Capitec reports 17% growth in headline earnings

FIFI PETERS: Capitec didn’t have the greatest day on the JSE today [September 29, 2022]. Its shares slumped over 10% following the release of its first-half results. Capitec actually reported higher profits. It said that it increased its retail banking clients in the period under review to around 19 million customers, and a lot more of those customers were becoming digitally savvy, and banking online.

To unpack the numbers we’ve got the CEO of the bank, Gerrie Fourie, on the Market Update. Gerrie, thanks so much for your time. Just starting with the share price and how the market has welcomed the release of your first-half report, do you think they’ve treated you fairly?

GERRIE FOURIE: Fifi, I don’t look at the market on a short-term basis. I look at it over a long-term basis. We believe our organisation is fundamentally very strong. To grow over a five-year period through Covid and the KwaZulu-Natal unrest and the floods and economic uncertainty that we now are in, a 17% [growth] shows you that the company is performing well.

We had very strong growth, as you mentioned, in client numbers. We had very strong growth in digital numbers. So overall we are quite happy with it.

I think the only reason why the market didn’t like the results is that they probably expected 21% growth or 22% growth. It’s probably coming from our transactional income, where we grew 8%, whereas traditionally we grow 18/19%. But we had about a R250 million fee reduction, and gave back to our clients, because we cut our SMS fees and in-app messaging we made for free. So we go back to the clients. We gave another R100 million back to the clients on our loyalty scheme. So it’s in line with what Capitec believes in – that we do what’s right for the clients over the long term.

There were opportunities to give back, and we believe it’s the right thing to do, and we’ve done that.

FIFI PETERS: That’s the thing, though, because you have done very well over the years, throughout the pandemic and even prior to the pandemic, and the market got used to you doing really, really well.

In fact, I read a comment from an analyst who was even disappointed at the dividend. You increased your dividend, but he was expecting a little bit more, given how you have done things in prior years.

But I want to look at what you’ve done now, and the rate of growth that you are achieving now. Would you say that this is what your shareholders should become used to going forward, or do you see room to do better in the second half?

GERRIE FOURIE: I think, just coming back to dividends, the one thing about Capitec we believe to be consistent is we said to our shareholders we are looking over the dividend policy, that 50% of our earnings will be paid out in dividends with about 37% paid out in the first six months and the rest in the second six months.

And we’ve been consistent on that and we won’t change our dividend policy. So we believe in consistency, and that’s important.

If I look, I definitely think we can get to double-digit growth in the future because there are big opportunities.

If I look at Capitec Connect, which we’ve launched, if I look at business banking, which we’re launching next year, we believe there are opportunities.

But you sit in an environment and an economy that’s very uncertain and not conducive to growth. To really grow 17% in an economy that’s under severe strain I think is an excellent performance.

I think people need to get their perceptions right and understand the real risk or environment in South Africa and worldwide.

FIFI PETERS: Certainly. I think most people will agree with you, just in terms of what the first six months of your year included – the likes of the floods; there were even strikes in certain sectors. In fact, the economy contracted in the second quarter, [and] the load shedding is actually getting a lot worse right now. How is that impacting your business?

GERRIE FOURIE: I think it has an effect – 500 of our branches were geared to handle load shedding, 300 not.

We decided two months ago to invest another R60 million in lithium batteries to get all of our branches up and running. It just shows you the cost of load shedding.

I think if you look at the South African economy, the majority of companies have actually moved over to be self-sufficient on lithium batteries or generators or solar panels. But it’s costing you.

FIFI PETERS: How much?

GERRIE FOURIE: Taking your eye off is costing a lot. In our case, if you look at what we’ve invested in solar and batteries, we are probably now at over R150 million that we’ve invested.

It’s money that you could use actually for the benefit of clients. Instead, you are making certain that you can operate, because you’re sitting with an Eskom that’s not producing. So it definitely has a big impact on South Africa.

But our businesses in South Africa are resilient. They keep on going. In Afrikaans they say ’n boer maak ’n plan’. So in South Africa that’s what they do.

