Capitec explains why its share price is tanking

Financial services firm Capitec moved to update the market in a statement on Thursday (19 March) after its shares continued to get hammered amid panic over the spread of the Covid-19 coronavirus.

Capitec ended the day 28% lower at R800. The share has now almost halved since last year, with the market valuing the bank at R93.5 billion. Since 19 December, Capitec has lost R79 billion of its value.

The bank referred its shareholders to a statement it sent out on 6 March 2020 in which it advised that headline earnings per share and earnings per share for the year ended 29 February, are expected to increase by between 18% and 21%.

“This guidance remains unchanged and Capitec’s fundamental business remains strong,” it stressed.

Globally, markets are in economic turmoil due to the effects of Covid-19, and many companies, including the banks, have seen big declines in their share prices, it noted.

Shares in Capitec declined 16% in the afternoon session, to R671.15, having shed 28% on Wednesday, wiping R36 billion from the company in a single day, and R79 billion since mid December.

The JSE’s all share index ended Wednesday 7.2% lower on 38,604 points. In afternoon trade on Thursday, the all share index was off 1.83% at 37,899 points.

“We believe that the sharp decline in the Capitec ordinary share price since yesterday may be attributable to the following technical reasons:

  • International shareholders are impacted by the continued weakening of the rand which, over and above the declining share price, further motivated the disposal of their Capitec shares.
  • The algorithms applied by professional traders enforce disposal of a share when the price of that share declines below a certain limit.
  • Banks that are counterparties to collar transactions are inclined to sell the underlying share when contracted limits are breached.

“There is speculation in the market that Capitec will be severely impacted by Covid-19 due to the market on which it focuses and its unsecured credit business model,” it said.

The bank reminded shareholders of several important features of its business model:

  1. Only 1.1 million of Capitec Bank’s 12.6 million active clients (9%) have credit with Capitec Bank.
  2. Capitec’s business model is well diversified and income is strengthened by transaction fee income and funeral cover sales. Net transaction fee and funeral income contribute 46% of net income and covers 91% of operating expenses.
  3. There has been a significant migration in Capitec Bank’s client base to the middle and higher income segment. 81% of credit granted in August 2019 was to clients with a gross salary of over R10,000 per month, and 47% to clients with a gross salary of over R20,000 per month.
  4. The bank has a strong retail deposit base.

Capitec said that its liquidity position as of today remains strong and its liquidity ratios remain in line with that published on 12 December 2019 being:

  • Capital Adequacy Ratio – 28.4%
  • Liquidity Coverage Ratio – 1 444%
  • Net Stable Funding Ratio – 186%
  • Leverage Ratio – 16.6%
  • Capitec Bank’s excess deposit base has grown by more than 5% from 31 August 2019.

“Management continuously assesses changes in the economy and trading conditions and make appropriate adjustments to business and granting models as required. This is particularly relevant in these uncertain times,” it said.

Read: Capitec expects massive earnings boost

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Capitec explains why its share price is tanking