By Sithembile Bopela
Capitec - Banking on the future
Capitec is South Africa's fastest growing retail bank. It provides accessible and affordable banking facilities to clients via its innovative use of technology in a way that is convenient and personalised. The bank's target market has expanded over the years, with middle- and high-income individuals also wanting to take advantage of its competitive fees and deposit rates, and the bank entering other business areas as well. Capitec has a flexible banking platform, making expansion into other banking areas relatively easy.
Impressive growth and diversification
The bank has diversified its operations through the years, particularly into business banking, ancillary and insurance products, while maintaining a highly profitable growth-focused model, complimented by a below-sector cost base. A relatively new technological backbone aiding quicker expansion into other business areas and a price-led strategy has accelerated the group's market share over time. In the last decade, the bank has gone from being the smallest listed bank by market capitalisation to being close to the biggest.
The growth of the group's ancillary offerings or value-added services (VAS) has been a key feature, underpinned by client growth and clients taking on more products, and is likely to support its long-term success. VAS includes prepaid airtime and electricity purchases, cash transfers, lotto and vouchers, and bill payments. Capitec Connect, the banks telecommunications offering, continues to boast exceptionally strong growth in active subscribers and usage (in voice and data). Additionally, insurance growth has been underpinned by continued solid take-up of funeral and life cover (+25% increase in policies in FY25).
With an aggregate of ~24 million customers (FY25: +9% y/y), Capitec serves more than a third of the SA population. However, only 37% of this base, or 8.8 million (FY25: +13% y/y), are main banked clients. Much of the bank's growth hinges on its ability to successfully monetise its base of existing and new clients and using VAS to narrow the significant disparity between its core and total active base.
The business bank has increased its market visibility over the last few years. Market share is still low and there is room for growth - particularly in the historically underserviced and underpenetrated small, medium and micro-enterprises (SMME) space.
Credit quality has improved as the bank matures
When Capitec was founded, the initial thrust into the market was aided by a focus on unsecured loans, all while the deposit base was still small and less mature. This has changed significantly over time. Unsecured credit products are disbursed prudently, the deposit base is solid, and the bank has diversified into asset-backed financing as well. Additionally, a large and growing proportion of revenue is from non-interest sources as its VAS thrust and push into insurance has continued.
Financial performance
Recent FY25 results came in in line with management's guidance and showed strong underlying operational momentum, continued client acquisition, and record profitability. Headline earnings per share (HEPS) grew 30% y/y to R119.12 cents driven by robust growth across the group's operating segments, particularly Personal Banking (+28.6%), which contributed R6.3 billion, while the growing Business Bank (+13%) added R727 million to earnings.
The bank posted healthy interest income (+23%) on lending as it eased its credit granting criteria for specific client segments, which more than offset the higher interest paid to its depositors. Non-interest revenue (+22%) development was mainly driven by strong net transaction and commission income, supported by a higher contribution from the funeral insurance book and VAS. The continued growth in digital and card payments (90% of transaction volumes, excluding system generated) highlighted the success of the group's investment into strategically shifting clients away from cash towards more lucrative digital banking and self-service solutions.
The bank's operating expenses have remained elevated, up 30% y/y to R18 billion, mainly due to expenses related to the inclusion of the recently acquired AvaFin (7%) as well as an increase in employee incentives (9%). Still, Capitec maintained its history of delivering positive jaws, which is expected to improve further over the medium term. Critically, a slowdown in spending on business investment and product expansion as the business continues to scale, could yield higher operating leverage and in turn, enhance earnings growth.
In FY25, the bank put aside more money for potential defaults amid robust loan demand and some deterioration in the macro-outlook, with total provisions for credit impairments up 18% to R26.4 billion, driven by growth in both the business banking (+27%) and the retail portfolio (+13%). However, credit quality continues to improve, with net credit impairments declining 6% to R8.2 billion and the credit loss ratio (CLR) improving to 7.5% versus 8.7% in FY24.
A final dividend of R44.25 per share was declared, bringing the total dividend for FY25 to R65.10, up 34% y/y. While we have seen a notable improvement in cash shareholder returns over the past five years, the dividend payout ratio matches the sector average. The yield is lower comparatively speaking because of the higher rating ascribed to the business. We see above sector dividend growth going forward, complimented by high top-line growth, strong profitability, and a solid capital position.
Summary investment case
Risks
Consensus considerations
Consensus remains bullish on the stock, with 64% of analysts covering the stock maintaining a "buy" rating and the target price denoting 12% upside potential from current levels.
Earnings growth in the mid-to-high-double digits is currently forecast over the medium term off revenue growth in the low-to-mid-double digits.
Valuation
Due to its higher growth prospects, Capitec (7.8 times PB) continues to trade at a significant premium to its peers (2.3 times PB average), and the premium has increased as the bank has continued to execute well on its growth strategy.
We believe a premium to peers and a high PB is justified given the bank's structurally higher ROE and growth runway - particularly in improving its market share in fully banked clients, business banking, and insurance.
