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Edited Transcript of CPI.J earnings conference call or presentation 26-Sep-19 10:59am GMT

Q2 2019 Capitec Bank Holdings Ltd Earnings Call

Oct 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Capitec Bank Holdings Ltd earnings conference call or presentation Thursday, September 26, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gerhardus Metselaar Fourie

Capitec Bank Holdings Limited - CEO & Executive Director

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Presentation

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [1]

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Okay. Good morning, ladies and gentlemen. Must be enjoyable because it's not chilly and cold this morning. A special word of welcome to Santie. As you know, she's taken over from Riaan as our new Chairperson (inaudible) always uncertain while you talk about it. And yes, I think they also a very appropriate, very special thanks for Riaan for his contribution of 18 years at the bank, I think, leading us from the beginning and then being Chairman for the last past 6 years.

I'm going to start over with the interim results. I think that's what you want to hear. If I look at the interim results, if I look at the big drivers of growth, I think the first one is brand acceptance. And this figure is 2 million new clients that's joined us from August last year. I've said here in March, we're doing 200,000 per month. And I'm really hoping that it will all come down, but it's staying at 200,000, 230,000, 240,000 per month, so there's a big influx of clients. So I think the brand is really taking off. And it's actually representing the force at South Africa, which for us is positive. I think if you look at brand acceptance, our deposit growth of 23% to ZAR 81 billion. And that talks from -- itself.

If I look at changing client behavior, I think that's probably the one that's surprised you, the transactional growth is not 13% as it used to, more 12%. And I'll talk -- elaborate on that, but there's a big step to moving from cash to swipe and then from branch to digital. And we're quite happy with that because that gives us that capacity to actually grow further.

Then on the credit side, I think we had exceptionally good 6 months of credit. All the strategies that we talked about for the last couple of years, the last 2 years, where we said, small and tiny companies, we're cutting out. Lower incomes, we're cutting out. Even if there's any risk on our reputational side, we're cutting that out. If you look at our up-to-date book, up 13% on arrears, down of 11%. I really am -- I'm very happy with our arrears performance.

And then yes, funeral, we're able to sell just over 1 million policies in a 13-month period. I remember I said to [Jan], when we launched, we will do it in 12 months, so I was out but 1 month, but he's quite happy. I'm quite happy, but yes, 100,000 policies is something that we are proud of. It just shows you the power of our distribution platform of over 800 branches that we can sell from.

Headline earnings up 20%. I think given the economy, a very strong performance. ROE up at 28%. The one that I say every time that I'm standing here, watch it, it's going to come down. But somehow, we're keeping it at 27%, 28%. We're working on seeing how we can do it, and I'll elaborate on that further on. But we are increasing, especially on the credit side, so 20% ROE products, we're increasing the whole time to actually see how we can catch the market, play in that markets. And we even have started now looking at 13% to see if we can get different ROEs going.

If I look at the different ratios, I think everyone understands or should understand IFRS 9 and IFRS 16. That's what keeps the accountants busy, changing all of the policies marker this year. IFRS 9, the biggest impact is your interest income after 90 days that you don't recognize anymore. That's about ZAR 768 million in this year. It was ZAR 442 million in August last year. So that is fixed income ratios. And then IFRS now, the biggest impact is that you're sitting with about ZAR 134 million. That isn't an OpEx anymore, but it's now added to your interest expense. Some detail explained in the sense, so just whenever you look at those ratios, just take that in consideration.

I think the other important one is, if you look at your credit income, that growth of 2%. But if you bring in IFRS 9, it goes up with -- up to 7%. If you look at your net impairments, it's down 17%. But if you again bring IFRS 9 in, it's only 4%. It's down 4%. So please, if you look at the analysis, just take that into consideration.

I think overall, if I look at all the different key ratios, 46% of our income is now nonlending. So the funeral is coming in -- funeral will probably increase in the next 6 months or 12 months. So that will go up. I think on the transactional side, we said we want to be at 50%. But remember, we've dropped our prices quite a lot in March. That added about a ZAR 200 million impact. And then net transactional fee and funeral income to operating expenses are 91% of our OpEx is carried by our transactional income and with our funeral.

So we're on track with our objectives. We're quite happy with that. Cost to income, 40%. It will probably stay now at 40%. It's more at 38%, 37% if you take all the IFRSes out. So I think, yes, overall all the ratio Is in line with our expectations and are in line of how we're driving the business. I think the last one is the credit loss ratio, that's roughly about 7.2%.

I think we need to talk about the economy and the landscape, I've been in the media where I say I believe South Africa must focus on one thing and it's to say that how do we grow? I believe all 28 ministers just need to have one objective is growth. And then the other -- and more important thing is how do we execute because everyone talks but nobody executes. So I believe a very strong areas to say, what do we focus on and what do we execute.

And then these 2 areas, I believe, one to really need to look and that's education and employment. And this is a scary threat that I saw about 2 weeks ago at our strategic session, only 43% of adults has got a matric. But the more scary one is in 2005, there was 1.2 million have attended school for the first time. Now 12 years later, the people -- that actually came up, only 36% passed with matric. But look at that bottom one, 4.5% had matric for math with up (inaudible).

