Equity Bank revives expansion plan after hard lessons

By James Anyanzwa

Equity bank Group had an uphill task when it entered Uganda and Southern Sudan less than three years ago.

Besides the huge initial investments in the subsidiaries, the impact of the new branches on the group’s profitability must have been a difficult pill for the bank’s management and shareholders to swallow.

James Mwangi Group CEO, Equity Bank CEO

The venture forced Equity bank into unfamiliar territory where its profit before tax (PBT) for the year 2009 grew by a single digit (five per cent) compared to a growth of 111 per cent in the previous period (2008).

It all began when the bank acquired Uganda’s biggest microfinance bank in June 2008 and converted it into a fully-fledged bank— Equity Bank Uganda Limited— in December 2008.

In the same year the bank opened subsidiaries in Southern Sudan and acquired an investment-banking license from Juanco investment Bank Limited.

The acquisition helped Equity Bank dispose off excess liquidity, which stood at 77 per cent by the close of 2007, and rose 25 per cent following the buy-in by Helios EB.

Combined Loss

But the new entities pulled a combined loss of Sh1 billion in 2009, eroding Equity’s bottom-line and eating into shareholders earnings.

The group’s total Non Performing Loans (NPLs) increased 91.1 per cent to Sh4.8 billion on a year-on-year basis, while the level of net NPLs as a proportion of gross loans and advances surged from 3.9 per cent to 4.7 per cent.

The bank adopted a cautious approach in lending and scaled up provisions for bad debts to stay afloat, while hoping that the investment banking division, and all of its newly opened branches in Kenya, Uganda and Southern Sudan would break- even before June last year.

"We hope by June (2010) all of the new investments will be contributing positively to the banks bottom-line.

This year (2010) we will see positive and significant contribution from these branches," Equity Group CEP, Dr James Mwangi, said at the time.

Unexpectedly, Equity bank emerged from the economic slump with minimal financial bruises owing to what it termed as "consistent" strategy execution focused on growth, efficiency and risk management through enhanced internal systems.

Still Profitable

Although efforts to achieve optimal profitability were upset by slowed economic activities and negative earnings from new investments, the Group pocketed Sh300 million more revenues, as profit before tax (PBT) climbed to Sh5.3 billion from Sh5 billion in 2008.

Two years later, having learnt a lesson from the previous experience, Equity bank is resuming its regional expansion initiative, with Tanzania and Rwanda as its prime targets.

The bank has set aside Sh2 billion to splash on 10 branches in Rwanda, and five branches in Tanzania during the third quarter of this year.

"We are responding to the aspirations of the people in the East African region to have a single market.

We want to be a facilitator of the new trend of inter-country trade in the region," Mwangi told the Financial Journal (FJ) last week.

"We have been motivated by our achievements in Uganda and Southern Sudan. In two years, we have made significant milestones."

Equity Bank’s business model of extending financial services to the low-income segment and the un-banked population has attracted both local and international recognition.

Large Number

"Tanzania and Rwanda a larger number of unbanked and underserved population than Kenya. We are very confident we should be able to focus on this market and be successful," said Mwangi.

"Our focus is on the niche market which is underserved, and to continue with our strategy of affordability."

Mwangi said the bank has been training manpower to be deployed to the new branches for the last seven months.

And this time, he expects the proposed subsidiaries to break even after one year.

Equity started operations in 1984 as Equity Building Society.

Today, it has a strong footprint in Kenya, Uganda and Southern Sudan. And thanks to its ‘high volume low margin’ business model, the bank is home to more than 5.9 million customers, the largest customer base in the Eastern African Region.

The Group posted a 52 per cent growth in pre-tax profit for the six months to June, buoyed by huge inflows of transaction and commission-based incomes.

PBT rose to Sh5.9 billion from Sh3.88 billion registered in a similar period last year.

This was despite worsening sovereign debt crises in Europe, threats of sovereign credit rating in the US.

It also shook off the precarious property bubble and deteriorating credit quality in China, political unrest in North Africa and the Middle East, and high inflationary and interest rate pressures in Kenya to grow profit.

Galloping Inflation

"The second part of the year will be more of a continuation of the first half because we have structured ourselves to cope with challenges of inflation which we believe is short-term," said Mwangi.