Capitec’s new CEO has a unique problem

The new CEO of South Africa’s biggest bank by customers has a unique problem on his hands. 

Since Capitec — South Africa’s first-ever challenger bank — made its public debut 23 years ago, its shares have soared by more than 200,000%.

That’s made it the country’s best-performing stock since it was listed and the second-most valuable lender on the continent, boasting more than 24 million customers.

Now, new CEO Graham Lee is expected to take it to even new heights. He’s betting that an improved offering to lure in more affluent customers and grow its retail bank, along with aggressively expanding the firm’s business bank — which targets the 3 million small, micro- and medium-sized enterprises across South Africa — will do just that.

“It is daunting,” Lee said. But, he added, “the upside to both us and to South Africa with getting business banking right — it’s the single biggest opportunity.”

Wine country roots

Capitec got its start back in 1997 as part of a financial services company, PSG. It was ultimately spun out in 2001 and listed on the Johannesburg Stock Exchange in February 2002. 

Capitec is headquartered in Stellenbosch, which is about 48 kilometres from Cape Town. Today, that area is known as South Africa’s preeminent wine country.

Several members of the founding team actually came from the alcohol industry — when they sold wine into shebeens, or informal taverns or bars that often operate out of homes.

“We were going into the shebeens, into the townships and understood that side of the market, and I think that helped us quite a lot,” outgoing CEO Gerrie Fourie said from the bank’s offices overlooking the famed Cape Winelands.

That background, he said, helped them “really understand banking, and understand the client.” 

Initially, the bank focused on gathering deposits from low-income consumers across South Africa along with unsecured lending. Over time, the company went beyond retail banking and launched its mobile app, Capitec Connect, which also operates a telecommunications network.

With 1.6 million subscribers, the network is the biggest seller of prepaid airtime with a 40% market share.

That push has helped the bank’s profit surge nearly 28,541% since it was listed in 2002 and lifted the bank’s return on equity to 29%, which is higher than peers like Standard Bank and FirstRand. 

“This gives them huge scope to leverage the balance sheet in future and grow in different directions, such as, for example, mortgages,” said Rademeyer Vermaak, the head of systematic solutions at Stanlib.

Shareholders have piled into the stock, giving it a R410 billion valuation. That’s meant it’s now trading at a price-to-book ratio of 8.02 — one of the highest in the world, fueling speculation from some quarters that the bank may be overvalued.

“Its earnings profile is different from its peers,” Vermaak said, noting the company’s digital platforms business consumes less capital than the traditional banking business. That’s what makes it more profitable, he argued. 

“Almost think of Capitec as a combination of a tech stock and a bank,” Vermaak said. “Tech stocks need to be pricier because of that growth factor.”

‘Safe’ hands

This is where Lee comes in. The 50 year-old has been with the bank since 2003, and led the lender’s pivotal retail unit for the last two years after holding various positions at Capitec’s credit, technology and data, personal bank operations.

Now, he’s plotting a continued expansion of the lender’s flagship digital retail bank. Not only is he hoping to cross-sell more of the bank’s products to existing clients, but he also wants to bring in even more of the 33 million working-age South Africans as customers. 

The bank has also embarked on a plan to attract the wealthy residents who earn more than R50,000 a month. He’s planning to woo them with secured home loans and credit cards.

The bank ultimately wants to build its market share with affluent clients to 25% by 2028 — a 10 percentage point increase from current levels.

The lender also recently set up a special-purpose vehicle with mortgage provider SA Home Loans that will see it nearly triple its home loan portfolio. 

“We are very comfortable that the business remains in a very safe pair of hands,” Chris Steward, sector head of financials at Ninety One, said of Lee, who took over on July 19.

“There’s history and there’s continuity — two important factors that we would look for from a succession perspective, which was neatly executed upon by Capitec.”