Our opinion on the current state of CPI

Capitec Bank (CPI), now the country's largest bank by customer numbers (up 14% to 18,1m), was launched by PSG, and has been a major disrupter in the South African banking system. It has steadily taken retail market share from the other banks by offering a cheaper and easier solution, especially for the previously unbanked section of our population. The company is adding about 90 000 funeral policies every month. In our view, this share is a "must-have" for any private investor's portfolio. Its parent company, PSG has now unbundled its holding of Capitec shares to release shareholder value. Capitec's client base is mostly in the lower living standards measure (LSM) levels and so it has just less than 10% of the retail deposit base despite its enormous number of clients. Capitec's annual average growth in HEPS for the past 19 years since 2003 is 32,2% per annum - an incredible record. On 19th January 2022 the company announced that it intends to conduct a BBBEE transaction by giving about R1bn worth of its shares to staff who have been working at the company since the beginning of 2019 or earlier. The issue is expected to dilute the share and caused the share price to fall. In its results for the year to 28th February 2023 the company reported headline earnings per share (HEPS) up 15% after increasing their provision for bad debts by 80% to R6,3bn from the previous year's R3,5bn. The bank says that the increased provision is a result of "normalising" after COVID19 and as a result of higher interest rates. The company said, "Our clients expended on average 8% more on groceries and 16% more on fuel for the 2023 financial year compared to the previous financial year. The increase in spend on groceries was tempered by the effect of clients buying more affordable products. The value of the average loan debit order increased by 20%, and the average vehicle finance debit order grew by 15%. The average increase in income into client accounts, however, only grew by 4% on average compared to 10% for the comparative period". In a voluntary trading statement for the six months to 31st August 2023 the company estimated that HEPS would increase by between 8% and 10%. The company said, "During the 6 months ended 31 August 2023, the credit granting criteria were tightened further to appropriately address the risk in the loan book created by the adverse economic conditions". Technically, the share has been falling since its record high of 237348c made on 4th April 2022. We ascribe this fall partly to the correction which took place on world markets in 2022. Capitec's high earnings multiple has made it vulnerable to systematic risk. It is now on a multiple of 20,34 - which is still well above the JSE Overall index (10,55) and other leading banks. In our view, Capitec is beginning to look like excellent value. This is a share you should accumulate on weakness.