Equity Bank asked to go slow on Africa expansion

Equity Bank should first focus on consolidating its gains in the eastern Africa and on talent retention before it seeks to be a pan-African bank, analysts at Citi say.

A report by Citigroup Global Markets Inc on Equity Bank titled Hiring, going pan-African and raising capital said the bank’s recent announcement that it would raise funds for expansion through a secondary public share offer was premature and that it should first make non-Kenyan business operations in the region more consistently profitable.

The report said the bank should focus on turning Uganda, Tanzania and South Sudan operations more profitable. Some of the regional subsidiaries are profitable while others are not.

The second offer, which means increasing shares to raise capital, would risk a dilution, Citi warned. The point is that more shares on sale in the market would likely lead to a lower price, unless fundamentals such as dividends and growth are strong enough to counteract the dilution.

“In our opinion, Equity Bank needs to focus on delivering on its East African expansion strategy before going pan-African,” says the report.
But other analysts call for patience with the bank noting that it took KCB Group 10 years to be profitable in its regional operations.

Francis Mwangi, a research analyst at the Standard Investment Bank (SIB), said it was expected that it would take time for Uganda operations to catch up since Equity had to replace management, train and make some write-offs.

“It took KCB close to 10 years for Tanzania operations to make a profit,” said Mr Mwangi.

The SIB analyst said it would take some time for Equity to make subsidiaries consistently profitable. It has to restructure and grow them at the same time.

Equity Bank’s chief executive James Mwangi said the Pan-Africa expansion would see the bank open branches in Nigeria, Ghana, South Africa and the Democratic Republic of Congo.

Alex Muhia, the personal assistant to Mr Mwangi, had not responded to our request for further information on the move by the time we went to Press.

Citi estimates that Equity has pumped close to Sh8 billion in the last four years into its regional subsidiaries and should wait to realise solid results from these investments before venturing into the wider African market.

“For this significant investment in international expansion, Equity Bank has made a combined profit before tax loss of Sh30 million over the past four years (2008-11),” says the report. This is after taking account of both profitable and loss-making subsidiaries during the period.
Over the four-year period cumulatively, Uganda has contributed a Sh880 million loss followed by Rwanda with a Sh59 million loss while South Sudan had a profit of Sh915 million— making a net loss of Sh30 million. Equity entered Rwanda in 2011.

The bank’s fortunes have been better in South Sudan where it has had two consecutive years of profitability with a loss only in the first year of its operations.

The Citi analysts reckon that the total return over four years of Sh915 million is inadequate given that total assets of the South Sudan subsidiary stood at Sh17 billion in 2011. At the same time, this is mainly based on transaction fees and not core banking business of lending, they noted.

They noted that in 2009, 2010 and 2011 the net interest income in South Sudan was Sh1 million, Sh57 million and negative Sh291 million respectively. The total assets in South Sudan were Sh2.1 billion, Sh6.5 billion and Sh17.8 billion in 2009, 2010 and 2011, respectively.

“We believe there is a need to improve on its banking income in Sudan,” says Citi. The report also said the bank needs to work on talent retention.

“We note that key staff retention seems to have been a problem at Equity Bank and perhaps more needs to be done to keep quality members of staff,” says the report.

Business Daily



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