When we're talking business science, artificial intelligence, et cetera, et cetera, that is what we need to grow in South Africa. And then the one that's scary is only 156,000 people has got accepted in to study further at university. That's -- if we really look at South Africa, and you want to grow South Africa, we need to have still people, engineers, business lines, machine learning specialists to really get South Africa growing. So I believe that is where we need to focus and make that we trend.

I still don't understand why a school operates from 8 to 2 in that whole infrastructure and don't operate in the afternoon and don't operate at night. And can go varsities as well. Majority of us, this is open for 9 months a year, and they don't work at night and they don't operate 12 months a year like a normal business. So I think we need to think radically different to change South Africa.

And then the next one is employment. You can see there's 38 million people in South Africa. I think we all know that the scary figure is that there's only 7.6 million people paying tax for the full 55 million. And the biggest portion of that tax burden is being paid with 1 million people that's earning more than ZAR 50,000 per month. But there's only 1 million people who are spending over ZAR 50,000 a month.

I think this is maybe a different perspective, and it's an interesting one. You could always criticize the ANC. But if we look at what they've done in housing and what they've done in water, quite an interesting figure. For me, interesting, if you look at the number of households, it was 9 million in 1996. And in 2018, there is 16 million, 16.7 million, make it 17 million. If I look at the number of houses, the houses increased from 5.7 million to 13.5 million. And what is interesting, informal has actually gone up 1.4 million to 2.1 million.

The number of mortgages that's been granted is flat to loss from 2007, where we've got stats from the NCR, 1.8, 1.7, that's flat. You can see in the values that's coming through. Now interesting, if you look at the number of households, now it's 3.4 per household. So if you take that 1.7 and you multiply it by 3.4, which is over 6 million people that's got a house or a roof over their head because of mortgages. And there's 16 million people in households. And we believe that's where unsecured lending is playing a tremendous role. And I'll show it to you figures later on the role that we believe that it is really playing.

Interesting, access to water, access to electricity, you're seeing big moves in that area. So the government has made a big improvement in people's lives in the last couple of years.

What are we focusing on? Our branch network with odd one out, we still got 834 branches. Our branches dropped slightly from February because there were certain branches that the retail now has moved, and the economy has moved. So we had to really close those branches and move into other areas. We still foresee that if you look at the next 6 months, we've identified 21 branches that we will still open up, these fine leases. So we're still opening up branches. Interesting, if you look at the 840 branches, there is 50 branches that's under extreme pressure, meaning that over 80% of capacity, 24 hours, of 24 days a year -- a month. So those branches that's really under pressure. And we need to create capacity for those branches.

And then very interesting, as you'll probably see it now when you go into our branches, is we're taking out the cashier area. It's been replaced by DNRs. DNRs where you can actually deposit money and you can withdraw money. And you create the ability to put that extra work station in to be able to service the client. Our ATMs and DNRs, we get a lot of criticism on our ATM and DNRs. We've just got over 5 million -- I meant 5,000 of them. 0.5 million is a little bit much. 5,000 ATMs. And it's one of those questions, your client wants cash but we actually want to move the client away from cash to actually use his app and swipe. So it's that talk that we're having. And we're sitting in our stress sessions that's coming up here, we need to make a call for (inaudible) in bringing in another 600, 800 ATMs to maybe satisfy the demand out there, and that will increase your CapEx.

And then people employed, we're close to 14,000 people that we employ. We're still looking for another 600 people before the end of the year. And that's all the same story. Give us engineers. Give us business lines people, give us machine learning people. We'll take each and every one of them. At our office alone, we need about 150 people to actually deliver on what we want to deliver. And then we're setting store with Mercantile when it's approved. I think there's a massive opportunity for young people as dynamic and really wants to grow and make a difference in life.

Banking. What does our client base look? We're really focused about the 2 million clients, on average 200,000 per month. Banking clients, we're still sitting with 4.8 million banking clients. But what we're showing you here is the 3.5 million because that is what we call quality banking clients. So those are people that's got a constant inflow. They either swipe or they use the app, and they've got debit orders going through, so that increase was 15%. And there was 100,000 that came in, in August, so this look growth.

In our credit lines, still 1.1 million credit lines. They're somewhat out of the market, the perception that all 12 when -- 12.6 million clients are actually taking up credit with us. So only 1.1 million has got currently is active with ourselves and has got credit with ourselves.

And then savings clients, a new stat maybe, it's 4.7 million clients has got a saving account with ourself. That's when he's got a fixed-term saving or flexible. Flexible is where he contracts for a 12-month period, for example, and then every month he puts away, it's ZAR 100 or ZAR 500 or whatever but he's committed to those. So you'll see that grows. And then December, that normally drops because then people use it for December, the holidays, et cetera. So we've got 4.6 million -- 4.7 million people that is actually saving with ourselves, which is a very strong figure.

