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Edited Transcript of CPI.J earnings conference call or presentation 14-Apr-20 6:00am GMT

Q4 2020 Capitec Bank Holdings Ltd Earnings Call

May 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Capitec Bank Holdings Ltd earnings conference call or presentation Tuesday, April 14, 2020 at 6:00:00am 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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Good morning, ladies and gentlemen. It's great privilege to bring to you the Capitec results. I think it's in extraordinary times and all COVID-19 situation, I think, it's quite scary to think that 1.2 billion people have actually been lockdown. As you know, in South Africa, we completely lockdown, but that gives us a lot of opportunities. I think if I look at the results of Capitec, we now have got 13.9 million clients. We have gone through April through 14 million. So now we had 14 million clients. We've 6.7 million digital clients making use of digital. And I think the one other big announcement was actually that we've sold over 1 million funeral policies.

However, if I go back to COVID and that's what I'm going to discuss is, actually, if you look at COVID, I think what is going to force us is to think completely differently. Einstein has said, "You can't solve a problem with the same thoughts that you've created a problem." So I think we need to think completely different. We need to go out and say the history is the past, and we will have to go and think and to say, how do we actually create our new future. And I think that is what we, in Capitec, has done in the last couple of weeks to actually say, how can we do things completely different and how can we create our own future.

If I look at what Capitec has done, I think the one thing we've learned in over the years is, if you're in a crisis like this is, that it's quite important to have very clear communication, that your staff and your clients knows exactly what is happening. You need to create clarity. You need to instill confidence. Our executive team is getting together every morning at 8, and we're getting an update on what's happening and what's not happening and making calls. And I think then communicating every day to our staff exactly what is taking place.

On our client side, we are promoting the whole use of digital. We've seen since the virus or the lockdown has happened, that a lot of clients have actually activated their digital platforms and is actually making use of the app or USSD to do transactions. And then on financial terms, we spend quite a lot of time on educating our clients, and as we see a big take-up from our own staff and our clients, on they actually using the digital platforms.

I think the other very big positive is the collaboration between ourselves, the banking industry and different bodies. I think what is new or very positive in this COVID or in this lockdown is that the work that's been done by government, reserve bank, the banks, and what is amazing is where it normally takes 3 to 4 months to bring out a new regulation, we've seen -- in the COVID space, we've seen that regulations comes in within a day and 2, and I think that's very positive.

On the credit side, we've definitely seen a big uptake for people to take on and phoning ourselves to actually take up a payment break or being rescheduled or claim on insurance. Especially on the retail side, we've seen to date about 80,000 clients that we've helped. And on the Mercantile side, we've seen exactly the same, with about 1/3 of the people has actually phoned us and said, "How can we help them?" So there's a big focus and to see how can we actually work with our clients and how can we cement that relationship going forward.

On the credit side itself, we've taken a cautious approach. We've cut back where necessary. And I think a very good example is we don't expect that there will be any overtime paid in the foreseeable future. So we've taken overtime out of our calculations. And that's typically what Capitec always do, we assess, we evaluate and then make changes as we go.

If I look at operationally where are we, we are, I think, broad, and it's actually -- never been actually a discussion point to say how should we actually focus on our employees, suppliers and landlords. Our philosophy is that we will remunerate our people fully. We will pay our suppliers. We will pay our rental, our landlords, and that's the way we do business. I think we need to help and support each other, and that is what Capitec does.

I think what I've seen is how quickly we can adapt in Capitec. If I look at our call centers, all our call centers, we've got plus/minus about 1,200 people in our call centers. There are 37 people, they're all working from home. They're achieving the same efficiency, the have the same productivity. And I think we've done that within 10 days. It's actually incredible to think that you've got a whole call center that's actually working from home.

Our IT people has done tremendous work. We've rented over 2,000 laptops. We've reconfigured them and they're operational. So currently, if you look at our head office personnel, about 90% of people are working from home. 50% of our branches is closed and is working on reduced hours. We're operating from 9 till 4, and we're evaluating the whole time and see what the needs of the clients is and then reducing the number of staff that is in those particular branches.

I think an area that we're extremely proud of is that within 10 days, we've converted our branch into so-called call centers. So the branch is physically is closed, but people, our consultants are in the branch, and they're physically working. And we've created the capability that people can actually -- that they can actually contact our clients, and we can do any transactions that you can normally do in a branch, we can actually do via these call centers. The aim is that we roll this out to all of our branches in the next 3 to 4 weeks.

I think the other very positive things is working together. We've waived our minimum merchant fee and our point of sale. It's interesting, we've got about 28,000, 27,000 merchants, and only 4,000 of them were operational. And so the majority of people are not operational. So we've waived the point-of-sale rental on those particular areas.

