Capitec confident on bad debts, pleased with banking revenue
If you're a bank in South Africa today, one of the things that would be keeping you up at night would be anxiety around bad debts. Such anxiety is particularly acute at a bank like Capitec, which earns a lot of its revenue from unsecured loans to low-income earners. But, surprisingly, both Capitec and the market in general seem pretty sanguine about their debtors' book. Capitec's loans are all fixed interest, so the change in rates won't directly affect its interest income (although it could have an indirect effect if its borrowers come under pressure as rates rise on the rest of their debt elsewhere), and although its bad debts have been increasing, the increase has not been critical. In addition, Capitec is less exposed to unsecured lending risks because it is, really, a 360 degree bank. It earns a decent amount of transaction revenue, and this creates a cushion for any impairments to the debtors book. I've personally always like Capitec. It's a well-run business with a good, attractive offering, and I think it will weather the next few years well. – FD
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ALEC HOGG: Capitec reported a rise in full year earnings at a slower growth rate than before, but still very, very strong numbers that they put on the table today. The company's Chief Executive Gerrie Fourie is with us in the studio. The most impressive thing about this is that you're only 26 days after your year-end, and here we are. If only other companies on the JSE were to take a leaf out of your book. David Shapiro said to us a bit earlier, that gives him confidence that you guys have your finger on the pulse.
GERRIE FOURIE: Good afternoon, Alec. Yes, one of the things we're very proud of is the fact that we could produce our financial results so quickly and it's also our financial departments year-end. It's basically on that Monday afternoon at 2:00 I had the financial results and very little had changed, so I think we can be proud of that achievement.
ALEC HOGG: But doesn't it also tell us about the way you run the business?
GERRIE FOURIE: Yes, it tells you a story because to us, a financial year-end is basically, exactly the same as every month-end. It's also the way we run our business. Every night at 7:00 I get the sales figures. At 7:00 in the morning, I get the arrears figures, so we know exactly what's happening at every given moment. It's part of our culture. It's the same at branch level. Branches receive their operational statistics every single morning at 7:30 so they can prepare for their start-up meeting. At 7:45 – 8:00, they actually share it with the staff. The staff know exactly what happened yesterday and what we need to do for the following day.
ALEC HOGG: If you can't measure it, you can't manage it. Your matrixes are all going in the right direction. I pulled some numbers out here. The cost to income ratio is down to 32 percent. Is that possible, that you could trim even more?
GERRIE FOURIE: Alec, it's not an area that we focus on. I think if we can keep it at round about 32/33 percent, we will be quite happy. Remember, we're still growing. We still plan to open ± 55 branches next year. We're also planning to increase our ATM distribution, so it's not an area that we focus on. We're focusing on growing our business, so the area we really focus on now is our transactional side, and that's increasing our banking clients. We're extremely proud of the numbers we produced – our client numbers – ending at five-point-four million active clients. We've opened up about seven million accounts, so these are client accounts, on which we're actually earning interest on fees. More importantly, if you go and look at our banking clients, they are clients who are actually depositing their salaries with ourselves. That has grown from 1.7m to 2.2m, so that's a growth of five hundred thousand. Those are people who actually trust the brand, trust Capitec, and are actually depositing their salaries in with ourselves, so we're very pleased with that particular number.
GUGULETHU MFUPHI: Another number, which Alec likes to zone in on, is the return on equity number. That's up at 23 percent and if I'm not mistaken, a lot higher than the other banks – the Big Four.
ALEC HOGG: Yes, but it's a very interesting point that you put your finger on there, that cost to income is down, but return on equity is also sliding.
GERRIE FOURIE: Yes, there are two reasons for that. It ended up at 23 percent, which I think is still a very nice return. We're aiming for 25 percent but remember, we raised extra capital 12 months back and, given what's happening in the credit limit environment and the way we've pulled back, the result is slightly down to what we are aiming for. I do, however believe that in the future we will still get back to the 25 percent.
ALEC HOGG: Gerrie, the strategy seems pretty simple: cheap banking, no frills, and it seems to be working, certainly, on the numbers you're telling us. On the other hand, you have the big question marks over the repayment periods and I see your bad debts are edging up again.
GERRIE FOURIE: Yes, bad debts have gone up and I think that's typically, what's happening in the South African economy. It's tight out there. We're seeing it in the strikes, we see it in the retrenchments, and we see it in the variable income of our clients, too. Interestingly enough, we did an analysis recently, and the variable income two years back, was 45 percent of a client's income and it has dropped down to 37 percent.
ALEC HOGG: What does that mean?
GERRIE FOURIE: It means that if you look at 100 percent of his income, 37 percent was variable, so it's overtime or bonus that he received. Two years back, it was 45 percent and that's purely what's happening in the economy, so there is stress in the economy and that's what you see in the figures. I think the difference is whenever we see stress or we see arrears increasing we take the knock early because that's the way we provide. If you go and look at our up-to-date book, we provide seven percent on our up-to-date book and that's completely different to what other people are doing who only start providing three or six months after the client has gone into arrears.
GUGULETHU MFUPHI: The bad loans number: does that also take into account the potential further interest rate increases?
GERRIE FOURIE: Interest rates – directly – has very little effect on us because remember, we have fixed rates. A client, whom we've given a loan to, will repay that loan until he's repaid the full loan. However, indirectly, if you go and look at whether the client has variable interest rates risks, that will have an effect. If he has a mortgage or he has vehicle finance that will definitely have an effect on his debt-to-income.
ALEC HOGG: I think the big difference – and you keep stressing it- between yourselves and African Bank (one of the differences) is that you have this transaction revenue, which is growing. I pulled out some figures from 2009 – that was six years ago – there, you were only at ten percent. Now, you're at 32 percent. That's quite a nice bulwark.
GERRIE FOURIE: Yes, if you look at what's happened last year…if you just compare that, we were at R1.3bn, which was coming from transactional income. That has increased to R1.9bn, so that's a growth of 43 percent so that's completely different. I don't have that base. Another very positive view: if you look at our retail wholesale funding, that has increased from R6.4bn to R24bn and again, that shows you the trust in the brand because people will only invest their money into Capitec if they have trust in the brand. It's something we've been focusing on for the last six years and we're very happy with the results we're getting.
GUGULETHU MFUPHI: You also mentioned the last time we spoke to you that you're looking at targeting the higher LSM groups. When will we see this happen?
GERRIE FOURIE: Well, it's already happening. If you look at that R1.9bn in transactional income, you must remember that's real growth because we hardly had any price increases. It was only on our cash handling fees that we increased slightly, so what you're seeing there is a combination of client growth and client mix that's changed, so what we're definitely picking up is a much higher income individual, whose coming to bank with Capitec.
ALEC HOGG: You're getting a lot of good publicity around Internet Banking lately.
GERRIE FOURIE: Yes, we were quite pleased about the Internet. As you all know, the Sunday Times Business results showed we were the best online, so we're quite happy with that. That, again, stresses the importance of simplicity because that's what we focus on, but it's the area, which I think we will develop very strongly in the next 12 to 18 months. The strategy was to uplift the look and feel of our branches, then to improve the service platform in the branches, and now the focus is on electronic channels.
GUGULETHU MFUPHI: What about small businesses?
GERRIE FOURIE: Yes, we get that question quite often, but on average, – and I don't want to go into the detail – we're averaging about ten percent market share in retail banking and we believe we can still take that market share up quite a lot. Let us therefore focus on the things we know we're doing well and keep to that and then, over time, one can develop, but can't, see it in the next five to six years.