The question now I get (inaudible) is about digital, branch and how do we see it. I had this slide up in March. It's quite interesting how this slide has moved. Firstly, we -- in March, there's 6.6 million clients that's coming into our branches. This is average of 6 months. That has dropped to 6 million. That's quite interesting, a 600,000 drop in clients. And now we've got 6.8 million digital clients. You can see there 2.9 million is app and the rest is USSD or SSD. But interesting is that our overlap. That overlap has grown from 3.3 million to 4.6 million. So you're still seeing a lot of people coming in taking the app, taking USSD, but they're still coming in, in the branch. They actually come and do a transaction, so the overlap has actually grown. But it's that transformation that you're actually causing from a person that's getting used to the digital side and starting to use the digital side. Whatever we see in the digital side, for me, the most important is you're taking your transactions away, and you're giving the opportunity for a consultant to actually sell. And really inform the client that the client really understands global one. And what are you creating there? You're creating a brand ambassador, word of mouth, and that gets your brand to grow. So it's a very strong point to have that combination of branch and digital. Now I think if you look at funeral, you can see the importance of the brand.

The one that we're really focusing on is the client engagement. It's the ability to engage with the client on a frequent basis, the ability to communicate real funds. That if he does a transaction now, we mean we can say to him yes or no. We've got a program in Cuba whereby we do surveys. Is the client happy with the surveys? If he's not happy, he can text us any information he wants to text us, why he's not happy. And we use that again to most certainly improve our client service. So we see those 3 circles as a very important part of our strategy going forward to make certain that we engage with the client, we create digital capabilities and then there's branch to -- for our assisting.

The digital banking create capacity. That's the figure you probably -- in all your analysis, probably got wrong, the 12%. So let me quickly explain the 12%. As I saying, now you got it spot on. But I think there's a couple of things. If you look at our digital side, very strong growth. We're at now 650 million transactions being performed on the digital platform, of which the app is [250 million], and that's up 99%. So very, very strong growth on the digital side.

The first one is the lowering of the bank fees. You're fully aware, we stated in March, that probably we'll have a saving of a full year of about ZAR 360 million. You can see where the more clients coming in, the saving to the client is about ZAR 227 million. So a big saving we're buying back and a big switch between branch and digital. Digital is actually very easy. A transaction cost you ZAR 1. And in the branch, depending on what type of transaction you perform and you're paying more or less.

First thing always remember when you're in a branch, it costs us ZAR 10 per minute. So if you sit there -- I had a client the other day who said he chatted for about 30 minutes to our consultant. I said, yes, you cost us ZAR 300, and he's got a different perspective.

In the volume shift. Big shift from branch to digital. The other one is a big shift from our own ATM to Saswitch. Now just to explain that and why it's got an impact on your transactional income. Saswitch is recorded as net. So it's the ZAR 8 fee that we're paying less the Saswitch fee, so it's a net figure. While if you look at our own ATMs, you have the gross figure with the ZAR 6, we're going to in transactional side, but the OpEx is lying under OpEx. So if you get a switch meaning between our own ATMs and Saswitch, the effect is much greater on your transactional income. And then a very big reduction on disputes.

Interesting paying debit orders below ZAR 100. There's a whole dispute or stand that's going on that has dropped to about 32%. So a big drop in debit orders below ZAR 100. For us that's positive because it's in line what we would like to do. And like (inaudible) sitting (inaudible) client's friend. All of this has actually created for us a lot of capacity to be able to take on more clients and sell better on the funeral side.

This is an interesting slide. You can see now what -- if you look at business, the transactions, the time that clients -- the time it actually takes to perform their transaction. So what we've done is on digital, let's say you create a debit order and let's say it takes 5 minutes to create a debit order. Now the client does it on digital. So we've allocated also 5 minutes if the client actually performs it. It's just to give you a feeling. And you can see now what's happening is that only 25% of our transactions is performed in branch and 75% is performed on the digital channel.

So another term, the number of transactions we performed in August, in-branch was 15 million minutes. And on our digital, which our clients actually performed, was 100 million minutes. So it's interesting to see how we've moved it away and the capacity you've actually created in the branch. And if you look at our capacity, it's actually been eaten up. It's been eaten up with more new clients coming in, selling funeral and selling digital and cross-selling all our other products. So we still see a big change that's happening, but it's a big positive area for ourselves.

This is an interesting slide, which I thought I'll share with you, and that is just cash usage in South Africa. And this is outlined base, so it's not the full South Africa. And so that this is our 12 million clients. So the first one, if you go completely to the right, you'll see that's your cash versus card volumes. So what we're saying is, if you look at, for example, 30,000 -- above 30 -- income of above ZAR 30,000, 21% of the transaction of that person is performing is cash, going to ATM, and the rest is noncash. I would have thought that figure would have been much lower, but that's the stats.

And then you can see 40% for a person that is earning between 50 and -- of ZAR 3,000 and ZAR 8,000, 40%. But now go and look at the value, and we'll see on the value side for those people, 71% of that is still cash versus 29% is still swipe or digital. So here is where the big opportunity is or the challenge is to say, how do you actually change South Africa from a cash society to a swipe or app society. And you can see we've made inroads but not big enough. So that's a big focus for us to make payments easier for the clients so that he can make use of noncash avenues.

There's 3 areas that I don't think you're always aware of. We've launched send cash to Shoprite-Checkers. So you can go on your phone in -- either with USSD or app. You can actually send money to somebody that hasn't got a bank account. So you want to move money to across buy, you can move it. As you can move ZAR 1,000 or ZAR 500 and the person will pick it up at the Shoprite-Checkers. We're working on a second retailer to do that as well as through our own ATMs. So just making it more accessible to our clients. We've launched that in March, and you can see already we've moved just over ZAR 600 million through that.