If I look at the economy, I think if I look at the lockdown, everyone is asking how long and what the impact is. I think if we look at studies that's been performed, there was a questionnaire going out to 1,000 companies. And I think that's the biggest insight is actually where 73% of companies said they won't be able to make 3 months of lockdown in the current format, and 27% of companies said that they won't be able to make it over a 1-month lockdown. So that gives you a bit of a feeling. I think that's the 1 million-dollar question we all struggle with is really what's happening with the cash flow of companies. 53% of companies said, they're already considering retrenching and taking further steps. So I think that's the challenge. We believe and I think what we need to focus on is to say, how do we actually release the lockdown in May and do it in a very responsible manner.

I think in South Africa, the biggest concern is actually on our high-density areas, what is happening in those particular areas. I think Professor Karen yesterday or last night has actually explained it to us very well in South Africa to say that's what they're monitoring in the next 10 days. And if those results are less than 60 people per day, we should be able to start looking at releasing the lockdown on areas.

I think an area that we are working on very hard now is the post lockdown. I think the lockdown was actually the quite easy one because there you give a payment break to a person. But what you now need to look at to say, but actually, how do you help these small businesses and especially the informal sector, how do you help them when you start up because they're going to need operating capital, they will need to pay wages, they need to pay suppliers. So there's a lot of focus currently on that.

We're spending a lot of time in Mercantile to look at different strategies. And are now between the banks and government and the reserve bank, we are looking at different options and things that's available to say, how do we actually support the small businesses during those times.

I think what is also interesting is you think about only South Africa, but I think it's important to look at the global economy and the impact the coronavirus is going to have on the global economy and how that will impact ourselves. I think it's interesting, if you look, for example, at the oil price, the oil price has dropped to round about $30 per barrel. The exchange rate is about 18, but it still got a massive positive impact on South Africa. We're still exporting quite a lot of our goods through Europe, America and China. So it's going to be interesting to see which of those goods won't -- will be able to be exported and what the regulations is going to be. So it's important to understand also not only what is happening in South Africa, but had to understand what's happening worldwide.

If I look at the South African landscape and the positives, I think we must commend our President on how we've handled the lockdown. I think we were the only country that had a lockdown before the first death. That is how serious we've actually taken it. So I'm extremely proud on what they've done and how they've handled it. And the fact that he's communicated now 4 times our people and the message that's coming out, it's very decisive. I think there's a very big spirit of, let's work together, spirit between companies, government, et cetera. And I think it's quite refreshing that even in the political space, all the political parties is actually supporting what is happening with government and very few negative comments is coming out. So I think the President has spoken about Thuma Mina and that says we must unite, we must work together. I think there's a very strong message in it. It's not about what is best for me or the I factor, but it's actually what we can do together. And I think that's the one thing that coronavirus has actually done, the fact that families are staying together. They're discovering themselves. They're creating new values. I think we're going to see a big change in the world where everything was about what can I buy and it's more going to be about how do we support each other and encourage each other. So I'm really positive from that side.

The opportunity. And I think the coronavirus is going to change the way we've done business completely. I think everyone is talking about less flying and less meetings that I need to go to Europe or I need to go to Johannesburg. I can do it certainly on Teams and Zoom and Skype. And I think the fact that we've taken the call centers away in such a short space and actually let people actually work from home gives you a lot of opportunities. I think the one that comes out is, if I look at our call centers, we take strain over peak periods at month end. And suddenly, you've got opportunities to do micro-jobbing. So we can actually contract with people and say, but you can come and work in our call center for, let's say, 3 hours or 4 hours per day. So it's going to really change things that we can actually become much more flexible and actually come to the right answers.

I think in South Africa, what I really believe is this crisis has given our government and especially President Ramaphosa to make -- to have the confidence in making the right decisions to structurally reform South Africa. I think for me, it's very simple. If you now need to choose between SOE like SOL or medium-sized businesses, we need to support medium-sized businesses and make certain that they are there to take South Africa to the next level. So those are the type of decisions that needs to be done.

And then lastly, I think the one thing I've learned is that when you focus and your whole team has got one objective, then you achieve it and you work together, and I really believe this is a big opportunity. We, in South Africa, need to have one objective between the government, the unions, between the private sector. We all need to think and say, how do we actually grow South Africa and create opportunities in South Africa.

I think if we look at the regulatory changes, I think everyone has seen the sense, where we said that we won't declare a dividend. That was the intention of the Board to declare a dividend. We had very strong meetings on that. But then with the regulatory -- with the SARB coming out with very strong advisory notes to rather be on the conservative side, we decided to follow that. So we won't be declaring a dividend. That's the first time ever in Capitec's history of 20 years, but we fully understand it, and we fully support to be conservative over this period. You'll also see that no cash bonuses will be paid to executives. And then in line with that spirit, we, the directors' fees and executives, will take no salary increases for this financial year to show our commitment to what we need to do in South Africa.

