Equity’s returns on shareholder funds seen falling

Equity Bank CEO James Mwangi. The lender plans to expand into Ethiopia, Burundi and DRC. PHOTO | SALATON NJAU 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• The return on equity (ROE) — used to measure profitability — will fall from 29.7 per cent achieved in 2014 to 25.8 per cent in 2017.

Regional lender Equity Bank could be headed for lower returns on shareholder funds as it doubles bad debt provisions and margins on interest income fall, investment bankers at Citibank Global Markets say.

As Equity grows its loan book, the analysts say, the return on equity (ROE) — used to measure profitability — will fall from 29.7 per cent achieved in 2014 to 25.8 per cent in 2017.

Bad debt provisions will rise from the Sh1.6 billion in 2014 to Sh3.2 billion this year before soaring to Sh4.9 billion by 2017, according to Citi.

This will come against a background of major expansion in the lender’s balance sheet with loans projected to rise by 24 per cent every year for the next three years.

The bank is also likely to see the net interest margin (NIM) from loans —which indicates the net interest earned relative to the total loans — come down from the current 29.7 per cent to 25.8 per cent by 2017.

The analysts at the same time believe that fundamentals of the bank do not justify its current price of more than Sh50.

Despite saying that the Equity Bank story has many positive aspects such as huge customer numbers, Citibank recommended to investors to sell at the current market price noting that the value can only be justified through unrealistic assumptions.

“We rate Equity ‘Sell/High Risk’ based on valuation. Although the story has many positive aspects, we believe the current stock price can be justified only with heroic and unrealistic assumptions,” said the investment bankers.

READ: Equity Bank readies Sh200bn for ten country expansion

Although the bank has made profits through regional subsidiaries, most of its net profit comes from Kenya thereby posing economic and political risks.

“We assign this stock a ‘High Risk’ rating, given the heightened political and economic risk associated with the bank’s primary country of operations,” said Citi. The report though comes as Equity is embarking on increasing its presence in other parts of Africa.

It plans to enter Ethiopia, Burundi and the Democratic Republic of Congo in the next two years. Afterwards, it wants to go into Mozambique, Malawi, Zambia and Zimbabwe.

Starting from scratch

Some of the expansion will be through acquisitions while others will be done by starting from scratch, the bank’s CEO James Mwangi revealed during the annual general meeting on Tuesday.

The expansion will involve creating new shares and borrowing. The bank has already announced that it will issue 411 million shares to raise about Sh20 billion in new capital.