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Capitec comes under selling pressure

Government proposals could hurt unsecured lenders.
Capitec CEO, Gerrie Fourie at the company's recent AGM.

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:

Capitec vs the Financial 15 Index

 

 

‘Money fan and capitalist pirate’ Adam Black, tweeted that government intervention will decimate Capitec, and unsecured lending.

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.

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I also think the market reaction is quite unjustified. Apart from the fact that the new upper limit is just slightly below the average interest rate charged by most banks on unsecured debt, there is also the big issue of them not addressing the insurance charge… I really don’t understand why they didn’t factor that into this regulation.

Perhaps the market is more rattled by the intervention of the government in the first place. I’m also lacking confidence in government regulators given the measure they took given that this interest rate limit can easily be bypassed by the insurance charge.

And I do think that they should definitely do something to address the unregulated market which is definitely going to benefit from this. South Africa is already a highly indebted nation so we do need to take caution in such areas. I do think it is better to let credible banks charge slightly high rates than leave it to unregulated loan sharks.

Who on earth is Adam Black and why should we care about what he says?

That is actually a good question. A reference would have been appropriate.

Well, if the new maximum rates are close to the banks’ existing rates already, they shouldn’t have a problem with the new regulations, right? In fact, they should actively support the new rates, since it would restrict other loan-shark operators and benefit the industry as a whole. I therefore expect the Capitec CEO to declare passionate support for the new regulations.

With regards to small loans sharks – they don’t have the billions of the formal banking sector to lend out. So the warning that tough regulations would drive consumers into the arms of scary loan sharks is vastly overblown – these guys simply don’t have the money of the big banks.

But the other loan shark operators are mostly unregulated and a lot of them are in the black market… How do we ascertain that they’re adhering to the legal rates? They could just be stealing business away from the formal sector.

Also these small loan sharks may not have the billions of banks individually but in aggregate they could hold a big chunk of the market. There is also potential for growth.

But if the government does up it’s game in enforcing regulation in these small loan shark business, then yes, Capitec does have a lot to celebrate about.

End of comments.

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