Trust in the Capitec brand pulls bank through tough times
Capitec’s latest results show that the bank is in good health as it continues to win customers over despite concerns sparked by the crash of African Bank and the bottoming-out of the credit cycle.
In its unaudited financial results for the six months ended August 31, released early on Monday morning, the bank, which is also South Africa’s second largest unsecured lender, reported a 21% increase in headline earnings to R1.173-billion and growth in active clients of 418 000 since February to 5.8-million.
It was this growth in the bank’s client base, and not necessarily income from lending, which saw its earnings soar.
Capitec said transaction fees grew by 34% over the reporting period to R1.2-billion, which covered 63% of the bank’s operating expenses for the six months. Clients who make regular deposits – mainly salaries – into their Capitec Bank accounts are considered to be a key category and these, too, grew from 1.9-million in August 2013 to 2.5-million in August 2014.
“We have really focused and worked hard on building the banking side of the brand over the five to six years,” Capitec chief executive Gerrie Fourie told the Mail & Guardian. “Most importantly, the picture the results paint is one of brand acceptance.”
The 21% jump in headline earnings compares favourably with those of the big four banks, whose combined headline earnings grew 13.1% in the six months ended June 30, as reported by PWC’s latest South Africa Major Banks Analysis.
“If you look at the credit side of the business and the tough conditions, the bank has also performed in line with expectations,” said Fourie.
This is despite concern about the lender, given the recent fall of major unsecured lender African Bank and the poor performance of credit furniture retailers.
The National Credit Regulator’s Credit Bureau Monitor showed that the percentage of consumer credit accounts in good standing decreased in the second quarter of 2014.
“Of the 79.42-million accounts, 58.15-million (73.2%) were classified as in good standing, a negative variance of 1.8% quarter-on-quarter and 0.3% year-on-year,” the regulator’s report said.
Banks have also pulled back on unsecured lending.
The Reserve Bank’s Quarterly Bulletin data shows growth in general loans and advances to the household sector (of which unsecured lending is the majority) began to drop sharply in 2013 and 12-month growth continues to recede, measuring just 3.5% in March, the lowest rate of growth since February 2005.
This is in contrast to highs of annualised growth of 40% in mid-2011 and a boom throughout 2012.
African Bank’s demise is partially attributed to its failure to pull back on unsecured credit in time, resulting in the Reserve Bank intervening and placing it under curatorship as part of a rescue plan.
Ratings agency Moody’s immediately moved to downgrade the bank’s rating to junk status and a few days later downgraded Capitec by two notches, citing “heightened concerns regarding the risk inherent in Capitec Bank’s consumer lending focus”.
Trust in the brand
Both Capitec and the Reserve Bank expressed dissatisfaction with Moody’s decision to downgrade Capitec bank, and argued that its business model is entirely different to that of African Bank’s.
“I would like to see the day we don’t get a question about African Bank – I don’t think it’s something that will go away quite soon,” Fourie said on Monday. “There will always be a comparison between ourselves, but from a trust perspective, clients have trust in the brand and what we have achieved from that view has taken us away from what African Bank is doing.”
Capitec reported limited loan sales as tighter rules meant the number of loans granted declined by 20% to 1.32-million compared with the six months up to the end of August last year.
“Despite decreasing loan sales, loan revenue increased by 6%. But we will continue earning interest and fees from loans sold in previous periods,” the bank said in its statement. “Gross loans and advances grew to R35.1-billion.”
Provisioning for debt grew by 18% and gross loan impairment expenses rose by 6%.
Write-offs totalled R2.1-billion – a 28% increase on those experienced in the six months up to the end of August last year. But the ratio of arrears to gross loans and advances “remained stable” at 5.5%.
The South Africa Major Banks Analysis shows the bad debt expenses for the four major banking groups (FirstRand, Nedbank, Barclay Africa and Standard Bank) was down 9.6% for the six months ended June 30 2014.
Fourie said that, in the first quarter, the bank saw numerous write-offs and high debt provisioning as part of the normal seasonality of the lending cycle after December, which was aggravated by strikes in the platinum sector and elsewhere.
“In the second quarter we saw a big improvement,” said Fourie. “Plus we are seeing people have earned better salaries with an average increase of 10%, well above CPI [consumer price inflation] … We do a detailed analysis on income versus debit orders and we have also seen improvement there.”