for the 6 months ended 31 August 2022

Headline earnings +17% to R4.7 billion Return on equity 26% Interim dividend per ordinary share 1 400 cents

Creating the future

Capitec is creating the future by embracing technologies that satisfy our clients’ needs and support their financial well-being. Our simple, affordable solutions create value for our clients and our digital innovation makes financial and value-added services available to an increasing number of retail clients. We are building systems that will allow us to offer our business banking clients a unique digital experience.

The migration of our data platform to the cloud and the implementation of bespoke client relationship management systems will allow us to continue building relationships with our clients that improve their financial lives.

The digital banking solutions that we have introduced have shifted clients away from cash transacting to digital banking. Clients using digital transacting grew by 21% to 10.8 million and they represent 57% of our total active clients. Digital transaction volumes grew by 27% to 791 million compared to the comparative period. The move to digital transacting allows us to scale future transaction volumes at minimal incremental cost.

During the reporting period, we implemented several digital payment solutions. Samsung Pay and Google Pay, for contactless mobile payments, were launched to our clients with zero fees for local card purchases. Capitec Pay, a secure online payment tool, was introduced and, together with Scan to pay, these payment solutions meet our clients’ need for secure, convenient payment mechanisms that can be used anywhere and at any time. Digital payment data is utilised to improve our understanding of our clients and assists us in tailoring credit products that create value for our clients.

Capitec Connect, our prepaid mobile offering, was launched during September 2022. Capitec Connect combines low, flat prepaid rates with bundles that do not expire. Flat rates mean that the cost per unit for data, voice minutes or SMSes stays the same whether clients purchase a little or a lot. There are no out-of-bundle charges. Data costs R4.50 per 100MB, voice minutes 90 cents per minute and SMSes 25 cents per SMS. Clients do not pay transaction fees when they recharge.

The Live Better rewards programme encourages clients to Bank Better, Save Better and Spend Better. All credit card holders get 1% cash back on the value of their credit card purchases. Clients that attain monthly Bank Better goals also qualify for 0.5% cash back on their debit and credit card spend. During the reporting period, clients received cash backs amounting to R97 million. Clients also earn cash back and discounts when they spend with our reward partners.

Our automatic saving tools, Round-up and Interest Sweep, encourage a savings culture and clients receive higher interest rates on funds in their Live Better accounts. At the end of August 2022, the balances in Live Better savings accounts amounted to R194.8 million (August 2021: R26.2 million).

Value-added services have expanded with the addition of national lottery ticket purchases to the already established send cash and utility payments. We will be adding bill payments, which will allow our clients to make instant payments to bill issuers, at the end of October 2022.

Headline earnings

The group’s headline earnings increased by 17% to R4.7 billion from R4.0 billion for the comparative period. Over the past 5 financial years, our compound annual growth rate was 17% despite the impact of the COVID-19 pandemic, the civil unrest and the KwaZulu-Natal floods. This demonstrates the underlying resilience of our business and the quality of our earnings.

Operating profit before tax and credit impairments grew by 24% to R8.8 billion. Lending income grew by 13% to R8.0 billion, net credit life insurance and funeral plan income grew by 64% to R1.5 billion and net transaction income (including net foreign currency income) grew by 8% to R5.6 billion.

Net credit life insurance income grew by 60% due to growth in active policies and a reduction in claims paid which also positively impacted the incurred but not yet reported (IBNR) provision. Funeral plan income grew by 72% based on growth in the active policy book, growth in average premiums and lower claims.

Net transaction income grew by 8% despite the impact of the continued shift away from cash to more cost-effective digital and POS transactions. This shift and the introduction of our Live Better rewards programme impacted gross transaction income. Digital transactions are, however, scalable at a lower cost than other transactions.

Operating expenses grew by 1% but excluding employee incentives grew by 9% primarily due to growth in the number of employees. Our cost-to-income ratio reduced from 45% in the comparative period to 40%.

We generated a return on equity of 26% (August 2021: 27%).

Credit

Lending results for the reporting period reflects the changing geopolitical and economic landscape during the past 18 months.

During the comparative period ended August 2021, the South African economy was recovering from the COVID-19 pandemic. Although the country was in the midst of the third wave of the pandemic and despite the civil unrest during July 2021, the annual inflation rate was 5% for August 2021 and the repo rate was 3.5%.

At the end of February 2022, Russia’s invasion of Ukraine affected international economic conditions. Commodity prices increased significantly, the South African annual inflation rate was at 5.7% and the repo rate was 4%.

