Even though Capitec continues to shoot the lights out on paper, experts say the bank reported figures are in no way a reflection of how tough the market is for local bankers now.

Firstly, the growth in its customer base from 1.5 million to 11.4 million for the year to February, is not necessarily a cause of bringing more South Africans into the financial fold, but more an effect of cannibalising the same existing market pool available to other banks.  

Secondly, the reported increase of 19% in headline earnings looks a lot less dandy if the cost of bad debt is brought into consideration, in accordance with new accounting rules. When the non-performing loan book of R1,1 billion is shifted from the balance sheet to the income statement the figure is a lot more modest at 10%.

But that figure is still not too shabby in comparison with other banks, says Jan Meintjes – portfolio manager at Denker Capital, especially at the rate they are growing their market share. Capitec has managed to become the second largest retail bank in its 18 years of existence by having a strong focus on deposits, transactional services and credit products.  And the onslaught on this basis is sure to continue in the short term. Capitec grew deposits and credit advances by 23% and 26% respectively in the year under review.

This simple strategy is paid off well for the bank in the past, but Capitec is not immune to the elements of pedestrian economic growth, not to mention growing competition from new entrants and legacy banks who are adapting their approaches rapidly. Meintjes says for customer growth figures to filter through more potently to the bottom line in future and in the longer term Capitec will have to shift its focus to a more affluent client base and offer them a wider selection of products.  

“Deposits-only aren’t your most lucrative clients and transactional fees being under pressure with new entrants like Thyme Bank, Discovery Bank and Bank Zero entering the fray,” he says. African Bank is also planning to launch a transactional offering.

The credit market is also well stocked, Meintjes says, with massive existing loan books across the sector. And even though Capitec says its new credit card has been well received, it must compete with the likes of Discovery, which already has 300,000 credit card holders, not to mention Thyme as alluded to a credit offering at a later stage.  The heat is on.

“Traditionally banks make their money from clients who subscribe to 6-7 service lines,” says Meintjes. Standard Bank and Absa for example are offering car financing, foreign exchange and access to share portfolios to the same client, and Capitec will have to significantly widen their scope to harness the same purchasing power. But that will not happen in the short term, he says, but the launch of its funeral policy and credit is a good start.

The Bank launched its Sanlam-backed funeral plan in May last year and has sold 500,000 policies since then through its growing branch network. Capitec had 840 branches at the end of the year, having opened 14 new ones since February 2018.

The bank also says in its results that its credit card product “has been well-received by the market”. At the end of February, the gross credit card book was R3.6bn or 3% of the total SA retail credit card market. Capitec signs up on average 14 000 new credit card clients every month, however the majority of Capitec clients still only use debit cards.

Capitec is also in the process of acquiring Mercantile Bank to speed up its entry into the business banking market. Mercantile is being bought primarily for the small and medium-sized enterprise segment of the market, although Capitec would also look for business banking opportunities in the informal sector. Fourie said it would be rebranded to Capitec Business Banking after some time.

In the meantime, Capitec continues to fight for their pound of individual flesh amidst the onslaught of new (and existing) players.

The annual Consulta SA Customer Satisfaction Index Report for Banking foresees that, as banking moves through technological disruption, it will be “heavily tested” with fierce competition among current players as well as the entrance of new “disruptor” banks.  Professor Adré Schreuder, SA-csi founder and chairperson, commented that “it’s well and truly ‘game on’ for banks in 2019”.

“As the SA banking sector heads into an environment of intense competition and rapidly increasing customer expectations, banks will need to thoroughly interrogate the drivers behind their performance, or lack thereof, in terms of customer satisfaction and loyalty,” said Schreuder.

“Getting an in-depth handle on how to deliver on all the variables of customer experience will mean the difference between barely surviving and growing.”

Capitec has already cut its transactional fees and believes that lower charges will be more than offset by higher volumes through its cheaper digital channels.  

“We want to get more of our clients moving to digital and self-help channels and away from cash,” Capitec CEO, Gerrie Fourie told journalist at the results presentation.  According to the company more than half of its customers are still utilising the branch network to conduct transactions. But Fourie added that even though the lender will continue to focus on digital banking services, it will continue to grow its branch network as customers still wants to transact in-store and receive personalised communication from staff members.  

This while some of the bigger banks are closing shops. Standard Bank recently announced it intended to close 91 of its 630 branches and reduce headcount by around 1,200 people. Other banks are likely to follow suite to prepare for the digital disruption which Discovery Bank and Bank Zero is sure to bring to the table.

Capitec reported that it now had 5.2 million digital clients, up 18% compared to the year before, versus 6.6 million branch clients, which was up only 11%. It stated that its self-service banking via the mobile app grew sharply – but stressed that it cannot discard the power physical branches continue to hold in the local context.  

The double standard is showing results. The Consulta SA Customer Satisfaction Index Report surveyed 15 542 consumers from lower, middle and upper retail banking segments to establish the overall level of satisfaction of customers of SA’s big six retail banks, namely Capitec, FNB, Nedbank, Absa, Standard Bank and African Bank. According to the index, Capitec once again leads by a significant margin, followed by FNB. At the same time, both Nedbank and Standard Bank have seen strong improvement in their scores due to significant infrastructure investment since 2016.

“Capitec’s consistent performance over the last six years demonstrates there is real substance to its value proposition,” states the report.

“Capitec understanding its target markets, their needs, and how the value proposition filters into that. The Capitec promise of simple, easy, and affordable banking is strongly backed by its ability to deliver in terms of processes, people, and systems.”

Capitec scored very well in reducing total customer costs in terms of reduced red tape, less documentation, more speed, efficiency and convenience – which translates into perceived value.

Meyrick Barker, investment analyst at Kagiso Asset Management told Fin24 that Capitec was still disrupting the industry by raising service levels, boosting access to credit and lowering fees. The bank’s “strong growth” in client numbers, high customer satisfaction levels and its projects aimed at improving service levels further meant Capitec “is well positioned to defend against the new entrants”, Barker said. “Those new entrants that provide a compelling offering likely pose a bigger risk to SA’s other large incumbent banks,” Barker said. “It will, however, take a number of years before we see any significant penetration by the new entrants.

Even if you buy into the banking proposition and growth story, buying into the share itself might not be advisable.  Meintjes says the share looks expensive at current levels. He says the impact of reduced fees and new products is yet to be seen and the growth prospects of the bank has already been priced in to the share price. He thinks there is better value with some of the other banks trading at much more attractive levels. Existing shareholders were however rewarded with a total dividend per share of 1 750c, up 19% from the previous financial years.