If I now go to the results, I think if I look at the results, there's been 4 drivers of the growth: and that's the -- our focus on the fundamentals; there's the changing client behavior; there's the ability to diversify; and then what is the new opportunities there is in South Africa. I think if I look at the -- on the first one, our headline earnings has grown with 19% in a tough economic environment. I think the fact that you brought in 2.5 million new clients, 200,000 clients per month, talks about your service levels. And I think then on the credit side, I think we've done extremely well on the credit side in a very tough economic environment. We probably had one of our best credit performances ever. And we were very positive going forward. But I think it will change now with the coronavirus.

I think the other important one is to look at our capital adequacy, and that says how much capital we've got. Our capital adequacy is always around about 36%, 34%. You can see it's dropped to 31%, but there's actually 2 main reasons for it. Mercantile -- with acquisitions of Mercantile, Mercantile has taken about 5.2%. And then with IFRS 16 on accounting side, that's also 1.2%. So actually, if you look at it with those changes, we've actually grown. So we're quite positive that our capital adequacy of 31% is a very strong indicator of how strong our capital is and how conservative we're managing the bank.

I think the 1 million -- we're having fun here with lights going on and off, that's movement sensors. I think if you look at what people is asking is to say, how do we actually achieve that growth. You can see what I've done here is, I've done a comparison between February '20 and February '19. You can see we've grown. On our income side, we've grown with ZAR 2.2 billion. But is what is important, if I look at our term loans, that is our traditional market, that's only grown with ZAR 600 million. About 73% of our growth is actually coming from our other income streams, of which our transactional fees are up close to ZAR 900 million. Our credit card is coming in at ZAR 350 million and then a very strong performance on our funeral side. So I think what is important to understand is that our growth is actually coming more from the way we've diversified our company away from our traditional term loan funding market.

I think everyone is also asking on credit impairments on our charge, and there will be critics that says [yes]. But in these difficult times, we had a negative growth of 2% on our credit impairments. But I think you need to compare apples with apples. That's where we've done a comparable credit impairment charge. We've done to take out the effect of IFRS 9. And you can see the biggest change is on our bad debts recovered. If you compare that on a like-for-like basis, then our gross credit impairment charge is up 14%, but our net credit impairment charges up 23%, in line with our book growth and in line with our exposure in the credit market.

On profitability ratios. Our transactional fee income and funeral income is now 47% of our income and that's in line, we wanted to get to 50%. And it just shows you the balance now in our income statement between lending and transactional and funeral. We're covering 93% of our expenses. We're covering with transactional income and with funeral.

Then our cost-to-income at 40%. And our credit loss -- net credit loss ratio at 7.2%, down from 8.6%. So I think overall very strong profitability ratios.

Then just what's the impact of Mercantile on the group performance. The impact is actually very small. I think everyone knows that we've acquired Mercantile in November. So they've only been 4 months with ourselves. The headline earnings contribution is ZAR 3 million. So it's very small. What have we done? You can see on the credit impairment charge, we've brought in extra ZAR 114 million. You can see what we've done in -- or what they've done in December 2018, only ZAR 47 million was brought in. We brought in extra ZAR 114 million, and I think it's in line with our conservative credit loss philosophy as well as what we've seen the stress in the economy. And then on early settlement fees, we had long-term funding of about close to ZAR 900 million with very expensive funding cost, which we decided to pay back, and that had an impact of about ZAR 26 million on it. So Mercantile, overall, very small impact given those 2 circumstances. We're still very positive on the acquisition of Mercantile.

If I look at our fundamentals and the things that we're focusing on, I'm going to cover those 5 particular areas: simplified banking, our omni-channel approach, credit, our development of people and then I think what is new in this presentation is just what are we doing for social responsibility.

You've seen the 13.9 million. It's actually now 14 million. So it's quite nice to talk about full 14 million clients, interesting. We acquire about 7,000 to 8,000 clients per day, but with the coronavirus, it dropped down to about 800 clients per day. So we ended end of March 9,000 short of the 14 million mark. But we've gone through it now in April. So we're proud of that particular figure. I think what is important, if I look at our client numbers, 51% of our clients is between the age of 16 and 35. So we've got a very nice young population. And then there's a 20% growth in our banking clients. And what we've shown you here is our quality banking clients. So that's people that actually has got a stable inflow. They use the app. They use debit orders and they swap up 20% to 3.6 million clients. Then 5.1 million clients, it's actually saving with ourselves. That is only focusing on our flexible and our fixed-term savings product and that's up to 20%.

Then on Insure, we've sold 1.1 million policies in this year. I remember I said to Ian Kirk of Sanlam, I believe we will do 1 million in a year, and he couldn't believe me. And that was a stretch target. So I think our people has done extremely well to sell 1.1 million policies.

And then our credit clients. Everyone thinks that all 14 million clients is actually borrowing from ourself, but it's only 1.2 million clients that has actually got credit with ourselves, only 9% of our client base. So that gives you a feeling of how our clients are using our product range.

