Publications
Partners
Cape Town - An increase of 50% in the provision for bad debt has impacted heavily on Capitec Bank’s [JSE:CPI] earnings during the year to February. An amount of R3.98bn was written off against income after Capitec has seen a rise is the number of clients that are not able to repay loans.
This high provision for bad debt resulted in earnings increasing by only some 27% compared with Capitec’s earnings growth of 49% a year, earnings growth investors got used to over the last 10 years. Headline earnings per share increased by 15% to 1 752c compared to the average annual growth of 42% over the last 10 years.
The increase in provisions for bad debt was largely expected, as other banks have recently announced that bad debt on unsecured loans has risen sharply. African Bank [JSE:ABL], which operates in largely the same market segment as Capitec, as well as similar businesses of the larger commercial banks, have all seen increases in bad debts on mostly shorter term personal loans during the last few months year.
It is significant that Capitec’s provision for bad debt has increased by 50% over the past year, while its total lending book has grown by less than 8%.
Management offers two reasons for this. Firstly, that the group offered slightly larger loans over longer terms during the latter part of 2012 and early 2013 and expected somewhat higher defaults.
“An increase in arrears and loan impairment expense was foreseen at the launch of our fixed term credit product in May 2012 and the pricing of the product took this into consideration. However, loans written in 2012 are performing worse than expected. It was in line with our risk appetite at that stage,” says Gerrie Fourie, Capitec’s new CEO, in the report to shareholders.
The second reason for the low increase in loans advanced is that Capitec has taken steps to improve the quality of its book. The number of loans granted has decreased. The average size and the average term of loans have also decreased.
“Newer loans are performing in line with expectations and our lower risk appetite after Capitec tightened its credit criteria significantly,” says Fourie.
As a result, the value of new loans advanced has declined to R18bn in the past financial year compared with R25bn in the previous year. Last year, Capitec approved only 44% of all credit applications and of these clients only 66% decided to take up the bank’s offer to receive a loan.
Capitec has increased its pricing by 2% per year for new loans, to provide for the current greater repayment uncertainty.
Management indicate that these steps will have a positive effect of earnings growth in the new financial year, but warn that they have not seen a positive turn in the economy as yet. “In the year ahead the retail credit market will remain tough.”
Better results can also be expected as the contribution from transaction fees are growing.
Net transaction fee income covered 59% of operating costs in the past year compared with 45% in the previous year. Transaction fee income grew by 43% and is now approaching R2bn. Costs were well contained and the cost-to-income ratio decreased from 38% to 32%.
Capitec has increased its dividend to 663c per share.
Investors seemed to be pleased with the latest results and the share price jumped 1.3% to R189.40 after the market digested the news.
This high provision for bad debt resulted in earnings increasing by only some 27% compared with Capitec’s earnings growth of 49% a year, earnings growth investors got used to over the last 10 years. Headline earnings per share increased by 15% to 1 752c compared to the average annual growth of 42% over the last 10 years.
The increase in provisions for bad debt was largely expected, as other banks have recently announced that bad debt on unsecured loans has risen sharply. African Bank [JSE:ABL], which operates in largely the same market segment as Capitec, as well as similar businesses of the larger commercial banks, have all seen increases in bad debts on mostly shorter term personal loans during the last few months year.
It is significant that Capitec’s provision for bad debt has increased by 50% over the past year, while its total lending book has grown by less than 8%.
Management offers two reasons for this. Firstly, that the group offered slightly larger loans over longer terms during the latter part of 2012 and early 2013 and expected somewhat higher defaults.
“An increase in arrears and loan impairment expense was foreseen at the launch of our fixed term credit product in May 2012 and the pricing of the product took this into consideration. However, loans written in 2012 are performing worse than expected. It was in line with our risk appetite at that stage,” says Gerrie Fourie, Capitec’s new CEO, in the report to shareholders.
The second reason for the low increase in loans advanced is that Capitec has taken steps to improve the quality of its book. The number of loans granted has decreased. The average size and the average term of loans have also decreased.
“Newer loans are performing in line with expectations and our lower risk appetite after Capitec tightened its credit criteria significantly,” says Fourie.
As a result, the value of new loans advanced has declined to R18bn in the past financial year compared with R25bn in the previous year. Last year, Capitec approved only 44% of all credit applications and of these clients only 66% decided to take up the bank’s offer to receive a loan.
Capitec has increased its pricing by 2% per year for new loans, to provide for the current greater repayment uncertainty.
Management indicate that these steps will have a positive effect of earnings growth in the new financial year, but warn that they have not seen a positive turn in the economy as yet. “In the year ahead the retail credit market will remain tough.”
Better results can also be expected as the contribution from transaction fees are growing.
Net transaction fee income covered 59% of operating costs in the past year compared with 45% in the previous year. Transaction fee income grew by 43% and is now approaching R2bn. Costs were well contained and the cost-to-income ratio decreased from 38% to 32%.
Capitec has increased its dividend to 663c per share.
Investors seemed to be pleased with the latest results and the share price jumped 1.3% to R189.40 after the market digested the news.
