Our opinion on the current state of CAPITEC(CPI)

Capitec Bank (CPI) stands as a formidable presence in the South African banking sector, having significantly disrupted the market since its inception by PSG. Known for its customer-centric model, Capitec has successfully attracted a vast client base, primarily serving the previously unbanked segments of the population. This approach has enabled it to become the country's largest bank by customer numbers, boasting 21.1 million clients.

Capitec's strategy of offering accessible and affordable banking solutions has been instrumental in its ability to capture retail market share from traditional banks. Its innovative offerings, such as adding approximately 90,000 funeral policies every month, underscore its commitment to addressing the diverse needs of its clientele.

The bank's performance has been robust, with an impressive average annual growth in headline earnings per share (HEPS) of 32.2% over the past 19 years. This growth trajectory highlights Capitec's effective management and strong market positioning. Despite holding less than 10% of the retail deposit base—a reflection of its focus on lower living standards measure (LSM) levels—Capitec continues to expand its influence in the financial sector.

A significant development in Capitec's corporate strategy was the unbundling of its holding by parent company PSG, a move aimed at unlocking shareholder value. Additionally, Capitec's commitment to broad-based black economic empowerment (BBBEE) was demonstrated through its plan to distribute approximately R1 billion worth of shares to long-serving staff, initiated on 19th January 2022. Although this move led to a temporary dip in share price due to expected dilution, it reflects a long-term investment in employee stakeholder engagement and equity.

For the fiscal year ending on 29th February 2024, Capitec reported a 16% increase in HEPS and a return on equity (ROE) of 26%. The bank also grew its number of active clients by 10% to 22.2 million. Notably, non-interest income significantly contributed to the earnings growth, comprising 72% of income from operations after credit impairments. This shift towards non-interest income is a strategic move that diversifies revenue streams and reduces dependence on traditional interest-based income.

The stock has been on an upward trajectory since June 2023, currently trading at a price-to-earnings (P/E) ratio of 23.7. While this is higher than the JSE Overall index and other leading banks, Capitec's strong fundamentals, consistent performance, and strategic market positioning justify this premium.

In conclusion, Capitec remains a compelling investment within the South African banking sector. Its innovative approach to banking, combined with significant growth and strategic expansions, position it well for continued success. Investors should consider accumulating shares on any market weakness, taking advantage of Capitec's potential for long-term growth and value creation.