By August, the income received by Capitec’s banking clients had returned to “normal” levels last seen in March. Contrast this to the 25% decrease it saw across its base of 14.6 million active retail banking clients in April due to the Covid-19 lockdown.
The pace and robustness of this recovery seems surprising, but the bank said as far back as July when it published its quarterly disclosure and trading statement that it does “believe that the results for the second half of the 2021 financial year could return to normal levels”.
Its April forecast of the probability of default of its credit customers across different sectors was pretty accurate, with only minor adjustments made in the August forecast. Here, the bank estimates the additional probability of default (over and above the base provision it makes when it lends) for clients who are employed in a specific industry.
The bank’s results for the six months to August 31 almost perfectly match the impact of the Covid-19 lockdown and gradual reopening of the economy.
However, there is a stark difference between people who managed to hold on to their jobs and were mostly not that affected versus those, particularly in lower income segments, who were.
Lower income earners most severely affected
Gerrie Fourie, CEO of Capitec Bank, says customers who earn over R20 000 a month are basically at the “same levels as before” with those earning less than R7 500 a month the most “severely affected”.
This mirrors the so-called “K-shaped” recovery taking hold in many countries around the world (although this was not specifically referred to by Capitec in Wednesday’s results presentation).
At the upper end – think its 3.8 million “quality bank clients” who have a stable income – there has been very limited impact. In fact, in April its retail call deposits spiked by R7.3 billion, or 13% from March, as many clients had substantial extra cash available. This has normalised in recent months, and at end-August remained lower than the April spike. It is evident in other trends too. For example, client transaction volumes at home improvement stores have been higher than March since May. By August, these volumes were at 149%. Fourie says building retail executives have spoken of “record months” of late.
But for those affected, the situation is dismal.
While lower income earners were severely impacted, certain sectors (most obviously travel and leisure) were affected across the board.
Fourie says when one looks at the 2.2 million people who lost their jobs in the second quarter (announced by Stats SA on Tuesday), many of those are casual and contract workers. One in 13 working in the agricultural sector lost their jobs. This compares with around one in 10 in the formal sector, one in five in the informal sector and one in four when it comes to domestic workers.
Fourie says this will likely further “widen the inequality gap”.
He cites education as an example, where those who could afford it over the past six months have been able to ensure their children continue with remote education. Those who couldn’t afford it simply weren’t able to. One of the biggest challenges facing South Africa “is how do you close this gap,” he says.
Contribution to total gross loan sales
The bank has over the past three years steadily reduced its lending exposure to the lower income segment. While any lender is able to cover the higher risk with higher interest rate loans, the bank took a decision to “get out of that market” says Fourie.
Only 7% of total loan sales in the six months were to clients earning less than R7 500.
More than half its loan sales in the period were to those earning more than R20 000 a month, up from 33% three years ago.
The key here is to what extent these higher-earning clients overlap with those who work for government (including state-owned companies and municipalities). This sector comprises 45% of its loan book and is clearly the best performing, with the additional probability of default forecast only at 2% as at August.
This is key in evaluating the risk inherent in the bank’s R63.4 billion retail lending book.
Additional probably of default by sector
On the whole, advances decreased by nearly two thirds (64%) compared to the six months ended February.
Capitec has provided a total of R7.5 billion in payment relief thus far, with the bulk of this (R5.5 billion) in the form of a three-month payment break for those directly affected by loss of income. It extended rescheduled payment plans on a further R2 billion in balances. It has seen success with over 80% of clients making payments after their payment break.
It says “performance of the Covid-19 rescheduled loans is encouraging but payment success rates going forward will reveal the medium- to long-term impact of the lockdown on our clients”.
“We expect that this impact will be softened by the clients employed in essential services, that comprise 60% of our performing loan book. Credit loss provisioning will remain conservative and we have provided in full for our expectation of future developments.”
It says “clients who qualified for Covid-19 reschedules were in good standing at the end of February 2020 and were considered to carry less risk than clients who reschedule in the normal course of business”. Still, it has raised an additional provision on the rescheduled loans.
The bank’s net impairment charge (primarily the retail book with a small impact from Mercantile Bank) is R6.1 billion, a R3.9 billion increase from a year ago. The bank’s credit loss ratio (impairment to total advances) is 8.1% from 3.6% last year.
It reported headline earnings for the six months ending August of R650 million, a decline of 78% from a year ago. Retail banking generated headline earnings of R701 million, while business banking made a loss of R47 million.
Notably, in the first three months of this period, it reported a loss of R404 million. This equates to a R1 billion turnaround in the second quarter.
Looking ahead, some risks remain. Chief among these, says Fourie, is whether we enter a second lockdown. Most businesses have been able to keep going by cutting operating expenses in the face of reduced turnover. It is not clear how this will play out a second time.
A further risk is that the ending of the special Covid-19 Social Relief of Distress grant (R350 a month) removes a vital lifeline for the most vulnerable.
Fourie remains optimistic, even though there are concerns over how this plays out in September, October and November. The bank says “economic conditions are expected to improve in the short term but the full impact of the lockdown will only be seen in the medium term”.