Capitec is eating Absa, Nedbank, and Standard Bank’s lunch

Capitec has grown from a relatively small Tier 2 bank to a major challenger to South Africa’s “Big Four” banks.

Capitec was established in 2001 and has now become South Africa’s largest bank by customer numbers at 23 million.

The group’s share price has grown by roughly 35,000% since 2004, with over 60.0% growth seen year-to-date in 2024.

Chris Steward from Ninety One said that Capitec’s evolution was due to its ability to identify lucrative and ripe market areas for disruption.

“These are some of the key characteristics that we look for within our investment framework. Companies that are differentiating themselves from their peers, capturing an ever-increasing share of economic profit pools, and in so doing, delivering a sustainable, improving earnings revisions profile,” said Steward.

“We believe that Capitec fits firmly within this framework and is well-positioned to continue its current growth trajectory, making it our preferred banking stock within the Ninety One SA Equity and Multi-Asset Strategies.”

The group has diversified from its early mono-line unsecured personal lending to include transaction banking, credit cards, insurance and business banking.

In insurance, Capitec will take over its funeral insurance business, as its prior arrangement with Sanlam is ending.

The group also acquired Mercantile Bank in 2019, with it set to acquire business clients while gaining a better understanding of their transactional activities and cash flows.

Through its award-winning app, Capitec also holds a large market share of prepaid sales of electricity, airtime, data, vouchers, online bills and Lotto sales.

“As shown in the figure below, the transactional side of Capitec’s business continues to grow exceptionally well, with its retail transactional income now accounting for over 136% of the bank’s cost base – a far cry from just a few years ago when the bank only earned its income from lending activities.”

“This is hugely significant for shareholder returns, as this side of the business requires substantially less capital.”

A legitimate threat to the “Big Four”

Despite increasing its market share from 3% to roughly 15%, Capitec remains the smallest bank in the country by market share of retail and business banking revenue. Ninety One believes that this demonstrates the vast opportunity for the bank to continue growing its revenue base.

“Capitec’s superior cost efficiency has not come at the expense of its physical footprint, which it believes remains an important channel for sales and service in the South African banking landscape.”

“From having around 250 branches and very few ATMs in 2005, Capitec has grown to nearly 900 branches, with the highest number of ATMs across South Africa, at almost 9,000.”

“This expanded presence comes at a time when most other banks are desperately trying to reduce costs, opting instead to lower the number of physical branches and ATMs that they have around the country.”

However, the consensus among most investors is that Capitec’s share price is too expensive.

South African banks usually have a price-to-earnings (P/E) ratio of between 6-10x and a dividend yield of between 5-7%.

Capitec, on the other hand, trades at over 20x P/E and a dividend yield of 2%.

“The reality, however, is that the bank has always traded at a high valuation. As with all growth companies, it is essential not to look at valuations in isolation but rather in the context of the company’s sustainable future growth trajectory.”

“We believe Capitec has a compelling growth story and has consistently delivered exceptional value for shareholders despite always screening as relatively expensive.”

“Given the company’s proven track record and long-term ambitions, we believe its growth story will continue to play out and that its earnings growth will more than compensate investors for higher valuations.”

Steward added that Capitec has done well to differentiate itself from what has often been an oligopolistic industryy.

“It continues to capture market share by redefining the way consumers experience banking and ancillary services through its built-for-purpose platform, value-added services, and low transactional fees.”

“This has made the bank more appealing and certainly more accessible to segments of the market that were previously underserviced. Operationally, Capitec continues to run a very efficient business while continuing to invest in future growth initiatives.”

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