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Capitec Bank’s share price has seen some pressurised spikes this year as contagion affected sentiment around the unsecured lending space when African Bank Investments (Abil) was placed under the curatorship of PWC’s Tom Winterboer, and subsequently delisted from the Johannesburg Stock Exchange. In this detailed analysis, Cor van Deventer of Seed Investments looks at a very different banking model to that of the troubled Abil, this report sheds light on the sound operations, and focused management that have seen Capitec grow earnings as well as clients. – LF
By Cor van Deventer
Capitec – Growing Earnings and Clients
Capitec Bank has taken the banking sector by storm since its listing in 2002, and is widely regarded as the most innovative player in the sector. Its mantra of Simplicity, Affordability, Accessibility and Personal Service has found favour with SA’s consumers, enabling Capitec to grow its client base rapidly. The bank now boasts nearly 6 million clients and 9,491 employees at 647 branches.
Capitec has its roots intertwined with that of PSG Group, which entered the thriving microlending sector in 1997 by acquiring SmartFin and FinAid, two Gauteng based microfinancing businesses. PSG’s aim was to establish a dominant position in a very fragmented industry by consolidating some of the smaller players.
The microlending business was spun out as a subsidiary of PSG Investment Bank, and sold into The Business Bank in order to use its existing banking license. Thus Capitec Bank was established in March 2001, and the holding company Capital Bank Holdings Ltd listed on the JSE in 2002.
In 2003 PSG unbundled Capitec, and over time PSG’s ownership stake has reduced from around 56% to the current 28%.
The bank recently released its interim results for the six months ended 31 August 2014, and reported an impressive 21% increase in headline earnings per share. Further highlights included an increase in the interim dividend by 21% to 246 cents and a 16% increase in active clients over the past year.
The graph below illustrates the growth in headline earning per share (cents) over time:
Capitec’s number of active clients has grown exponentially since 2005, and now stands at 5.8 million including 2.9 million mobile clients. Primary bank clients, which Capitec defines as those making regular monthly deposits such as salaries, have increased to 2.4 million.
Capitec has realised the importance of diversifying its revenue stream away from its micro-finance roots. As a result, management has focused attention on increasing the revenue from transactional banking as opposed to interest and fees earned on loans granted. The increase in active clients has enabled Capitec to make some progress here, and transaction fee income now accounts for 22% of income from banking operations.
The net transaction fee income (millions) over time is illustrated in the graph below. For the six months ended 31 August 2014, transactional income was 33% higher at R 1.2bn compared to the same period last year.
On the liability side, the value of new loans advanced decreased by 2% to R 9.3bn, while the number of new loans reduced by 20% to 1.3 million for the period. The average loan amount is now R 7,059, up 22% from the previous period. This is a result of tighter affordability requirements and granting less low-value, short-term loans. Management took the opportunity to remind investors that they remain cautious in extending credit, and that comprehensive affordability assessments are done before granting any loan. The overall term of the outstanding loan book decreased from 45 to 44 months over the last 6 months.
It is encouraging that Capitec continues to provide very prudently for bad loans: 8% are provided for loans that are up to date, 46% for those who are 1 instalment behind, 74% for two instalments behind and 87% for three instalments. After 90 days in arrears the loan is written off as a bad loan.
Gross loan impairment expenses – that is debt written off and provisions for bad debts – rose by 6% compared to the previous period, with write-offs totalling R 2.1bn. Provisions made previously were more than sufficient to absorb the current period write-offs. Recoveries increased by 58% to R 259m.
Capitec currently trades at a PE of 13 and a dividend yield of 2.4%, comparing favourably with the ALSI’s 16.3 and 3.1% respectively.
The share has been included in the Seed Equity Fund in the recent past as a small portion of both the Momentum and Value building blocks, but is not held currently.