Capitec was the biggest loser among banking shares on Tuesday, as concerns around moves by government to reduce interest rates on unsecured loans begin to surface.
At R425 a share, Capitec was down more than 7.81% at market close, significantly off its April high of R580 a share. At these levels, a correction was bound to happen and its slide down mirrored that of banking peers.
Standard Bank closed Tuesday 4.41% lower, with Nedbank down 4.57%, FirstRand down 3.63% and Barclays Africa off 2.14%.
See the graph below of Capitec’s performance on Wednesday:
‘Money fan and capitalist pirate’ Adam Black, tweeted that government intervention will decimate Capitec, and unsecured lending.
Capitec falling apart here. Abil got shredded by bad debts & looks like CPI will b decimated by gov intervention. Bye-bye unsecured lending
— Adam Black (@AdamBla27986197) July 7, 2015
Black was referring to the proposed eight-percentage point reduction in the maximum prescribed interest rate on unsecured loans. This was published along with other recommended changes to rates and fees on loans by the Department of Trade and Industry (dti) in June. The National Credit Regulator (NCR) drafted these proposals.
Currently at 32.65%, the NCR proposes that the maximum interest rate chargeable on an unsecured loan be reduced to 24.78%.
Initial predictions by MicroFinance South Africa (MFSA) suggest that larger lenders might be looking at a 20% to 24% haircut on turnover, while short-term lenders could suffer an 18% impact on turnover.
Despite the fall in its share price, which is down more than 6% over the past week, Capitec may in fact be better off than many of the other banks.
According to CEO, Gerrie Fourie, the average interest rate it charges on unsecured loans is 26.5%, which is not far off the ceiling proposed by government.
Capitec also doesn’t charge customers separately for credit life insurance, opting to include it in the overall cost of credit and then insure its entire loan book rather than provide individual cover to customers. Fourie argues that this is much cheaper for clients and in line with Capitec’s simplistic pricing philosophy.
Since the proposed interest rate cap does not take into account credit life insurance charges, Capitec presumably could, if its margins were really squeezed, decide to charge its customers separately for credit life (as most other credit providers do).
Equally, other credit providers also simply decide to increase credit life charges in order to make up for lost margins if the proposals are implemented in their current form.
Unsecured lenders have long come under fire for the high cost of credit life, with many clearly abusing it to plump up their margins.
“We find it interesting that the proposals do not cap credit life and this obviously provides an opportunity for price manipulation in the market by some role-players,” Fourie told Moneyweb when government first issued the proposals.
According to NCR company secretary, Lesiba Mashapa, the NCR (together with the Financial Services Board) submitted draft regulation to the dti at the end of February and it is now out of the regulator’s hands.
While the costs associated with unsecured lending must undeniably be reduced in the long term, short-term shocks to the system brought about by drastic rate reductions could lead to a sudden reduction in credit available to high-risk borrowers and the subsequent flourishing of the unregulated market (i.e. loan sharks).
“Less access to credit and consequently lower spending by consumers may potentially dampen overall economic activity, exacerbated by increases in fuel and utility prices,” adds Omar Baig, head of Absa Consumer Lending.
Simon Brown of JustOneLap is not worried about Capitec’s current moves and believes there is still massive long-term value to be had from the share. “Capitec is a world-class business… and that’s what I want to be investing in,” he said in this YouTube clip.