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Capitec: credit boom is over

Update: Capitec on the past growth in unsecured credit and expected loan book growth.

*The number of new customers signing up has been changed since first publication.

JOHANNESBURG – Capitec is moving into a phase of ‘consolidation’ as the growth in SA’s credit market appears to tapering-off amidst high levels of consumer indebtedness.

Following a period of booming growth in advances since 2007, the major unsecured lender begun tightening its lending criteria in November and December last year and expects to see ‘flat,’ single-digit lending growth for the next one to two years.

This is according to its CEO, Riaan Stassen, who spoke to Moneyweb at Capitec’s head office in Stellenbosch on Tuesday.

“I am concerned over the high level of indebtedness of South Africans – that is a fact,” said Stassen

“Thirty percent of loan applications at Capitec get rejected because the potential customer has no affordability to take on credit and that is not a healthy sign at all.”

But with African Bank CEO Leon Kirkinis calling the beginnings of an adverse credit-cycle, expected to be felt by year-end, Stassen says “I would prefer to define it as a phase of consolidation.”

For Capitec, the move to consolidation is driven as much by an internal need to ensure the accuracy of its lending models as by any deterioration in the macro lending environment, he says.

And while African Bank expects its bad debt to advances line to tick-up by about 1% to around 13% for 2013, Capitec sees no “technical” deterioration in bad debts, but rather a temporary spike in the figure resulting from recent strike actions.

Nonetheless, growth in advances is expected to be “below double digits” for at least the next year as compared with African Bank’s forecasted 23% growth for the financial year ending 2013.

“There is no reason for Capitec to take unnecessary risk,” says Stassen who notes “very strong” growth in the bank’s transactional revenue with around 100 000 new customers signing up to the bank a month.

Testing against a shifting environment

Since 2007, in addition to booming growth approaching levels of 40% per annum, two clear trends have marked the development of the unsecured markets.

The first has been a shift towards lending more unsecured credit to higher income individuals (earning above R15 000 per month), with growth in this segment of market at times exceeding 80%.

According to former ABSA retail head, Bert Griesel, this “worrying” trend appears to be the result of a growing indebtedness amongst higher income individuals who have been forced to top-up on unsecured after exhausting their traditional secured finance channels.

Kirkinis believes the trend was influenced by a push from major lenders into the unsecured markets, owing to the higher margins achievable in the space.

However, according to Stassen the trend has been a result of “transformation” whereby an emerging black middle class, predominantly in the government but also in the private sector, has been securing high value unsecured loans as a result of their lack of credit history and the asset base required to attract secured finance.

The second trend has been the tendency for lenders to extend both the term and value of unsecured loans to amounts exceeding R150 000 and over periods of up to 84 months.

“I have no doubt that the fact that we have migrated to longer-term, higher value loans and the interest rates coming down by 10%, have led to abnormal levels of high growth,” he says.

However, in response to its evolving customer demographic, Capitec has had to develop new affordability models used to asses customer affordability and to account for predicted loan impairment ratios.

“Understand the industry has since 2007 to date migrated from a 36-month loan to an 84-month loan. How we deal with that is we test behaviour and we do an affordability assessment and for a longer-term debt commitment we allow a lower percentage of disposable income to be available for debt repayment.

“I buy that with the change that we have had comes risk … there is always a risk that problems can be disguised in growth and that is why we want to go into a consolidation phase for 12-24 months, to make sure that that is not the case.

“It means that we need a period to validate the accuracy of our model predictions.”

Further comment from Capitec:

Charl Nel, Head Communications Marketing & Corporate Affairs at Capitec says the growth in unsecured credit, over the past five years, can primarily be attributed to three changes applied by credit providers since the advent of the new Act in 2007 and the resultant effect this has had on the profile of lenders using this market. The three changes applied by providers were:

  • The increase in the term of loans from 36 months to in the order of 84 months
  • The increase in the maximum amount of credit disbursed from R10 000 to inthe order of R240 000
  • The increase in distribution by banks to address the unsecured market

“The profile of credit takers in the unsecured market has shifted to higher net-worth clients who are new to this market. The proportion of higher income clients earning over R15 000, who take unsecured credit, has increased from 17% to 39% of the market over the five years, based on loan value.

“The expected slowdown in loans disbursed (sales) in the market over the next 12 months is as a result of credit providers not further extending the maximum term offered or maximum amount offered, as has been the case to date. It is also expected that the stricter credit scoring being applied by most providers and the terms of credit being shortened since mid-2012, will slow the growth in loans disbursed even further.

“Therefore, while market growth in loan disbursements to date has been in the order of 25% to 40% annually, this growth is expected to be at lower rates and can even be as low as single digit percentages in the year ahead. The effect on loan disbursements to the new-to-market, higher income clients are at this stage however unknown.

“Strong growth in total loans and advances (loan book) is however still expected, in the case of Capitec Bank, due to our long term book not reaching maturity. This will be the case for the next few years,” says Nel.

*The journalist’s flight to Cape Town was paid for by Capitec.


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