Why Capitec is miles above the competition 

You may think that a change in CEO, a volatile global market and the outbreak of war would shake the foundations of any company. But Capitec – arguably South Africa’s most successful start-up of the past 20 years – is still raking it in.

Wednesday’s financials mark the first full-year results for the post-Gerrie Fourie era. When Graham Lee took over the corner office last July, people wondered if the bank’s historic period of hyper-growth would come to an end without its main architect. For now, the momentum is still going strong.

The bank’s total active client base sits at 26-million, with 15.3-million of those users engaging through its banking app. In other words, a third of South African adults.

“It’s hardly a traditional bank anymore,” says Kokkie Kooyman of Denker Capital. It is much more of a fintech company, both in product and in valuation.

Looking beyond banking

While business banking made up 5% of Capitec’s profit, and its Avafin lending business 1%, fintech accounted for 26% of Capitec’s total earnings. That’s revenue from so-called value-added services like airtime and electricity payments.

“Accessibility to connectivity is really a fundamental to people’s lives,” Lee explains. So, naturally, Capitec is “looking beyond banking” to its strengths in providing other services, he says.

This has all combined to drive headline earnings 23% higher, to R16.85bn, for the year ended February. Net non-interest income – that’s money made from services and fees – climbed 19% to R28.34bn. After credit impairments, net interest income was up 18%, to R14.1bn. The dividend was 23% higher, at R79.80 a share. Total assets grew 10% to R263.28bn.

Return on equity – how a company has used shareholders’ funds to generate a profit – is also still way ahead of its older competitors at 31%, and is up from 29% a year ago.

Arguably, this growth is all in Capitec’s share price already: its stock has gained 54% over the past year and, on Wednesday, Capitec inched up just 0.5%, to close at R4,403.96.

Not your traditional lender

But don’t write off the bank’s growth prospects.

Regarding Capitec Connect, its tie-up with mobile network Cell C, “we should be able to be 10 times bigger; in insurance, we have a long way to go. And that’s all over the course of the next one to three years,” says Lee.

Indeed, people should be wary of seeing Capitec as just a “traditional lender” says Sarah-Jane Alexander, investment analyst at Coronation Fund Managers. “Lending has become smaller in the mix over time, and some of these new businesses that they’re growing, particularly around the transactional platforms, are far more capital-light, and they’re delivering very strong growth.”

Kooyman reiterates: “Income not from lending is 67% of the total. For a bank, that is unheard of.”

Capitec isn’t just seen as a fintech because of its other services, but because of its flexible, cutting-edge operating system. The other Big Five don’t nearly qualify as fintechs, Kooyman says, because of their massive and antiquated systems. Some banks like Nedbank are trying to move in that direction with a refocus on their app, “but unfortunately, they are still very poor compared to where Capitec is”, Kooyman says.

Passing the baton

Lee says that taking over the corner office was not only easy, but also “quite a joy”. He says that the bank’s “truly fantastic team” and a deeply ingrained common purpose across the organisation made the handover go smoothly.

Kooyman notes that Lee’s long tenure, including four years as Fourie’s “right-hand man”, has made for a smooth transition.

“He came across very confident,” Kooyman tells Currency, pointing out that Lee hasn’t felt the need to conservatively pad the balance sheet with chunky bad debt provisions in his first year, a move that shows the confidence he has in the growth and dynamics of the business.

This continuity in leadership also applies to Lee’s views on the economy as a whole, especially when it comes to South Africa’s controversial unemployment numbers. Fourie famously said that official data greatly undercounts the informal economy. Similarly, Lee argues that “South Africans are doing something that adds value to their lives every day, and it’s not always counted as formal work.” Ultimately, there’s an underrepresented economic engine that Capitec wants to help grow – and profit from.

Where to next?

Still, the question of just how much the group can grow further has resurfaced. “Every time I listen to them, I sit in awe of the culture they’ve built and how they manage it,” says Kooyman. But “I often challenge them on how they will sustain it”.

Lee acknowledges that Capitec can see the “ceiling” in personal banking. That’s why he sees business banking as its new avenue of growth. “In my mind, it’s our biggest opportunity,” he says.

Yet this is a fairly saturated market in South Africa, and business – mapping the state of the economy – isn’t exactly booming.

“It will take a long time before they move over to larger corporate accounts,” Kooyman says. “I wouldn’t put an exact timeframe on it, but I would be surprised if they shift to larger corporate accounts within the next five years.”

Capitec has also traditionally shied away from growing, like its local counterparts, across borders. Aside from its Avafin product, which services Europe and Mexico, the bank has no real endeavours outside of South Africa.

Staying local

Alexander and Kooyman don’t think this is such a bad thing, though.

“Capitec has had the luxury of continuing to find massive growth in its domestic and home market,” Alexander says. “So there has been no real reason to dilute the incredible efforts of the local management team. They don’t seem to be short of growth opportunities here.”

Kooyman thinks Capitec should play around with Avafin some more before expanding. “You want them to experiment now with those six different countries to find out what works and what doesn’t before getting too big.”

Lee, for one, argues that “moving outside of South Africa is going to be essential for continued growth in the future. It’s a long way away from when it will contribute meaningfully to our bottom line, but it is there.”

For now, though, Capitec is in no rush.

“I think their product is still incredibly competitive,” says Alexander. “They keep innovating. They keep adding functionality. So yes, I think it’s a very compelling offer for most South Africans.”

This story was produced in partnership with Stanlib.

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