Written by James Makau
March 10, 2008: Equity Bank is shifting its focus to mortgage financing hoping to replicate its micro-lending success in the market that millions of aspiring homeowners have found difficult to penetrate.
Last Friday, as the bank announced the 2007 results, it emerged that the coming in of foreign investors towards the end of last year has left Equity with too much idle cash that it now plans to pump into Housing Finance (HF) — a home loans financier where it holds a 25 per cent stake — targeting the low income mortgage market.
Equity — Kenya’s largest bank in terms of depositors and capitalization — maintained the growth tempo to break its own earnings record by a wide margin last year. The results show that the bank’s after tax profit grew by 151 per cent in 2007 to Sh1.9 billion helped by robust growth in customer deposits, loans and advances.
The huge capital injections last year have however put Equity in a unique position leaving with excess money for short term lending. This aspect of a bank’s business is measured by the liquidity ratio — which for Equity has risen to 77 per cent from 38 per cent in 2006.
Dr James Mwangi, the chief executive, told the Business Daily that Equity plans to use HF to manage the excess liquidity while opening the home loans market to ordinary Kenyans.
Dr Mwangi said HF is set to play a critical role in the bank’s 2008 strategy — offering it a window to enter the mortgage market as well as tapping into opportunities that are expected to arise from reconstruction funding following the recent destruction of property worth millions of shillings in post-election turmoil.
Equity acquired a 25 per cent stake in HF in November last year, an investment that provides it with an avenue for penetrating the mortgage market without incurring significant start-up costs.
The bank’s entry into mortgage lending should help lengthen the maturity profile of its loan book, which remains largely short term.
A liquidity ratio of 77 per cent — well over the statutory minimum requirement of 20 per cent — has left the Equity management with the daunting task of finding viable investment avenues the money to generate new income.
Equity high liquidity position is unique in the fact that it came in a year in which Barclays Bank, Kenya’s largest in terms of total assets and the industry’s most profitable had to confront a low liquidity challenge.
Barclays closed the year 2007 with a liquidity ratio of 18.8 per cent, 1.2 per cent below the statutory minimum in what analysts attributed to its rapid expansion strategy.
Other key financial sector players such as Standard Chartered Bank and KCB Bank remained well above the statutory minimum level, but are keenly monitoring their position in a market characterized by neck-break competition on both branch network and lending fronts.
Analysts at CFC Financial Services say the recent investment by Helios EB investors totalling Sh11 billion bodes well for the bank and should serve to strengthen its capital base and more importantly its prudential ratios leave ample room for it to expand its loan book portfolio.
“The benefit of an equity investment as opposed to a subordinated debt is the fact that the bank is now not obliged to make any interest payments which could have had a negative impact on the its profitability,” said the report by CFC Financial Services.
The bank’s balance sheet position for 2007 strengthened as loans and advances to customers grew by 100 per cent from Sh10.9 billion in 2006 to Sh21.8 billion last year. Within the same period, Equity’s total assets increased by a massive 165 per cent from Sh20 billion in 2006 to Sh53.1 billion last year.
But despite the rapid growth, the bank’s cost to income ratio improved from 67 per cent in 2006 to 59 per cent last year, pointing to the management’s ability to control the costs as a proportion of income.
In 2007, the bank’s net interest income was up 83 per cent to stand at Sh2.8 billion, while income from non interest income-funded activities stood at Sh3.1 billion last year marking a 64 per cent rise from 2006, thanks to the 826,000 new customers who joined the bank last year and the increase in the branch network as well as the roll out of new ATMs in 2007.
With 73 per cent of all cash transactions carried out through ATMs, the bank is looking at fees and commissions income as a vital source of income.
Dr Mwangi added that the outlook for 2008 looked promising despite the setbacks witnessed in the first quarter of the year, saying that the bank was surprised at the level of business transacted at the beginning of the year during the period of political unrest.
“The outlook looks very promising indeed after the peace deal and the opportunities arising especially in reconstruction funding,” he said.
As an added sweetener for investors, Equity Bank topped up the earnings per share — the portion of a company’s profit allocated to each outstanding share of common stock— by 148 per cent from Sh2.77 in 2006 to Sh6.88 last year.
The proposed dividends have also been worked upwards 200 per cent from Sh181 million to Sh543 million.
Stock pickers will be closely watching the moves of the major shareholders carefully in a year that a two-year mandatory share lock ends in August.
Following its public offer by introduction at the Nairobi Stock Exchange in 2006, Equity Bank’s major shareholders were barred by Capital Markets Authority regulations from off loading their shares for two years.
In a move to allay any speculation about the issue, Dr Mwangi told journalists he had not intentions of off-loading his shares in the bank even after the lock-in period ends.
“I have no intentions of selling my shares or leaving Equity unless the shareholders ask me to or I retire,” he said.