I think the important one is our omni-channel business model. I've said it last year because everyone is asking me what is the digital players doing because there's a lot of people that are saying you only need a digital approach. You can see with ourselves, we've got 6.7 million clients that is making use of digital. On app, there's 3.3 million and USSD user of 4.9 million. The 6.7 million is we've counted only once, so we're not double counting. So a person who is not using the app and USSD, up 29%. And then the branch, there's still 7.8 million clients on average every month that's coming into our branches. And that creates that unique opportunity to sell and do communicate, connect with that particular client.

And then on the client engagement side, an area that we're focused with client insights, with machine learning to understand our clients, to help our clients better. You can sort of see what we're doing is, we're communicating on average to 7.9 million clients every single month with 13 million engagements that is going out. So there's massive effort to make certain that our clients understand our products, they engage with ourselves and they are involved in exactly where Capitec is going.

If I look at the credit market, if I look at the NCR stats, unfortunately, for the last 10 years, they're talking about ZAR 15,000. So the ZAR 15,000 is gross, and that's what they are reporting on. What is interesting? If you look at the total credit granted, you can see that secured credit, which is 90% vehicles are flat. There's hardly any growth. Then you can look at the mortgages. You can see the mortgage market has gone up with about ZAR 5 billion, also pretty much flat. And then you can see on the short term a cutback. I think a lot of players has moved out of the short term. And then a 7% year-on-year growth in the unsecured market. If you compare it through 2017, that's a 31% growth. But you can clearly see where the growth is coming from. The growth is all coming in the ZAR 15,000-plus market. Remember, this is gross salary. So the whole market is starting to focus on the higher income client base.

You can see what Capitec has done. Very strong growth in the ZAR 20,000 plus. We're showing here net, so that is the actual salary that falls into the bank account. So that's after deductions like tax, provident fund and medical. You can see now 51% of our capital advance is actually coming in from ZAR 20,000 plus. And then on below ZAR 7,500, it is only 8%. And below ZAR 10,000 -- between ZAR 7,500 and ZAR 10,000, it's 7%. So it's only 15% of our sales, that is now below ZAR 10,000. Remember, again, it's on a net basis. And remember, in South Africa, the average salary is about ZAR 18,000 per month. So that just gives you a feel. But you can see a massive switch away to a lower-risk clients. And that is a deliberate strategy that we followed in the last couple of years.

I think the other big change that we've done is and I've mentioned it before, that I believe that is not only myself, that is the CEO of the bank, but every single person is the CEO in the bank. So I want every single person to operate as a CEO. The C stands for client first, the E is energy and the O is ownership. And we started with a big drive to make certain that our clients gets the right product. And then the branches called it the CEO loans. And it's interesting if you look at -- that is where we offer max term, max amount to the clients. You can see which clients are taking up lower term or lower amount. So 67% of our clients are actually now taking up either a lower amount or a lower term. So the client is actually taking up the right credit for himself. I think what is very interesting is to see what the interest rates has done on those particular areas. You can see now the average interest rate on the so-called CEO loans is 18%, down from 20%. We go as low as 12.7%. And we actually want to take that as low as 10%. And so for us, that is very positive.

And then you can see on gross loans, how we've actually reduced our interest rates. And I think the next slide gives you a very good feeling because what we're saying is we want to compete with the secured market. If I look at the vehicle market secured, the average interest rate there is 15%, and we want to compete in that particular market. And you can see, overall, we're actually reducing our interest rates, giving it back to our clients. These figures are before the interest rate cut of the reserve bank in March, which was 1%. So you will see an automatic drop of plus/minus 1%, but I think it's quite positive that our average interest rate now is 17% on our credit card and the average for the total Capitec is about 22%.

If I look at impairments, on a net basis, you can see our impairments has dropped 8.6% to 7.2%. And you can see our impairment charges dropping from 2018 to 2019 and basically 2019 and 2020 is equal. I think what -- if you want to do a comparison between '18 and '19, you need to really unpack the impact of IFRS 9 because before 2019, we've written off bad debts completely. Now we're keeping it on book. So please, if you do a comparison on impairment charges between years, you need to take that in consideration. But I think overall, we had a very good performance on credit.

Then for me, the company is all about people, it's only our people. We've got now 14,000 people working for ourselves. What is very encouraging? 85% of those people are below the age of 35. So we bring in very young people. We believe very strongly in employing people with potential and then developing those particular people. We're still on a big drive to recruit people in the IT space, digital space and data space, especially now with Mercantile and especially where the world is now going given the coronavirus, and I will elaborate on that much later. And you can see the amount of effort that's been put into learning and development. 690 million (sic) [690,861]digital learning encounters that we had.

