The Capitec train continues to roll with the bank rated by Lafferty International as the world’s very best posting sparkling financial results for the half year to end August 2016. CEO Gerrie Fourie tells Biznews.com’s Alec Hogg that the strategy which has gathered over a fifth of SA’s retail market is gathering further momentum. Transactions grew strongly in the half year, putting the bank on target for this revenue stream to cover all operating costs by 2020. And with Capitec launching new challenges in credit cards and insurance, SA’s great banking disruptor is determined to rattle even more financial sector cages in the months ahead.

Joining us now from Johannesburg is Gerrie Fourie, the Chief Executive of Capitec. Gerrie, as always, you guys are out very quickly with your financial results. This is for the six months to the end of August. We arenât even at the end of September yet so you continue with this proud record and with the record of keeping up the earnings growth. Was it a tough six months?
Yes, it was an interesting six months but first coming back to us reporting so quickly: thatâs part of our DNA. Weâve done it for the last 15 years. Itâs been an interesting year if you look at the six months from an economy point of view because on one side, the economyâs very positive for us from the banking side. People are looking for value for money. Theyâre looking for transparency. Theyâre looking for simplicity and thatâs reflected in our client numbers. We had very good, strong client numbers. I think we brought in 650,000 new clients at about 110,000 per month. I think itâs a very good performance. Then, if you look at the economy on the credit side, itâs the one where you need to be conservative/tight and itâs taken a lot of management time and effort to make certain that we are managing our credit correctly.
Thatâs extraordinary. The growth in clients – as you say, about 110,000 per month. Last time we spoke six months ago, youâd moved your branch network to 720. Have you expanded it still further to be able to attract these new people?
Yes. Weâve brought in 31 new branches. Weâve also brought in close to 200 new ATMâs or DNR. DNR is where you can actually deposit money, as well as withdraw money, and also get a back statement. Weâve increased our number with another 1,000 in the last six months so thereâs been a big effort to deliver on service and getting our branches out. For us, the big positive is that there was a very big focus on self-help devices – our app on USSD self-help devices that we put in branches where clients can actually transact. Weâve also seen a big increase in those numbers. To give you a bit of a background: in February with the app, we were doing about 1.5 million transactions per month. In August, we were doing 7.8 million transactions on the app and itâs growing with about 1/1.5 million month-on-month so a very big take-up on our self-help devices. Thatâs actually moving people away from our branches, which to us, is in line with our strategy. It enables our consultants to actually sell better to our clients.
Thatâs extraordinary growth. Again, just to go back and put some context on this: when we spoke about transactions six months ago at your year-end, you said at the first half of the year you did 4 million transactions. That went up to 8.5 million transactions overall. How many transactions overall did you do in the first half of this year?
I didnât count, actually. I must actually do that count but if you look at the 8 million for a six-month period, we did 7.8 in August so that gives you a reflection. Weâve done in one month basically what weâve done in six months up to February so itâs a tremendous take-up. We now have 1.1 million clients on the app so itâs going very strong in that area.
You do say in your results that 70% of your costs are now made up through transaction fees. Have you got a target to get that to say 1:1?
Yes. Our target for 2020 is to get it to a 1:1 basis. Itâs quite interesting because if you look at your pricing on your self-help devices, itâs about 50% lower than in-branch so the more youâre moving away from branch to self-help, the more difficult that particular target is but youâre actually then saving because that clientâs not coming in to your branch. Alternatively, when heâs coming in to your branch, you optimise it. We would like to cover at least 100 % of our operating expenses with transactional income.
Why over 22% of SA banked folks with Capitec
-some branches open up to 10pm
-lowest fees/just one card
-Lafferty named it best bank globally— Sure Kamhunga (@sure_kamhunga) September 28, 2016
And that would keep your profitability rolling.
Yes. Well, you can see that 37% of our income is now coming from transactional income, up from 34% so weâve lifted it by 3%. Thatâs very encouraging, just showing how our model has diversified over a period.
And the modelâs working. Gerrie, I watched (for the 2nd time) that movie called âThe Big Shortâ. Iâm not sure if youâve had the chance to see it yet. Itâs all about how the global financial crisis unwound. What those guys looked at there, were arrears. One point of issue in these results is that your arrears have actually gone up very sharply. What happened there?
I donât look at August 16 versus August 15. I actually look at August 16 versus February 16 and the reason Iâm doing that is because those six months (to me) is more comparable, given whatâs been happening with the economy. If you compare those two periods then our arrears went up between 6 and 10%, depending on what youâre looking at. Before August 15, the economy was completely different to the economy after August 15. The other thing that you will see is that given the economy, weâve increased our provisioning because we still feel that it will be a difficult 12 to 18 months ahead and thatâs why weâve increased our provisioning â to make certain we cover your loans and that we expect weâll go into debit. Your problem is if you gave a 5-year loan when the economy was strong and now the economy is weaker, then you expect bad debts to come through.
Just explain that. When you say that the economy has changed from August 2015 to August 2016, what do you mean?