And then the RTC, that's an interesting one. That is where if you want to move money from ourselves. If you move money from ourselves through Capitec, it's immediate. The moment you move it to another bank, you have to wait 1 or 2 days. So we brought in real time clearing. And within about 18-month period, we've got a 32% market share. And you can see they're -- we've moved close to ZAR 21 billion has been moved, and we show the model. What is quite easier is if somebody wants to buy something, he then doesn't need to go withdraw that money and pay cash. He can just do a transfer immediately, and that person, as he's standing with him, will receive the money. So it's in that whole process that make the cash or swipe. And you can see that's why we've dropped it from ZAR 10 to ZAR 8, and then we would like to have dropped that to even ZAR 2 to make it much more accessible for the client to actually to move money across.

And then our QR payments, which we started in the last couple of -- last 12 months. Big movement to Masterpass and QR payments, which is all positive for the long term, moving people away from cash.

Insure. Yes, I think 100,000 plus, 100,000 policies per month. Our collection rate is 79%. On book rate is 67%. So that's the one area that we're working on now apparently to understand that better. So how can you take that 67% to, let's say a 70% -- or a 70-plus percent, plus 80%. It's much better than what we anticipated, but we would like to have a much longer on book. And then another interesting one is that 85% of policies are actually sold in branch, only 15% is on app. The price differential is ZAR 25 per ZAR 1,000 if you did on the app and ZAR 40 if you do it in branch. So you will think that the app will actually be much bigger. But I've seen it just going through the branches here in a [low profile] area 2, 3 months ago, a client wants to sit down and he wants to understand the rand value, how many dependents does he need to put up, et cetera, et cetera. So they want that personal contact. So it's quite positive for ourselves. So we're quite happy with that and we're focusing on optimizing funeral, making certain that we can deliver on it. And we're slowly, slowly starting to think about the next product.

Save. I think on the save side, ZAR 81 billion growth of 23%. We've paid out ZAR 2.3 billion on interest to our client base. We've published articles about lazy money or lazy deposits. It was very active on social media. But it was quite scary. There's about 290 billion in South Africa that's lazy, that's got very little interest. And if you are to pay out a 4.7% to 5% interest rate on that, you will pay out ZAR 14 billion in the South African economy. So that's a very nice challenge. But we believe by thinking completely different and giving that money back to our clients, we've put in ZAR 2.3 billion on interest rates in this side.

On the wholesale side, you'll see we've got now about ZAR 3 billion on the wholesale funding. We're still in the market and retail goes up in market every year. We were in May in the market. We brought in 500 million. We were about 4.5, 5 funds oversubscribed, and we'll keep on doing that. And then hopefully, with Mercantile, when we really start growing on that side, we'll be more active in the market.

Then on Credit. Everyone is here for the credit slide. If I look at credit, because the growth in the credit market is always important to understand the credit market. You can see mortgages, it's only grown with 4%. It's very stagnant and it's quite scary. If you're going to look at the mortgages below ZAR 500,000, it's actually flat and has actually come down. And that's where the biggest need is. If you walk into [Soweto] and you just go and look at all the stat agencies -- I'll do it whenever I'm in Soweto. The majority of the houses are selling between 400,000 and 600,000. So that's where the need is. Very little activity in that particular area, but they've grown 4%.

Then secured credit, that's basically being flat. Remember, that is 90% vehicles. So the biggest portion of those are vehicles. It's interesting that vehicles are bigger than the mortgage market. You will think it's the other way around. And then strong growth in the unsecured side. 21% growth on the unsecured side. And then 20% growth in our credit facilities in the credit card side.

Where did that growth come from? And it's quite interesting to see what has actually really happened in this market. You can see all the market segments is basically up to 15,000 is actually flat. Up to 7.5 is actually coming down slightly as we expected, given the debt intervention vote. But you're seeing some really strong growth in the 15,000-plus, and that's where, I think, the majority of players are very active in. And it's coming back to what I've shown you earlier, on the housing side, there's 15 million houses, but there's only mortgages for about 1.7 million, it's closing that particular gap. So there's a lot of activity in the more -- higher income areas.

We just asked, whenever we -- a client takes credit from ourself, we ask him what is he going to use it for, and it's a very dangerous question because you normally don't want to say what credit has been used for. But you can get here a very good indication. You can see the biggest need is, 61% is housing and then furniture, education and vehicles coming through. We then trace this, and we actually check it if the card is swiped or he does electronic payment because then we can see if it corresponds. And the correspondence is, I think about plus, minus the same. So we obviously see a very strong correspondence of what the client is saying, and basically what we're seeing when we do electronic payment analysis. We're seeing where the money is going through. And as we're moving on with new products it will bring in the market, we'll have much better information on that.

This is just, I think, a very nice way to show you the journey that we've been in Capitec. We've been 18 years now in this market. And one of the biggest -- strong points we've got is analyzing, building models, using machine learning to optimize our data. And it's that 18 years data of every single client that has joined us, all 16 million that has joined us. Remember, we've got 12.5 million clients but there's 16 million clients. So we've lost about 3.5 million clients. Those clients' data we've got, we can analyze their credit best, we can understand what's happened to them. But we've built very strong data modeling and analytics over those 18 years. We've got currently in credit side alone, over 25 models that are running to make certain that we optimize our credit side. We're using machine learning very strongly in identifying debit orders to assist our clients much quicker.

