Headline earnings per share increased by a very comfortable 20% for the six months ended August, compared with the same period last year. This solid growth came despite the diluting effect of its November rights issue, without which earnings would have increased by a further 6%.
Much of this performance has been driven the bank’s sustained ability to attract new primary banking clients with it now having reached the 5 million client mark, pushing its market share of primary banking clients above 10%.
More clients means more transactional revenue and Capitec is now proud to boast that it has managed to cover 55% of its overheads through transactional fee income a goal it had originally hoped to achieve by 2015.
The strong performance in retail banking has also meant that Capitec has been able to generate significant economies of scale with the effect that its cost-to-income ratio had dropped notably to 33%, compared with the 42% for six months to August 2012.
In all, income from banking operations has grown by 40% to R4.94bn while interest income has risen by 52% to R4.6bn.
But while Capitec continues to deliver, apparently leaving rivals such as African bank in the dust, there are some concerning numbers which jump out of its results.
Most strikingly Capitec has reported a massive spike its impairment expense, which jumped by 92% to just under R2billion. The bank has also reported a 26% decline in the value of new loans advanced which now sits at R9.5 billion as compared with R12.83 billion at August last year.
These figures betray a worrying deterioration in Capitec’s client base as well as its concerns “about the fundamentals of the SA economy” which have forced it to tighten lending criteria in order to preserve an acceptable level of bad debts going forward.
“What we have experienced is normally you find an increase in arrears from December through to February and then an improvement from normally April through to August,” says Capitec CEO, Riaan Stassen
“This year, however, we got the increase in arrears but a much slower recovery … arrears as a percentage of book spiked at 5.8% in February but reduced to only 5.5% by end August, whereas we would have expected that to go closer down to 5% … it is really that additional half a percent that kicked in the escalation of our provisioning,” he says.
Provisions for doubtful debt has been increased by 70%.
As such, although loan revenue remains strong this has been driven primarily by “the annuity effect of loans sold in previous periods as the loan book is not yet mature”.
“Although the performance and the quality of the loan book is within risk appetite, it was worse than expected,” admits Capitec.
Naturally, there is a lag in the impact of reduced credit extension but as Capitec’s book eventually does begin to mature this will catch up with it, impacting on its forward looking prospects.
Stassen said he would be stepping down as CEO, to be replaced by Gerrie Fourie, the bank’s sales and operations head.
Stassen remains confident of the bank’s outlook, despite the difficulties being experienced in its lending base.
“If I analyse the industry it is pretty scary to see the different provisioning approaches that players take … but since inception we have been consistent in what we have done and our approach has always been to take the bad news upfront,” he says.