Capitec lets loose

As a parting shot at his final annual results presentation, Capitec CEO Gerrie Fourie on Wednesday left investors with two pleasant surprises: a more generous than expected dividend payout and a hint that the bank could now target a higher return on equity.

The markets lapped it up and Capitec shares closed 7.2% higher. In terms of value, the surge propelled the company, started only in 2001, past much older rival Standard Bank and brought it to within a whisker of Firstrand’s market cap of R400bn.

By several other measures – number of ATMs, branch network, volume of transactions – it is already the biggest bank in the country. The most arresting statistic though, is the sheer size of its client base.

Total client numbers grew to 24-million, up nearly 8% on last year. Though the expansion has slowed from the heady days of half a decade ago, when it leapt by a few million per year, it is still actually growing. Six months ago, the bank had 23.2-million clients. Of course there is always a bit of nuance when it comes to financial institutions. Many South Africans have more than one account and there tends to be plenty of churn.

That is why the really important number to watch is how many people are fully-banked with Capitec. Here the increase has been 13.3% to 8.8-million – these are the clients who deposit their salaries, wages, commissions or whichever way they get paid, into a Capitec account and then use it as their financial home base. They are the ones doing multiple transactions. No wonder then that the bank’s net transaction income now tops R14bn, up 17% from a year ago. It helped drive headline earnings 30% higher, to R13.7bn.

No longer a loan shark

The long term trend at Capitec has been to lower its reliance on unsecured lending. Remember, the bank was initially funded by financial services group PSG and started off by buying 300 microlenders – “loan sharks” as some called them – as a distribution platform. For years those loans dwarfed just about everything else, but the plan had always been to build a bank, and steadily Capitec attracted more and more clients who were there for the noticeably lower banking fees or the no-frills savings account, or both.

Now, non-interest income, after making provision for bad debts, represents more than two-thirds of the total revenue from operations. For many clients it started off as a second account, while retaining a foothold at one of the traditional banks. Not so much any more.

The nearly nine million people that now use Capitec as their home base, is a big deal, because the average revenue per fully banked client is significantly higher than for the rest, says Old Mutual Investment Group analyst Irina Schulenburg.
“By converting clients you get incremental revenues while costs don’t necessarily increase at the same rate, given a cost to service is already being allocated in the current base,” she adds.

For Capitec the jaws of profitability open ever wider. And wider still, if you consider that the transaction income does not even include R4.2bn the bank made from “value-added services” (VAS). A lucrative little sideline, if ever there was one. VAS refers to things such as the commission income from the sale of prepaid mobile network services, electricity, national lottery tickets, vouchers and enabling clients to pay bills on the banking app.

The app, by the way, now boasts 13-million users and 11-million of them spend on these services. Hopefully not all of them are lotto ticket buyers, and those that are would have done better by investing in Capitec stock. Even before Wednesday’s run, the share price was up 43% since the last set of full-year results.

Lending, though not as big as it was, is still an important part of the business. Whereas 22 years ago, the average loan size was R618 and you could even borrow just R50, Capitec has very much moved up the ladder since. Its slice of borrowers who earn a net salary of more than R50,000 is growing quickly, up 56% on last year. While it has been extremely conservative in lending since the COVID-19 pandemic, Fourie said it started “opening up” on the credit side last year.

Loosening up on loans

But this, says Aeon Asset Management analyst Shaakir Salie, reflects a more targeted, data-led approach rather than a blanket loosening. “The bank expanded in areas where it saw strong performance signals, such as lending for vehicles and home improvement, while maintaining robust credit card growth. Importantly, overall credit quality still improved, with the Group’s credit loss ratio (excluding AvaFin) decreasing from 8.7% to 6.9%,” he said.

Avafin, of course, is its fintech investment in Europe that does business in places such as Latvia, Poland and Mexico. Capitec will start funding it soon to enable it to be more aggressive with cheaper loans. Imagine Fourie and his successor Graham Lee in sombreros … they will be going to Mexico to have a look on the ground in the coming months.

The general indication seems to be that Capitec is happy to let loose a bit. Fourie definitely hinted that the group’s target for return on equity (ROE) is no longer 25%, but is probably closer to 28% or even 29%, and that they will now keep to a dividend payout ratio of 55%, instead of 50%.

Coronation portfolio manager Sarah-Jane Alexander says that while the market clearly reacted to the CEO’s comments on what seems to be a structurally higher ROE and dividend payout, the quality of the results was also very high.

“There was a strong performance in areas of the business that are ‘capital-light’ and Capitec keeps investing incredibly hard in growth initiatives, which bodes well for the future.”

Fourie also sees Capitec Connect, the virtual mobile network, which now has 1.6-million users, growing to 10-million in the next two or three years.
The insurance side of the group and the business bank have also shown solid growth, but for both these divisions it is still early days.

Fourie likes to call Capitec a data or tech business. And yes, the company now employs 750 engineers out of a full staff complement of 17,000. If ever there was an indication that the business plans on building more things and making processes more efficient, this is it.