Capitec on fire 

Capitec has been South Africa’s best-performing stock over the past two decades and is among the most popular on the JSE. In 2024 alone, Capitec’s share price has grown by nearly 63%.

This incredible share price growth has led many to question how long Capitec’s rally can last and whether the bank is still worth buying at this high price tag.

When Capitec first launched in 2001, South Africa’s banking landscape was dominated by four large players.

Capitec disrupted this market by focusing on underserved and unbanked clients and offering them accessible and affordable banking services.

This strategy worked well, as Capitec now has the largest client base in the country. Other banks followed its playbook and now also offer low-cost accounts to clients.

While South Africa still has four large, dominant banks – Standard Bank, Nedbank, FirstRand, and Absa – the market has significantly changed, with new players and new markets to enter.

In 2023, Krutham founder and executive chairman Stuart Theobald explained that the ‘Big Four’ bank model is dominant in many countries worldwide, including the UK, Kenya, Australia, the US, India and Spain.

He said the prevalence of the ‘big four’ model is likely due to a balance between competition and stability. 

More banks would lead to more competition but less stability, while fewer banks would stifle competition but create a more stable system. Therefore, four banks seem to be the “sweet spot”.

South Africa has followed this model for years, but Capitec’s incredible growth over the past few decades led many to believe the bank will disrupt the sector.

“Given Capitec’s continued outperformance in profitability, it could one day break the model. Capitec, for now, seems the only bank with a prospect of doing so,” Theobald said.

“If a bank is sustainably more profitable than the rest of the market, it is inevitable that it will gain market share. Either Capitec will be one of the big four (or big five) one day, or it will be less profitable. Those are the only two options.”

While Capitec is still not considered one of the country’s ‘Big Four’ banks, it has undeniably impacted the country’s banking landscape and has become South Africa’s largest bank by clients.

From a financial perspective, Capitec is also one of the top performers, posting consistent profits year after year.

One of Capitec’s most impressive achievements is a 30-year rally in its share price, making it South Africa’s best-performing share since the advent of democracy.

Since it was listed on the JSE, Capitec’s share price has grown by 235,322%, making the bank one of the most expensive shares on the exchange.

On 11 November 2024, Capitec traded at a P/E ratio of almost 31. For comparison, Standard Bank, South Africa’s biggest bank by capital, currently has a P/E ratio of just over 9.

Therefore, compared to other local banks, Capitec is trading at an exceptionally high price. Capitec’s share price growth since its listing can be seen in the graph below.

This high price tag has raised the question of whether Capitec is still worth buying and whether this rally can continue.

When asked this question on BusinessDayTV, analyst David Shapiro responded with a resounding ‘yes’.

Shapiro, an analyst at Sasfin Securities, said that, despite the high price tag, Capitec remains a good operation and one of the most exciting finance groups in the country.

“Where other banks are dead scared to lend, this one’s not, and I really like what they’ve done with the group,” he said. 

Shapiro said one of his biggest regrets was not buying Capitec shares because he was intimidated by the high price.

In the same interview, Sanlam Investments’ Roy Mutooni provided a slightly different perspective.

He said many people make the mistake of comparing Capitec’s share price to that of other big banks like Absa and Standard Bank. Viewed through this lens, he said Capitec is “ridiculously expensive”.

However, looking below the surface of that comparison and drilling down into the numbers shows that Capitec’s financial makeup is what sets it apart from other banks.

Mutooni explained that most traditional banks’ books consist primarily of lending and a smaller portion of non-interest income.

Capitec, on the other hand, derives over 50% of its revenue from non-capital intensive, non-interest income.

“Which is fantastic – it means they don’t have to hold back capital, and they can keep throwing other things at their customers, and the customers are a captive audience who want pretty much everything, so the leverage there to the upside is significant,” Mutooni said.

“I think they’re more of a platform business than a bank, and that allows you to open up from a valuation perspective.”

“They execute incredibly well, their returns are incredibly high – I see no reason why you should be betting against them. They haven’t put a foot wrong in a long time.”

Capitec’s latest results showed that the experts are likely accurate in their analyses, as the bank performed exceptionally well.

Capitec’s interim results for the six months through August 2024 revealed that the bank had reached 23.2 million clients, including point-of-sale merchants. 

Its headline earnings surged 36%, and return on equity neared 30%. The bank also crucially reduced its annualised credit loss ratio to 7.6% from 9.6% in the same period last year. 

Interest income, which surged 72% to R5.6 billion after credit impairments, drove the company’s strong performance. 

However, growth in this area was limited by the tight lending criteria during the past six months to minimise the impact of bad debt on its credit loss ratio. 

This strategy bore fruit, with credit impairments being reduced by 15% and R729 million. The bank’s annualised credit loss ratio (excluding AvaFin) decreased to 7.0% from 9.6% (including AvaFin: 7.6%).

Despite the strong growth in interest income, non-interest revenue remains the core of Capitec’s business, contributing 67% of operating profit. 

The graph below shows how Capitec’s share price has grown since the start of this year.