[TOP STORY] The impetus of Capitec’s SME targeting

‘We like the business model. We like the quality of the business, but it is the valuation that is a problem. It is very, very expensive for us’: Patrick Mathidi of Aluwani Capital Partners.

ALISHIA SECKAM: Patrick Mathidi, who is head of equity and balance funds at Aluwani Capital Partners is joining me now to put the spotlight on Capitec for a bit. Patrick, good morning. Thanks for joining us. I saw the headline last week – Business Day Live running on the back of a Financial Mail article – and I thought to myself, how many times have we read a similar headline: ‘Has Capitec run out of steam?’ How much added impetus do you see its banking business arm, with a target on SMEs in particular, adding?

PATRICK MATHIDI: Good morning, Alishia. Thanks for having me. Look, I think the story with Capitec is always polarised, as you say. We have those who are forever believers who think that they can turn literally anything into gold, and then you’ve got the sceptics who kind of sit back and think, well, looking at the past certainly they’ve done very, very well. This is a bank that is 20 years old and has literally run past the big four before in terms of market share, then the market cap. But as well now when its fees did not grow to the sky, at some stage fees levelled off. My guess that’s where the debate sits as to do we think that what they’ve achieved in the retail space they can do in the business banking side, especially with SMEs.

Certainly there is cause for believing if we are looking at the better past.

But I think the SME space is highly, highly contested in South Africa, and the winner to me is not that clear cut.

I think all the other guys certainly have got strategies to try and win market share in the space, and it’s too early as yet to pronounce a winner from what we’re seeing.

ALISHIA SECKAM: That being said, though, the kind of growth we’ve been seeing in Capitec’s business banking unit has been adding what 1 500 clients a month as recently as March, a total of more than 125 000 accounts held at the year end in February. What are you making of that kind of traction it’s able to garner?

PATRICK MATHIDI: Look, I think the number of clients being loaded is one statistic, but I think the important number is how profitable those clients coming in are. We’ve seen other players the likes of Tyme and others, especially on the digital side, where they’re loading hundreds and thousands of clients, but there’s no activity on those accounts. Literally money comes in on payday, then it goes out the next day. So I think in the case of Capitec, especially in the SME space, we’ll have to see who is able to monetise that client base as and when [they] load those clients on their books.

ALISHIA SECKAM: Yeah. If we home in on that client base, the target market for this unit is businesses with a turnover of less than R100 million a year. How much risk is the bank taking on here in what’s become an increasingly tough high-cost operating environment for business that’s not necessarily high demand right now, or is this the only way that a player like Capitec actually takes on the legacy banks, your traditional players?

PATRICK MATHIDI: Look, I think a lot of studies have been done and it shows that that part of the segment within the SME space is literally ignored. So the big banks don’t want to play there because of the risks, also, I guess, because of legacy systems where they have no real product [they] can offer. I think this is a way Capitec can actually make a difference if they are able to come up with a credible product and a process that enables that top of the market to actually be onboarded, and offer them a credible service at a decent price. So, as I said in the article, I think they certainly are at the forefront, having identified that part of the market. But I think the [proof] of the pudding will be whether they are able to actually offer them a decent product at a decent price, which then turns profitable in Capitec’s books. I think that part is still early.

ALISHIA SECKAM: Especially when you’ve got these small businesses focusing on cost, focusing on fee structure in a very big way. A fee structure is going to be one of its levers that it pulls, Patrick. If that’s the basis, what’s the collateral that Capitec will have to demand, because rates are rising and that’s got to offset the risk to non-performing loans and defaults in some way. But that microlender reliant on charging high interest rates is going to be a hard one for any SME to stomach.

PATRICK MATHIDI: Look, I think the way Capitec are going about it is actually very clever in that they’re loading those customers, they’re looking at activity in their accounts, and then they’re lending on the back of activity. So if you are a microlender with an account with Capitec, and only about, let’s say, R1 000 goes through your accounts on a monthly basis, can you come around and then want a loan for R100 000? Clearly it won’t work because they can see clearly through your account that it actually does not generate enough revenue to afford servicing that loan.

So they’re almost going the behavioural way of banking, where they look at how you behave and how you conduct accounts. Then, starting small, see if indeed you can handle credit. And, as your business grows and it shows through the activity [in the] account, hopefully they can lend a bit more.

But I think again, it’s a small start in an area that, as we’ve been saying, is highly contested, highly risky.

Then I’d say the jury is still out, it’s a long road to go. I wouldn’t been in a rush to sort of announce a winner at this stage. I think it’s the market that … it’s very interesting. Whoever can get it right … certainly will be the winner.

ALISHIA SECKAM: So with that the sentiment then, bottom line – should you still buy the shares? We’ve had this conversation before, but there’s a lot of concern right now about the longevity of the bank’s high growth figures. With that starting to rear its head once again, this conversation props up about valuations. Is Capitec worth it at current levels?

PATRICK MATHIDI: So here’s the fix, right? Looking at the growth in the past that [it] has been able to show over the last 20 years or so, if you believe they can replicate that going forward, then it is a steal. But if … you are starting from scratch, then looking forward certainly in our view the valuation is very high – because we always try and focus on the form of future and not on the past – [and] it is trading very high compared to the big four. For all intents and purposes, let’s face it, it is still pretty much a microlender. A big part of their earnings still comes through microlending. Yes, they are trying to diversify in terms of *** and business banking, and the traditional side of the business is actually doing very well. But at the core of it, it is still a microlender. So for us, we like the story. We like the business model. We like the quality of the business, but is the valuation that is a problem. It is very, very expensive for us.

ALISHIA SECKAM: Let’s leave it there. Patrick, a pleasure chatting to you this morning. Thanks so much for your time. Patrick Mathidi is head of equity and balanced funds at Aluwani Capital Partners.


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