Capitec CEO Gerrie Fourie has downplayed an 80% rise in impairment charges disclosed in the bank’s latest annual results, putting it down to the “normalisation” of provisioning in a postpandemic world reeling from higher rates and inflation.
Shares of SA’s biggest retail bank by customer numbers slumped on Tuesday after it said total net credit impairment charges on gross loans and advances jumped to R6.33bn in the year to end-February 2023. That is nearly double the R3.51bn reported the previous year and offset the 12% growth in income from operations, which rose to R30.31bn, from R26.96bn the previous year.
The news prompted Capitec’s shares to fall 4.5% to R1,670, the steepest closing price drop since December 1. That compared to a 1.8% fall for the JSE banks index.
“I reckon the move is due to lower revenue growth than expected as well as impairment charges worse than expectations,” said Hannes van den Berg, co-head of SA equity at Ninety One. “People are concerned about the state of the SA consumer and therefore the further acceleration of credit loss ratios remains a concern.”
However, Capitec’s CEO said the group’s credit impairment charge for the 2023 financial year had to be looked at in the context of Covid-19. While Capitec reported a net credit impairment charge of R4.36bn in February 2020 just before the pandemic, this jumped to R7.36bn a year later as it followed other banks in provisioning conservatively.
By February 2022 net credit impairment charges had dropped to R3.29bn again as Capitec weathered the Covid-19 storm better than expected. However, with interest rates now at a 14-year high and an economy teetering on the brink of recession, Capitec has once again upped provisions, booking a net credit impairment charge of more than R6bn.
“Everyone is looking at the R3.5bn versus the R6.3bn and says here’s a problem — it’s just the ups and downs that’s taken place that is now smoothing out,” Fourie said in an interview. “You had very high provisions in 2021, then you had abnormally low provisions in 2022, and you’ve got a normalisation now.”
Fourie’s comments came after Capitec, which now banks a third of SA’s population, delivered a 15% rise in headline earnings, which climbed to R9.71bn in the period, up from R8.44bn the previous year. That allowed Capitec’s board to declare a final gross dividend of 2,800c per ordinary share, taking the total dividend for the 2023 financial year to 4,200c per share, 15% higher than the previous financial year’s 3,640c.
“On a lot of metrics you could say Capitec actually came in ahead of consensus,” said Radebe Sipamla, an analyst at Mergence Investment Managers. “The only area of concern that the market has is on the impairments side.”
With Capitec having grown its gross loans and advances 16% in the period to R97.8bn it was forced to raise its provision for anticipated credit impairments by 12% to R19.65bn. The group’s retail banking operations accounted for about R18.81bn of that expected credit loss across all loan types, from stage 1 to 3.
However, Sipamla said he felt the market was being “overly sceptical” on Capitec due to its perceived exposure to SA’s deteriorating economy and the cumulative 425 basis points in rate hikes since November 2021. He said the main reason for Capitec’s rise in net impairment charges was setting aside 8%-9% of new stage 1 loans as part of upfront provisioning to deal with expectations from SA’s macroeconomic backdrop.
On a segmented basis, Capitec said profit at its retail bank and insurance business rose 12% to R9.3bn, while profit at its fledgling business bank jumped 124% to R389m. Fourie said while Capitec’s business banking unit would target any entity with revenue of “R100m and below”, its core potential market was the 2.6-million small- to medium-sized businesses that account for up to 40% of SA’s GDP.
“We’re not going to focus on commercial banking,” he said. “We actually want to look at the smaller guys.”
He also punted Capitec’s ability to mine data from its 20.1-million clients, which gives it a deep understanding of how the economy is affecting SA’s population of 60-million.
“The way we’re going to do it is with data and technology,” Fourie said. “Data is going to be everything. Everyone always talks about data being the new gold, so we’re definitely are giving a big focus to the data side.”
Capitec suggested that it intends moving its credit life and funeral plan policies onto its own life licence, which it obtained in October 2022. It is to transfer existing credit life policies, underwritten by Guardrisk Life, to the Capitec Life licence by end-2024. Its existing arrangement with Sanlam-owned Centriq Life Insurance, which underwrites its funeral policies, expires in 2025. Capitec said negotiations were under way on the way forward.
Sipamla said Capitec had “significant opportunity for further earnings” should it opt to take full control of its funeral business.
Capitec’s funeral book grew to 2.2-million policies in the period while funeral plan income increased 58% to R1.4bn. The group launched its funeral plan offering in May 2018.
“It’s phenomenal how they’ve grown their funeral product from zero at the start of 2018,” Sipamla said.
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