And then on the behavioral, the third slide -- the third from this credit behavior scoring, we use machine learning very strongly in the transactional side. Because on the transactional side, you want to understand the behavior of the client. And if you're analyzing the client, when does he do, what and what type of transactions he's performing, you get very good indications. And it helps us -- assist us tremendously on the credit scoring part.

And then last year -- or basically in the beginning of this year, we invested in a full-time credit delivery team. It's about 160 people, full time focus on delivering on the credit needs. We've got 4 teams, technical teams that operates: the one is on new products, the other one is on granting, the other one is on book, and the fourth one is on technical. The most certain we can make changes, we can deliver on the credit needs and it's gotten incredibly quite interesting to see what these teams are delivering as they're going forward in the next year or 2.

You'll probably then see, the result of that is the middle columns, our credit result. And a big focus is to give the right credit to the right person and what he really wants. So we're really encouraging the client to take a shorter or lower interest rate. And that's total the max loan or the max interest rate. We can improve the credit card scoring now in August. We've said to you that the credit card was pulled on other data of other credit card providers. We had to wait 18 months to get our own data. We've got our own data, and we've opened up on the credit side. I will elaborate on that.

And then the ability to be able to look at specific pockets and optimize those particular pockets given the economy, I think was the strength in this year. It's still amazing for me if I look at our credit committees. We're probably making 2 changes on our credit policy per month. And that's where we will also -- we have a particular employer of a particular pocket, and say we're happy, we're not happy, we need to make a change, yes or no. So it's a constant evaluation and optimizing your credit processes. And you could see the result: low arrears, very strong client quality and then the credit card improved performance, which I'll elaborate on.

This is the result of -- average credit interest rate has dropped another percent. And we'll see that continuing in the next couple of results presentations. The challenge is to get below 20%. If we look at that 25% of our sales are now below 20% ROE. And like I've mentioned, we started now 15%. And because we're just seeing a better take up, and we're seeing better quality arrears coming through as you're dropping those ROEs. And then an important one is 58% of our sales. When you do a client, what we do is when a client comes in, we'll offer him max rand amount. But we'll give him different options to -- where he can decide what is the best for him. And we're seeing 58% of our clients are actually going shorter or lower rand value. And for us, that is extremely positive. Because the client is actually taking credit for what he really needs it for.

Just pricing in the market, just to show you what we're seeing in the market. This is total cost of credit. This is for our 12 months and longer products. This is total cost of credit, so the tax initiation fee in the tax management fee into consideration, our tax credit life into consideration. Remember, our credit life, we give you full cover on retrenchment. The majority of people only give you 12 months cover on the retrenchment. But you can see our average is around about there about 27% and it's slowly dropping. So you can see the difference between 23 and 27 is all the other people -- other charges that's coming through. The market is -- the majority of the market is around about 30% to 35% is where the majority of the market is actually playing in.

This is an area that we really would like to drive prices down. Remember what I've said previously, vehicle finance, average interest rate on vehicle finance is 15%. So that is still a challenge for ourself. This is the way we challenge the book, very similar to the market. You can see that 47% of our sales is now for people earning more than ZAR 20,000 and then 11% of our sales is below the ZAR 7,500, the debt intervention rule bold. But remember, those are short-term loans, so on your book exposure, it's only 5% as we've mentioned. And we'll probably see that number coming down in the future. So a big swing that came through.

This is another illustration of what we're calling selling to the client the right product. But you would think, with us opening up the majority of the sales will actually come in from your longer-term product. And actually, what's happened is, the majority of the growth, 35% of our sales is now coming from the 12 -- 13- to 36-month product because the clients are going shorter. Remember you can get a 12-month loan at 12%, 12.9% interest. So majority of the people has seen -- we've seen the growth here and just a pure reflection of the person is taking the right credit for the right reasons.

This is also a slide that you're familiar with, and that is always what is the health because I'm getting that question, given the economy, what are we seeing. And it's quite encouraging to see that 83% of our clients, snapshot end of August, has got more -- if I look at their debt to income, have got more than 40% available for other expenses. And that just shows you the way we do our net account calculation, and the way we bring in living expenses. The way we're bringing in over time, et cetera, et cetera. Because for us, it goes all about to build that long-term relationship with the client to grow -- the other (inaudible) 400 years plus. So 83% of our clients could have got more than 40% income available. And then you can see less than 20%, we believe, then you have cash -- interesting enough if you do the NCR sum, you're around about 80%. So that gives you a feeling. We're saying 12% of our client both and 2% is now inflows. The majority of that is businesses that goes down or the person is being retrenched or circumstances are the same.