From March to August 2022, global and local economic conditions deteriorated. Devastating floods occurred in KwaZuluNatal, the country was impacted by prolonged periods of load shedding, food and fuel prices spiked and the repo rate increased more rapidly than expected. At the end of August 2022, the annual inflation rate for August 2022 was 7.6% and the repo rate was 5.5%.

Loan sales and disbursements Retail bank

Total loan sales and disbursements grew by 35% to R26.5 billion (August 2021: R19.7 billion). As the impact of the COVID-19 pandemic waned during the last quarter of the 2021 calendar year, we returned to our pre-COVID-19 risk appetite. This, in addition to a significantly higher number of credit applications, led to an increase in loan sales and disbursements.

The economic uncertainty, increasing interest rates, inflation and an increasing cost of living during the 6 months ended August 2022 focused our attention on identifying specific areas of risk within the loan book. We tightened granting rules and affordability criteria to ensure that we remained within our risk tolerance. This led to more muted loan sales and disbursements growth during the latter months of the reporting period.

Term loan sales grew to R10.4 billion (August 2021: R8.2 billion) but represent a lower proportion of the loan sales than in the comparative period. Credit card disbursements increased to R6.3 billion from R5.2 billion for the comparative period.

Access facility disbursements grew by 58% to R9.9 billion (August 2021: R6.2 billion) and represent 37% of loan sales and disbursements (August 2021: 32%). Disbursements grew because of new limits granted as well as ongoing utilisation by a larger base of existing clients. Utilisation of limits granted was 61% at the end of August 2022 (August 2021: 60%).

The ability to dynamically adjust access facility limits allows us to manage the risks in the loan book as well as utilise opportunities that are identified.

The total number of lending clients was 1.2 million (August 2021: 1.1 million).

Credit income

The group’s interest income on loans increased by 13% to R7.4 billion (August 2021: R6.6 billion) due to increases in interest rates as well as the growth in loan sales and disbursements. The cumulative repo rate increases of 200bps from 3.5% at the end of August 2021 to 5.5% at the end of August 2022 contributed to the growth in interest income. The full impact of the higher loan sales and disbursements will reflect in interest income over time.

Retail bank

Interest income on loans for the period ended August 2022 increased by 11% to R6.8 billion (August 2021: R6.1 billion).

The increases in the repo rate directly affected our variable interest rate products. This positively impacted yields on access facility and credit card disbursements for the period. Interest rates on term loans are fixed and are risk-based. Yields decreased by 0.8% despite increases in the repo rate as new term loans were advanced to better quality credit clients than in the comparative period.

Credit impairments and provision for expected credit losses (ECL)

Group net credit impairments on loans and advances increased by 45% to R2.9 billion (August 2021: R2.0 billion). The credit impairment charge was driven by the increase in loan sales and disbursements, changes in the composition of the loan book and a partial release of the forward-looking macroeconomic ECL provision.

Retail bank

The net credit impairment charge on loans and advances was R2.8 billion (August 2021: R1.9 billion). The table below reflects the change in write-off, movement in the provision for ECL and bad debts recovered on loans and advances.

Bad debts written off decreased to R2.5 billion (August 2021: R3.0 billion) due to lower write-offs of COVID-19-related reschedules which amounted to R312 million (August 2021: R490 million). This was because the value of COVID-19-related reschedules in stage 3 of the loan book diminished over time. There were higher debt review (August 2022: R5.0 billion; August 2021: R4.5 billion) and handed over (August 2022: R4.2 billion; August 2021: R3.0 billion) balances than in the comparative period. While these loans perform according to the payment arrangements that were made, they remain on the loan book and are not written off.

Bad debts recovered (excluding debt sales) consisted primarily of recoveries on loans written off before the implementation of IFRS 9 in March 2018 (August 2022: R286 million; August 2021: R366 million). After the implementation of IFRS 9, balances remain on the loan book for longer before being written off. This means that amounts recovered, while the balances are handed over or in debt review, and clients are making payments, reduce the loan book and do not form part of bad debts recovered. This has led to a downward trend in bad debts recovered that will continue. During the reporting period, debt sales generated R79 million in recoveries (August 2021: R130 million).

The movement in the provision for ECL was a release of R525 million in the comparative period and a charge of R697 million for the reporting period. The release in the comparative period was due to high volumes of COVID-19-related reschedules that rehabilitated and moved out of the stage 3 loan book to the stage 1 (up-to-date) or stage 2 (up-to-date with SICR or forward-looking SICR) loan book. In the reporting period, the movement out of the rescheduled book has primarily been into arrears.

