Capitec details credit granting criteria, loan book reconciliation

Capitec has sought to allay market scepticism by providing detail on its credit granting criteria and loan book reconciliation while continuing to report strong financial results.

The banking group reported an 18% increase in headline earnings and headline earnings per share to R4.46 billion and R38.58 respectively during the financial year ended February 28 2018.

Chief executive Gerrie Fourie attributed the solid earnings growth to the group’s simple and affordable offering, and two focus areas: providing excellent client services and managing its credit exposure.

Arguably, the fastest growing bank in the country, Capitec’s active client base increased by 15% to 9.9 million clients by March. It expects to hit the milestone 10 million active clients number by the end of the month. Fourie noted that a “much quicker than anticipated” 74% shift in total transaction volumes to self-service channels allowed the bank to better serve clients across all platforms and in branches.

“On the credit side – given the economy – [we’ve] had to make the right calls and be conservative. I think we’ve done a very good job of that, we moved away from the risky clients given the economic situation, and entered a more high income stable side especially in employers,” he said.

Capitec’s credit granting criteria and loan book have come under scrutiny in recent months after short-seller Viceroy Research published a series of controversial reports alleging that the bank was understating defaults and misrepresenting the balance of its unpaid loans by rescheduling said loans through the issuance of new loans. The bank has, in several Sens statements, refuted Viceroy’s allegations even pointing out flaws in the research group’s methodology, calculations and use of data.

Now, in announcing financial results the group emphasised that its approach to credit is conservative and that it adequately prices for risk – in line with the National Credit Act – and makes adequate provisions for bad debt.

In his CFO report, Andre du Plessis also addressed concerns related to clients taking up additional credit and restated that the bank conducts full credit assessments on returning clients.

“If a client qualifies for further credit, it can be extended as a further agreement in addition to the current credit; or the client can have the existing credit consolidated into a new credit agreement. This is only available for clients if instalments are up-to-date (not in arrears on any Capitec loans) and for clients who have a satisfactory credit risk. Only the amount of the separate, new credit will be included in loan sales.

Our scoring models react to instances where a client repeatedly takes up credit, and when their debt-to-income ratio becomes too high. In such instances we limit the term and amount of credit offered to clients or we decline the application for credit. We report the net amount of credit issued and we exclude the consolidation loans from loan sales.”

Fourie told Moneyweb that the group assesses its credit-granting criteria on a weekly basis, in line with developments in the economy, with such agility being key to operating in the unsecured lending market. He said the bank makes use of machine learning as well as both internal and external data in conducting credit assessments and that it also analyses client behaviour, affordability and income sources. “The game is analysing a [vast] magnitude of data and then to say yes or no.”

According to Du Plessis, the stricter credit granting strategy, effective from 2016, has resulted in lower growth in loan sales and revenue but delivered a better-performing loan book.

Loan sales rose to R28.3 billion from R27.2 billion, with the number of loans granted during the year rising to 3.9 million from 3.5 million. Revenue generated from loans increased by 6% to just under R14.6 million.

Capitec, for the first time, also disclosed details relating to the reconciliation of its loan book, intended to provide a comparative between revenue and growth in the loan book. Renier de Bruyn, an investment analyst at Sanlam Private Wealth, noted that Viceroy drew some of its conclusions “by incorrectly attempting its own reconciliation”.

Source: Capitec CFO Report 2018

The banking group reported a decrease in arrears as a percentage of gross loans and advances to 5.7% from 6.3%. Arrears and up-to-date loans that were rescheduled from arrears as a percentage of gross loans and advances fell to 8.3% from 9.8%.

Its provision for doubtful debts as a percentage of gross loans and advances decreased to 12.2% from 13.1% while the provision coverage of arrears increased from 208% to 216%. “The lower provision percentage and higher coverage ratio is a direct result of the better-performing loan book,” it said.

“The Capitec results showed an improvement in the quality of the loan book with the percentage of loans in arrears reducing year-on-year. This allowed for a reduction in provisions, which supported earnings growth. The growth in client lending income slowed noticeably to 4% as a result of slower book growth and lower yields as a result of a shift towards lower-risk customers. The slowdown in lending income was offset by continued strong growth in transactional income (+31%) and a release of bad debt provisions,” De Bruyn said.

Transactional or non-lending income increased to R5.1 billion from R3.9 billion. Capitec, which aims to cover all operating costs with transaction fees by 2022, said net transaction fee income to operating expenses increased from 81% from 72%. Operating expenses increased by 17% to R6.36 billion.

Capitec increased its total dividend by 18% to R14.70 per share.

Shares in the group closed 0.67% higher at R900 per share.

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