The credit card. We've brought in the transactional data, especially in our thin-files. What is a thin-file? A thin-file is a client that hasn't got a lot of credit history. So a typical client that's a CA and he's just signing off, he's got very little history. So you can't bring that person on. But we've looked at his transactional side, how is he actually transacting with ourselves, and makes it right. It used to be about 3%, and we've increased that to about 13% because we would like to see that younger people actually coming in the market, your CIs, your LLBs, et cetera, et cetera, because if you can bring those clients on early, they will stay with you for long. With credit card is at prime. So it's at the lowest price, 10%. It's interesting, how many of you will know what is your interest rate on your credit that you are paying. One of those interesting things -- everyone has had (inaudible) credit card. Nobody really looks at what that interest rate is. So we use very strong price differentiation. So we go from 10% to 21% on the risk profile of the client. The majority of the payers flows in the 21% lead.

We've upped our limit on our credit card to ZAR 250,000. So if you look at the journey that we've gone through, you can see when we launch the credit card, we started at ZAR 80,000. Then we've got to ZAR 150,000. Now we've gone to ZAR 250,000. We're quite happy with that. That to me is the important figure is that 28% of all clients that is joining us now is new credit card clients. And you can see our book has now grown to 4.2 billion. We believe we're still on track to acquire more than a 10% market share, 15% market share. But we're not chasing market share, we're chasing quality. So we still see a lot of opportunities on the credit card part.

Then on the loan book. The performance on the loan book -- I mean the up-to-date book that has increased with 13%. So that is, if you expect the up-to-date book plus SICR, an increase of 13% on our up-to-date book. I think that tells you a story on how our quality of our book has changed. And then arrears drop of 11%. And rescheduling slightly up but very much in line with our targets. And then this is just the new write-off policy where we don't write-off after 90 days but we actually bid much longer on book. So I think, overall, on the credit side, I think we're quite happy with our performance, and that's where you can see it on the credit/loss ratio which has dropped from 10% -- 10.2% to 7.2%. So a very strong performance on credit.

Future. What are we going to do and look at going forward? I think the first one is Mercantile. We're still waiting for regulatory approval. It's imminent and probably be in the next couple of weeks, we are hopeful. So then we can actually start playing with the toy we bought a year ago. So yes, we're quite excited about it. I think what is very important on the Mercantile side is everyone thinks business banking but they're sitting with 5 divisions, from rental finance to ForEx to payments. Every one of those are very exciting businesses that we can optimize and use. We're awaiting for the approval. We'll invest seriously on the IT side, especially on the digital side, especially on the data side. We will stick to the fundamentals of Capitec. So we'll focus on affordability, accessibility, simplicity and personal service. But we need to change the old service model on the business banking side from a person-to-person model to a digital role but much more relationship-based relations. So one will have to wait and see. We believe it's about a 2-year road map once the deal has been approved.

Then new products. I think everyone -- I don't know how thing -- we've just launched it last week on this week, the new card. So that's the new card that we've launched. Again, in each and every client and we must say the acceptance in the Western Cape has been extraordinary. Everyone thinks it's for private banking clients only. But it's for every one.

And then the new app. The new app is coming in October. What is what quite nice about the app is that it's got an open platform that enables us to link up to any other fintech company much quicker. It's got in-app messaging that gives us the ability to do remote onboarding later on, and then you can personalize it. So we believe that's part of our journey. It's quite scary if you have won 2 years in a row the best app in South Africa and then you're changing it. You feel like, you have to do it and then you want to do it.

And then I think on the financial education side, there is also quite a lot of new things that's happening. We've just launched our financial education game, loading it up last week. In the first few days, we had 5,000 takeups. And that's a game that you actually play. And as you're playing it, it's actually giving you how to budget, how to work with your money, how to plan for a holiday, et cetera, et cetera. So we believe that's a very nice game, especially for people who don't want to study. But the moment you give them a game, then it's quite easy. So there's some very nice things coming through on that particular side.

And then lastly, I'll focus on culture. I think if you look at South Africa, it's the uncertain area. And when you work an uncertain area, it has got a tremendous effect on your clients and on your people. So you need to spend quality time understanding your clients, understanding what's happening in these areas so that you can deliver on the needs of those particular clients. And then on your own people, you forget about what the economy is doing. And I'm challenging them and saying, all those bright place talk that we're having on negative things, just turn it around on positive things. And so what can you do differently? So I believe there's a strong focus for us to make certain that there's clarity from our side, there's focus on our side and that they actually really understand what is they need to deliver. If you can get that clarity, you can create a lot.

And then lastly is that delivery. I've mentioned that it's quite easy to talk but you need to deliver and execute strategies, so there is a strong focus on those.

Three pillars of us to make certain that you understand the client, you deliver but you deliver with your people, the 14,000 people. So there's a big drive would be driving us to say, how do we unlock the full potential of the 14,000 people that's actually working with us. We're moving into the new head office in March next year. And yes, moving away from 13 buildings into 1. I think it can go a long way to bringing that Capitec head office we've put it together as one big team and to actually really unlock that full potential.

Thank you very much from my side. We'll open up for questions.

