Capitec’s late results show cost-to-income rising

Kokkie Kooyman from Denker Capital takes a look at how SA’s major banks are shaping up post-pandemic.
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SIMON BROWN: I’m chatting with Kokkie Kooyman from Denker Capital. Kokkie, I appreciate the early morning time. I want to dig into to the banks, but let’s first kick off with Capitec, the late results, because they’ve got a slightly out of sync year-end and mid-year. Lots of big numbers. The ones that struck me, however, were costs up 32%, cost to income 45%. I always knew their cost to income was rising. I was surprised how soon. Your sense? Is that a structural issue or perhaps a one-off, and more sort of pandemic -related?

KOKKIE KOOYMAN: Yeah, I think, Simon, you’re right. I think it’s bit of both – slightly pandemic-related, but I think the result is good. The environment is still tough. They had big reserve releases. So I think they accelerated costs and spending to be able to afford the spending now while they have this big reserve release. But you all right, there is an underlying structural issue that they are spending a lot, and that we see globally. Every bank in the world is spending a lot on tech and, as we call it, fresh tech – more money on new apps, rather than maintenance. I think they tried to get it out of the way, prepare the way going forward, especially on the business banking side. You got Michael Jordaan with Bank Zero coming in. So I think they said, “we’ve got to make sure we stay ahead of the game”.

If you look at your right, the cost-to-income ratio has deteriorated because of the spend, but I don’t think we’ll see this type of spend going forward. But the fee income has been really their strong point, and that has really grown as they keep on adding new clients, and those new clients are doing more swipes, as we call it. A lot of the clients that they are still adding are at the middle-lower end of the income table. So they are more transactors than using expensive wealth-management products. Economic activity is very important, and so what would we expect going forward as the economy picks up, you’ll see the transactional volumes of Capitec picking up and then the fee income will come through even stronger.

SIMON BROWN: Yeah, and that should take some of that 45%. I take your point. You suddenly have that money flowing in; spend a bit of it while it sits there and sort of get ahead of that curve. I love the ‘fresh tech’ phrase.

If we go to the broader banks, results are all out. We certainly saw dividends are back after prudential authority asked no dividend. FirstRand and Capitec dividends are above pre-pandemic. Broadly this set of results – I thought, considering the pandemic, considering the lockdowns, the job losses, the income losses, the banks have come through fairly strongly.

KOKKIE KOOYMAN: Yes. Look, unfortunately we’ve to still thank the regulators. I always dislike thanking regulators, but globally they’ve done a really good job post-2008, and really forced banks. The saying after 2008 was ‘we never want to be in this situation again where the global economy, or rather the developed-market economies were at risk of falling over because of the banking system falling over’. So the regulations put in place and accounting changes like IFRS 9 forced the banks to have very high capital levels and reserves pre-emptively.

So what banks had to do last year during the lockdown is that they had to do an economic forecast and reserve on the basis of that. As we now know, as lockdowns ended those reserves were unnecessary. The economy rebounded and the bad debts didn’t come through. It showed that the banks were cautious and good in their lending, and I think that going forward now is going to stand in the sector’s favour in that they overcapitalised. But they are well capitalised; not all of them overcapitalised and they’ve still got sufficient reserves, which means they can grow. That’s very important. So there’s enough capital to grow and to pay good dividends.

SIMON BROWN: Certainly. The banks are good and, as you say, the regulators really have sort of beefed that up since the 2008 crisis.

If we look at the big four, the big five, the big six – we’ve got so many of these days – if you put Investec in there, they’re all looking good, they all do fairly well. Typically for most people I speak to it’s all about FirstRand. That’s the preferred [one]. Is it as simple as [that] FirstRand is the better of the bunch?

KOKKIE KOOYMAN: Yeah. FirstRand management teams – the legacy of GT Ferreira, Laurie Dippenaar, Paul Harris, and then you had Johan Burger and Sizwe Nxasana – had a phenomenal management team who have left; guys like Alan Pullinger. They just grew up in the shadow of these [other] guys and just the culture. The wise thing they did was they saw this whole what is now referred to as ‘platform banking’ or ecosystem. They saw this way ahead of everybody else and prepared the bank for that. They see so much of their clients’ data – and that’s corporate, commercial, retail clients – that they can use that in terms of their offerings, in terms of their pricing, in terms of what they do. Really their systems have allowed them to do so well.

In between, it was criticised at the time they bought Aldermore in the UK, and that helped out MotoNovo, which was struggling in the UK. So they put those two together, MotoNovo, that funding; Aldermore had sufficient funding. So they’ve got an offshore arm which is working.

The other banks – and by the way you can see this in the fee-income growth over the last five years, where FirstRand and Capitec have continued growing fee income – the other banks have actually gone sideways. Absa looks as if its dipped – insurance income there. So FirstRand, just on the numbers, is just doing well and they held back during the pandemic. Their loan growth was a bit below the others, and so they are opening the taps again, so to speak.

But FirstRand is the most expensive of all, and I’m sure you’ll come to that.

SIMON BROWN: That was to be my next point. FirstRand is the best bank, but if you want the quality you are going to have to pay up for it. And if you want the cheap ones you’re going to get perhaps slightly less in terms of quality. That is the trade-off as an investor.

KOKKIE KOOYMAN: Yes. I really like what Nedbank and Absa are doing; also the management teams. You can see in both cases have pulled together [for] different reasons, and they are working hard. But they are just behind FirstRand and Capitec, and have to play catch-up when Absa’s releasing a new strategy, while they’re taking that to the board. And so they are a bit behind. You can see the percentage of clients that actually use their apps is the lowest of the banks. That could be a feature of the type of client they have, or just could be the applications.

Nedbank has been spending a lot of money on Avo, things like that, and is starting to come through. You can see it in the tech, but not on the numbers yet. Both of them are actually very cheap. So maybe the gap between the valuations of Nedbank and Absa versus Capitec and FirstRand are such that Nedbank and Absa will for a while simply perform catch-up in the valuations.

And then you’ve got Investec. That team, post Stephen Koseff and Bernard Kantor leaving, and IPO-ing out a part of the Ninety One stake. Those guys under Fani Titi have come through, and specifically in the UK they did some harsh cost-cutting, they had a lot of one-offs when they closed less profitable units. And the learn growth there in the UK was actually really strong – 9% – which analysed could be something like let’s make it 20% which, if they keep the cost flat, opens those jaws in the UK where, as we know, economic growth is picking up strongly.

So don’t ignore Investec. It’s also actually very, very mispriced and cheap at the moment.

SIMON BROWN: Okay. Got you – a whole bunch there.

We’ll leave that there. Kokkie Kooyman from Denker Capital, I appreciate the early morning.



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