African Bank and Capitec comparison

Over the weekend I got asked by a client why we choose African Bank over Capitec even though they have similar business models and similar customers.

It is no secret that Capitec have done fantastically managing to grow from around R30 in 2009 to where it is now, around R168. Now I'm not going to delve into the numbers because Sasha did that when Capitec released their results a couple of weeks back. What I want to do is compare the two companies and how they do their business. Yes I think both are well geared towards an increasing South African middle class. The reason Capitec have done so well is because they are retail deposit takers and this is where their business differs from African Bank.

What retail deposit takers do is get clients to receive salaries into their Capitec accounts, Capitec in turn pays them a small interest rate and lends that money out the other door at a much higher rate. This has increased substantially with their increasing client base following some good marketing which has established them as a good, trustworthy low cost bank for the middle class. African bank on the other hand are purely micro lenders getting their capital from bond issuances. It's a simple business model with good margins.

There are a few reasons they have not rallied as much as Capitec has. One being that African Bank is very much correlated with the other banks because of its size. The book is worth R25bn (26.8 bn total advances as at 7 Feb 2011) compared to the R10bn odd of Capitec. Another reason is the bad timing of the Ellerines purchase (just before the crisis). They have however restructured this business and look well geared to benefit from this in the future. Selling on credit is a money making machine and they look to use the retail stores as a way of bringing in more new clients.

To be honest I like both companies. How can you not like Capitec, it is the darling of our market with a highly regarded management team. It is also easy to look at them in hindsight and consider how they took the gap in a market dominated by more expensive charges from the big four who sat in their comfort zone. But at that time it was a risky investment, the type we stay away from and rightly so when you look at the comparison between returns of small caps versus the big blue chips. Look at Blue Financial Services and African Dawn, micro lenders who have really bombed out. Capitec now have huge expectations from their shareholders who expect the company to double revenues every 2 years. And that reflects in their share price. It looks expensive.

To conclude, if you hold Capitec I wouldn't be selling them but I wouldn't necessarily be buying them at these high levels. I definitely wouldn't be selling my African Banks and shifting that money into Capitec.