{"id":2527,"date":"2020-03-27T14:08:36","date_gmt":"2020-03-27T14:08:36","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=2527"},"modified":"2020-03-27T14:08:36","modified_gmt":"2020-03-27T14:08:36","slug":"capitecs-corona-coaster-ride","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2020\/03\/27\/capitecs-corona-coaster-ride\/","title":{"rendered":"Capitec\u2019s Corona-coaster ride"},"content":{"rendered":"<p><span style=\"font-weight: 400;\"><span class=\"trx_addons_dropcap trx_addons_dropcap_style_2\">C<\/span>apitec has had a volatile few weeks even by current market standards. The bank has been the darling of the market for years, growing from obscurity to become South Africa\u2019s largest bank by retail customer numbers.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So, what\u2019s going on?<\/span><\/p>\n<p><b>Tracking the Corona-coaster.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Capitec fell from around R1,440 per share in mid-Feb to R1,110 by the third week of March, a 23% drop in sympathy with losses in global markets.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Then, something crazy happened.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The share price collapsed from R1,110 to R680 per share, a further 39% drop in the share price, taking the total drop from the R1,440 peak to 53%.<\/span><\/p>\n<p><b>Capitec isn\u2019t just another unsecured lender.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">A market move like this cannot be ignored by the management team. They released an announcement to calm the markets and remind people that Capitec is in a stronger position than its Black Friday share price would suggest.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The first useful reminder was that Capitec still expects earnings (i.e. profit) growth between 18% and 21%, so things were going very well before Corona hit.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Management stressed the evolution of Capitec\u2019s business model from an unsecured lender to a fully-fledged retail bank:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Only 9% of Capitec\u2019s customers have credit from the bank<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Capitec is almost break-even purely from transaction fee and funeral policy income<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">47% of the bank\u2019s credit is extended to clients earning more than R20,000 per month, so Capitec doesn\u2019t exactly rely on the poor and marginalised\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Capitec is an excellent case study of giving people what they actually want: an affordable bank account.<\/span><\/p>\n<p><b>So, why did the share price drop so sharply?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Management identified three possible causes of the precipitous drop on 19<\/span><span style=\"font-weight: 400;\">th<\/span><span style=\"font-weight: 400;\"> March 2020:<\/span><\/p>\n<ol>\n<li><span style=\"font-weight: 400;\">Sell-off by international shareholders with Rand fears<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Algorithmic trading<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Banks needing to cover derivative positions<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Algorithmic trading (automated trading systems) can send a share price into freefall when certain lower limits are breached. These systems have rules like \u201csell if the price drops 10%\u201d which then drives the price even lower \u2013 this is often the reason for crazy swings after slightly bad or slightly good news.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Banks need to cover their derivative positions when certain limits are breached, which is an extremely complicated topic. Basically, fancy financial structures get put in place in relation to shares and when certain pre-agreed levels are hit, the bank is forced to try sell the exposure and unwind the deal.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Lots of investors being forced to sell at the same time can only send the price down.<\/span><\/p>\n<p><b>What aren\u2019t they telling us, if anything?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Companies don\u2019t often choose to point out the risks in their business. That\u2019s something investors need to identify and make a decision on.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As strong as Capitec is, a major upswing in bad debts would certainly hurt them, even if only 9% of the customers have credit.<\/span><\/p>\n<p><b>Volatility. Volatility everywhere.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The market appreciated the announcement, rallying over 42% to close at R970 per share the next day. Over the next few days it climbed as high as R1,033 per share and dropped as low as R873 per share.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The market is reacting sharply to any newsflow. Capitec\u2019s business is highly exposed to the fortunes of ordinary South Africans, so they bear the brunt of actions taken in relation to the COVID-19 crisis.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investors who see value in Capitec\u2019s shares will have to be willing to sign up for a bumpy ride.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Capitec has had a volatile few weeks even by current market standards. The bank has been the darling of the market for years, growing from obscurity to become South Africa\u2019s largest bank by retail customer numbers. So, what\u2019s going on? Tracking the Corona-coaster. Capitec fell from around R1,440 per share in mid-Feb to R1,110 by the third week of March, &hellip;<\/p>\n","protected":false},"author":2,"featured_media":2559,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[26],"tags":[39,38,17,16,36,37,40,41],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/2527"}],"collection":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/comments?post=2527"}],"version-history":[{"count":0,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/2527\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/media?parent=2527"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/categories?post=2527"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/tags?post=2527"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}