Capitec still shaking up the establishment

While Capitec announced solid results for the six months to August 2022, the ever-critical ‘market’ was not pleased with a mere 17% increase in headline earnings to R4.7 billion and management’s rather cautious remarks about its prospects.

The share topped the list of the biggest losers on the JSE for most of the day on Thursday, with a loss of nearly 9%.

The share actually adjusted to the possibility of lower growth going forward as soon as Capitec published a trading statement on 8 September to warn the market that headline earnings per share would increase by 15% to 18% compared with the first half of the previous financial year.

This sent the share price tumbling by 24% from R2 140 to R1 630 within days. It has since recovered a bit, but Thursday’s 9% drop wiped out most of the gains.

Jan Meintjes, portfolio manager at Denker Capital, says Capitec posted good results against the background of a difficult operating environment.

“Fundamentals are still good and the bank continues to grow and attract new clients.

“However, there are two concerns. The growth rate is declining and earnings growth of 17% is way lower than what investors are used to from Capitec,” he says.

“Secondly, investors seem to focus on management’s cautious tone when discussing the outlook for the future.”

Premium rating

Investors have rated Capitec highly since it listed on the JSE in 2002 as the new bank promised – and delivered – strong growth with a bold new strategy to bring simple, cheap and efficient banking to the masses.

Read: Capitec CFO and co-founder, Andre du Plessis to retire after over 20 years

Before the recent fall in the share price, the price-earnings (PE) ratio was still very high at nearly 33 times. This compares with those of other commercial banks of between seven and 10 times.

Even after the recent decline, Capitec is still on a PE of 20.8 times (based on the new earnings figures).

Its price-to-book ratio is also way above that of traditional SA banks, but it has been even higher.

Read: There’s no stopping Capitec, as it declares surprise special dividend [Apr 2022]

Meintjes says it can be expected that it becomes more difficult for Capitec to continue growing at the same phenomenal rate of the past.

“It is impossible to maintain the growth rate on a larger and ever-increasing base.”

“Capitec’s client base, its deposits and advances are all still growing, but the rate of growth is slowing,” says Meintjes.

Growth in perspective

Capitec still presented strong growth figures. The financial statements show that total retail loan and disbursements grew 35% to R26.5 billion during the six months to end August, compared with R19.7 billion in the same period last year.

This resulted in the retail gross loans and advances book increasing by 18% to R77.9 billion. Retail credit impairments increased by 44% to R2.9 billion (R2 billion at the end of August 2021).

Management said the increase in provisions is prudent due to the increase in advances, changes in the composition of the loan book, and an uncertain macroeconomic environment.

Transaction income

Meintjes notes that shareholders might also have been disappointed in lower growth in net transaction income. The income statement shows that income from transaction fees increased by only 8% compared with a year ago.

Capitec’s transaction income is lower than that of other banks compared with the total income. Capitec earned net transaction income of R5.6 billion compared with its net lending, insurance and investment income of close to R8.3 billion, while recent results from other banks once again show that banks earn about half their income from fees on transactions.

Not that it can do much about it. Capitec built its fortunes on offering – if not promising – low transaction fees, while the banking sector’s move towards digitalisation will continue to put pressure on fees. Digitalisation makes banking cheaper for clients, but the opposite side of the coin is that it reduces any bank’s income from transactions.

Read: Shoprite tackles TymeBank, Capitec head on with no-fee full bank account

“Capitec needs to stay competitive. Competition in the bank sector is very healthy,” says Meintjes.

Opportunities

Nevertheless, Capitec CEO Gerrie Fourie maintains that opportunities abound.

“The year has not been an easy one for our country, and the South African consumer took considerable strain in this period due to inflationary pressure, higher interest rates and record-high fuel prices.

“Over the last five financial years, we have seen consistent growth despite this, demonstrating the underlying resilience of our country, our business and our clients.

“On average, over 165 000 new clients joined the bank every month for the past year. Its active client base increased by 13% to 19 million and digital banking clients that use Capitec’s banking app, internet banking and USSD platform increased by 21% to 10.8 million – now representing 57% of its total active clients,” says Fourie.

The bank’s continued development of new digital offerings and innovations aimed at making banking simpler led to a 27% increase in the number of digital transactions, with clients doing 791 million digital transactions during the last six months.

Still being disruptive …

Capitec also announced that it will enlarge its presence in the cellular market, following its success in selling airtime to its clients through its banking channels.

It launched Capitec Connect, a prepaid mobile offering in partnership with Cell C, in September 2022. The selling point is low, flat prepaid rates with data and airtime that does not expire.

Read: Capitec aims to disrupt mobile market with data that doesn’t expire

“The flat rates mean that the cost per unit for data, voice minutes or SMSs stays the same whether clients purchase a little or a lot,” says Fourie.

It is a natural extension as more than eight million Capitec clients already buy pre-paid data and airtime on the bank’s digital channels.

The new offering is simple, offering a flat rate of R45 per gigabyte for data purchases, with no out-of-bundle charges – and clients won’t pay transaction fees when they recharge.

Fourie says Capitec takes an idea, runs with it, and once successful, looks at the next.

“We stick to the core principle of looking at customers’ needs with a simple and efficient solution,” he says, noting that the focus will now move to integrating the business bank division.

Listen: Capitec CEO Gerrie Fourie on its interim results