Capitec opening the taps

After months of South Africa’s largest banks experiencing a decrease in credit extension, demand is picking up again, and Capitec has opened its taps.

Capitec CEO Gerrie Fourie told Daily Investor at a recent Media Day that the bank has started opening its taps again after around two years of implementing stricter lending criteria.

In November 2021, Capitec relaxed its credit granting criteria for certain pockets of clients that had begun showing recovery after the Covid-19 pandemic. 

This led to book growth, particularly in the access facility book. 

However, due to the impact of the negative economic conditions after February 2022, when the war in Ukraine began, Capitec started tightening credit granting criteria in June 2022.

It maintained its more stringent credit granting criteria for the remainder of the 2023 financial year. 

In September last year, 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.”

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

To combat this, the company tightened its credit granting criteria in the first half of 2023 to address the risks to the loan book amidst the difficult economic environment.

Changes to the granting criteria 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 bore 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. 

Following the release of its results for the financial year ended 29 February 2024, Fourie told Daily Investor that, despite the improvement, Capitec is keeping the taps closed.

Capitec reported that its net credit impairment charge on gross loans and advances increased by 37% to R8.4 billion (2023: R6.1 billion).

Its credit loss ratio was 10.1% compared to 8.0% for 2023. The H1 2024 annualised credit loss ratio was 11.0%, which improved to 9.2% annualised for H2 2024.

In Capitec’s 2024 results presentation, Fourie said the bank would remain cautious regarding its lending criteria.

“If you look at the economy, we all know it’s on thin ice,” he said. “In August I said Ukraine/Russia looks like it stabilised, and nothing else must happen in the world.” 

“Then Israel happened, and now two to three weeks ago, Israel/Iran took place, and all of that has an impact on South Africa.” 

“So, our focus on the credit side is going to be on business banking on the secured side, but we will be very cautious in the retail space.”

Fourie told Daily Investor that Capitec would only consider relaxing its lending criteria if South Africa achieves high economic growth and interest rates are down. “Then we can open up,” he said.

At the Media Day on 22 August 2024, Fourie said that the time had come, and the bank had opened its taps.

This comes after months of subdued demand for home loans and other forms of credit, but now South Africa’s biggest banks are noticing an uptick in demand.

This comes on the back of lower inflation and anticipated interest rate cuts, boosting consumer confidence and willingness to take on debt. 

The South African Reserve Bank (SARB) has been in a hiking cycle since November 2021 but has not raised rates since May 2023.

Therefore, the repo rate and prime lending rate have been at 15-year highs of 8.25% and 11.75%, respectively, for over a year.

However, signs of a potential cut from the US Federal Reserve and low inflation in South Africa have led many experts to predict that the SARB will cut rates at its next meeting in September.

This will bring much needed relief to South African households and see an uptick in demand for credit.

Fourie told Daily Investor that the bank has started opening its taps in light of green shoots appearing in the country’s economy.

This includes the potential rate cuts, lower inflation, and the formation of a Government of National Unity, which was largely seen as an investor-friendly outcome of the May general elections.