The increase in the provision for ECL to R18.3 billion (August 2021: R17.5 billion), which represents 23.5% of the loan book (August 2021: 26.5%), was driven by loan book growth and composition, the quality of the loan book and a partial release of the forward-looking macroeconomic provision which are detailed below.

Loan book growth and composition

The gross loan book grew by 18% to R77.9 billion (August 2021: R66.1 billion). This impacted the movement in the provision for ECL.

The provision for ECL coverage ratio on the total loan book was 23.5% (August 2021: 26.5%; February 2022: 23.6%) and is returning to pre-COVID-19 pandemic levels (August 2019: 21.3%). The coverage ratio peaked at 28% in August 2020.

The coverage ratio decreased from the comparative period when provisions were held for COVID-19-related risks. The ratio has not changed significantly compared to February 2022 because the forward-looking macroeconomic provision was partially released as the expected impact of the deteriorating economy was provided for by the base provision model. The stage 1 coverage ratio decreased because the rehabilitated COVID-19 and other reschedules included in the stage 1 balance performed well.

Loans advanced and disbursements made attract a 12-month provision for ECL in the month of granting. Growth in loan sales and disbursements contributed R480 million to the credit impairment charge for the reporting period at an average coverage ratio of 7%.

There has not been any material shift in the percentage of the gross loan book per category from the comparative period. The only noticeable change was that the stage 1 loan book increased to 63% of the total loan book (August 2021: 61%) and there was a corresponding decrease in the balances with SICR.

Loan balances that were between 1 and 3 months in arrears grew by R858 million and comprised 5% of the gross loan book (August 2021: 4%). Arrears worsened because economic conditions deteriorated between February and August 2022.

In April 2022, there was an increase in balances that were 1 month in arrears due to a mining strike and some of these balances migrated through the book, notwithstanding a focused campaign to reschedule the affected clients. System problems in August 2022 led to further growth in arrears in all categories.

Loans that were more than 3 months in arrears, had a legal status or where clients had applied for debt review within the previous 6 months grew to R11.1 billion (August 2021: R9.3 billion). The rolls into default across all industries returned to levels seen during 2019.

Forward-looking macroeconomic provision

At February 2022, the total forward-looking provision for ECL was R3.0 billion. The ECL calculation was updated during the reporting period based on economic forecasts obtained from the Bureau for Economic Research and on actual experience for the months from March 2022 to August 2022, resulting in a release of R0.8 billion.

Net investment income

Interest income on investments grew by 31% to R2.5 billion for the 6 months ended August 2022 (August 2021: R1.9 billion). Interest expense increased by 33% to R3.1 billion (August 2021: R2.3 billion). Both the interest income on investments and the interest expense were impacted by the increases in the repo rate.

Deposits grew by 9% and totalled R138.9 billion (August 2021: R127.9 billion). The group’s clients earned R2.9 billion (August 2021: R2.1 billion) in interest on call, fixed deposit and positive credit card balances for the period.

Net transaction income

Net transaction income grew by 8% to R5.6 billion (August 2021: R5.2 billion). The continued growth in our active client base, the expansion of our product offering and the optimisation of our existing transacting channels were the primary drivers of the growth.

The ratio of net transaction income, funeral plan income and foreign currency income to operating expenses was 108% (August 2021: 98%) and represented 54% (August 2021: 52%) of net income.

Retail bank

Net transaction income amounted to R5.2 billion compared to R4.8 billion in the comparative period. Gross transaction income grew by 17% to R7.3 billion (August 2021: R6.3 billion), while transaction expenses grew by 40% to R2.1 billion (August 2021: R1.5 billion).

Transaction income

Transaction volumes increased by 26% and clients migrated away from cash transactions to digital and POS transactions. Our focus is on affordable and accessible banking for our clients through innovation and low transaction fees on digital transactions. Our digital fees were unchanged for the 4th year in a row and we added free payment features on our app.

Digital transaction volumes grew by 27% year-on-year to 791 million for the reporting period. Transaction volumes on the banking app increased by 51% from 340 million to 515 million and represent 65% of digital transactions (August 2021: 55%). POS transaction volumes increased by 32% to 836 million (August 2021: 631 million) for the reporting period.

