What makes Capitec special 

Capitec’s differentiated strategy set it apart from South Africa’s traditional banks, enabling it to rapidly grow its client base and reducing its revenue sensitivity to interest rate fluctuations. 

Ultimately, this has led to the bank’s price-to-earnings ratio of 33 times—more than double that of its peers Standard Bank and FirstRand. 

In a research note sent to Daily Investor, Old Mutual Wealth research analyst Tasneem Samodien explained how this happened and why investors continue to value Capitec so highly. 

Traditionally, banks generate most of their revenue from net interest income, which comes from the difference between the interest earned on loans and the interest paid on deposits. 

Samodien explained that after the Global Financial Crisis, interest rates fell sharply and remained lower for a decade, forcing banks to find additional revenue streams. 

Many turned to wealth management, trading, and insurance to generate stable, predictable revenue that was not sensitive to interest rate fluctuations. 

Locally, non-interest revenue accounts for 20% to 30% of total revenue across the traditional Big Four banks – Standard Bank, FirstRand, Absa, and Nedbank.

In contrast, Capitec generates half of its revenue from non-interest income, which makes it far less sensitive to interest rate changes. 

Samodien said this is the core reason the bank has a premium valuation, as this revenue is not only more resilient but should also translate into more stable and higher profit margins. 

Capitec’s traditional competitors have pivoted into the previously mentioned areas of wealth management, trading, and insurance. 

While these revenue streams are less sensitive to interest rate fluctuations, they are closely tied to economic growth. 

Without a growing savings pool, it is very difficult to grow assets under management or generate trading revenue. 

Furthermore, in times of economic difficulty, such as the last decade in South Africa, insurance premiums are one of the first things consumers stop paying to save money. 

As a result, Capitec’s revenue mix is vastly different to South Africa’s traditional banks, making its income more resilient and translating into higher profitability. This is shown in the graph below. 

How Capitec got here 

Samodien said Capitec’s differentiated strategy highly relies on the bank having a wide customer base into which new products can be cross-sold. 

While the Big Four banks focused on growing their balance sheets in the early 2000s and then rode the wave of the Great Financial Crisis, Capitec adopted its disruptive strategy. 

In 2000, then-CEO Michiel Le Roux set an ambitious goal of banking the majority of South Africans, with a specific focus on the unbanked. 

Capitec’s model emphasised simplicity (one account and equal treatment for all), affordability (low, transparent fees) and accessibility (retail outlets, ATMs, branches and a digital app). 

This drove Capitec’s growth throughout the 2000s and 2010s, with the bank fast becoming one of the largest players in the sector. 

Today, the bank boasts 22.2 million active customers who conduct 9.9 billion transactions, generating a significant amount of non-interest income. 

This includes fees on transactions executed in branches via ATMs and digital banking and commission income on the sale of lottery tickets and electricity.

Value-added service income related to the sale of mobile data, renewal of vehicle license disks, and cash remittances also play an increasingly important role in revenue generation. 

Income related to the sale of credit life insurance and funeral policies has seen more muted growth. However, a recent change means revenue from insurance should pick up. 

In August, the Competition Tribunal approved Capitec’s intended transfer of the Capitec credit life business, currently underwritten in a cell captive arrangement with Guardrisk Life, to its own insurance licence.

The bank’s large customer base has also provided a valuable data source, which Capitec has used to drive new offerings such as Capitec Connect and Capitec Pay. 

These services enhance customer engagement and deepen their integration into the bank’s ecosystem.

Capitec is expanding into life insurance, business banking, and international markets. It also plans to introduce secured retail lending products, such as mortgages and vehicle finance. 

Samodien explained that Capitec’s revenue mix and future growth avenues mean it cannot be directly compared to traditional banks on a price-to-earnings basis. 

Capitec’s price-to-earnings ratio is far higher than its peers at 33 times, but its earnings are far less cyclical due to its lower interest rate sensitivity. 

The bank’s higher-margin revenue also drives superior profitability, as shown in the graph below, while traditional banks have typically tied their growth to economic growth.