There’s a particular jingle that you’ll recognise from Capitec adverts. You know, the four-note, high-pitched one. If you aren’t sure what I mean, search for any Capitec advert on YouTube. Either that, or keep an ear open the next time you swipe or tap your card to pay for something!
Yes, popping in at my local Vida last week led to hearing that familiar jingle after I paid. It’s not the first time I’ve noticed it. Capitec is pushing hard into the digital merchant commerce space and the results are all around you. All you have to do is listen to the sounds of disruption, literally.
It probably gets annoying for the person working behind the till, but the jingle on the Capitec point-of-sale machine is a powerful reminder to customers of all the other times they’ve heard that little tune. Capitec has eaten the other banks for breakfast in the retail space and it is on the same mission in the business banking arena, so you can expect to hear that jingle more often when you tap your card. And when you do, it means that a percentage of what you just paid went straight to Capitec.
Capitec’s expansion into business banking started with the acquisition of Mercantile Bank at the end of 2019. It’s easier to start with a market footprint and a decent infrastructure base and grow from there than to try to build something from scratch. The build vs buy debate is nothing new in acquisition strategies. In fact, the entire venture capital market is practically built around this concept, with many start-ups (especially in the fintech space) built with an exit to a corporate in mind. That may not have been the original intention with Mercantile Bank, but the result was the same.
Capitec paid R3.56bn for the deal, giving itself a launchpad in the market. It sounds like a huge number, but it was actually a fairly gentle start for the bank; at the time, it was about 2% of Capitec’s market cap. That’s enough to show intent without scaring off investors based on risk.
Capitec achieved 69,000 new business accounts in August 2024 vs just 21,000 in August 2023
The post-acquisition growth and integration plan would probably have gone a lot faster were it not for the pandemic, with Mercantile Bank finally rebranded to Capitec Business in the 2024 financial year. The first few years of the journey were a baptism of fire and Capitec took its time to prepare for battle against local banking groups that had already been dished out a hiding in the retail banking sphere. With the Capitec share price having doubled in the past five years, it’s hard to find fault with its approach.
Capitec’s numbers for the six months to August 2024 show that the business banking operations generated headline earnings of R214m. That’s much smaller than the insurance segment at R1.5bn and especially personal banking at more than R4.6bn. It’s difficult to compare the relative segmental contributions with local peers, as other banks tend to lump together the retail and business banking operations for reporting purposes. Still, we can say with high conviction that there’s plenty of runway for Capitec in this space.
The trajectory confirms this, with Capitec achieving 69,000 new business accounts in August 2024 vs just 21,000 in August 2023. It is offering particularly competitive commissions on payments if the amounts are settled into a Capitec account, with the goal of winning more transactional banking clients in the market. Capitec’s interim report claims it has the lowest maximum rates in South Africa, so the group’s DNA of competing based on simplicity and fees has been carried through into the business banking operations.
More will become clear when Capitec releases its next set of full-year results. With the share price up 45% over 12 months, Capitec is once again the best-performing local banking share. Next up are Nedbank and Absa at 33% and 22% respectively, benefiting from a low valuation base coming into 2024. Standard Bank and FirstRand each managed nearly 13%.
I have no horse in this race, preferring to hold US banking exposure instead (JPMorgan and Goldman Sachs keep delivering the goods for me). If I had to choose just one local bank to hold for the next five years though, it would be Capitec — even at such a steep valuation. I don’t see an end to its growth any time soon. I suspect you’ll be hearing that jingle far more often at coffee shops.
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