Well, if you look at what is happening with the resources like platinum, gold, and iron ore, thereâs a major shift. Then you have the Nene saga in December, during which time the Rand went to R17 to the Dollar. It had a massive impact on everything that weâre importing. Then it stabilised. It came back to about R13.60 and then we had the Gordhan saga and suddenly, it went up to R15 again. You also had the effect of Brexit so the economyâs volatile in South Africa. Youâve got political risk that you also need to take into consideration with economic risks. Itâs definitely a different environment. We also see it in our client base where the client definitely has much less free cash flow than what they had 12 months ago. Especially the lower-income clients. Weâve seen the overtime and bonuses have been cut back.
How much are you cutting back your loans to that sector?
Weâve cut back quite a lot. Weâve cut back in three areas, predominantly. Weâve been very conservative on overtime on bonuses because we believe that given what is happening in the economy, companies are not going to pay so much overtime and bonuses out so weâve cut that with about 16%. Then weâve become very strict on small and tiny businesses because weâve seen a lot of these companies either retrenching or closing down. With the people earning less than R5000, weâve also made some adjustments because the whole food and transport inflation etcetera, has a big impact on those clients.
Doesnât it worry you at all when you see the bottom end of the pyramid as it were, coming under such enormous pressure?
Yes, it worries you. You work a lot on that and thatâs getting your balance right between your high-risk client and your low-risk client. Thatâs why I personally spend about 40% of my time on credit. If youâre in unsecured lending; when the economy is volatile or under pressure, itâs got a much bigger effect on unsecured lending than what it would have on secured lending.
Youâve certainly done the best you possibly can to prepare your bank for this difficult economic period with the return on equity still strong and your balance sheet still strong. Your capital ratios are high. How much of an economic decline would you be able to handle?
In our 5-year forecast, we do stress scenarios and weâre quite comfortable with our stress scenarios that we can handle that. I think what is important is that we target ROE of 25% and weâre at 26%. That shows you our performance is in line with our risk appetite. Itâs when that is going below that, that our risk is higher so weâre watching the credit environment very closely and managing it very closely.
ICYMI: #Capitec cuts back on lending to cash-strapped consumers from lower income groups https://t.co/4UUSf63lMB
— Mail & Guardian (@mailandguardian) September 27, 2016
Well, the good news for now (and thereâs a lot of it) ⌠I was interested to see Michael Lafferty â a former employee of mine, youâd be happy to know â ranks you the best bank in the world. Yes. I used to write for Retail Banker International â his newsletter that he started many years ago â and they rank you the best in the world. Now Michael is the best in the world at what he does. Thatâs an enormous plaudit.
Yes. It was quite an honour to receive that award but for us, we believe â knowing the business â thereâs still massive ways where we can improve, especially on client delivery and service. Yes, it was nice to get it but weâre fully aware of the work tha still lies ahead and we need to deliver on the expectations of the client.
You are moving into new fields. Your credit cards that youâve kicked off with in the Western Cape: whatâs the thinking there and when are we likely to see this contributing to the bottom line?
Well, we started in the Western Cape because itâs completely integrated with Global One, and we were very concerned about system stability. If youâre servicing 7.8 million or 7.9 million, system stability is very important. We just wanted to launch it in the Western Cape and make certain that we have system stability. So far, everything is good so weâre ready to launch in October. It wonât have a big contribution in this financial year. The contribution will come in the next financial year. I think what is also very important is weâve given the economy a new product. Weâve been extremely conservative on the credit side. Weâll manage that and then develop that product over time.
Gerrie, with you coming from the one end and now Discovery looking for a banking license, it canât be very comfortable being one of the Big 4. Are you expecting that they will be doing things to try and rebuff your attack?
Yes. If you look at the banking environment, itâs very competitive. Itâs very aggressive. I think the biggest advantage that weâve got is that we focus on the individuals while the traditional banks are actually focusing from investment banking to commercial banking so theyâve got quite a lot on their plate. They definitely are coming for us though, and we treat them as very serious competitors.
#SA's Capitec Bank adds over 100 000 clients each month. The bank has 7.9 million active clients. Currently rated best bank globally.
— Clayson Monyela (@ClaysonMonyela) September 28, 2016
But youâre also going for them in a different field with the launch of insurance. Tell us about that.
Well, everyone is making a big song and dance about it. All I said this morning was that if you look at the basic needs of the client then itâs credit, savings, transacting, and then insurance. Weâve started with Credit Life. Weâve always done Credit Life, but as part of our interest rates. We slid it in May and itâs an avenue that weâre looking at to say, âShould we go into insurance? Yes or no.â Everyone else is doing it and itâs a definite need from the client â to look at insurance.
Again, just to close off with: when we spoke 6 months ago, you said the business modelâs got plenty of runway ahead. Youâre at 22.4% now of your target market. Thatâs a big slug of it. Are you still confident that youâve got a long way to go?
Yes. If you break that up, with people earning below R10,000 weâve got a 25% market share. We believe we can easily take that up to 30%. Then with people above R10,000, weâve got 11% market share and that we would like to take up to 20%. That gives you an indication that we believe thereâs still runway but itâs going to take hard work from a product side, innovation side, and more especially from a client service delivery side.
Gerrie Fourie is the Chief Executive of Capitec.