After another strong year Capitec CEO sees lots more growth to come

Were he to cast an eye to the bottom of the African continent, the father of disruption theory Harvard Professor Clayton Christensen, will discover at least two businesses well worth studying. Discovery in the medical aid arena. And Capitec in banking. The Stellenbosch headquartered bank today reported financial results to end February.  I had two bites at the cherry. First with Gugu on CNBC Africa Power Lunch. And then in this Podcast from the Biznews studio.  In our discussion CEO Gerrie Fourie explained some key differences between Capitec and beleaguered African Bank, took us through the way his team has tightened credit granting, talked about staff recruitment and more.- AH 

ALEC HOGG:  With me in the studio today is the Chief Executive of Capitec, Gerrie Fourie.  The financial results released just 26 days after the year-end and there’s a lot to digest in these numbers, Gerrie.  So far, though, in the discussions, you’ve had with investment analysts, what have been the areas they’ve been picking on you for, or where they feel that maybe you aren’t performing well enough?

GERRIE FOURIE:  It’s always the question on credit.  What is happening on the credit side?  Is there a bubble?  Is there not a bubble?  I think if we look at the credit side, we say we believe we’re managing our credit conservatively.  If you can look at our first cut that we’ve made where we pulled back, it was in November 2012, and then we made another serious cut in June 2013.  That’s why, if you look at the loans, advances dropped from R25bn to R18bn.  The Million Dollar question always is, was that enough and was it quick enough?  We believe yes, it is, but one will have to see what comes out.  I think the question everyone is uncertain about is if you’re going to look at the economy, the economy is under stress.  We’ve seen it in the strikes.  We’ve seen it in retrenchments.  We’ve seen it in the variable pay that’s reduced, so one will have to carefully manage your credit risk in this coming year.

ALEC HOGG:  Bad debts are definitely going up, but it’s very interesting…your number of loans are down from 4.5m  in 2012 to around 3m today.  The size of the loan though, has increased over that period.  How does that strategy work?

GERRIE FOURIE:  The number of loans is related to the number of applicants that we actually approve.  If you look at the numbers now, we will only approve 44% of our applicants, but only 29% will accept our offer.  The difference between the 29 and the 44 is where we either offer too little Rand value, or the term is very short.  Traditionally, those are people who will receive a one to three-month loan. So sometimes people walk away.  Strictly speaking, if you get 100 clients coming into a Capitec branch, only 29 will walk out with a loan. So that’s what you’re seeing reflected in the number of applications being reduced.

ALEC HOGG:  What is the comparison with 2012?

GERRIE FOURIE:  If you look at 2012, when we were still growing very strongly, your successful applications…comparing that to current 29% was about 44% percent of people who got loans.  Where it’s now 44%, it was then 59%.

ALEC HOGG:  That’s a big decline.  Have you tightened up your credit policies?

GERRIE FOURIE:  Yes, that’s why I mentioned now that we tightened up our credit policy in November 2012, so we didn’t wait.  We identified the pressure very early, tightened in November 2012, and tightened again in June 2013.  I think the other important point is we look closely at our credit…every Monday we have a credit meeting and then we analyse the results for example, what’s happening, what’s deteriorating, what’s improving, and if necessary, make the adjustments.  For example, this Monday before I left the Cape, we had a meeting until 7:00pm and we made certain adjustments that we’ll implement on the 1^st of April.

ALEC HOGG:  That is not such good news that your business is not growing as rapidly as it would have, but the other ratios are very strong.  The transaction revenue as a percentage of your total revenue continues to grow to three times what it was in percentage terms, six years ago.

GERRIE FOURIE:  Yes, there are two figures we’re extremely proud of: our growth in our transactional volumes, and then our growth in our retail fixed deposits.  Why they’re such important figures for us is the brand acceptance, where Capitec has established itself as a bank, and where people trust the brand. For us, those two figures are very important.

ALEC HOGG:  The number of people banking with you now is growing.  Just to repeat, which we were talking about on television: in 2009, 1.5m clients (active clients, as you call them).  Now you’re at nearly five-and-a-half-million active clients.  Where could you take number?

