Market value: Where Equity Bank beats KCB

At the close of trading last week, Equity Group’s value at the stock market was Sh150 billion.

This is about one-and-a-half times that of KCB Group’s Sh101 billion. This means two Equity Banks are equal to three KCBs.

It is a rather puzzling trend as KCB is Kenya’s largest lender by assets and profitability. Further, it was more valuable at the end of April last year at Sh186 billion against Sh182 billion for Equity.

Now, the two institutions, both headed by respected bankers, have the widest gap in their market values yet.

KCB’s Joshua Oigara was crowned banker of the year in East Africa for 2016, while his counterpart James Mwangi was last year recognised as chief executive of the year at the 8th Annual Africa Investor Investment Summit.

A sustained meltdown as the stock Kenya market has also taken a hit on both lenders, albeit unevenly, with Equity gaining from recent demand from foreign investors.

Standard Investment Bank (SIB) reported that the counter accounted for more than three-quarters of market activity at the NSE on Tuesday last week.

“The bank accounted for 85.1 per cent of foreign investor buys and recorded net foreign inflows for the seventh straight session,” it said.

KCB, on the other hand, has had seven weeks of sustained foreign investor outflows as at July 8.

Investor sentiment

Foreign investors generally account for more than half of all trading at the Nairobi bourse, with Safaricom, Equity, KCB and East African Breweries often the top picks.

While varying investor sentiment on different counters largely drives the share price of a company, and by extension its valuation, analysts have picked out the differences that set KCB and Equity apart.

“Equity Bank has traditionally had a higher return on assets and equity than KCB, hence the disparity,” Francis Mwangi, an analyst at SIB, said.

A higher return on assets is more important to an investor, he said, than asset base, which includes the size of a loan portfolio.

Financial Times’ Banker Magazine reported in March that Equity Bank had made the highest return on assets in Africa after generating a rate of 6.84 per cent. The ranking of the World’s Top 1,000 Banks also listed KCB, with a 5.14 per cent return.

KCB was more profitable in the latest 2015 full-year results, but fell behind Equity in the first quarter ended March 2016. Equity’s Mwangi reported Sh7.2 billion in profit before tax for the three months, while KCB’s Oigara announced Sh6.6 billion.

The two institutions are in the lead in Kenya’s banking sector after leapfrogging Standard Chartered and Barclays, which trace their ownership to the United Kingdom.

Equity Bank won the hearts of the poor as a banker for the common man before gradually sweeping the market, while KCB has been able to shed the Government tag to be seen as a trustworthy local bank.

And lately, KCB has taken deliberate steps to identify with the youth, a critical demographic.

Mr (Francis) Mwangi added that the fact that KCB is top heavy with corporate clients, its profitability margins would naturally be lower than Equity’s.

“Over the last five years, Equity has improved in managing costs. And by virtue of KCB having its loan book concentrated among large corporates, its return on loans is also lower — a key reason KCB is lagging on return on equity.”

A development in the banking sector may also be partly responsible for Equity’s current leadership in profits, going by the latest financial results.

The Central Bank of Kenya has demanded a stricter reporting code in the treatment of bad and doubtful loans, and by extension, the provisions set aside to cover for defaults. Provisions for bad debts are, however, booked as expenses.

So when KCB announced its operating results for the first quarter, its non-performing loans portfolio had jumped by 43 per cent to Sh26 billion. To cater for the rise in bad debts, the provisions for NPLs shot nearly three-fold to Sh1.4 billion.

Mr Oigara said in a statement that the increased provisions for doubtful loans had slowed his bank’s profit growth in the three-month period.

Equity surged ahead, with after-tax earnings rising by a fifth to Sh5.1 billion.

Profitability aside, Equity also beat KCB in attracting customer deposits and fresh lending opportunities.

Now, the race has shifted to the lucrative small and medium-enterprise market, a low-cost per customer segment where a single transaction could run into tens of millions of shillings. SMEs tend to borrow big amounts and pay them off much faster than individual customers.

As the big boys in the banking arena, KCB and Equity are in a cut-throat competition on several fronts in this segment, including product innovation, where both have elaborate agency networks and micro-loans granted to customers through mobile phones.

Both have made heavy investments in mobile banking platforms, which offer customers convenience and cut operating costs to near zero.

Oigara often speaks about how the mobile phone has revolutionised banking for the small vegetable trader at Kangemi market who does not need to close her business to go to her bank to request a loan, make a withdrawal or deposit sales at the end of the day.

But unlike KCB, which has partnered with Safaricom to offer micro-loans and operate virtual accounts, Mr Mwangi’s Equitel is operated in-house by Finserve Africa, a subsidiary of Equity Group Holdings.

Finserve is also offering voice calls services on the Equitel platform, translating to a broader product offering.

Equity has, however, been clear that its interests in the subsidiary are not to be a mobile service provider, but to set up another avenue to remove brick-and-mortar investments from banking.

Mwangi is yet to report how significant the contribution of Equitel is to group revenues. It is worth noting that Equity had planned to partner with Safaricom to provide virtual bank accounts where customers could save, borrow and transfer money through M-Kesho. The product flopped.

But it was always going to be a tough battle between the two indigenous lenders after a revolution in banking that has seen the focus shift from huge corporates and wealthy people to the (wo)man on the street.

Both banks have assembled the best brains in the market, often extending their search for talent beyond Africa to get ahead. However, top executives from either bank would be reluctant to admit there is a race between the two; instead, it is an effort to ‘maximise returns for shareholders’.

Tough battle

But such a scripted response is difficult to believe. The two banks operate in the same market and have plenty in common, including regional expansion in the search for growth.

Therefore, it is difficult to pin down exactly why the difference in market valuation is just about Sh50 billion — especially with KCB looking into buying Chase Bank, a strong player in the SME segment.

Still, KCB is expected to be moving its head offices to a newly completed block owned by its staff pension scheme. The building happens to be right opposite Equity’s offices. Oigara will likely look out his window and see Mwangi, and the two gentlemen will smile knowingly: game on.

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