27 Jul 2004 :

THERE has been a high casualty rate amongst Cape-based banks with Boland Bank, Cape of Good Hope Bank and BoE all disappearing in a merciless consolidation process in the last few years.

When Capitec Bank, then part of Jannie Mouton’s Stellenbosch-based PSG empire, disclosed its mass banking aspirations in early 2002 there were more than a few observers who reckoned the initiative would be short lived.

For one thing, Capitec was heading out on the bumpy mass banking highway at a time when the mangled wrecks of Saambou and Absa’s Unifer were still smoking in their respective ditches. But two years later criticism is somewhat muted. Capitec now looks like developing into a real mass banking contender, earning a chunky R400m in interest income from is primary micro-lending activities in the year to end February 2004.

The group, which started off by building a sprawling 265 strong network of micro-lending branches under the FinAid banner, now has nearly 150 fully fledged Capitec Bank branches. The Western Cape roots remain strong with 46 branches situated around Bellville, Paarl and Cape Town.

Newly appointed CEO Riaan Stassen says Capitec could have 200 branches operating throughout South Africa by the end of this month. “Since May last year we have been converting 10 to 15 branches a month and are happy that this complicated process has been running smoothly.”

While Capitec has made an impressive makeover into banking halls and ATMs, Stassen admits all Capitec’s profit in the last financial year stemmed from short-term loans.

During 2003 Capitec advanced 2.6m loans with an average size of R724. The previous year the average size loan was R618, but more importantly than the increase in loan size was the development of a longer term loan product.

Stassen says Capitec launched three month loans (its other offering was a short term 30 day loan in 2003), which accounted for an encouraging 12% of turnover.

Clearly balancing a fair return from the micro-loans market is a tricky task, especially in a competitive market.

Stassen says Capitec’s interest on short term loans dropped from 22% in 2002 to 20% in 2003. “20% a month still sounds exorbitant, but our loans are mostly between R50 and R3 000 in size and the rate charged has to cover the administrative cost of the loan.” He points out that if Capitec charged interest of 30% a month on small loans - the industry norm - the group’s profits would have topped R167m. “Being a price leader has its disadvantages, but we intend to keep reducing rates as our efficiency improves.”

One of the key efficiencies for Capitec is curtailing the number of bad debts on its loan book, something that a number of failed micro-lending/mass banking initiatives neglected in their quest for growth a few years ago. Stassen says Capitec’s arrears were a mere 1.4% of its loan book, and that net bad debts declined by R3m despite the group pushing its turnover by R430m. He says the provision for short term loans is pegged at 2.75% and 4% for the newer three month loans.

But what of expanding the banking products into savings accounts so Capitec offers a full bouquet of banking products?

Stassen says to date Capitec has only 18 104 savings customers. “Our main aim this year is to change the culture and the ability of the whole organisation to that of a bank and to have 60 000 bank customers by year end.”

This is easier said than done. Stassen notes that it is expensive to build bank infrastructure. “Strategically we are supporting the cost of building a bank with our small loans business. The running cost of a bank branch is 34% higher than the cost of running the same branch as a micro-lending branch.”

He says costs will again rise sharply in the year ahead, and gaining bank customers requires heavy spending on marketing.

”Capitec Bank’s success depends on our ability to convince our customers to bank with us. Our branches are accessible, our prices and products are right and our service levels are improving.”

One area of concern for Stassen is the government proposing new credit legislation. “But will the new legislation be realistic or will it be utopian, making it difficult for us to do business? Payment systems require close co-operation with your competitors. Will the big banks treat a small newcomer fairly.”

Possibly a way forward for Capitec is to cosy up to a major international banking or financial services specialist - much in the same way as former Saambou subsidiary 20/20 did with Standard Chartered.

Capitec, now unshackled from PSG, has definitely built an impressive foothold, and has a business model that may well be attractive to lure an influential strategic partner.