The growth in quality banking clients of 16% to 5.1 million (August 2021: 4.4 million) contributed to the growth in transaction volumes. A quality banking client is a client who has stable inflows into their account and stable product usage over a consecutive 3-month period. Clients using digital transacting increased by 21% to 10.8 million (August 2021: 8.9 million), representing 57% (August 2021: 53%) of our total active client base. Active banking app users grew to 7.8 million (August 2021: 6.0 million).

Digital and POS transactions are more affordable for clients and are scalable with limited incremental cost. We are driving the shift to digital transacting and our long-term strategy is to shape the future of banking. The alternative payment solutions we have introduced, increased fees on cash transactions and device down time due to load shedding resulted in the ratio of cash transactions to total transactions decreasing to 14% from 17% in the comparative period.

Transaction income reduced by R220 million because of the migration to in-app notifications and the reduction in SMS notification fees from 40 cents to 25 cents.

Branch transaction volumes remained flat year-on-year but there was an increase in transactions utilising selfservice terminals and DNRs where cash deposits can be made. Self-service terminal volumes now comprise 45% (August 2021: 39%) of total branch-related transactions.

During the reporting period, we added additional products to our value-added services offering which grew by 17%. Value-added services include prepaid purchases of electricity and data, send cash and national lottery ticket purchases.

Transaction expenses

Transaction expenses grew by R0.6 billion primarily due to the growth in transaction volumes. Abnormal rebates in the amount of R143 million reduced expenses in the comparative period and cash backs paid to our clients as part of our Live Better rewards programme increased transaction expenses by R97 million in the reporting period. Our Live Better rewards programme will grow transaction income in the long term. The cash backs are also part of our strategy to shift clients from cash to digital transacting. After adjusting for these differences, transaction expenses grew by 27%.

Insurance income Net insurance income

Net insurance income from credit life policies increased by 60% to R912 million (August 2021: R571 million). Premium income grew based on an increase of 14% in the average active book which reflected the increase in loan sales and disbursements.

Claims reduced by 28% from the comparative period to R375 million (August 2021: R519 million). Of the claims paid, R174 million related to retrenchment (August 2021: R285 million), R152 million to death (August 2021: R208 million) and R49 million to disability (August 2021: R26 million).

The IBNR provision for the comparative period was R568 million. At the end of August 2022, the provision was R318 million. The decrease in the provision aligns with the decrease in claims paid.

Funeral plan income

The Capitec funeral plan income increased by 72% to R629 million (August 2021: R366 million). The increase was driven by growth in the active book, increased average premiums per policy and improved claims experience. Active policies increased to 2.0 million (August 2021: 1.5 million). At the end of August 2022, 8.9 million South Africans were covered by a Capitec funeral plan.

Persistency in the 12 months after a policy is issued is a key indicator of the quality of funeral plan policies issued over time. Persistency as at the end of August 2022 was 61% (August 2021: 57%).

Operating expenses

Operating expenses increased by 1% to R5.8 billion (August 2021: R5.7 billion). The cost-to-income ratio was 40% (August 2021: 45%). Operating expenses excluding incentives grew by 9%.

Employment costs excluding incentives increased by 13% to R2.8 billion (August 2021: R2.5 billion). The number of employees grew from 14 789 at the end of the comparative period to 15 295 at the end of August 2022.

The drive to migrate our information technology infrastructure to the cloud is an integral part of our digital banking journey. The cost of using software as a service contributed to the increase in operating expenses.

Our clients’ shift to digital transacting is gradually reducing the cost of making cash available although there is a lag in the benefit due to the fixed component of cash costs. Costs associated with making cash available to clients did, however, decrease by R43 million during the financial reporting period.

Business bank

Business bank contributed R201 million to group earnings for the period (August 2021: R126 million). The loan book grew by 21% to R14.0 billion (August 2021: R11.6 billion), and together with the impact of the repo rate increases during the period, this led to an increase of 39% in interest income on loans to R612 million (August 2021: R441 million). The credit loss ratio was 0.7% for the 6 months (August 2021: 0.8%) and the loan book is managed proactively.

Total clients including POS merchants grew by 14% to 142 185 during the last 6 months. The growth in client numbers contributed to a 13% increase in transaction fee income to R399 million.

Credit ratings

During May 2022, S&P Global affirmed the South African Sovereign rating together with the ratings of Capitec and other South African banks and revised the outlook from stable to positive. We have a global long-term rating of BB- and a shortterm global rating of B. Our South African long-term national scale rating is zaAA and the short-term rating is zaA-1+.

Capital and liquidity

We remain well capitalised with a capital adequacy ratio of 35.0% for the group compared to 37.4% at the end of August 2021. The decrease in the capital adequacy ratio is attributable to the special dividend that was paid in May 2022.