Social responsibility. And we spent quite a lot of effort on social responsibility. I think there's 2 things that I want to highlight. I was privileged to be at an award ceremony where we have changed our approach to actually focus on our headmasters of schools and whereby we actually give them managerial skills, how to actually lead their people, inspire their people because we believe it's important that the headmaster is the COO of the school, and he needs to be able to have the skills. And there was a particular headmaster of the Eastern Cape that was awarded as the best headmaster. They take the results over a 3-year period. And his pass rate in his school was 45%. And 3 years later, he was at 91%. And it shows you a clear indication of how that program of ours are working.

And I think the other one on social responsibility that we've done is that every staff member and the banks get 3 days leave where they need to go in and focus on the community. And then for every rand that they get together, the company adds another rand. And there's a tremendous effort of our 14,000 staff to use the 3 days and actually go into the communities and make a difference in the communities, to paint schools, to do fund raises, et cetera, et cetera.

And then Livin' It Up is the app that we've launched in October, where people can actually -- it's a financial education game, where you go through certain stages. If you've mastered 1 stage, you can move over to a next stage. And we've got close now to 40,000 people that's actually using it from October. And it's -- again that whole focus on educating the client base.

Changing behavior, a very strong digital adoption. If I look at digital, you can see it's up 69%. Interesting, our volumes in our branch with the number of transactions performed on our branch is 11%. Yet, there's over 7 million people that's coming into our branch. We've also launched Send Cash, where people can send cash to retailers like Shoprite-Checkers. We've had 3.7 million transactions in the first year. And we're launching -- this month, we're launching Send Cash to ATMs and are helping people to use the digital platforms that we've created

And then on self-service, interesting is our dual note recyclers. That's actually where a person can actually deposit and withdraw money. We've actually taken the cashier area out of our branches. So we're busy with the rollout so that there's no more cashiers in the branches because why do you actually need to take cash, count cash and drop it if a machine can do it. We can rather use that cashier to actually engage with our client base. And those -- the volumes are up 36%.

Retail deposit growth of ZAR 87 billion. If you add Mercantile to it, we're over ZAR 100 billion. You can see very strong growth in the retail fixed, up 23%, and then very strong growth on 22%. If I look at our retail core, where we pay currently 3.5% for every cent that we earn, we've paid over ZAR 2.2 billion -- ZAR 2.2 billion, ZAR 2.3 billion, we've paid out an interest to particular clients. So I think it's a very nice performance. And you can see our dependency on our wholesale funding has decreased over this period. Yet, every year, we're going back into the market to make certain that we're in contact with that particular market.

Whatever we give back to clients, it's one of those interesting cultures we've got in the bank that we talk on a frequent basis how do we actually reduce prices, not increase prices and how can we optimize given what we've achieved, our reductions in the transactional side, we've given back ZAR 470 million to clients. That is where we've reduced our fees on our debit orders and on the digital side to ZAR 1, we've given back to our clients. I referred to the ZAR 2.2 billion that we've paid out. The majority of other banks pay 0 interest on the savings accounts. We're paying 3.5% on that -- on the current interest, that is after the 1% cut off the reserve bank.

Then on the credit side, I didn't bring in the full. This is only where we've dropped our concessions on our ROE to 20%. We've brought that in.

And then 2 other areas that people don't normally know about is on our data side. If a person do a transaction on our app, the data is for free. So it doesn't cost the client anything. So that was ZAR 25 million. And then on Live Better benefits, I've mentioned that we're starting to work on Live Better. That's our -- where we want to do things different. We're not very fond of loyalty schemes. We want to keep it simple. We've given back ZAR 26 million to clients, and that is, for example, ground, where we've got an excellent relationship, where that if you book your bus ticket, you get 15% off if you pay with your Capitec card. And I think everyone knows that there's -- we don't ask any commission on our exchange rate when people are operating overseas. So in total, we've given back ZAR 3 billion to our clients.

If I look at are we diversified? Our credit card has grown very nicely. Our book is now ZAR 5.3 billion, up 60%. We've got now 4.4% of the market. Interestingly, we're acquiring 17,000 clients new on the credit card. So we're seeing very strong growth and is helping us to give that full credit offer to the client base. So we're extremely happy with the credit card.

And then on our funeral, I think everyone knows how well we've done on the funeral side. What is still for me very interesting is that 86% of policies are sold in branch and not on the app. Yet, the app is -- in branch, it costs you ZAR 40, in app, it's ZAR 25. But it shows you people wants that interaction. They want to understand the product. They want to talk to our consultants. But 86% of them is sold in branch. Our collection rate is 82% and then on book is currently 58%. So we're extremely happy with this -- how this product is going and with the potential to bring out other products in the insurance space.

