Investment analyst questions Capitec’s newfound Bull – argues facts haven’t changed. The bank responds.

My turnabout after Friday's visit to Capitec hasn't resonated everywhere. An investment analyst I respect shot me a mail to argue that no matter how much I buy into the bank's business model, the facts haven't changed. In his view, Capitex is over-extended having granting big ticket unsecured loans over terms of up to seven years – and that this will come back to bite them. From a bull, he's turned into a sceptic. He prefers to remain anonymous. We asked Capitec to respond. Both sides of the story are published below. – AH     

A leading investment analyst writes: 

I read your Capitec piece and thought it was very interesting. I'm not sure if I mentioned it when we spoke, but I was a huge Capitec fan in the early days. I saw them as the great disrupters with a 21st century approach to vanilla banking. And I owned shares in Capitec for many years, first buying them at R14 and buying more at R27. I sold them a few years ago at R101. The reason I sold them is because they started extending and increasing their loans. They started focusing almost exclusively on micro lending (where the big money is) and problematically their growth has been in the big loans category. There is no way around the this chart:

So while it is a fantastic business that had so much potential to really take on the Big Four retails banks, I fear the damage has been done by lending out billions upon billions of large (up to R230k), long dated (as long as 7 year), unsecured loans. I think their ability to collect those large long-dated loans are minimal.

Charl Nel, Capitec's Head of Communications responds:

At its inception Capitec Bank always had the ambition to be a retail bank.  It used the micro-lending base to fund the business in the developmental years. This approach gave us the income stream and time to evolve from a micro-lender to a fully-fledged retail bank.

This evolution has taken many forms, from increasing to a client base of over 5 million clients, by offering retail call and fixed deposit products with some of the best returns in the industry and by offering a simplified low cost, customer friendly transaction platform which includes internet and cell, at the most competitive fees in the market. Over 2 million clients now use us as their primary bank.

Part of this evolution has also included extending loan duration to include longer term loans in addition to what were essentially microloans in the early phases of the bank. This was made possible by the advent of the National Credit Act that replaced the Exemption to the Usury Act in 2007 and provided the opportunity for credit providers to advance longer term, higher value credit on an unsecured basis to individuals. The introduction of the new act has resulted in the unsecured credit sector of the market addressing a substantial need for life improvement expenditure in South Africa.  This has also attracted a significantly "lower risk" type of client to the bank as many of these loans are used by high income consumers for housing and other capital assets.

The number of mortgages held by South Africans has remained flat at 1.8 million accounts for the last 6 years. Only 6% of South Africans have a mortgage. This is despite the migration of many individuals up the LSM curve over this time.  The market opportunity exists to address life improvement expenditure via the unsecured credit market at lower prices. Clients who qualify for these longer term loans are the lower risk group of clients in the industry,  with the most stable re-payment & employment profiles.

The chart below (attached) shows the arrears on the book since the bank has diversified its loan offering to lower risk clients and by definition has extended loan duration as well. The return on equity expectations for the bank of long term loans is the same as short-term loans, despite the variance in the interest rate charged. This is because the bad debts experience of longer term loans sold to lower risk clients is significantly different to that of traditional pay day loans.

Over and above this Capitec continues to gain substantial numbers of new primary bank clients as our simplified low cost solution is attractive to all profiles of consumers.  We will continue to drive down prices on transactions and unsecured credit, while simplifying access to banking solutions.