Thursday, July 27, 2006
About Equity Bank, will have a secondary listing on the Nairobi Stock Exchange next month at a price of Kshs. 70 per share. I located an information memorandum (prospectus) a at thanksgiving celebration /prayer /dinner the company threw for 3,000 Nairobi customers at KICC last night – and went through it do decide on whether to buy the shares next month.
Commissions: Banking at Equity is not cheap, and this is the situation in the entire the micro-finance sector – and Equity will probably have to lower some of their bank charges. Their account opening minimums are very low, but some of their charges e.g. cheque clearing are rather high compared to other banks who are now targeting Equity’s customers.
However lowering charges may not be an easy option since, these form a greater portion of the Bank’s income (52i%) than at its peers (CFC 33%) NIC (24%) and D-Trust (30%).
Employment: Despite the staff high turnover, the bank is a good, fast growing, employer that has gone from 354 employees in 2003, to 884 in 2005. It has 35 branches, (14 in Central province, 8 in Nairobi) and over half of them have opened in the last two years.
One issue I disagree with in the memorandum is that Africap agreed to sell 50% of their shareholding in the Bank to staff. But the truth is that staff were forced into buying these shares. The staff trust (unregistered staff ESOP) now owns 5.52% pf the Bank’s shares, same as Africap.
Listing costs: Floatation was much cheaper than a new IPO. Equity’s listing is budgeted at 28 million compared to the Kengen IPO at 401 million and KCB rights issue at 104 million. The CMA and NSE get their fees (8.1m and 1.5m here respectively) as they did from Kengen (24m, 1.5m) and KCB (6.1m, 0.5m) and most of the savings come from not having to pay stockbrokerage and advertising costs. Equity has budgeted 11m for the financial advisers and sponsoring brokers; compare this to Kengen who paid 101m for advertising & 118m to brokers and KCB who paid 13m for advertising, 6m to brokers, 37m as agent commissions, 9m for postage, and 11.5m for printing etc.
Loans: Equity has been keen to grow their loan book ever since they became a bank to keep up with their ever growing deposits. They have five times as many depositors as they do borrowers and while this was acceptable at a micro-finance level, it is important they grow their interest income.
They doubled their loan portfolio in 2005 from 2.9 to 5.5 billion, but NPA’s likewise doubled from 246m to 519m. Their loan to deposit ratio is now 72% (June 2006) which is comparable to CFC (76%), NIC (85% and D-Trust (785) at the beginning of the year
Management: The MD, current Chairman, and former Chairman, are among the largest shareholder in the Bank - and along with employees (in the ESOP) are barred from selling their shares for the next two years.
Marketing: Equity is now a Bank and should focus on marketing as a bank, not a micro-finance institution. The more, the MD shouts about how the Bank is not about one community, being very liquid, excellent global capital rating, not depending on government deposits etc, the more it makes one think about those very issues. Imagine if Adan Mohamed said the same thing about Barclays every time he was on TV. The focus should shift to marketing the bank’s customers, products, and convenience.
Nakumatt like: I’d compare Equity to Nakumatt in terms of their fast growth and they also own very little property (branches).
Ownership: Confusing to say the least, and it would be good to know why the management took such a convoluted route - from building society converting to a bank, converting deposits into shares, private placement to finance the bank’s share capital, and finally the issue of 4 bonus shares for each 1 held that created the 90m shares, that will be on offer in August.
Pesa Point: Equity has signed and agreement with Pesa Point to link their ATMs.
Verdict: In 2005 the Bank returned a pre tax profit of 501 million, which translated to an EPS of 3.77, up, from 2.51 the year before. (Dividend was Kshs. 2 per share, same as in 2004). The Bank is on track for another year of record profits of 800 million before tax and could pass the billion shilling milestone next year.
The memorandum contains joint statement by Dyer & Blair and Suntra Stocks that values Equity shares (par value 5/=) using the DDM method at Kshs. 91.4 shillings per share, PBV at 64/=, and PE method 63.4 shillings per share. The advisers reckon that this compares well to CFC, Diamond Trust and NIC banks, who they consider to be Equity’s’ peers listed on the NSE
Yes, Buy Equity: But not immediately. It will take a few months for the share to settle since, the current 2,800 shareholders of the bank will have to open CDS accounts and immobilize their shares before they can be traded. In 2006, 2.5 m shares have been sold in the OTC market. A share split is likely but it is also prudent to ask if the Bank is growing too fast.