If I look at prospects, I think those are the particular areas that I want to talk about. What is the COVID-19 doing, the new access facility, or our new positioning of credit, then business banking and then our people. If I look at the impact of COVID, for us, it's always been running the business and looking at it long term. So for us, it's all about discipline, discipline on your strategies, to have focus on your strategies. And then the most important thing to execute on your strategies to make certain that all your staff understand your strategies and deliver on your strategies. So we're focusing on our long-term business model. That gives us a lot of opportunities to change our business model. And I think the first question that we will ask and currently ask ourself is digital innovation. It's quite incredible that you can actually change a branch from a complete branch to a complete digital call center in a matter of 10 days if you put a group of people together to say, how do you think completely differently. And you will see there's quite a lot of innovative things that will come out in the next 10 days to 20 days that we will be able to actually service our clients completely on a digital platform.

I think the other big opportunity is payments. I think all of us is going to think completely differently. Why do you want to touch a point-of-sale machine? Why do you want to enter your pin because somebody else has touched on it? I think that's where the whole QR code is a lovely opportunity to actually take your card and just tap to use Masterpass. So there's a lot of initiatives and things that we're busy on that particular side.

I think if you really want to look at going forward is the ability to be agile and flexible, your client needs, it's all about understanding your clients and delivering on those client needs. So you need to be agile and flexible, and I think we've proven that, and that's going to make certain that we can actually do things better and faster.

I think it's also giving us a big opportunity actually to lower your cost of banking. Look at our call center, the call center is costing you fairly a lot of money. People can work from home. We can start using micro-jobbing, where we can contract people and say people can work for a specific period. So there's a lot of opportunities to change the way we've done things in a traditional manner and to do it in a new manner. And I'm actually quite excited about the opportunities that's lying ahead. And as for me, all about executing on those particular strategy that will make certain that we will win the race.

If I look at the short-term effect, the short-term effect is going to be there. I think we're all uncertain about what is happening. You can clearly see if you open -- if you close 50% of your branches, that the volumes will reduce. It's got an impact of swipes. It's an impact on credit. So there will be a short-term impact, especially also on the business banking side. One needs to understand what the impact is going to be on businesses and the way we're going to try. But I think ultimately, if you build an organization, yes, there is short-term challenges, there is short-term uncertainties. Be decisive, be clear, communicate correctly and focus on your fundamentals of your business plan. I believe that will actually make certain that you will win the race.

If I look at the new credit solution, our whole purpose that we set ourselves out is to change the credit environment to reposition our credit. And this is the first product that we're bringing in to take away the perceptions of unsecured lending. I think what is important of this product is that it's access facility. It's granted to a person, and that's basically you only apply once. So you'll only come once into a branch. And then if you repay this product and you don't need to repay your full installment, you can repay a portion of it, you've actually got it forever. So it's quite a nice positive product. We've also structured the product that we won't be granting a 1-month, 2-month, 3-month and 4-month product, but we will actually convert those products into access facility. So if you look at what is the NCR saying is that you can charge up to 5% per month or 60% per year on a short-term product. And then for the second time, you can charge 36%. What we've done is we're converting all of this in facilities at an interest rate of 20% and lower and we go down as low as 13%. So it's a very nice way of repositioning our whole credit offer, and we will be launching this product earlier in this year, probably in May. It also gives us the opportunity that a client will go into a branch once and never again.

And then it comes back to the second phase, and that is actually to go on to purpose. And I've already said in the past that we will look at home improvements. We will look at education. We will look at vehicles. And that's when we started with our purpose-lending phase. We're working together with WeBuyCars. We're quite excited about it to see how we can use unsecured product in this so-called secured market. We've started 3 weeks before the lockdown in this particular area. We've got a branch here in the WeBuyCars warehouse, where people can apply for their credit. We've done 9 loans in a matter of about 14, 15 days. And this was our first client. And I think there's 2 things about it. You can see the first vehicle was financed ZAR 189,000 at an interest rate of 16.7% with no hidden cost. You'll pay your normal monthly fees and your normal initiation fees. But there's no other cost. That is typically what you'll see in -- under unsecured offers.

And then we've signed up agreements with other dealers. There's a region of about 80 that we're rolling out our purpose side on purpose lending and focused on this particular market, and we'll move this over into the home improvement side and education side later this year.

If I look at the business banking side, we believe there's a lot of potential. People don't realize actually what is the dimensions of business banking. It's quite interesting if you look at -- there's only 5,000 so-called formal large companies in South Africa. There's only 450 companies that's actually listed. So it's a small portion that is actually listed. And if you take the second, third and fourth bullet, there's about 900,000 clients that's in -- or 900,000 businesses that's in the so-called SME space, and that's the area that we will be focusing on. And then very important is the estimation is there so-called 2 million informal businesses that we see is operating in the so-called townships. And I believe there's also some opportunity. So that's the market, that's the market we were focusing on. We will definitely focus first on that 900,000 to make certain that we've got a recipe that can actually focus on those particular areas.

