At the heart of Capitec’s evolution has been the firm’s ability to identify areas of the market that are both lucrative and ripe for disruption – and then target those areas with precision. These are some of the key characteristics that we look for within our investment framework. Companies that are differentiating themselves from their peers, capturing an ever-increasing share of economic profit pools, and in so doing, delivering a sustainable, improving earnings revisions profile. We believe that Capitec fits firmly within this framework and is well-positioned to continue its current growth trajectory, making it our preferred banking stock within the Ninety One SA Equity and Multi-Asset Strategies.
One of Capitec’s defining features is how conservative the business has been during its developmental phase, particularly in terms of how it has managed its capital and liquidity. When looking at the bank’s capital adequacy ratio (which measures how much capital a bank has available as a percentage of its risk-weighted asset exposure), Capitec operates at around 37%, which is significantly higher than most South African Tier 1 banks at around 12-13%. Its liquidity buffers tell a similar story. While most banks use the money from short-term savers to fund longer-term lending activities, retaining a relatively small portion for liquidity purposes, Capitec maintains a liquidity buffer of around 100%, meaning it could meet all of its short-term liabilities through a combination of cash and other highly liquid instruments. Yet despite holding more capital than any of its peers, and this very conservative stance on liquidity, Capitec has the highest return on equity of any bank in the country. Not only does this demonstrate its effectiveness in terms of deploying capital, but it also gives the bank further optionality to generate higher returns over time, or return more value to customers (thereby unlocking further growth opportunities) while maintaining similar returns.
Figure 1: Capitec: Return on equity (%)
Source: Ninety One and Capitec, November 2024.
Capitec’s ability to successfully identify and target opportunities ripe for disruption has been a hallmark of its evolution. Fairly early in its history, the bank decided to diversify away from mono-line unsecured personal lending towards retail transactional banking. At the time, most savings and transactional accounts were dominated by the “Big Four” and characterised by high fees, inflexible service and little by way of interest paid on credit balances. Capitec identified this as an opportunity to offer consumers a simple, easy-to-understand transactional banking offering, delivered at an exceptionally low cost, leveraging its lack of legacy constraints (a challenge that many of the incumbent banks faced, and to a degree, still do) to build a transactional platform that was fit for purpose and significantly more cost-effective. This enabled Capitec to compete on transactional costs and offer clients competitive interest rates on retail transactional deposits.
After complementing its transactional offering with a credit card, Capitec’s next major move saw it diversify into the insurance business, an area where it already had some experience through offering credit life insurance on the back of its unsecured personal lending book. Funeral insurance became the next major initiative, and in 2018, Capitec entered into a joint venture with Sanlam to offer its clients affordable funeral insurance as a value-added service, with the plan to eventually build its own in-house capability. The arrangement with Sanlam is set to terminate later this year, and Capitec has already embarked upon building its own bespoke range of value-adding life insurance products.
This was not the only time Capitec leveraged the expertise of an existing specialist business to fast-track its entry into a new market. In 2019, Capitec purchased Mercantile Bank to accelerate the development of its in-house business banking capability, in particular targeting businesses that were too small to fit into a typical corporate banking framework, and consequently being under-serviced by the market. By offering business banking at a lower cost, with a special focus on point-of-sale, Capitec is in the process of acquiring business clients while gaining a better understanding of their transactional activities and cash flows. This will allow the bank to unlock an alternative approach to business financing, effectively lending funds against the cash flows of a business rather than its assets.
Another area where Capitec is excelling is its ability to use client data to get a better understanding of client needs and behaviour, thereby improving the overall client experience and identifying opportunities to cross-sell its value-added services. Through its award-winning banking app, Capitec holds a significant market share of prepaid sales of electricity, airtime, data, vouchers, online bills as well as Lotto sales. It is now the most downloaded banking app in the country, with the largest number of retail transactional banking clients.
As shown in the figure below, the transactional side of Capitec’s business continues to grow exceptionally well, with its retail transactional income now accounting for over 136% of the bank’s cost base – a far cry from just a few years ago when the bank only earned its income from lending activities. This is hugely significant for shareholder returns, as this side of the business requires substantially less capital.
Figure 2: Capitec retail transaction fee income to Opex (%)
Source: Capitec Financials, November 2024.
When looking at the South African retail and business banking revenue pool over the past 14 years, Capitec’s market share increased from around 3% to around 14%. Given its low-cost, purpose-built business model, its profit share has grown faster, from around 4% to almost 20%. Despite growing its market share by almost five times, Capitec remains the smallest bank in the country by market share of retail and business banking revenue, demonstrating the vast opportunity for the bank to continue growing its revenue base.
Figure 3: RBB SA share of total revenue trends by bank (%)
Figure 4: RBB SA share of post-tax profit trends by bank (%)
Source: RBB, Ninety One; October 2024.
Capitec’s superior cost efficiency has not come at the expense of its physical footprint, which it believes remains an important channel for sales and service in the South African banking landscape. From having around 250 branches and very few ATMs in 2005, Capitec has grown to nearly 900 branches, with the highest number of ATMs across South Africa, at almost 9 000. This expanded presence comes at a time when most other banks are desperately trying to reduce costs, opting instead to lower the number of physical branches and ATMs that they have around the country.
Figure 5: Number of physical branches by bank
Figure 6: Number of ATMs/DNRs by bank
Source: RBB, Ninety One; October 2024.
The consensus among most investors is that Capitec’s share price is too expensive. South African banks typically trade at a P/E of around 6-10x and dividend yield of between 5-7%. Capitec, meanwhile, trades at more than a 20x P/E and a dividend yield of only 2%. The reality, however, is that the bank has always traded at a high valuation. As with all growth companies, it is essential not to look at valuations in isolation but rather in the context of the company’s sustainable future growth trajectory. We believe Capitec has a compelling growth story and has consistently delivered exceptional value for shareholders despite always screening as relatively expensive. Given the company’s proven track record and long-term ambitions, we believe its growth story will continue to play out and that its earnings growth will more than compensate investors for higher valuations.
Table 1: SA Banks’ valuation and growth characteristics
ROE | Price-to-Book* | PE (rolled 12-month forward) | Dividend Yield (FY24e) | Consensus EPS growth (+3yr average) | |
---|---|---|---|---|---|
ABSA | 14.0% | 1.1 | 6.1 | 8.7% | 10.5% |
Standard Bank | 18.6% | 1.7 | 8.4 | 6.3% | 7.3% |
FirstRand** | 20.1% | 2.5 | 10.3 | 5.5% | 9.7% |
Nedbank | 14.8% | 1.4 | 7.7 | 7.1% | 9.8% |
Capitec | 28.4% | 7.9 | 23.6 | 1.9% | 18.8% |
Source: Ninety One and Bloomberg, October 2024.
* Tangible assets.
** June FYE.
Capitec has done exceptionally well to differentiate itself in what has historically been an oligopolistic industry dominated by the “Big Four”. It continues to capture market share by redefining the way consumers experience banking and ancillary services through its built-for-purpose platform, value-added services, and low transactional fees. This has made the bank more appealing and certainly more accessible to segments of the market that were previously underserviced. Operationally, Capitec continues to run a very efficient business while continuing to invest in future growth initiatives. We are confident that if the company executes well, as it has in the past, holding Capitec as an overweight position in our SA Equity and Multi-Asset Strategies will continue to benefit our investors over time.