By every measure and metric, Capitec has beaten the odds. From its founding 25 years ago, the bank has grown in a way that previously seemed unthinkable in the compact and saturated South African banking sector.
“It’s transformed significantly from its earlier days where it was purely a retail credit lender to now being this financial ecosystem for the vast majority of South Africans,” says head of research at Aeon Investment Management, Shaakir Salie, who is a great believer in the Capitec story.
It seems Capitec will continue on this upward trend: its latest interim results showed green flags galore, with headline earnings growing 19% to R9.5bn, return on equity sticking around at a stellar 31%, and a declared interim dividend of R31.10 a share.
What investors liked most about the results was “the quality of earnings, seeing that noninterest revenue growing at 21% and now representing more than 70% of operating income after impairments. I think that shows the nonbanking bits are scaling,” Salie says.
And despite this growth and scaling, Capitec managed to slim its cost-to-income ratio down to 36%, the lowest it has been for nearly a decade.
“It’s always been evident that Capitec has a very tight awareness of its costs and what it is spending on, and I think that allows it to adjust quickly when needed,” says Differential Capital CEO Vincent Anthonyrajah. “To me it seems clear that this management team knows where the levers are and where it needs to spend to keep growing.”
Indeed, growth is the buzzword on everyone’s mind when it comes to Capitec; the bank has had a stellar run, but its critics question how sustainable this run can be. Salie acknowledges that the market “reacted slightly negatively” to the drop in earnings growth from 23% from the full-year results.
“Those are fair questions to ask of any business growing at this rate and ones we ask ourselves constantly,” says Capitec CEO Graham Lee. But he isn’t losing too much sleep; he sees a plethora of paths for the bank to go down to extend its reach.
Part of this is not changing anything and sticking with what got Capitec this far in the first place — personal banking. Could it possibly grow beyond its current size? “Yes, very much so,” is Lee’s answer. In its latest results, Capitec set out its aim to be “the bank for 95% of South Africans” — and it’s certainly on the way.
To do this, Capitec is focusing on banking younger. “Banking the youth is where we build the next 25 years,” Lee says, adding that the bank now serves 4.9-million clients between the ages of 18 and 25.
Banking young people comes with a new set of challenges — the risk that maturing clients will leave the bank when it no longer provides the services they need later in life. “So, we are growing additional things to keep those clients with us throughout their lives.”
The business of growing
Where Capitec sees opportunity to expand is in business banking — “it should really grow to about 30% [of income] long term”, Lee says. It’s an ambitious goal. Business banking “is still only 6% of its total income, and it’s only got 3% or 4% of the market”, says Denker Capital director Kokkie Kooyman. But he views this less as a hindrance and more as a clear opportunity to grow.
Business banking is a famously cutthroat and saturated field, and some might worry about Capitec’s ability to penetrate the market. But analysts don’t share this fear. “I mean, we thought personal banking was saturated,” Anthonyrajah says. And then Capitec came along.
The idea is that Capitec will differentiate itself in the business sector simply by sticking to what it has always done: being the most accessible, straightforward and affordable bank. This means being the bank not for the corporate conglomerate but for the everyday entrepreneur and small business.
Lee notes that customers working in the gig economy or as entrepreneurs “are up 138%”, and that non-salary income continues to outgrow salaries being deposited into the bank. “That is the entrepreneurship and ingenuity of the emerging market at work.”
Ultimately, the goal for Capitec is to grow via SME funding and banking. “It’s hardly the first to try something like this,” says Salie, “but it’s the best. I think it carries a strong brand behind it that will allow it to capture a large market share in the SME lending space.”
In his view, Capitec has both the scale and balance sheet to offer the best prices to that sector, particularly in the sphere of solo entrepreneurs. He certainly seems correct, as Capitec has added 56,000 new trading merchants to its systems in the past year and upped its point-of-sale transactions by 60% to a value of R62bn.
“Maybe it’s not a case of cannibalising from other business banking offerings, but more so growing the market in a way that others haven’t been able to,” adds Anthonyrajah.
By building up a new client base from scratch, Capitec will be able to escape the competitive nature of business banking while also fostering loyalty to the brand. As Kooyman says: “It’s starting with SMEs, but then your successful SMEs grow and become large commercial clients."
He warns that as good as that sounds, it can also be problematic. “What we find with other banks that do SME banking is that as those successful SMEs grow, they try to hold on to them, or they get to a point where they get too big and can’t offer those services.”
Capitec’s main culture point is its client focus and being the best at that. “When you start drifting away, and you’re trying to help a client that has got too big, the risk is to your reputation for good service,” Kooyman says.
The grass isn’t always greener ...
Many South African banks have ventured offshore in search of that next growth engine. For some, such as Standard Bank, it has become the cornerstone of their business; for others, it has been less than successful.
Capitec has so far shied away from offshore expansion, aside from dipping a toe in with its fintech lender, AvaFin. “There’s a lot of work to be done there for that to be the kind of sustainable business we’re proud of,” says Lee. Currently AvaFin contributes just 1% to the bank’s earnings, and Lee sees it growing beyond that only in the next five to 10 years.
Capitec sees this as a “big experiment”, says Kooyman. “You’ve put it in the oven; now let’s see how it comes out.” Lee acknowledges that while AvaFin is working well in Latvia and Poland, in some countries, such as Mexico, it is “not yet where we want to be”.
Lee says the bank has no “active” plans in place to expand beyond AvaFin, though it is beginning to look at opportunities for Capitec to grow its network. It is looking at taking specific things that it does well and seeing “whether those things are exportable as business-to-business services”. An example is airtime advance services, which could be used by South African businesses and elsewhere across the globe.
For Anythonyrajah, it “might be a bit late” for Capitec to enter global banking markets given how diverse it already is, never mind the exponential number of regulatory compliances it would have to adhere to. “Looking at many other geographies might become a distraction for the group.”
As soon as you begin to expand, the costs start adding up, Kooyman adds. He thinks it is inevitable but cautions against making the jump too soon. In his view, Capitec’s reason for success is its culture — “the focus on the client and keeping costs low. That’s built into the whole psyche of the business.”
Other banks in South Africa simply can’t compete because they don’t have that ingrained culture, but distractions such as overseas expansions could dilute it.
Kooyman compares it to familial intergenerational wealth transfer: as Capitec grows, expands and ages, the drive that once ignited the business could be lost. “With any successful business, does your third or fourth generation [of management] realise the business got to where it was because of the culture, or do they become fat cats who think clients are lucky to have [them]?”
The general consensus is that Capitec’s special sauce — and the thing that will help it grow — is simply what it already has. So, for those who believe in the Capitec story, the future looks bright. As for the sceptics, only time will tell.
