Capitec Source: Google Images

The global financial crisis is an unlikely catalyst for business growth, particularly for a bank. However, Capitec’s emergence as a serious player in the South African market had a lot to do with how the world changed after the collapse of Lehman Brothers.

In the decade since, Capitec has been one of the most consistent performers on the JSE. Its share price has multiplied from R27.50 to its current levels of over R1 100, making it one of the greatest success stories on the local bourse.

“Due to changes in the market and regulation, the global financial crisis changed the whole banking industry,” says head of equities at Sanlam Investment Management, Patrice Rassou. “It moved from a secure lending base to more unsecured lending, and that played into the hands of Capitec.”

The big move

In particular, unsecured lending became far more attractive to middle income consumers.

“Before the financial crisis, most people had access bonds,” Rassou points out. “Instead of getting an unsecured loan, you would use your access bond to borrow, but banks stopped that. As soon as they did, consumers looked at other ways to get credit. That’s when the unsecured lending market moved from very much a dark alley, lower income type of offering to a more middle income type of offering. You saw Capitec move from taxi ranks and train stations to malls.”

This also led to the bank offering larger loans and longer terms. In 2008, Capitec’s average loan size was R1 636. Last year, the average loan it advanced for a period of six months or shorter was R2 621, and the average loan for a period greater than six months was R36 302.

Attracting more middle income consumers to its unsecured lending offering also opened up the possibility for it to expand its business model.

“The company has managed to evolve from just a personal loans business to a massive transactional banking business,” says Hannes van den Berg, co-portfolio manager of the Investec Equity Fund. “It has almost reached a point where transactional income will cover its full cost base. The revenue from the personal loans business would just be on top of that.”

Taking advantage

There is no question that during this time it has benefited massively from the struggles of certain competitors. The demise of African Bank allowed it to gain a much larger market share in unsecured lending, and over the last few years Absa has gone through a tough patch that has pushed many customers into Capitec’s arms.

“Add to this the credit card that has really taken off,” says Rassou. “Given its low cost, convenient operating model, it’s been able to reach a lot more customers more quickly than many other players.”

This ability to be nimble has been a key feature of Capitec’s success.

“Capitec has not had any of the legacy issues that big banks have,” points out Philip Short, portfolio manager of the Old Mutual Top 20 Fund. “It hasn’t had to carry those big costs, big branches and old IT systems.”

Critically, the company has been extremely efficient in taking advantage of this flexibility.

“Capitec has had this success in a very low-growth South African environment, with phenomenal cost discipline and good allocation of capital,” says Van den Berg. “It is a company that ticks a number of fundamental quality boxes.”

Its customer-centric approach has also been key.

“It has a simple operating model, which focuses on what clients need,” says Rassou. “Capitec is able to offer products extremely quickly and that are priced competitively. This combination of low costs and clear, transparent products also means that customers won’t shop around. They know they will get what they need, without the bells and whistles, quickly and efficiently.”

The next frontier

Capitec will now have the opportunity to demonstrate that this approach can deliver the same success in business banking. Late last year it acquired the local assets of Mercantile Bank, giving it a presence in this space.

Van den Berg believes that the real opportunity for Capitec will be to replicate to a large extent what it has done in retail banking – open up a previously untapped market.

“When we met with management recently they gave us more insight into the potential opportunity that they see in the informal sector,” he says. “Informal traders make up a large percentage of the overall retail market, and if Capitec can provide them with hand-held units for transactions and bring a lot of what is currently being done in cash into the formal banking system, that is a huge opportunity.”

The R3.2 billion Mercantile transaction is not that big in the context of Capitec’s headline earnings last year of R4.5 billion, but it will be interesting to see how it is able to deliver on it.

“They will compete with other banks, but there is a massive segment of the market where Capitec is already quite strong on the consumer side that they can now access on corporate side,” Van den Berg says. “It probably won’t move that needle that much in the first year or two, but if they can get it right there is a lot of potential in this acquisition. It’s a good way to get some additional scale and leverage their existing management knowledge in what is an untapped market.”