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Questions and Answers

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [1]

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(inaudible)

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Unidentified Analyst, [2]

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My question is regarding the use of the personal loans. It's a very nice slide that you've got there, the 61% in relation to (inaudible) I assume most of that's in relation (inaudible) to us. How much of that is in lieu of the mortgage book to more actually paying us the (inaudible)?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [3]

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It's very difficult to determine that. But we get frequently focused from clients that actually shows us how that actually in (inaudible), where you can have drive to lead and realize, say, thank you to ourselves. So I think that's the best example. If you're going to, of course, I've said it before 85% of consumer (inaudible) is trust land or achieved land. And then you go into those areas, you drive there, you see the amount of houses that's built, those houses cannot be built with a mortgage. I think when it comes to the city areas, the government has spent a lot of money on housing. But I mean, it's a your typical 2-room, 3-bedroom type houses, but you will see a lot of add-ons. And then remember what you see on the add-ons, then forget about now I need a lounge, I need a TV, I need infrastructure so I can't give you a direct answer. We are going to look at some products that's specifically aimed at what you're talking about. And then I'm going to give you stats on that. The only thing that we can use currently is really swipe.

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Unidentified Analyst, [4]

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Can you hear me?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [5]

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Yes, I can hear you.

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Unidentified Analyst, [6]

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Okay. Okay. Thank you for the presentation, good set of results. Two questions from my side. First is could you unpack the operating cost growth of 14% that seemed to be quite high, and what are we getting for going forward. The second is that ZAR 227 million of noninterest revenue give back, is that going to be in the basis or do you see, call it, 2 to 3 years of continual fee reductions? Going to the third question. For your client base for new payments, is the improvement in your credit loss ratio just as a result of shifting down and moving to different risk buckets? Or for your existing clients, are there also (inaudible) than what you expected for the same product?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [7]

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Okay. Let's go on the first question on the OpEx side. Sorry this light is hurting my eyes, so I'm just going to -- on the OpEx side, if you're growing the way we're growing, then you will always spend more on OpEx. We've said it before on the IT side, on the machine learning side, business science side, you invest in those people. Unfortunately are not low salaries. If I look at practice signs, we probably need another 40, 50 as now. And those people, you get for about ZAR 100,000 a head. And that's where the biggest cost is incurred on the OpEx side. Then we've also had things like we're busy implementing step. We've moved our data centers to world-class data centers. We've got those cost structures also coming through. So we're quite happy with the 12%, 13%, 14% growth. We've been doing it for the last couple of years because you're saving more than 33% growth on your transactional volume.

On the ZAR 230 million that we give back, we sit basically at once a month and look at how do you reduce prices? And how do you -- or more effective in the market, quite a strange meeting because people normally say how do you make more profit, we say how do we optimize. That ZAR 230 million will probably be another ZAR 230 million this coming next 6 months. We haven't made a decision on pricing for next year. We normally do that in October, November. But we will evaluate that and decide on that going forward and we will share it with you in March. So that's a continuous process, what do you do on your pricing side. It's like on the credit side, we also I'm looking at the 20% ROE, 15% ROE.

The performance on the credit book, I think there's 2 big drivers. The cutting out of high-risk clients, is definitely a big contributing factor. And then the second contributing factor is the better quality clients that's coming on board. Your ZAR 15,000-plus client base. And I think to really focus on the different industries and make the right calls on the different industries is very helpful because you need to -- what we spend quite a lot of is, for example, mining. We spend time with the mining companies, with the HR people, what are they going to do, what's going to happen on shelf 1, what is going to happen on shelf 2, and to have that insight and then to make decisions according to that. So that's one of our very strong levers is that our employee sales team are very close to the employers. And we understand that quite a lot, especially in industries that's very volatile like mining.

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Unidentified Analyst, [8]

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[Shane Watkins] , All Weather Capital. I just wanted to ask so if you grew your book to 17%, what do you do to your collection capability as you grow the book. And how instrumental is it at being the primary banking -- having the customers' primary banking clients so you can see what's going on in their account. And can you talk about what you're seeing in terms of debit orders failure rates?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [9]

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If I look at -- about 80% of our credit lines are banking with ourselves, and that helps us in the transactional side, machine learning, et cetera, to optimize the client base, which I understand the client just got much better. On the collection side, it's not about people. It's actually about how effective you are on the different strategies. So that's also one area where we've used machine learning. Of course, in machine learning, you can actually optimize the client, you can actually see what is his income, what is his expenses, what is his debt that he owes us. And then you can actually work out what is the best optimal plan for that particular client. Is it a partial payment? Is it a rescheduling? Is that a -- we've got a capital -- a Capitec assist program where we will write down interest or write down a capital if we see decline at a very abnormal income or a very abnormal expense, drop in income expense. So we evaluate that. And it's interesting, if you look at our collection side, we actually are operating now with about 50 people less than 2 years ago. But it's a flexible model to bring in if we see there's uptick, and we need to bring in people and train them. It takes us about a month, 2 months. The collections for us is not so much about people. It's how do you communicate? When do you communicate? What is your timing? When do you phone the client? When do you send him an SMS? And that is all data and you need to optimize those data points to actually understand what is the best strategies on the collection side.

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Unidentified Analyst, [10]

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Debit orders?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [11]

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There's one question. Debit orders. On the debit orders, what we've said, like I've said, there was a 32% drop in debit orders below ZAR 100. These are all ZAR 100 scans. Interesting, probably the one that is coming now in the industry is moving to ADO. We're starting -- oh AC. Not ADO, AC. Our industry is moving now from October, and it's going to be interesting to see what that effect is that we're uncertain about. But debit orders, overall, the biggest impact we've seen is the dispute debit orders where the whole industry is actually clamping down, and we've seen a big drop in those debit orders.

