Capitec continues to defy the doomsayers

UNSECURED lender Capitec continues to confound the naysayers, who have boldly predicted that it will slide down the same path as one-time rival African Bank.

UNSECURED lender Capitec continues to confound the naysayers, who have boldly predicted that it will slide down the same path as one-time rival African Bank.

This week Capitec reported a 21% surge in first-half earnings, causing the share price to inch up to a high of R250 - 21% more than at the same time last year - illustrating the difference between this lender's trajectory and that of Leon Kirkinis's failed bank.

This is despite ratings agency Moody's downgrading Capitec by two notches last month, and the Wall Street Journal reporting this week that South Africa has a "sub-prime loan crisis" that spells a "bigger bucket of trouble for the country's banking system" (See Page 3).

This sentiment has left investors skittish about putting their cash behind Capitec. More analysts now rate it a "sell" rather than a "buy", with many on the fence.

Yet Capitec's soaring profits defy the sceptics. For the six months to August, it expanded its customer base by 16% with gains in the middle-income and lower-income markets. It added 18 branches (which now number 647) and 290 ATMs (now 3208 across the country).

Capitec has 5.8million customers, thanks to its aggressive marketing (think, #askwhy), closing in on Nedbank and its 6.7million.

Carl Fischer, Capitec's corporate affairs head, describes his bank as "small but dangerous", which reflects how much of a thorn in the side it has been to the big four.

It has kept a tight leash on costs. Capitec's cost-to-income ratio is in the mid-30s - which means it spends 30c for every R1 it makes. This ratio is in the mid-50s for the big four, Standard Bank, FirstRand, Barclays Africa and Nedbank.

"This is largely why the big four find it very hard to compete with Capitec, especially on price. Legacy systems at the big four are expensive," said Simon Brown, head of Just-OneLap.

One of the key factors that sunk African Bank was that it did not impair, or write-off, bad debts early enough.

But Capitec is far more conservative and wrote off R2.1-billion in loans for the first six months of the year, 28% higher than in the previous year. At the same time, the Stellenbosch-based bank increased its income from lending to R5.2-billion for the six months, 13% higher than previously.

Neelash Hansjee, a senior investment analyst at Old Mutual, said he was surprised at the resilience of Capitec's impairment ratios, given how tough the environment is for consumers. Overall, Capitec's total impairments rose only 2% to R1.9-billion, to cover weaknesses in its lending book.

Matthew Warren, head of financials and retailing at First Avenue Asset Management, said this level of provision implied that Capitec's bad debts are above average.

This sentiment explains why most analysts continue to be wary about recommending to investors that they sink more money into this country's undeniably fragile unsecured lending sector.