FIFI PETERS: All right. On the positive side, though, Gerrie, you have an interest rate environment that is working in your favour and expected to potentially work in your favour, given that when rates go up it means that you can charge a whole lot more for the loans that you grant or the loans that are even out there. Has the rising interest rate environment been helpful to you thus far?

GERRIE FOURIE: We don’t see a rising interest rate as an opportunity to make profits.

We see with rising interest rates you need to be fair to your clients. So what we do, as lending rates go up, is increase our deposit rates because we fund our lending book by our deposit book.

So we are fairly neutral. If you look at the impact of interest rates, they’ve got a small effect on our profitability because we believe it’s always best to look at what is fair to the client.

FIFI PETERS: How about its impact on the ability of the Capitec customer right now to repay what it has borrowed from you, and to do so on time? Are you seeing areas in which some of your customer base is starting to feel a bit of stress, given what is happening in the economy, the slowdown, the rate of employment that continues to tick higher, and the fact that the cost of servicing debt has risen?

GERRIE FOURIE: I think what one must understand, if you look at our book, we’ve got a book now of about R78 billion; R50 billion of that is term loans where the interest rates were fixed, and if the interest rates go up these interest rates are not affected. So the client base is still exactly at the same [point] as what they [have been paying].

We’ve also increased our living expenses – which we use in the calculation of affordability – by about 15%, to make certain that our clients can really afford it.

But I think, like anyone, the fact that food is costing you more, that petrol is costing you more, has an impact on the way you live. I think that’s where you need to be very self-disciplined to make certain that you live within your means.

If you look at our cash-stressed clients, those are the clients that have an income, and if you look at their expenses plus their debt that they need to repay, if they have less than 20% free flow, that has increased from 12% to 13% – still not major – you start seeing signs of people who are taking strain.

FIFI PETERS: What does that mean about your position towards lending, then, in this environment going forward?

GERRIE FOURIE: I’ve shown today in the presentation that we’ve cut back.

Interestingly, if you look at our take-up rate of our loans, that’s now round about 20%. During Covid it was 22% and pre- Covid it was about 27%. It shows you that we are more conservative than we were during Covid.

So we are managing our credit in a very conservative manner.

We are very agile, we make quick decisions to cut back. I think we’ve also got the flexibility in our access facility where we can reduce limits and adjust the risk from that perspective. It’s just something that you need to manage.

FIFI PETERS: Just lastly, circling back to your business bank, I see that it’s in for a makeover, a rebrand sometime later on in this year.

I want to talk to you about this space, because the pitch to the SME customer looks like it’s becoming really heated, not only from existing players like yourselves and African Bank and TymeBank that have got transactions to beef up their business offerings, but also from the likes of unusual competitors like Shoprite which are also now providing finance to small businesses and the like.

How would you describe the competitive environment right now, and what does that mean for your growth targets?

GERRIE FOURIE: I think that’s a market everyone is starting to enter. We’ve been monitoring that market very carefully.

Everyone goes into the lending space, and the big question there is how do you get data, because if you’ve got data you can score that particular business better.

So our approach is to offer those clients a full banking solution so the client can transact, save and get credit. It’s always about the financial services and whoever makes it in their strategies is the best, and whoever looks after the client the best, they are ultimately going to go and win.

FIFI PETERS: And one final question just on regulation. There’s a lot that’s being spoken about the risk of South Africa’s banking sector being put on the grey list, what this could mean, and the implications and ramifications. What’s your view on this and how worried are you – or not?

GERRIE FOURIE: I’m worried from a South African perspective, because I think it’s highly likely that it will take place.

If you look at the impact on Capitec, it will be very indirect, because we are not making use of a lot of wholesale funding. Wholesale funding is about 2%, 3% of our funding side, and we don’t use any international funding. But it’s definitely going to have an impact on companies that are making use of international funding, and then the perception of investors into South Africa. That will have an impact on the long-term growth of South Africa.

So it is concerning. It’s something we watch, but one holds thumbs and hopefully we come through positively.

FIFI PETERS: As you say, hopefully the government adopts the ‘boer maak ’n plan’ mentality and we do come out right.

Gerrie, we’ll leave it there. Thanks so much for your time. Gerrie Fourie is the CEO of Capitec.