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Unidentified Analyst, [12]

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Okay, can I follow up with another question. Just in terms of how your client base is changing. You're shedding clients, and invest in 7,500 and you're growing above 15. Who do you think is picking up those clients that are earning less than 7.5 because I presume they're still active. And who do you think you're taking market share from in above 15?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [13]

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I think if you look at the market, what's interesting, the banks are doing 80% of unsecured lending in South Africa. People think always it's just ourselves. But all the 4 traditional banks is very active in the market. Everyone is actually starting to move away from the 7,500 and below market. And we warned the regulators and the government on that, that you need to be careful. And the analysis that came out now actually proven what we have said.

I think a big portion of that market is going to the traditional micro lenders, which are registered and are focusing on that 1- to 6-month market. When you walk around in places after seeing more and more of these books opening up, shops opening up because there's that opportunity. And then the market that nobody really knows is the mashonisas. The mashonisas is underground, and no one really knows. They're not registered, and you don't how big is it. You don't know what they do. You hear about them, and you know they're active.

Where are we taking market share? I think it's a little bit more of this whole ZAR 15,000-plus market is growing, and it's -- we're just making the right decisions in that particular market. We're evaluating our market share the whole time. We know exactly what the other competitors are doing. So -- but I think it's more that we've got a market that's opening up.

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Unidentified Analyst, [14]

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Can you just comment on the lower tax rate and what was the driver of that. Where do you see it taking?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [15]

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On the lower tax rate, what is happening is, is again, marketing of lending. What that -- come in, what has happened. We're always at 28% tax on our insurance products, the funeral and credit life. Now you've taken the tax on that to the top. So that is net of tax. So it looks like our tax rate has dropped. But the credit income -- the insurance income is actually a net figure net of tax. So that's got nothing to do. So when you do...

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Unidentified Analyst, [16]

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Just ZAR 100 million (inaudible)

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [17]

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No. No, it's the full tax on the income of funeral and credit life is now a credit life is now on top of your income line that used to be in your tax line. We preferred it on the tax line but that's the way we have to report it. Everyone else does it the same way.

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Unidentified Analyst, [18]

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(inaudible) Investor Relations. Just looking at 2 things which seemed to conflict. First of all, the scary stats that you had on school entrants and school levers with matric, especially those with mathematical subjects. It's an extraordinary low number. And it speaks to the government's education policy to some extent. And I'd just like to mention a definition that I saw recently, and that is education genocide. The government keeps on saying we've got to have beneficiation. We've got to do more than just -- dig stuff out the ground and sell it as is. But if you've got beneficiation without education first, we don't have that. So isn't this, to an extent going to limit your potential new account growth to a level of only those who have got a tiny percentage of actually getting through school with a satisfactory degree that will allow them to understand transacting with yourself. Doesn't that put a ceiling and doesn't serve potential growth.

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [19]

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Well, I think that -- yes, I think that's a very relevant question, but it's got more to do with the economy in totality because it's got a negative effect on every single person that's doing businesses in Africa. If you're going to look at where the needs is, we've got needs for people with qualification. That's why if you're going to look at the BASA figure, and I could be incorrect, but the figure I remember now is that BASA, which is the banking association. The banks together has spent the last year ZAR 4 billion in education. We have our social development program, we've spent a lot of money on schools. But what we've started off as doing as looking at bursaries and then we saw -- but this is not working. So what we're now doing is we take the headmaster, and we're actually giving him managerial skills and training him. And then specialized skills to the teachers, and then it filters down. And that's working quite nicely for ourself. But again, it's not something that -- and that's why we started with financial education games and financial education per se. It's a big driver of ourselves to make certain that we can educate our client. But it's something that actually all education programs in South Africa needs to change.

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Unidentified Analyst, [20]

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Yes, if I may make another comment, please. That is, if you look at the teachers' union, I mean, they're not on the same side as you are. They seem to treat the banking sector and the employers as the enemy instead of as potential partners. Do you do see a way through that in the foreseeable future. You have to...

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [21]

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Like it's not my responsibility. It's this government's responsibility. But I think yes, we need to only partner to get it right. Yes, but I share your concerns.

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Unidentified Analyst, [22]

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Business growth depends on it, it is your problem.

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [23]

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I can take one more question, I think it's 9, then we need to cut. I'll take 2. It's one only.

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Unidentified Analyst, [24]

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I just wanted to ask with regards to your transaction income, you were targeting around 100% to your operating expenses by 2020. Given the fee drop and also your drive towards digital, which tends to decrease your transactional income. Do you still -- are you still going to reach the 100% target?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [25]

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It's my -- one of those targets, you said it 3 years ago, and that's where you focus the business. It wasn't in our planning to drop the fee income of ZAR 300 million, and it wasn't in our plan to actually drive so many people across digital. So yes, it's a target. We probably won't make it. But we're really worried about the fundamentals. And the fundamentals to say is where it actually came from is we actually said, if we can cover our OpEx with our transactional income, your credit income is actually for free, in very simple term. And to say that you covered 90%, 91% of your OpEx is covered by your transactional income, I think it's a sterling performance.

Okay. Thank you very much. I think there are some tea and coffee outside. Thank you very much. And André and myself will be there if there's more questions.