SA’s biggest retail bank Capitec recovered R18bn in market value on Friday as its share price soared 10% in its biggest one-day gain since the early days of the Covid-19 pandemic after the release of the trading update.
With over 20-million clients and counting, Capitec dominates the retail banking market, having leapfrogged the traditional Big Four banks in SA over the past two decades since it burst onto the scene. However, its turf is being challenged by new start-ups and traditional banks alike even though the bigger competitors offer much more than retail banking services.
Under CEO Gerrie Fourie, Capitec has been able to leverage its ubiquitous brand and client base to expand banking and financial services products. It is also looking to replicate the success in retail banking in its fledgling business banking, which it has identified as one of the potential growth areas.
Releasing the trading update for the six months ended August, the unsecured lender said it tightened its criteria in granting credit to its clients given the high interest rates environment and a generally weaker economic backdrop.
High interest rates can be a double-edged sword for the banks. While they boost their net interest income, they can also lead to bad debts as consumers and businesses start to fall behind in their debt repayment obligations.
Capitec said provisions for expected credit losses were conservative as of the end of the reporting period while inflation and GDP growth projections were improving relative to expectations earlier in the year when high stages of load-shedding dimmed growth prospects.
Its headline earnings per share is likely to grow 8%-10% year on year, boosted by net transaction fee income and funeral plan income.
“Net transaction fee income performed strongly driven by growth in transaction volumes and the addition of new products,” Capitec said in a statement.
“Growth in the active funeral plan book, due to high sales and client retention, as well as good collection rates ensured that funeral insurance performed well.”
The share price ended 10% higher at R1,712.68 on the JSE, giving Capitec a market valuation of almost R200bn. The jump in the share price came off a low base though after underperforming this year relative to other banks on high valuation concerns.
“Some investors in the market had incorrectly extrapolated that the observed increase in impairments within the unsecured lending books of Absa’s and Nedbank’s retail divisions in their recent interim results would manifest within Capitec given its high exposure to unsecured credit within its retail business,” said Radebe Sipamla, investment analyst at Mergence Investment Managers.
“The market I believe may not have been aware of the strong risk management at Capitec where credit acceptance criteria are quite stringent and credit risk is continuously monitored and credit appetite dynamically adjusted,” Sipamla said, adding the outlook was positive going into the traditionally strong second half of the financial year and the improving macro backdrop.
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