Capitec closed the taps – and keeping them closed

Capitec’s efforts to reduce its credit losses and bad debt have paid off, and its more stringent requirements will stay in place until South Africa’s macroeconomic environment allows more flexibility.

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.

Capitec Bank’s net credit impairment charge grew 62% to R4.8 billion in the six months ended 31 August 2023.

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

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

Stage 3 loans are technically impaired loans and comprise R21 billion of the bank’s R100 billion loan book. 

Stage 2 refers to loans that show an increased risk of impairment, but interest payments are still counted in the books. Just under R14 billion of loans are at stage 2.

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

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 discontinuing short-term access facilities and cutbacks on clients who increased their instalments to income ratio by more than 30% during the past six 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,” Capitec explained. 

The bank said bad debts recovered – excluding debt sales – decreased from R642 million to R498 million for the year. 

The company reported that Capitec’s stage 3 coverage ratio is declining and is currently below pre-Covid-19 levels. 

Capitec CEO Gerrie Fourie told Daily Investor that the bank is unlikely to tighten its lending criteria further.

He said the bank reviews and monitors performance on a weekly and bi-weekly basis and may make a few adjustments to its criteria but will likely not tighten further.

When it comes to easing the bank’s lending criteria, Fourie said, “that’s a factor of the economy”.

“We’ve gone through a very tough time with inflation, food inflation, interest rates and all of that, and I think this is just purely managing that and going through that,” he said.

“For me, credit is this flexible thing. If it’s tough, you cut back, and if the economy is good, you open up – that’s the thing about credit.”