We've said and we see it as a 2-year build that we'd be focusing on changing the traditional business model to a completely different model to what Capitec has done on making it simplistic, making it transparent and to make certain that we can handle big volumes, so that's what we're focusing on. We're investing heavily in our people to grow and build Mercantile. And once we're ready, we will actually rebrand it. I think what is important is that we must realize in Mercantile, there's actually 5 businesses. I mentioned the businesses, there's the normal traditional business banking. We've got for about 4,000 clients. There's our merchant services. We've moved Capitec's merchant services over to Mercantile. So they're reporting to that structure. That gives us the ability to offer those merchants a business account and then a loan to those particular merchants. There's payment services, whereby if an applicant has got a debit order and the debit order fails, we can view an eye on it, put tracking on it and we can increase your collection successes. We've been extremely successful with our own funeral product. And we believe there's a lot of room in that particular areas. Then there's our ForEx division. And then lastly, our rental finance division that we were focusing on.

So we're still very excited on the opportunities. I think the question here is, how do you think differently and how do you operate in a completely different manner?

Our next and our last slide is on unlocking the potential of all 14,000 people that's working with ourselves. Yes, it's actually quite interesting. That's our new head office. You've seen in the sense that we plan to move in March. We were about 500 people that moved in and then, given the coronavirus, we had to rerent our old premises, our old 13 premises to make certain that there's social distancing. And so it was a little bit of an anticlimax, but we're very excited. I could see with those 500 people that was jam, just the vibe and the camaraderie, the teamwork and the communication that was taking place. So we can't actually wait for the lockdown to finish and having our people to move in. I think the nice thing is we were already at 2,000 people in this office, and given what's happened with digital, we probably will have a lot of people working from home. So that will be quite exciting.

I think then you'll have -- we've implemented SAP successfully in March, and so far, it's going well. It's interesting somebody asked me, what are you planning to do in March? And I said, we will be moving into our head office. We will launch SAP, and we will restructure given that Mercantile is coming in. And he said, "You are extremely busy." I said, yes, but that's normally what we do in Capitec. I didn't envisage at that stage that we will still have to handle the coronavirus as well. But I think that's the way we can handle and the way we can change. And it comes to me to the most important thing is to our Capitec culture. And our culture lies beyond 3 elements. It's that obsession to focus on the client, and it's not only to focus on the client, the product, but it's that to make certain that you deliver on the end-to-end service experience of that client. Then a big passion on our people, to make certain our people are engaged, they're focused, they're motivated, they understand where are we going so that we can execute on our strategies. And then lastly, on our delivery side, the world is changing and the world is changing very fast and very differently. And it's that ability, that agility to actually focus -- to actually deliver on the clients' needs.

So that is our focus on our people. We are very excited about the future. Yes, it's going to be a tough year, and it's probably going to be a tough 4, 5 years. But I think if you think completely differently, you can actually go out there and you can actually go and create your own future, and that is what we will do in Capitec. Thank you very much.

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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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There is now questions that people can ask by posting it. I think the team here on my left-hand side has received certain questions, so they will pose the questions to myself and then I will answer it.

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Unidentified Company Representative, [2]

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Thank you, Gerry. We've received a couple of questions during the presentation. So the first one is, please, can you give some color on how the collections processed in the March month when compared against your business as usual collection.

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

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Well, I think if I look at collections, maybe indication, lockdown was very -- the impact of the lockdown was very small in March because the lockdown only happened on the 26th, 25th. So you only had it for 4, 5 days. What we've definitely seen is where we normally handle about 2,000 to 3,000 calls per day, we were handling about 10,000 calls. We've also seen it with Mercantile, where people were phoning in to be assisted. We took up 300, 400 calls per day. And after about 4, 5, 6 days, it actually quieted down. So I think that's the interesting thing about it. It's still early days, and one will have to see what's happened. And that's also why we've developed our digital ability to handle collections or treatments on a digital platform, and that will be rolled out in the next couple of days.

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Unidentified Company Representative, [4]

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Then on insurance, particularly unemployment [capital], how much of the book is covered? Is it just the installment that is covered? Or does the insurance cover the full outstanding amount? And how much of the risk is in the...

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

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If I look at the insurance market, it's actually very simplistic because if the person is retrenched, he's fully covered. If the company is liquidated, that person is fully covered. If we -- or let's talk to 15 days or now 30 days that we've been locked in, for this period, if -- the client has got 2 options: he can actually do a payment break or he can actually come in and claim his installment for that particular 30 days. So those are the options that is available for client. The full book is covered in that particular manner.

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Unidentified Company Representative, [6]

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And the full book is covered [in the insurance].

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

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For sure.

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Unidentified Company Representative, [8]

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Then how much and how is the long term loan size changed during the lockdown period? Are your origination loans that are Capitec's max term? Or are you originating loans that Capitec's max term and maximize?

