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In August, the income received by Capitec’s banking clients had returned to the “normal” levels last seen in March. Compare this to the 25% decline it saw in its base of 14.6 million active retail banking customers in April due to the Covid-19 lockdown.
The pace and robustness of this recovery seems surprising, but the bank said in July, when it released its quarterly disclosure and trading statement, that it does “believe that results for the second half of fiscal 2021 could return to normal levels. ”.
Its April forecast on the probability of default for its credit clients in different sectors was fairly accurate, with only minor adjustments made to the August forecast. Here, the bank estimates the additional probability of default (above the basic provision you make when you lend) for clients who are employed in a specific industry.
The bank’s results for the six months to August 31 coincide almost perfectly with the impact of the Covid-19 lockdown and the gradual reopening of the economy.
However, there is a big difference between people who managed to keep their jobs and were mostly not affected as much compared to those who were, particularly in the lower income segments.
The lowest income people most affected
Gerrie Fourie, CEO of Capitec Bank, says that clients who earn more than R20,000 per month are basically at “the same levels as before” and those who earn less than R500 per month are the most “affected.”
This reflects the so-called “K-shaped” recovery that is taking hold in many countries around the world (although Capitec did not specifically address this in Wednesday’s results presentation).
At the high end, think of your 3.8 million “quality bank clients” who have stable income, the impact has been very limited. In fact, in April, its retail demand deposits soared by R7.3 billion, or 13% from March, as many clients had substantial additional cash on hand. This has normalized in recent months and, at the end of August, remained below the April peak. It is also evident in other trends. For example, customer transaction volumes at home improvement stores have been higher than in March since May. By August, these volumes were at 149%. Fourie says retail construction executives have been talking about “record months” of late.
But for those affected, the situation is depressing.
While people with lower incomes were severely affected, certain sectors (most obviously travel and leisure) were affected in general.
Fourie says that when you look at the 2.2 million people who lost their jobs in the second quarter (announced by Stats SA on Tuesday), many of them are casual and contract workers. One in 13 who worked in the agricultural sector lost their job. This compares with around one in 10 in the formal sector, one in five in the informal sector, and one in four when it comes to domestic workers.
Fourie says this is likely to “widen the inequality gap even further.”
He cites education as an example, where those who were able to afford it over the past six months have been able to ensure that their children continue with distance education. Those who couldn’t afford it simply couldn’t. One of the biggest challenges facing South Africa “is how to close this gap,” he says.
Contribution to total gross loan sales
Source: Capitec
Over the past three years, the bank has steadily reduced its credit exposure to the lower-income segment. While any lender can hedge the higher risk with higher interest rate loans, the bank made the decision to “get out of that market,” says Fourie.
Only 7% of total loan sales in the six months were to clients earning less than R7,500.
More than half of its loan sales in the period were to those earning more than R20,000 per month, up from 33% three years ago.
The key here is the extent to which these higher-income clients overlap with those who work for the government (including state-owned companies and municipalities). This sector comprises 45% of its loan portfolio and is clearly the best performing sector, with the additional probability of default forecast only at 2% as of August.
This is key to assessing the risk inherent in the bank’s R63.4 billion retail loan book.
Additional probably default by sector
Source: Capitec
Overall, advances were down almost two-thirds (64%) compared to the six months ended February.
Payment relief
Capitec has provided a total of R7.5 billion in payments so far, and most of this (R5.5 billion) in the form of a three-month payment interruption for those directly affected by the loss of income. It extended the rescheduled payment plans by another R2 billion in balances. It has been successful with more than 80% of customers making payments after payment interruption.
It says that “the performance of rescheduled Covid-19 loans is encouraging, but future payment success rates will reveal the medium and long-term impact of the lockdown on our clients.”
“We expect this impact to be mitigated by clients employed in essential services, which comprise 60% of our current loan portfolio. Provisioning for credit losses will remain conservative and we have fully met our expectations of future developments. ”
It says that “customers who qualified for Covid-19 reschedules were up to date at the end of February 2020 and were considered to have less risk than customers who rescheduled in the normal course of business.” Still, it has raised an additional provision on rescheduled loans.
The bank’s net impairment charge (mainly retail book with a small impact from Mercantile Bank) is R6.1 billion, an increase of R3.9 billion from a year ago. The bank’s credit loss ratio (impairment of total advances) is 8.1% compared to 3.6% last year.
Profits
It reported overall earnings for the six months ending in August of R650 million, a decrease of 78% from the previous year. Retail banking posted an overall profit of R701 million, while corporate banking posted a loss of R47 million.
In particular, in the first three months of this period, it reported a loss of R404 million. This is equivalent to a change of one billion rand in the second quarter.
Looking ahead, some risks remain. Chief among them, Fourie says, is whether we enter a second lockdown. Most companies have been able to continue reducing operating expenses due to reduced turnover. It is not clear how this will play out a second time.
Another risk is that the termination of the special Covid-19 Social Relief of Distress grant (R350 per month) will remove a vital lifeline for the most vulnerable.
Fourie remains optimistic, even though there are concerns about how this will play out in September, October and November. The bank says that “economic conditions are expected to improve in the short term, but the full impact of the blockade will only be seen in the medium term.”
Listen: Gerrie Fourie Discusses Capitec Interim Results and Client Trends, with Dudu Ramela