GERRIE FOURIE:  Alec, if you look at the total number of people who bank in South Africa, its 27 million. So if you have 5.4m you’re roughly at about 15 percent.  You can therefore easily take that figure to above 20 percent because there are, basically, five big players in that particular part.  If you just divide it by five, you’ll get 20 percent.  We believe we focus on that market segment, so we should be more than 20 percent.  What is more important for us is that we look at the active client base but we also focus very much on our banking clients – clients who deposit their salaries with us.  That has grown from 1.7m clients to 2.2m clients. We’re extremely satisfied with those results.  That’s where the big focus is going to be.  It’s to make certain that our banking client numbers continue to grow.  There, we have a market share of about 12 percent and we would like to take that up to at least 20 percent.

ALEC HOGG:  You mentioned that the other big area was retail deposits. How has that improved over the past year?

GERRIE FOURIE:  Retail deposits consist of two areas: fixed term retail as well as people who just deposit money into their savings accounts.  As you know, we’re offering 4.4% interest from the first Rand you deposit in your savings account.  A lot of our opposition hardly offer any interest on daily savings accounts.  What you’ve seen is that our retail’s fixed term has grown to R9.1bn – that’s growth of 30 percent – and our normal savings accounts have grown to R14bn. In total, that is a growth of R6.4bn, so in total that’s about a 35 percent growth.

ALEC HOGG:  So it’s about R23 billion in total from the retail base.  How much is that of your funding requirement?

GERRIE FOURIE:  It’s 65 percent of our funding requirement, so you’re looking at it overall…R12bn is wholesale funding and R23bn is your retail funding.

ALEC HOGG:  It’s a good place to be.

GERRIE FOURIE:  Yes, as you compare, you’ll see our wholesale funding hasn’t grown at all – it’s flat – and the reason for that is because we are attracting more retail funding.

ALEC HOGG:  I know that you are compared often with Abil as an example.  What is their wholesale funding versus retail funding?

GERRIE FOURIE:  Well, they’ve started taking retail funding only a few months ago.  The latest BI9 figures that I can recall they were at round about R100m – relatively small – so they’re just starting in that particular area.

ALEC HOGG:  They’re virtually non-existent.

GERRIE FOURIE:  Yes, if you’re talking about 100 million, it’s not a lot.

ALEC HOGG:  So, that is one of the areas where you are different.  The other area we spoke about earlier was transaction revenue and that you continue to grow.  How are you doing that without increasing the prices?

GERRIE FOURIE:  Well, I think it’s come back to three areas which we focus on.  The first area is our whole marketing approach.  Our ‘Ask Why’ campaign has been extremely successful.  Secondly, our distribution strategy has been focusing on the urban client and we’ve seen quite a lot of branches, which we’ve opened up in malls.  Again, next year we’re focusing on more, specifically in the Gauteng area.  Thirdly, if you look at the whole service platform in the branch where we’ve changed the whole service flow, where the client is actually side-by-side with the consultant: that’s made a tremendous impact in putting the client in control.  Remember now, the client actually experiences what the consultant is doing, so if we take affordability calculation on the credit side, the client…we’ll do his full cash flow.  We can look at his income.  We can look at his expenses, and he understands when we say ‘yes’ or ‘no’ or why he can’t afford it.

ALEC HOGG:  There’s no antagonism when he leaves the branch.  Surely, if you have these five-and-half-million customers now and you’re giving them a basic service, isn’t the next move into mortgages, or is that too just big a bridge to cross?

GERRIE FOURIE:  Yes, it’s an interesting debate.  I don’t want to say too much.  We’re working on that particular area, so let’s wait and see what happens in the future.

ALEC HOGG:  But it is something that has potential for you?

GERRIE FOURIE:  Yes definitely. We look at the credit market and we say there’s a potential credit market if you look at credit granting in the quarter of about R65bn and what we do is we look at mortgages below R350 000. We then look at the vehicle finance market – and we throw the top 30 percent away – so we’re looking vehicle finance up to R200 000 and we look at credit facilities in the unsecured market.  We say ‘that’s the particular market we need to focus on and that we believe we can penetrate with unsecured lending’.  We currently have a 7% market share on that and we believe there are many growth opportunities in that particular market.

ALEC HOGG:  What’s going to stop you?

