Capitec looks to the future

Cape Town - Capitec Bank, the listed microfinancing and retail bank, is on track to post a previously projected R29m in headline earnings for the financial year to end-February 2003, and from March aims to add both deposit-taking and three-month loans to its current product offering of one-month loans, according to CEO Michiel le Roux.

In an exclusive interview with I-Net Bridge, Le Roux said 2003 would be a key one for the bank in terms of the rollout of its branches and services across the country.

Capitec's share price this week hit an all-time high of R3.00 since listing at R2.75 on the JSE Securities Exchange in February 2002.

The company, which is 55%-owned by the PSG Group, saw its share price hit a low of 80c on March 18 amidst the problems exposed in the local banking sector, but it subsequently gained steady ground, rising about 275% since then.

Currently the group has 57 fully operational Capitec branches and 230 Finaid branches providing one-month loans to low-income clients. It aims to have converted another 100 Finaid branches to high-tech Capitec branches by the end of its 2004 financial year (February 2005), and to have signed up 2 million clients by 2006, le Roux revealed.

In March all Capitec branches will begin accepting deposits, following a successful pilot program at one of the branches, ongoing since March last year.

The bank's progress in setting up new branches and services has been slower than management had originally expected, impeded by the crisis of confidence in small and medium-sized banks since early last year. Capitec listed just as the impact of Unifer's collapse was making itself felt, with funding for small, niche microlenders such as Capitec immediately drying up.

"We must be extremely conservative in exposing ourselves to credit risk, as well as in planning positive cash flows and investment," he explains. "We are financing the opening of Capitec branches with our cash flow and operating within strict financial constraints, so we can't be aggressive in our expansion."

Still, Le Roux says that despite the turbulent conditions experienced by local banks, the group now has a monthly outstanding loan book of R140m (up from R120m in August) comprising about 200 000 loans at an average of between R600-R700 per loan. Its book has been increasing steadily, posting growth of about 50% over the six months to end-September 2002.

Currently 15 of its branches have loan books of more than R1.0m.

"Our biggest books are in areas that are not truly rural but also not urban," he observes. "In large or medium-sized towns there are fewer banks operating - therefore less competition - and repayment rates are better. It does seem to be true that people in smaller towns are more honest."

This lending growth has meant that Capitec has continued to lower its costs per loan per branch, enabling them to lower the interest rates they charge and making the bank more competitive, the CEO explains. This is the "virtuous circle" that should benefit the group considerably over the next few years. And while profits have suffered temporarily as a result, rising quantities are gradually making up for the lower margins.

At the same time, Capitec has seen its outstanding bad debts (arrears) decline to less than 3.0% of its total loan book, down from about 3.4% at end-August. Management closely monitors the arrears data on a daily basis, states Le Roux.

He expects bad debt levels to continue to decline as the group gains more experience with its clients' payment patterns, builds up its client information base and enhances its collection efforts even further.

Looking ahead, Le Roux says the key challenge for Capitec in 2003 will be to see whether it can convince its current lending clients to also deposit their savings with the bank. Savings products are in short supply in the low-income market, but they are very much needed, he believes.

"We agree with the government that this market is under-serviced, and we are trying to address this," he said. "Its core needs are accessibility and affordability - which we can provide."

South Africa's big banks should not be forced by the government to help to fill the gap, he adds.

"Although the big banks have done a good job providing a wide array of products for a wide array of the market, they are not really suited to service the low-income segment," he opined. "We can offer a better, less expensive service because we are specifically targeting this market, and for them it wouldn't be practicable or fair to charge some clients lower fees and others higher. It is a tiny, specialised market that we are in, representing only about 2% of the total market."

As for the microlending industry as a whole, Le Roux says he doesn't foresee any further consolidation ahead in 2003, with African Bank left as the only large player after the abrupt exits of Unifer and Saambou last year. The industry will be watching African Bank very closely to see how it improves its bad debt levels, he said.

"One would have thought that with less competition they would have benefited. It will be an interesting challenge for them.

"The entire industry really needs to re-look at its credit standards," adds Le Roux. "The industry has been in flux in the past few years and I believe it has not found its final form. One must expect the market to be volatile and then be flexible by adapting to the changing conditions." - I-Net Bridge

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