Banking

The Company 

Equity Bank, founded in 1984 as a building society, is currently the largest bank in Africa by customer numbers with 8.4m clients. The bank is 24.5% owned by Helios Investment Partners Holdings, and it has a strong regional presence, operating in Kenya, Uganda, Rwanda and Tanzania. Equity Bank has 186 branches and 10,000 agents. In Kenya, the bank has a market share of 16.6% of total industry assets and 14% of total industry deposits. The Kenyan operation contributed roughly 85% of the bank’s assets.

Equity Bank has won numerous awards. Most notably the bank was voted Best Bank in Kenya 2013 during the eighth edition of the Think Business Banking Awards, and was selected the Best Managed Company in Africa 2012 by Euromoney magazine.

Equity Bank’s growth strategy is centred on “banking the unbanked” and has attracted numerous bank accounts from low-income earners through a zero deposit requirement for account opening. The strategy has been applied across other East African countries as the bank tries to take advantage of the highly unbanked population: financial penetration rates in Tanzania stands at 17.3% and Uganda at 20.5%.

Equity Bank has applied the agency banking model in Kenya, Tanzania and Rwanda to reduce the cost of setting up branches and facilitate the availability of banking services in rural areas. In line with its large retail book, Equity Bank has the lowest cost of funds in the industry and thus the highest net interest margin at 12%. However, non-performing loans are the highest in the industry at 8%, compared to the industry average of 5%. Increased focus on lending to small and medium-sized enterprises is likely to lead to an improvement in net interest income and asset quality.

In financial year 2013 results, net interest income increased by 11% to KSh87bn ($991.8m) as a result of an increase in interest income by 3% and a decline in interest expense by 22%. Interest rates have been coming off compared to the same period the previous year due to declining inflation. Non-funded income increased by 19% and consequently total income increased by 14% to KSh42bn ($478.8m). Growth in income was recorded, however instability in South Sudan resulted in increased provisioning. Total costs increased by 16% to KSh22bn ($250.8m) attributable to expenses related to physical upgrades of some branches. Despite the rise in costs, the cost-to-income ratio decreased from 48.5% in 2012 to 48.8% in 2013. Profit after tax increased 11% to KSh13bn ($148.2m).

Total assets grew by 14% in 2013 mainly attributable to a 26% increase in loans and advances. Kenya’s advances grew by 24%, Sudan’s by 23%, Rwanda’s 113%, Tanzania’s 231%, and Uganda’s grew by 2%. Total deposits grew by 16% while the loan-to-deposits ratio increased to 88%. The investment metrics also showed a positive trajectory as the earnings per share rose 10% to KSh3.59 ($40.9m), while price to earnings stood at 8.58 x. The return on equity was 28% with a dividend yield of 4.8%. Management projects customer numbers improving to 10m by the end of financial year 2014. Total deposits are expected to grow 20% by targeting a 15% increase in agents to 15,000. Management aims to reduce the cost-to-income ratio to 48% with return on equity and return on assets forecast at 30% and 5%, respectively.

Development Strategy

In 2014 Equity Bank embarked on its next 10-year strategy called Equity 3.0. A key highlight of the strategy is centred on taking the bank virtual through its mobile virtual network operator (MVNO) strategy. The MVNO strategy was launched in July 2014 targeted at growing its mobile phone-based financial services market. The MVNO accords Equity Bank the opportunity to continue its mission of furthering financial inclusion. Equity Bank sees an opportunity in converting liquid cash into non-cash electronic payments. The bank will be able to do this cheaply by avoiding middlemen and passing the cost savings to the customer. All the bank’s products would be available over the mobile phone. The bank will incur no additional expenditure and will leverage off of existing capacity by using Airtel’s network infrastructure.