Disruptive Capitec, rated the world’s best bank, now moving into credit cards, insurance

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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.

Capitec Bank CEO Gerrie Fourie
Capitec Bank CEO Gerrie Fourie

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 aren’t 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: that’s part of our DNA. We’ve done it for the last 15 years. It’s been an interesting year if you look at the six months from an economy point of view because on one side, the economy’s very positive for us from the banking side. People are looking for value for money. They’re looking for transparency. They’re looking for simplicity and that’s 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 it’s a very good performance. Then, if you look at the economy on the credit side, it’s the one where you need to be conservative/tight and it’s taken a lot of management time and effort to make certain that we are managing our credit correctly.

That’s extraordinary. The growth in clients – as you say, about 110,000 per month. Last time we spoke six months ago, you’d moved your branch network to 720. Have you expanded it still further to be able to attract these new people?

Yes. We’ve brought in 31 new branches. We’ve also brought in close to 200 new ATM’s or DNR. DNR is where you can actually deposit money, as well as withdraw money, and also get a back statement. We’ve increased our number with another 1,000 in the last six months so there’s 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. We’ve 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 it’s growing with about 1/1.5 million month-on-month so a very big take-up on our self-help devices. That’s 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.

That’s 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 didn’t 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. We’ve done in one month basically what we’ve done in six months up to February so it’s a tremendous take-up. We now have 1.1 million clients on the app so it’s 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. It’s quite interesting because if you look at your pricing on your self-help devices, it’s about 50% lower than in-branch so the more you’re moving away from branch to self-help, the more difficult that particular target is but you’re actually then saving because that client’s not coming in to your branch. Alternatively, when he’s coming in to your branch, you optimise it. We would like to cover at least 100 % of our operating expenses with transactional income.

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 we’ve lifted it by 3%. That’s very encouraging, just showing how our model has diversified over a period.

And the model’s working. Gerrie, I watched (for the 2nd time) that movie called ‘The Big Short’. I’m not sure if you’ve had the chance to see it yet. It’s 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 don’t look at August 16 versus August 15. I actually look at August 16 versus February 16 and the reason I’m doing that is because those six months (to me) is more comparable, given what’s been happening with the economy. If you compare those two periods then our arrears went up between 6 and 10%, depending on what you’re 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, we’ve increased our provisioning because we still feel that it will be a difficult 12 to 18 months ahead and that’s why we’ve increased our provisioning – to make certain we cover your loans and that we expect we’ll 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, there’s 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 we’re 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 economy’s volatile in South Africa. You’ve got political risk that you also need to take into consideration with economic risks. It’s 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. We’ve seen the overtime and bonuses have been cut back.

Capitec. Picture courtesy of Twitter

How much are you cutting back your loans to that sector?

We’ve cut back quite a lot. We’ve cut back in three areas, predominantly. We’ve 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 we’ve cut that with about 16%. Then we’ve become very strict on small and tiny businesses because we’ve seen a lot of these companies either retrenching or closing down. With the people earning less than R5000, we’ve also made some adjustments because the whole food and transport inflation etcetera, has a big impact on those clients.

Doesn’t 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 that’s getting your balance right between your high-risk client and your low-risk client. That’s why I personally spend about 40% of my time on credit. If you’re in unsecured lending; when the economy is volatile or under pressure, it’s got a much bigger effect on unsecured lending than what it would have on secured lending.

You’ve 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 we’re quite comfortable with our stress scenarios that we can handle that. I think what is important is that we target ROE of 25% and we’re at 26%. That shows you our performance is in line with our risk appetite. It’s when that is going below that, that our risk is higher so we’re watching the credit environment very closely and managing it very closely.

Well, the good news for now (and there’s a lot of it) … I was interested to see Michael Lafferty – a former employee of mine, you’d be happy to know – ranks you the best bank in the world. Yes. I used to write for Retail Banker International – his newsletter that he started many years ago – and they rank you the best in the world. Now Michael is the best in the world at what he does. That’s an enormous plaudit.

Yes. It was quite an honour to receive that award but for us, we believe – knowing the business – there’s still massive ways where we can improve, especially on client delivery and service. Yes, it was nice to get it but we’re 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 you’ve kicked off with in the Western Cape: what’s the thinking there and when are we likely to see this contributing to the bottom line?

Well, we started in the Western Cape because it’s completely integrated with Global One, and we were very concerned about system stability. If you’re 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 we’re ready to launch in October. It won’t 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 we’ve given the economy a new product. We’ve been extremely conservative on the credit side. We’ll 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 can’t 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, it’s very competitive. It’s very aggressive. I think the biggest advantage that we’ve got is that we focus on the individuals while the traditional banks are actually focusing from investment banking to commercial banking so they’ve got quite a lot on their plate. They definitely are coming for us though, and we treat them as very serious competitors.

But you’re 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 it’s credit, savings, transacting, and then insurance. We’ve started with Credit Life. We’ve always done Credit Life, but as part of our interest rates. We slid it in May and it’s an avenue that we’re looking at to say, “Should we go into insurance? Yes or no.” Everyone else is doing it and it’s a definite need from the client – to look at insurance.

Again, just to close off with: when we spoke 6 months ago, you said the business model’s got plenty of runway ahead. You’re at 22.4% now of your target market. That’s a big slug of it. Are you still confident that you’ve got a long way to go?

Yes. If you break that up, with people earning below R10,000 we’ve got a 25% market share. We believe we can easily take that up to 30%. Then with people above R10,000, we’ve got 11% market share and that we would like to take up to 20%. That gives you an indication that we believe there’s still runway but it’s 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.

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