Shareholders seem to expect continued growth.

Capitec CEO Gerrie Fourie had good news for shareholders, as well as SA in general, when he took to the floor to announce the bank’s results for the financial year to February on Tuesday.
While headline earnings decreased by 27% to R4.6 billion (2020: R6.3 billion) and return on equity fell from 28% to 17%, his message was that banking activity is picking up and his interaction with branch managers countrywide indicates that there is quite a strong recovery underway.
Read: Capitec is adding 200 000 customers a month
I visited branches in Pretoria, Soweto and the Vaal Triangle. Managers are telling me that most clients are getting their full salaries, even bonuses, and that employment is recovering, says Fourie.
He says a feature of conversations with customers is an underlying optimism and positive energy.
Yet Capitec increased provisions for bad debt by nearly R3.4 billion during the financial year although the figures show that the bulk of the higher provision relates to the first six months of the year. Barring the much higher bad debt provision, figures looked good.
Q2 recovery
Fourie says banking activity and profitability recovered sharply in the second six months, after restrictions on freedom of movement were eased. Capitec posted higher profit in the second half of the financial year than in the second half of 2020 better by a respectable 18%.
Read: Second quarter boosts Capitec (Sep 2020)
For the first six months of the financial year, while the country was in lockdown, headline earnings decreased by 78% (compared with the first half of 2019) to only R650 million. During the second six months, headline earnings jumped to R3.9 billion, better than the comparative six months by a solid R300 million.
Reuben Beelders, chief investment officer at Gryphon Asset Management, comments that Capitec performed much better than anticipated in the second half of the year. Growth in transactional fee income and client numbers [is] impressive and net transaction fees and funeral plan income alone cover the operating expenses.
The growth in deposits, increasing 27%, is equally impressive and reflects the growth in banking business. It is a cheap source of funding for Capitec, says Beelders.
Fourie listed a long list of figures in his presentation to illustrate the strong growth. We just celebrated our 20th anniversary and we count 15.8 million active clients.
We launched six new products during this difficult year, we are expanding our digital offering and continue to open and reconfigure our branches, says Fourie.
The income statement discloses a few interesting numbers.
The decrease of nearly R522 million in lending, investment and insurance income was more than offset by a drop of nearly R700 million in interest expenses, with the compliments of the South African Reserve Bank, which reduced interest rates.
Fourie noted that the repo rate decreased from 6.25% per annum in March 2020 to 3.5% at the end of February 2021, but added that clients still earn a minimum of 2.25% on call savings and positive balances on credit cards with fixed deposits earning up to 7.7%, which helped to attract deposits.
Thus, Capitec was ahead by some R1.5 billion compared with the previous financial year, before taking into account operating expenses and provisions for bad debt.
Operating expenses increased due to hefty increases in staff costs and accelerated spending on technology, but the huge R7.8 billion provision for bad debt was the biggest factor to impact on earnings.
However, an explanatory note in the financial statement discloses that Capitec actually reduced its provision for bad debt during the second six months when things turned out better than expected halfway through the year.
How did Capitec do it?
Fourie mentioned that management had been planning for a challenging economic environment before Covid-19 hit. We cut back on higher risk lending, effectively exiting the short-term micro-lending market.
Clients take up credit for the right reasons such as education and home improvements. During the year under review, Capitec attracted higher-income clients and advanced better quality loans at lower interest rates, according to Fourie.
Read: Capitec launches its first full home loan offering (Nov 2020)
The result was a 19% increase in the number of loans over longer loan periods (37 to 84 months), and more than 50% of new loans are currently to clients with a net income over R20 000 per month.
Capitec is also assisting clients to get back on track with their loans in cases where repayment holidays were extended.
Clients who took payment relief can get an interest refund of 50% of the interest charged during the three-month payment break if six consecutive successful payments are made thereafter. If 12 payments are made, the remaining 50% of the interest during the three-month period will be refunded.
The incentive [was] welcomed, with clients phoning in to ensure that payments were done on time, says Fourie.
Capitec had also embarked on a programme to grow the digital side of its banking operations before the health crisis forced it to.
The Covid-19 pandemic presented the biggest challenge since our inception, but it also gave us an opportunity to adapt and think differently. We saw a fundamental shift in how clients do their banking and we proactively enhanced our banking app with new functionalities, according to management’s report on the results.
Fourie mentions that the acceptance of new technology has accelerated beyond expectations, effectively making Capitec the biggest digital bank in SA.
Digital uptake
The bank boasts that it has 8.6 million active users of the Capitec banking app, USSD channel, or a combination of different digital channels. At the end of February 2021, 5.3 million clients were using the Capitec banking app regularly.
The total number of digital transactions increased by 36% to 1.1 billion, with about half of those on Capitec’s banking application.
Fourie seems optimistic about the future, mentioning that the strong growth in digital banking, continued growth in client numbers, and the acquisition of Mercantile Bank will fuel earnings growth.
Around 16 million clients present opportunities to design and offer new products, while the plans to develop and grow Mercantile are on track, says Fourie.
Investors seem to agree. The share price jumped 2% in early trade after the result announcement before falling back to end the day flat.
At R1 380, the share isn’t far off its all-time high of R1 525 not bad in an uncertain environment.
Listen: CEO Gerrie Fourie discusses Capitec’s annual results