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JSE Superhero No 2 – Capitec

Superpower: Flexibility.

The global financial crisis is an unlikely catalyst for business growth, particularly for a bank. However, Capitec’s emergence as a serious player in the South African market had a lot to do with how the world changed after the collapse of Lehman Brothers.

In the decade since, Capitec has been one of the most consistent performers on the JSE. Its share price has multiplied from R27.50 to its current levels of over R1 100, making it one of the greatest success stories on the local bourse.

Read: The three stocks that have defied the JSE’s stagnation

“Due to changes in the market and regulation, the global financial crisis changed the whole banking industry,” says head of equities at Sanlam Investment Management, Patrice Rassou. “It moved from a secure lending base to more unsecured lending, and that played into the hands of Capitec.”

The big move

In particular, unsecured lending became far more attractive to middle income consumers.

“Before the financial crisis, most people had access bonds,” Rassou points out. “Instead of getting an unsecured loan, you would use your access bond to borrow, but banks stopped that. As soon as they did, consumers looked at other ways to get credit. That’s when the unsecured lending market moved from very much a dark alley, lower income type of offering to a more middle income type of offering. You saw Capitec move from taxi ranks and train stations to malls.”

This also led to the bank offering larger loans and longer terms. In 2008, Capitec’s average loan size was R1 636. Last year, the average loan it advanced for a period of six months or shorter was R2 621, and the average loan for a period greater than six months was R36 302.

Attracting more middle income consumers to its unsecured lending offering also opened up the possibility for it to expand its business model.

“The company has managed to evolve from just a personal loans business to a massive transactional banking business,” says Hannes van den Berg, co-portfolio manager of the Investec Equity Fund. “It has almost reached a point where transactional income will cover its full cost base. The revenue from the personal loans business would just be on top of that.”

Taking advantage

There is no question that during this time it has benefited massively from the struggles of certain competitors. The demise of African Bank allowed it to gain a much larger market share in unsecured lending, and over the last few years Absa has gone through a tough patch that has pushed many customers into Capitec’s arms.

“Add to this the credit card that has really taken off,” says Rassou. “Given its low cost, convenient operating model, it’s been able to reach a lot more customers more quickly than many other players.”

This ability to be nimble has been a key feature of Capitec’s success.

“Capitec has not had any of the legacy issues that big banks have,” points out Philip Short, portfolio manager of the Old Mutual Top 20 Fund. “It hasn’t had to carry those big costs, big branches and old IT systems.”

Critically, the company has been extremely efficient in taking advantage of this flexibility.

“Capitec has had this success in a very low-growth South African environment, with phenomenal cost discipline and good allocation of capital,” says Van den Berg. “It is a company that ticks a number of fundamental quality boxes.”

Its customer-centric approach has also been key.

“It has a simple operating model, which focuses on what clients need,” says Rassou. “Capitec is able to offer products extremely quickly and that are priced competitively. This combination of low costs and clear, transparent products also means that customers won’t shop around. They know they will get what they need, without the bells and whistles, quickly and efficiently.”

The next frontier

Capitec will now have the opportunity to demonstrate that this approach can deliver the same success in business banking. Late last year it acquired the local assets of Mercantile Bank, giving it a presence in this space.

Van den Berg believes that the real opportunity for Capitec will be to replicate to a large extent what it has done in retail banking – open up a previously untapped market.

“When we met with management recently they gave us more insight into the potential opportunity that they see in the informal sector,” he says. “Informal traders make up a large percentage of the overall retail market, and if Capitec can provide them with hand-held units for transactions and bring a lot of what is currently being done in cash into the formal banking system, that is a huge opportunity.”

The R3.2 billion Mercantile transaction is not that big in the context of Capitec’s headline earnings last year of R4.5 billion, but it will be interesting to see how it is able to deliver on it.

“They will compete with other banks, but there is a massive segment of the market where Capitec is already quite strong on the consumer side that they can now access on corporate side,” Van den Berg says. “It probably won’t move that needle that much in the first year or two, but if they can get it right there is a lot of potential in this acquisition. It’s a good way to get some additional scale and leverage their existing management knowledge in what is an untapped market.”

Read: JSE Superhero No 1 – Clicks

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question for investors : do you invest with a conscience?

Capitec shareholders did well till recently but it was and remains a payday lender masquerading as a low-cost bank.

Would you invest in any business, regardless of the misery and social damage it causes, as long as the share price does well? Conscience cuts many ways – the environment (bp & sasol & strip miners), business practices (capitec or that us crowd that bought medical patents to raise prescription prices tenfold) , alcahol, tobacco, privacy (facebook debacles), etc

Misguided and uninformed comment, and very selective and questionable morality.
all the banks are in unsecured lending and funeral policies, not only Capitec,
And as a client of PSG I got in at the issue price- still happily and cheerfully holding my 10 000 Capitec shares.
I even bank with them, and I sleep like a baby at night.

babies wake up every few hours and dirty their nappies, but maybe that is not what you meant

The nice thing about opinions is that everybody is entitled to one. Having seen as employer the business end of Capitec payday lending in illegal garnishee orders enforcing unsustainable repayment terms on loans that should NEVER have been handed out by a responsible lender, I have my opinion. But sure : 35% interest is not “questionable morality” as you put it.

There are enough good companies put there, morality is just another filter before investing, for me.

Sounds like you should adopt and stick to Shariah compliant practising banks.

Capitec have – single-handedly – upended the ENTIRE banking sector with a product that is simple and actually beneficial to every client.

And premised from the get-go with giving ordinary customers what they actually need (and not what sharp, greedy skelms in insulated executive suites pretend they should want).

Low fees? Check.
Interest on your everyday account? Check.
Longer opening hours? Check.
Minimal form-filling? Check.

All this is simple, common business sense.

Yet not a single one of the big banks thought of offering these services – UNTIL they started losing their higher-grade customers in spades to Capitec.

Now they’re all falling over themselves to catch up.

Who should responsible investors support?

The lazy slobs who are ALWAYS behind the curve, and taking advantage of their captive conservative clients at every turn?

Or the cat setting upon these fat, greedy, pigeons??

No brainer if there ever was one!

Where’s Viceroy?? Still cleaning off the egg on their faces?

watch out…they have a point..read the detail in their report..Capitec is not clean

Very detailed article. Quite enjoy these perfect hindsight reviews………now I just have to find a way to ROLL BACK TIME for A YEAR, and Bob’s your uncle 😉

Banks make mistakes…this one never does…sounds fishy to me

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