Late on Friday Moody’s downgraded Capitec by two notches and placed it on review for a further downgrade.
Capitec Bank, the second largest player in the unsecured lending credit sector, reported a 20% increase in first half earnings this week, but this was against a 67% increase in arrears.
When presenting the bank’s interim results to the end of August, outgoing chief executive Riaan Stassen said Capitec was feeling the effects of a slowing economy.
Stassen said that though the bank had been lifted by loan growth and an expanding customer base, which has reached five-million, it was clear that there was more financial pressure on consumers than before.
While the bank’s appetite for the unsecured lending market has not reduced, the “fundamentals of the economy” were of concern.
It seems the bank, like African Bank Investments, plans to batten down the hatches and make provisions for the storm.
“We are seeing increased use of unsecured credit by high income consumers. The most recent National Credit Regulator statistics indicate that more than 45% of the credit taken in the unsecured market is by consumers with a monthly income of more than R15 000, compared with 36% a year ago,” said Stassen.
Customer deposits
Unlike African Bank, Capitec takes in customer deposits, making it capable of benefiting from fees and commissions from client transactions.
In a statement issued to the JSE, Capitec said that though the bank saw strong growth in net transaction fee income to R899-million — up 51% on the previous period — it saw arrears in accounts increase from R1.07-billion in 2012 to R1.8-billion.
Loan revenue increased by 38% to R4.9-billion, but fee income from loans fell 26% to R465-million.
“Arrears are up significantly,” Stassen said, adding that it remains within the risk profile, but he was concerned about “the economic conditions and the overall credit state of the average consumer”.
Capitec until now has said little about the strained credit market, leaving that to African Bank, which has sent out frequent updates on its efforts to cut volumes around unsecured lending and boost its provisioning.
Stassen this week said that the bank had tightened up its credit criteria, which accounted for the 26% reduction in the value of loans advanced.
On the plus side, it was successful in getting money back on the loans it issued.
Covering bad debt
Capitec has increased its provisions to cover bad debt by 70% year on year to R3.2-billion.
“This increase as a percentage of gross loans and advances increased from 7.6% to 9.8% year on year,” he said.
Stassen said the bank was confident that it would continue to grow its customer base and increase transaction income.
He saw the tough trading conditions as a positive for growing Capitec’s customer base, saying that he felt “consumers would become increasingly sensitive to good value and good pricing” as a result of the economic squeeze, and the bank was favourably positioned on both the banking and credit markets.
The markets reacted negatively on Wednesday with a drop in the share price after the news that Stassen will retire on January 1.
He will be replaced by Gerrie Fourie, an executive management team member since the bank’s inception in 2000.
Masterminding growth in a difficult market
Stassen is seen by many as the mastermind behind Capitec’s growth in a difficult market. It has about 600 branches and a market capitalisation of R23-billion.
An analyst said Stassen was seen as the core of the bank and a “strong manager” who was open and approachable.
The bank’s ability to access and analyse its data at all times was seen as an advantage.
Speaking at an Africa Unsecured Lending Summit in Kempton Park last month, African Bank Investments executive director and chief risk officer Tami Sokutu said that though African Bank had diversified by opening an insurance and vehicle and asset finance channel, he believed this was a “particular cycle”.
“Our view is that unsecured lending is going nowhere, it’s here to stay,” he said, mirroring earlier comments by Stassen.