FINANCE: You Can Bank On Capitec
Recent Western Cape Business News
IN the midst of the global financial crisis it seems woefully inappropriate to use the term ‘growth in banking’.
But by April this year that very phrase may be apparent in the final results for Cape Town-based mass banking initiative Capitec Bank.
Over the years aggressive expansion by Cape-based banks (remember BoE and Cape Investment Bank?) often coincided with tricky trading conditions and the inevitable operational crunch.
Capitec, though, has gone out of its way to stress conservative management and careful lending practices – something which has convinced more than a few pundits that this PSG controlled bank could be a genuine contender in the sprawling mass banking sector.
Despite the credit crunch (and overall market despondency) at the end of 2008 Capitec was still very much in expansion mode, having opened 39 new branches to bring the number of banking halls to nearly 350.
Capitec CEO Riaan Stassen is on record as saying the bank remained on an ongoing expansion programme – most notably plans to open 20 new branches by the end of this month.
“We are confident that we will continue to grow our client base aggressively given that we offer the most affordable, accessible and simplified everyday banking available in the market,” Stassen says.
One can’t really accuse Stassen of bravado because he has some muscular numbers to back up his forecast.
In the half-year to end August 2008 income from banking grew 55% to R916 million on the back of a 33% growth in clients to 1.6 million.
Stassen reckons client numbers at Capitec continue to grow rapidly as awareness of the “attractive banking offer” increases in the market.
“We want to maintain our position as price leaders in the market and have continued to price our transacting facilities at about half that of other banks. Our innovative bank model is low-cost and this underpins our aggressive approach to pricing,” he says.
The value of Capitec’s loans advanced for the six months to August increased by 43% to over R3 billion – probably thanks to the bank launching a 36 month loan product in late 2007. The longer term loan product now comprises around a quarter of Capitec’s outstanding loan book.
Capitec’s mainstay business is its 12 to 24 month (medium term) loan products – which comprise 57% of the outstanding loan book.
Clearly there will be a thrust to bulk up the 36 month loan book as income streams are higher on longer-term loans.
Stassen notes the continued demand for unsecured loans in the market and points out that clients in need of credit have not been adversely affected by the present financial conditions.
Naturally one concern around Capitec’s exponential growth is the risk of simply getting too big too quickly – a development that can often see growth inclined management taking their eye of core operational issues.
One key statistic is that Capitec’s provision for doubtful debts increased by a whopping 93% to R236 million in the interim period ending August 2008.
Stassen explains that the startling increase was due to the changing nature of the Capitec Bank book and the growth in term loans as a percentage of the total outstanding book.
Net loans and advances due increased by 117% to R2.7 billion and Stassen argues that a more realistic comparison is showing the arrears as a percentage of gross loans extended – which amounted to an acceptable 9.9% (only slightly ahead of the previous year’s 9.6%).
“We provide more for doubtful debts on term loans in the initial months of the loan term than in the later months of the loan term. The net impairment expense ratio will therefore continue to increase as the size and tenure of the loan book increases.”
The bottom line, according to Stassen, is that Capitec’s bank’s arrears are well within its risk appetite and that the bank has responded to the present economic conditions.
“We continuously adjust our vetting criteria to address changing market conditions and we have specifically applied a more stringent approach during 2008.”
While Stassen acknowledges that things could remain tough in the lending market, he reiterates that Capitec has the ability to change the granting parameter immediately thanks to the size and tenure of the loans offered.
“We do not expect further deterioration in arrears and bad debts.”
Overall, though, Capitec remains well capitalised with Stassen stressing that the bank can manage expansion and growth in branches within its ability to grow the funding base.
“We are not exposed to liquidity problems should additional funding not materialise. We are confident that we will continue to grow our client base given that we offer the most accessible, affordable and simplified everyday banking available.”
Reassuringly Capitec launched its domestic medium-term note programme in April last year and has so far raised nearly R500 million in funding.
Capitec also has access to a further R150 million courtesy to funding raised from Proparco, a French development agency.
Stassen says Capitec has since its launch in early 2001 always followed a conservative approach to liquidity - even at the expense of profitability. “Even though the present market conditions have not had any effect on us at retail depositor level, it has again emphasised the value of our funding approach and the importance of our long-term agreements with our funding partners.”
Go you good thing…
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