Capitec doing well despite rising bad debt

Capitec had a successful first half of its financial year despite a tough economic environment and concerns over bad debt hurting the company’s performance.

Capitec released its results for the six months ended 31 August 2023 today, which revealed a strong performance.

Operating profit before tax increased by 6% to R5.89 billion from R5.55 billion in the comparative period last year.

Headline earnings per share increased by 9% to 4,072 cents from 3,738 cents. Earnings per share increased by 9% to 4,068 cents from 3,739 cents.

Interim ordinary dividends increased by 9% to 1,530 cents per share from 1,400 cents per share.

The company’s net asset value (total equity) increased by 13% to R39.35 billion from R34.81 billion.

Capitec’s pre-provision operating profit grew by 26%, but this was partially offset by an increase in the credit impairment charge.

The company’s net credit impairment charge grew 62% to R4.8 billion. 

“The higher charge was largely due to an increase in the migration of balances into stages 2 and 3 of the retail loan book,” the company said. 

“The migration was driven by the impact of economic constraints on clients’ ability to remain up to date with their loan instalments.”

Consequently, the company’s overall credit loss ratio increased to 4.8% (H1 2022: 3.3%).

However, the company said its capital position is strong, with a common equity tier 1 ratio of 36% and a CAR of 37%. 

“Our capital and liquidity ratios are still well above the regulatory and board-approved requirements,” it said. 

“The return on ordinary shareholders’ equity of 24% (H1 2022: 25%) reflects the group’s solid performance in the face of tough economic conditions.”

Net interest income comprised 47% of the company’s income from operations and grew to R8.0 billion from R6.9 billion the previous year. 

The company said its margins on the loan book and the investment portfolio benefitted from the 275 basis points increase in the repo rate since August 2022, and net interest-bearing assets grew by 2%. 

The company’s interest expense grew by 47% and was impacted by the 10% increase in total deposits and funding.

The net transaction and commission income was 40% of income from operations (H1 2022: 39%) and grew by 24% to R6.9 billion. 

“The performance was driven by our consistent investment in innovation and an increase of 11% in the number of active clients, which led to an 18% increase in retail transaction volumes,” Capitec said.

Tightening taps

The company said tough economic conditions continued to put pressure on South African consumers and businesses. 

Earlier this month, the bank said that the economic climate in South Africa had been characterised by high interest rates and inflation above the government’s target.

“This led to consumers being under financial pressure, which impacted the retail bank loans and advances and resulted in a higher credit impairment charge and credit loss ratio,” the company said in a trading update.

During H1 2023, the company tightened its credit granting criteria to address the risks to the loan book amidst the difficult economic environment.

Changes to the granting criteria during the reporting period included the discontinuation of short-term access facilities and cutbacks on clients who increased their instalments to income ratio by more than 30% during the past 6 months. 

These changes appear to have borne fruit, as the impact of the adjustments to granting criteria was to decrease loans and limit sales by 32%. 

“We can adjust the term to maturity of our retail loan book more quickly than mortgage or commercial lenders because of the comparatively shorter term of our loan book,” the company explained in its results today. 

As a result, retail loan sales and disbursements decreased by 9% to R24.2 billion (H1 2022: R26.5 billion). 

The tightening of access facility criteria resulted in a significant decrease in the new access facility limits granted to R3.8 billion (H1 2022: R10.5 billion). 

In addition, access facility limits were cut by more than R3.0 billion, and access facility disbursements decreased to R7.3 billion from R9.9 billion. 

The lower-risk credit card disbursements grew from R6.3 billion to R8.0 billion. Term loan sales decreased by 14% from R10.4 billion to R8.9 billion.

Capitec declared an interim ordinary dividend of 1,530 cents per share, up 9% from 1,400 cents per share in the comparative period.