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

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That is available to clients. What we've seen is clients has gone much shorter, so you can assume then it's more for consumption lending. What we've seen is about 40% to 50% of the sales is actually credit card. So there's a big change in that particular area. I think people want certainty to understand where we're going and what's happening before they were going to the traditional way of taking credit, especially because a big portion of our credit is being granted for purpose lending. I've mentioned it before, people are using it for building, improvements, et cetera, et cetera. And I don't think there's much of that happening currently.

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Unidentified Company Representative, [10]

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And what percentage of disbursements are up to the new versus existing or repeat clients?

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

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Well, I've said in the credit card, we're acquiring about 17,000 new clients per month. And if I look at the term loan book, we're acquiring about 28,000 to 30,000 clients per month. We, on average, are giving per month about 120,000 loans to clients. So you can see if you do that calculation, you'll get about 20% is new clients that's stacking up. And I think that's a very healthy figure. You can also see, if you've watched our presentations over a period, that 1.2 million clients hasn't grown tremendously because there's people that takes up credit and stop using credit again, and then there's a completely new client.

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Unidentified Company Representative, [12]

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And what percentage of the customers or gross book have elected to take payment holidays during this period?

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

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I want -- if I look at Mercantile, about 1/3 of the people has taken a payment break. And in Capitec, of the 1.2 million clients for the first 10 days, we had about 80,000 clients that has taken a payment break or rescheduling. So it gives you a feeling of what's happening. So I think it will be interesting to see, given the length of the payment, after the lockdown period that has been extended, how many more people will come into this period.

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Unidentified Company Representative, [14]

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Have you stopped credit originations completely to any particular sector?

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

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No. We've cut down on certain sectors where we believe there's risk. And I've mentioned over time, for example and let's talk about contract workers, we see there's risk. So we've cut back in those particular areas.

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Unidentified Company Representative, [16]

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Then how will payment holidays and restructuring look during the COVID-19 lockdown period? Do you plan to give any concessions on interest rates or fees charged?

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

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We don't charge any fees. On interest rates, if you look at our payment break, there's 2 options available to the client, he can either extend the term and pay the interest at the end or he can increase his installment after the payment break is completed and then catch up with these 3 months break. So those 2 options is available to the particular clients, but we don't ask -- on anything -- any treatments, we don't ask any additional cost, except the interest cost.

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Unidentified Company Representative, [18]

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And then what have recent trends in retrenchment letters received? Or have the recent trends in retrenchment letters received changed?

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

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We -- till the end of March, we haven't seen any uptick, and I think it is too early. I think the interesting question will be April, and I think probably more May because I think, like I've mentioned, 73% of companies said. They will struggle to survive 3 months. So I think it's the period of the lockdown. And then if you release the lockdown, what is allowed and what is not allowed will determine retrenchments, but it's too early to say.

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Unidentified Company Representative, [20]

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And we've got 3 quick questions regarding funeral cover. Firstly, what is your lapse rate for insurance policies? And has this changed significantly during the COVID period?

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

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It's again too early to decide because remember now the majority of funeral policies gets paid on month end, and we haven't seen anything strange between the 25th and 30th of March. I think one will have to wait and see what happens in April. The one area that we have seen is quite a lot of clients has done disputes of debit orders, and that's cash flow management. But on our lapse rates, we haven't seen any early indications of any difference in trend. I think it's just too early to know exactly what's going to happen.

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Unidentified Company Representative, [22]

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And given that the majority of policies are sold in branches, have you seen an impact on sales?

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

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Yes, you definitely will see an impact on sales. I think the fact that we've got only 50% of our branches open and they're operating from 9 to 4, will have an impact. That is why I think it's so important to create a digital call center concept, whereby our consultants are now sitting in the branch and they can actually phone a client or the client can phone them to take up any product, anything that Capitec is offering. So that gives us that ability to sell and work with our clients. And if there's a complete lockdown, we can still be fully operational.

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Unidentified Company Representative, [24]

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Your target for the first year of funeral sales was 1 million policies. What is your target for the next year? And how do you see the change?

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

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Yes. We haven't set it out. I think what we've set it out was we would like to be at a 10% market share. We're now at a 14% -- we're at very close to 10%. So we've set it up to 15%. For me, it's always -- you can talk numbers. It's actually the quality. That's the important part. And I think what one needs to look at to say is what other products maybe you can add in the next year to that particular range that can -- that is actually quite exciting.

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Unidentified Company Representative, [26]

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Then there's a question that asks, are we stealing market share? And who are the competitors that we're stealing the most from in terms of funeral policies?

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [27]

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I think it's right across. There's not anyone in particular. We see it when there's some change, but it's in line with the market share of any one of the other people that's competing in this particular market.

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Unidentified Company Representative, [28]

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That's all the questions for now. Thank you very much.

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Gerhardus Metselaar Fourie, Capitec Bank Holdings Limited - CEO & Executive Director [29]

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Thank you.