Capitec's earnings face severe pressure

CAPITEC is expected to report negative earnings growth for the first time in years as unsecured loan providers find themselves in the eye of the storm.

CAPITEC is expected to report negative earnings growth for the first time in years as unsecured loan providers find themselves in the eye of the storm.

However, Gerrie Fourie, the group's new head honcho, is convinced that it will be business as usual.

"What is true is that the economic situation is tougher, but we are still okay," Fourie said.

He also dismissed rumours that he inherited a mess from Riaan Stassen.

But some analysts beg to differ, and if African Bank's woes are an indication of what is to come, Capitec is going to hurt.

"Trouble is coming," predicted Matthew Warren, First Avenue Asset Management's head of financials and retail.

Cadence Capital fund manager Warren Riley said Capitec earnings depended on it taking action on the loan book.

Capitec had "stubbornly kept its head in the sand", and refused to acknowledge the significant deterioration in the credit quality of its customer, said Riley.

He said Fourie was part of the team for over 13 years, so he was aware of the situation.

They both hold views contrary to those of the market, which forecasts headline earnings a share to be up by 9.1% this year and 13.9% next year.

"That's not going to happen," Warren said. Polled analysts have a "hold" view on the lender.

Warren noted that Capitec was taking much more risk than its peers so the losses were going to be "horrendous".

In September, Capitec reported a loss on its credit business for the six months to August, but overall earnings were still up due to revenue growth in the transaction business.

Some analysts are convinced Capitec is in a worse condition than African Bank .

But Fourie's bank might be saved by it having transactional revenue that may cushion a hard landing.

"That revenue helps without a doubt, but growth is going to slow down," Warren said.

Riley said that either way it would not save the group. "Retail transactional banking is a marginal business, which comprises 18% of their banking operations income."

This argument is based on the Stellenbosch-based bank having gained customers by issuing loose credit.

Most of those customers came from the Maria Ramos-led bank, Barclays Africa Group, also known as Absa in South Africa.

Ramos and her team were lambasted for not aggressively playing in the unsecured space and, more importantly, losing market share to newcomers like Capitec. She tightened up on personal loans earlier than her rivals.

Her peer at Nedbank, Mike Brown, ordered his team to do the same, saying too much credit in the market is a "sign of froth".

Soon after, Capitec bragged to the market that it had overtaken Nedbank as the fourth-largest bank in terms of customers according to AMPS.

Capitec has tightened the lending taps a bit. And as bad debt rises it will tighten further, and that exercise will be felt by the transactional accounts. So obviously this will lead to transactional accounts revenue taking stress. As it does not have other products such as mortgage or vehicle finance to rely on as revenue streams, the well is expected to dry up.

But Fourie plans to grow this business and keep these customers as it improves the group's offering.

During the interim results presentation, Capitec told the market that arrears had increased 67% to R1.8-billion from R1.07-billion in 2012.

Capitec's former CEO Stassen said he was not happy with the economic conditions and the overall credit state of the average consumer. He said he was turning away up to 58% of credit applications as pressure on consumers increased.

Fourie said this view has still not changed.

What should worry him is that the troubled mining industry makes up 7% of its loan book. Workers who lose their jobs and those who have been on lengthy strikes may not be able to repay those loans.

African Bank, whose share price fell 80% last year, could not rely on transactional revenue like its closest rival, Capitec, can.

Its boss, Leon Kirkinis, also bemoaned excess credit in the market and pleaded for more regulation.

Riley fears Fourie and his team will continue with their "laager mentality" until it is too late.

"The irony is that the sooner they step up and recognise the severe deterioration the greater their chance of survival.

"A significant equity raise to recapitalise their balance sheet will be announced within the next 12 months. It may be too late," Riley said.

But Fourie protests that the group's business model is unlike that of typical bankers.

He said African Bank and the JD Group did not have the transactional arm that Capitec had.

Riley said that funding composition, provisioning and the approach to risk was completely different.

"We are still focusing on building a banking model that we believe in," Fourie said.

Capitec's marketing and corporate affairs executive, Carl Fischer, said the group had leaned towards a more conservative approach, given the current condition of the market.

He said the bank would not be granting large loans for longer periods.

The country's largest asset manager, the Public Investment Corporation (PIC), lamented previously that some lenders in the unsecured loans space had abused consumers.

These comments worried some of the lenders in which the trillion rand fund manager has investments.

Capitec financial director André du Plessis said that after a private meeting the fund manger understood how the bank did business.

As a result, the PIC still remained one of its largest shareholders.

Capitec plans to roll out 50 to 60 news branches a year throughout the country. It registers about 100000 new clients a month.

Capitec will report annual results next month.