We comfortably comply with the Basel 3 liquidity coverage ratio (LCR) as well as the net stable funding ratio (NSFR). Our LCR is 2 603% and our NSFR is 220.5%, with the regulatory requirement of 100% for both ratios.

Prospects

Our focus remains on being innovative and responsive in an ever-changing environment. We will offer an ecosystem of services to address clients’ needs. Our Live Better rewards programme and value-added services will expand.

Through innovation and by making use of data and technology, we will develop products and services to enhance our clients’ financial well-being and improve their digital experience.

Employees in the data and technology field remain in high demand locally and abroad. We appointed 1 642 external employees during the past 6 months with 20% fulfilling data and technology roles. We will continue to appoint more data and technology experts for the rest of the financial year.

We are passionate about empowering and upskilling our employees through education and mentorship. This resulted in 30% of our vacant positions being filled by internal candidates.

Business bank is making good progress with the re-engineering of systems and processes and the migration to cloud computing. Testing of the new online banking system and the remote onboarding process will start soon. This will enable the business to manage the anticipated volumes when we rebrand from Mercantile Bank to Capitec Business and will ensure that we provide business banking clients with the high levels of service Capitec clients currently enjoy. We anticipate that the rebrand will occur in the first quarter of the next financial year.

Changes in board composition

On 30 June 2022, André du Plessis, chief financial officer (CFO), financial director and co-founder of the bank retired. We thank and pay tribute to André for his invaluable contribution in building the bank. Grant Hardy was appointed as André’s successor effective 1 July 2022. We look forward to his contribution and welcome him to the board.

Interim dividend

The directors resolved that a gross interim dividend of 1 400 cents per ordinary share be declared for the 6 months ended 31 August 2022 (31 August 2021: 1 200 cents) on 29 September 2022. The dividend will be paid on Monday, 24 October 2022. There are 116 099 843 ordinary shares in issue.

The dividend meets the definition of a dividend in terms of the Income Tax Act, Act 58 of 1962. The dividend amount, net of South African dividend tax of 20%, is 1 120 cents per share. The distribution is made from income reserves. Capitec’s tax reference number is 9405376840.

Share certificates may not be dematerialised or rematerialised from Wednesday, 19 October 2022 to Friday, 21 October 2022, both days inclusive.

In terms of the company’s memorandum of incorporation, dividends will only be transferred electronically to the bank accounts of certificated shareholders, as cheques are no longer issued. In instances where certificated shareholders do not provide the transfer secretary with their banking details, the dividend will not be forfeited, but will be marked as ‘unclaimed’ in the dividend register until the shareholder provides the transfer secretary with the relevant banking details for payout.

Short-form announcement

This short-form press announcement is the responsibility of the directors. The information in this short-form announcement has been extracted from, and is only a summary of, the unaudited information in the full announcement published on SENS and on the Capitec Bank website, and does not contain full or complete details. Investment decisions by investors and/or shareholders should be based on a review of the full SENS announcement. The full announcement may be requested and obtained, at no charge, from the company at InvestorRelations@capitecbank.co.za and from its sponsor, PSG Capital.

On behalf of the board

Capitec Bank Holdings Limited Registration number: 1999/025903/06 Registered bank controlling company Incorporated in the Republic of South Africa JSE ordinary share code: CPI ISIN code: ZAE000035861 JSE preference share code: CPIP ISIN code: ZAE000083838 (‘Capitec’ or ‘the group’ or ‘the company’) Company secretary and registered office: YM Mouton 5 Neutron Road, Techno Park, Stellenbosch 7600; PO Box 12451,Die Boord, Stellenbosch 7613 Transfer secretary Computershare Investor Services Proprietary Limited (Registration number: 2004/003647/07) Rosebank Towers, 15 Biermann Avenue, Rosebank, Johannesburg 2196; Private Bag X9000, Saxonwold, 2132 Sponsor PSG Capital Proprietary Limited (Registration number: 2006/015817/07) Directors SL Botha (Chairman), GM Fourie* (CEO), AP du Plessis* (CFO)(retired on 30 June 2022), SA du Plessis, CH Fernandez, GR Hardy* (CFO) (appointed on 1 July 2022) MS du Pré le Roux, V Mahlangu, TE Mashilwane, NS Mashiya* (CRO), DP Meintjes, PJ Mouton, CA Otto, JP Verster *Executive director. capitecbank.co.za