The market took a grim view of Capitec’s full-year results — its shares slid over 6% last week — yet a majority of analysts surveyed by Bloomberg aren’t recommending that shareholders dump their stock. The bank, still South Africa’s most expensive, is rated a “hold”.
That’s despite a stomach-churning 80% jump in credit losses as Capitec customers, especially in lower income brackets, struggle to make ends meet amid runaway food and transport costs.
Add the struggling businesses which aren’t adding staff, above-inflation municipal tariff increases and the government’s failure to keep the lights on, and the immediate future for consumers is not bright.
Still, Capitec eked out a 15% rise in headline profits as the explosion in bad debts was offset by healthy loan book growth, a push into insurance that’s targeting its 20-million-plus client base and a jump in profits at the business banking unit, up 123% to R389m.
While it’s a small proportion of Capitec’s overall R9.7bn profit, a 21% increase in its loan book to R12.1bn means the unit is ahead of competitor Sasfin’s R9.4bn.
Capitec bought Mercantile Bank in late 2019 for R3.56bn when the lender — focused on smaller businesses — had outstanding loans and advances totalling around R10bn.
“There are lots of opportunities among SMEs with a turnover of up to R30m,” Capitec CEO Gerrie Fourie tells the FM.
It was the insurance unit that saved the day with a 32% jump in profit to R3.3bn in the 12 months to end-February. The bank received its life insurance licence last year, having previously sold insurance products through a cell captive arrangement. Now Capitec can get the full benefit of this unit’s profits through sales at its branches.
“Our existing distribution network creates the opportunity for increased sales,” says Fourie. “We have 10,000 ‘agents’ that can sell [insurance].”
Capitec’s credit, life insurance and funeral policy products raked in R3.3bn in sales last year, up from R2.4bn. This compares with listed life insurer Clientele’s R2.35bn in gross premiums for its fiscal year to end-June.
Was the board too optimistic about the economic outlook when financial statements were compiled last year?
Still, Capitec remains a retail bank at core, and an 80% surge in impairments is no small matter. Was the board too optimistic about the economic outlook when financial statements were compiled last year?
It argues the comparison is skewed by the fact that, facing Covid, it raised R2.48bn in provisions. This pushed net credit impairments up to R7.36bn for 2021, compared with R4.36bn a year earlier.
Last year, with a strong economic rebound just completed, Capitec reversed R238m in provisions which saw its credit impairments more than halve to R3.3bn. With hindsight, that now looks to be a very optimistic view of an economy that was about to skid to a standstill.
Before June last year, Capitec also relaxed lending criteria for new customers, a move reflected in the jump in credit impairment provisions for new loans, up to R4bn from R2.7bn a year earlier. At the same time, consumers came under pressure and existing loans attracted a R4.5bn provision, up from R2.9bn.
Had Capitec decided rather to raise a provision worth, say, half that of 2021, this year’s expense would have been 28% higher (rather than 80%) — and closer to the 17% growth in its retail loan book.
“It’s [a] fair [view],” says Patrick Mathidi, head of equity and balanced funds at Aluwani Capital Partners. “Remember, a big chunk of the earnings the guys reported [last year] was a reversal of the [provisions for] impairments that they’ve put forward.”
Says Mathidi: “This reversal was informed by two things: the actual experience of the consumer at that stage, which was far better than expected, and second, the outlook for the economy was far better up until the fourth quarter [bout of] load-shedding.”
After unwinding most of 2021’s provisions, Capitec’s credit loss ratio has settled at 8% of its loan book, slightly higher than pre-pandemic ratios.
Despite being singed by this year’s economic decline, Fourie remains optimistic about South Africa’s prospects.
“We expect inflation and interest rates to normalise from August onwards,” he says, adding that China’s economy should start to fire up soon. That’s key, since China is South Africa’s largest trading partner.
Hopefully, Fourie will be able to convince markets of his vision. Capitec’s share price has slumped 27% over the past 12 months to trade at a p:e of 19 and a dividend yield of 2.6%. This compares with the FTSE/JSE financial 15 index’s 5% decline over the same period. The stock is still more richly priced than traditional lenders, with Standard Bank on a p:e of 8.1, FirstRand on 10, and Absa and Nedbank on 7.2.
“We like the business,” says Mathidi, though its price “has always been the issue.”
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