Capitec on fire – with a warning

Wayne McCurrie from FNB Wealth and Investments warned that Capitec, although an excellent business, looks expensive. However, there are good reasons for this.

Capitec experienced strong growth in its earnings and active client base for the financial year ending 29 February 2024.

Capitec’s earnings grew by 16% to R10.6 billion, thanks to its diversified businesses. Non-interest income now contributes 72% of its total income.

Its active client base grew by 10% to 22 million, and its app user base grew by 19%. Transaction volumes then increased by 21% to 9.9 billion.

Another big contributor was transaction and commission income, which grew by 29% year-on-year to R14.8 billion.

Capitec CEO Gerrie Fourie attributed this incredible growth to Capitec’s investment in its systems, innovative payment solutions, and three new business units.

McCurrie told Business Day TV Capitec’s latest results were fantastic. However, he cautioned that its rating is three times higher than other South African banks.

“In the next two to three years, you may get a better time to buy Capitec. However, to buy it now is not a wise decision,” he said.

He highlighted that the Capitec share price falls sporadically which offers a good buying opportunity for prospective investors.

David Shapiro from Sasfin Securities explained that Capitec’s value-added services, like selling airtime and electricity, add to Capitec’s appeal.

Another factor is that it has captured the attention of international investors looking for stocks in the South African market.

“Capitec stands out to global investors looking for a share representing South Africa,” Shapiro said.

He agrees with McCurrie that explaining or justifying Capitec’s high rating is difficult. However, it is not coming down from its current levels.

There is strong momentum behind Capitec’s share price growth, which has increased by 60% over the last year.

“It is a difficult decision whether to go with the Capitec story or look at the other big banks. Capitec seems to be the Shoprite of the banking sector,” he said.

McCurrie and Shapiro are bullish on the South African banking sector. They said Standard Bank, FirstRand, and Nedbank offer good value.

McCurrie added that Absa looks exceptionally cheap. However, it comes with more risk than the other three large banks.

Banking comparison

Daily Investor delved deeper into the numbers McCurrie mentioned to see why Capitec is outperforming other banks.

Analysing banks’ share prices relative to their performance measures makes it possible to compare their relative valuations.

For this analysis, we considered three ratios – price-to-earnings (P/E), price-to-sales (P/S), and price-to-book (P/B).

These ratios showed that Capitec’s valuation is significantly higher than that of other South African banks.

Valuation ratio	Standard Bank	Nedbank	Absa	Capitec
P/E ratio	7.95	8.2	6.35	29.53
P/S ratio	1.85	1.92	1.21	8.65
P/B ratio	1.36	1.01	0.82	7.18

Generally, when this is the case, the most common explanations for the inconsistency are either profitability, profit growth, or revenue growth.

Considering the income and revenue growth of the various banks, it immediately becomes apparent why Capitec is valued higher than its competitors.

The 5-year compounded annualised revenue and net income growth for Capitec is significantly higher than its competitors.

5-Year CAGR	Standard Bank	Nedbank	Absa	Capitec
Revenue	11.4%	5.1%	6.5%	13.6%
Net income	10.3%	3.7%	8.4%	14.8%

Capitec is also able to convert its revenues into higher profits. It has the highest net profit margin of all large local banks.

In its last annual report, Capitec reported a net profit margin of 29.3%. Its closest competitor was Nedbank, with a net profit margin of 25.7%.

However, Capitec’s higher profitability is not directly comparable with that of its competitor banks and can be explained to a large extent.

Capitec rose to success by catering to the lower-income segment of South Africa. This strategy served Capitec well.

However, one shortcoming of this strategy is that Capitec carries greater credit risk than its competitor banks.

One way to view this is to look at the bank’s credit loss ratio, which gives the percentage of credit impairments relative to its total loans made.

Comparing the CLRs of the different banks from their latest annual reports shows that Capitec has a significantly larger relative credit loss.

Measure	Standard Bank	Nedbank	Absa	Capitec
Credit loss ratio	0.98%	1.09%	1.18%	10.10%

Capitec remains a market favourite

Capitec’s latest results and continued strong performance show why it has been a market favourite for fifteen years.

Investors have profited tremendously from investing in Capitec. Its share price increased by 9,300% over the last fifteen years.

Capitec has taken on more risk than many of its competitors to achieve these excellent results.

From 2022 to 2024, Capitec’s credit impairments have more than doubled from R3.5 billion to R8.7 billion.

However, the higher-risk client base is precisely what caused Capitec to do so well, as they pay higher interest rates for the risk they bring.

It is also an exceptionally well-run bank with a strong focus on customer satisfaction and technology.

Capitec’s app increased its user base by over 180,000 per month and registered over 11 million daily logins, equal to over 500,000 people using the app every hour.

This enabled its branches to focus more on service delivery and selling its more complex products.

“We have over 2 trillion data points, which helps us anticipate our clients’ needs, develop better products, and communicate with our clients in a more relevant way,” Fourie said.

This can explain the premium at which it trades, and it may well continue its strong run.