Capitec breaks down the loan-granting strategy which has helped make it so successful

Capitec has published its integrated annual report for 2018, with the business once again seeing strong growth.

This includes an 18% rise in headline earnings to R4.5 billion for the year ended 28 February 2018, generating a return of 27% on its shareholders’ equity.

Diluted headline earnings per share increased 18% to R38.46, while the directors declared a final gross dividend of 945 cents per ordinary share, bringing the total dividends for the 2018 financial year to R14.70 per share.

One of the big reasons behind Capitec’s success is its focus on credit and loan-granting facilities, and despite the bank having come under fire from research house Viceroy at the beginning of this year, the bank has continued to show strong growth in these areas.

Capitec explained that the reason why clients approach credit providers for credit is that they have specific requirements – typically the need for emergency cash, education, secondhand vehicles, and housing.

It added that unsecured lending plays a beneficial role in a large section of the country’s population who live in dwellings on communal land and townships with no title deeds.

“These people can only build or improve their houses by accessing unsecured finance. Supporting this assertion is the fact that there are only 1.7 million mortgages in South Africa,” Capitec said.

“Furthermore, more than 75% of South Africans do not have access to traditional secured lending to fund assets such as vehicles older than 5 years or appliances.”

According to the National Credit Regulator’s consumer credit market report of September 2017, the total value of new credit granted for the 12-month period to end September 2017 increased by 5.21%, compared to 10.86% for the 12-month period to end June 2017.

The total number of applications for credit decreased by 209,000 to 9.9 million in September 2017, and the rejection rate for applications was 51.39%.

The unsecured credit share of total credit granted remained unchanged at R22.3 billion, 18.0% of total credit granted.


Loan strategy

According to the report, Capitec currently boasts 26.6% of the total market share of unsecured and short-term credit, and 5.4% of the total credit market.

In an explanation of its loan-granting strategy, Capitec said that it encourages clients to match the term of the loan to the requirement for funds.

“Thus short-term loans and facilities (similar to overdrafts) are used for cash flow reasons, while medium-term loans are matched against appliances and education. The predominate use of long-term loans is for housing,” it said.

“By continuously refining our credit offer, we are able to provide clients unsecured credit solutions that best suit their personal needs and at competitive interest rates compared to the secured credit market.”

Capitec added that in granting these solutions, it incorporates a comprehensive assessment of the client’s behaviour, affordability and source of income.

“For the assessment, we use information from the credit bureaus, bank statements and payslips,” it said.

“We apply three parallel disposable income calculations i.e. the NCA affordability calculation, a Capitec client disposable income calculation that maintains conservative buffers and the client’s own calculation. We then apply the most stringent of the three.”

Capitec noted that branch staff have no credit granting discretion and all exceptions are managed and monitored by a centralised specialist team.

“During the loan application process, we present the maximum loan amount, maximum term and maximum instalment to the client. Within these constraints, the client may select any combination that best suits her or him.

“We encourage clients to take up credit for shorter periods of time and for smaller amounts. This is done through a pricing model that discounts the interest rate in instances where clients select a term that is shorter than the maximum that they qualify for.

“This is due to the manner in which the pricing for risk model reacts to the lower default rates for such clients,” it said.


Read: Capitec pulls ahead to be South Africa’s top bank

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