Capitec plays fastball

Retail bank’s revolutionary innovations have seen it capitalising in the unsecured credit market

Selling unsecured debt has become big business in South Africa, but it seems Capitec Bank is doing it better than its main rival, African Bank.

According to the 2012/13 yearly report released in June by the SA Reserve Bank, the six main players (Absa, African Bank, Capitec Bank, FNB, Standard Bank and Nedbank) in the unsecured credit lending market racked up about R441 billion in unsecured loans by December last year, from R341 billion in December 2011.

The reserve bank said the activity had “moderated somewhat” but that it would continue to be under the bank’s supervision.

Companies operating in this space have had mixed fortunes.

African Bank, the largest unsecured lender in SA, with about 40% of the market, came out this week with a trading update that full-year group headline earnings for the year ending September 30 would slump by between 58% and 63%, causing a drop in its share price.

According to Bloomberg, theshare price has dropped 53% so far this year, making it the worst performer on the FTSE and the JSE’s All Share Index.

Rival Capitec, which holds about 17% of the market, released a trading statement earlier this month saying earnings for the half-year ending August 31 would jump by 18% to 22%.

But what is Capitec doing that African Bank is not?

Capitec has shown an impressive performance since it listed on the JSE in February 2002, nine days after the infamous collapse of Saambou Bank.

When Capitec reported its first full-year results in February 2003, it had granted 2.4 million short-term loans of an average R618.

Fast forward to February this year, and Capitec has advanced 3.7 million loans of an average R6 756, and has also increased its repayment method to 84 months.

It has introduced some revolutionary innovations into a staid banking sector, including extended opening hours, one global account and card for various transactions, higher interest on savings as well as a password generator for added security on its internet banking portal.

“Capitec has a more conservative bad debt recognition policy.

(They) write off (loans) after three nonpayments and their revenues are more diverse because they offer transactional accounts,” said Patrice Rassou, an analyst at Sanlam Investment Management.

With Capitec increasing its loan term to seven years, Rassou did not agree that it would necessarily lead to a higher default risk. “They may have long-term loans, but that’s for their best customers only.”

African Bank, through its exposure to the furniture business it bought to extend credit to the lower-income segment, has taken a bit of strain.

In August, the company announced that it would accelerate the sale of its furniture retail business Ellerines, which has about 9 248 employees, and keep the credit portion.

African Bank has, in the past, admitted that it was facing elevated levels of indebtedness and deterioration in consumers’ affordability.

Rassou said one of the things African Bank has to do is increase the provisions that it makes for bad debts. According to accounting rules, each year banks set aside an amount they expect to be written off as bad loans.

African Bank has clearly realised this is necessary. This week, it said it would increase the impairment provision of its nonperforming loans by between 2.5% and 3.5%.

In the previous financial year, African Bank wrote off about R5 billion in bad debts against the impairment provision of R5.49 billion.

But African Bank has a chance to turn things around with a capital injection of R4 billion that will be coming through a share rights offer, which was approved by shareholders this week.

The bank’s chief executive, Leon Kirkinis, said enhancing the capital of the bank was the best way to achieve its strategic objectives and create sustainable value for shareholders for the future.

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