affected Capitec, he said.

anetosp@sundaytimes.co.za

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