GERRIE FOURIE:  That’s an interesting question.

ALEC HOGG:  What worries you?

GERRIE FOURIE:  If you grow, there’s always this challenge of making certain that our systems are in place and are keeping up.  There’s also your competition, because you need to develop products quick enough to stay ahead of the market.  Then you’re standing with the one that you really can’t control directly, and that’s the economy.  As we all know, there are many things happening.  Our GDP growth has been 2.2 to 2.5%.  Ideally, you would like South Africa to be at a five or six percent growth.  The unemployment in South Africa is just extreme – too high.

ALEC HOGG:  So what you’re doing at the moment is eating away at the competitors’ market share, but you’d really become turbo-charged if the economy were to start fulfilling its potential.

GERRIE FOURIE:  Yes, traditionally, our market penetration came from our rural areas.  Now, we’re focusing more on the city or urban areas, and we also start focusing on higher income levels.  We see quite a lot of growth in that area.

ALEC HOGG:  With a company like yours, which is developing as rapidly as it is, you clearly are also adding staff, rather than, I guess, competitors who are trying to contract their staff complement.  The numbers however, are impressive.  In the past year, according to the figures I saw, you’re now above 9 000 people in the organisation.  It was about 3 000 six years ago.

GERRIE FOURIE:  The other way to look at it is when we started in 2000; nobody worked for Capitec, so we created nine-thousand jobs.  If you look at last year, we’ve created 2 400 new jobs.  Our net growth was just over 700…1 900 were school-leavers so it’s people who just completed their Matric.  We always say we recruit for potential and then skill up the people, so I think we’ve been very successful in that.

ALEC HOGG:  Many of those people would have left you if only 700 stayed.

GERRIE FOURIE:  Yes, remember you’re sitting with 9 000 working with your.  If you look at your Head Office environment, we have a very stable workforce.  In the branches, we compare more to a retail environment.  Our staff turnover there is roughly about 14%.  Retails is about 18% to 20%,  so we’re quite happy.  What we see is that people join us, and in the first year, we lose quite a lot of people but after that, you can think about the people who are 18/19 years old.  They still need to settle, so they will leave us in the first year, but above that age they stay with us.

ALEC HOGG:  So you can pick and choose from the Matriculants.  If there are 1 900 you’re bringing in – in other words, without a university education – you must be a place where many are knocking on your door.

GERRIE FOURIE:  Yes, there are quite a lot of applicants coming through, so it’s always a trick to make certain the people are competent.  They go through numerous tests to make certain they are.  What is positive for us is if you look at the 1 900 that have come in…last year, we promoted 925 people from within, so if you compare the 900 to the 9 000, ten percent of the people were actually promoted.  People will come in on the bottom and then move up through the ladder.  Even with myself being appointed as CEO, within three months everyone was appointed from within and we had to go and hire a new consultant in my place.  That just tells you our succession planning and our development training of people etcetera – that whole program is working.

ALEC HOGG:  And to close off with, the branch is still growing, from 560 last year to 629 this year.  ATMs went from 640 to 744.  Do you see any end in this growth?

GERRIE FOURIE:  Alec, if you look at this year, we’re opening another 55 branches.  A particular area we want to focus is our ATM distribution network.  Up-to-date ATMs were mainly placed next to a branch.  What we’re now starting to do is putting in loose-standing ATMs to increase our distribution network.  If you look at the traditional banks, they have branches for 500/600/900 square metres.  Our branches are anywhere between 150 and 200, so we’ll probably end up – I would say – close to 800/900 branches in South Africa.

ALEC HOGG:  And of those branches, can you work out space per person in the branch?  You do seem to pack them in.

GERRIE FOURIE:  Yes, we analyse everything.  That’s one of the benefits we have with our renewed services system we’ve put in…we can measure every single transaction.  If you take a lending transaction, we actually break it down into its smallest components.  For a new client, it currently takes about 35 minutes to take up a new loan and we analyse that completely.  We have actually identified areas where we can cut back with another eight minutes, so it just comes back to the fact that we analyse everything in detail in order to understand how we can optimise our infrastructure.

ALEC HOGG:  If you can’t measure it, you can’t manage it.  That was Gerrie Fourie.  He is the Chief Executive of Capitec.