Financial Performance review
Equity Bank Group, East Africa’s second largest banking group by assets, reported a 42% rise in pre-tax profit to KES 12.8 Billion. Equity Bank is now the second most profitable bank in Kenya (after the KCB Bank Group) having overtaken Barclays Bank Kenya in 2011.
Operating income rose by 29%, and operating expenses by 21%, translating into a fall in the cost to income ratio from 60% to 56%. Equity bank has historically kept a tight lid on costs. Even with the recruitment of top talent over the past year, staff costs have risen by only 15%.
Equity Bank Group, East Africa’s second largest banking group by assets, reported a 42% rise in pre-tax profit to KES 12.8 Billion. Equity Bank is now the second most profitable bank in Kenya (after the KCB Bank Group) having overtaken Barclays Bank Kenya in 2011.
Operating income rose by 29%, and operating expenses by 21%, translating into a fall in the cost to income ratio from 60% to 56%. Equity bank has historically kept a tight lid on costs. Even with the recruitment of top talent over the past year, staff costs have risen by only 15%.
The loan book grew by 45% to KES 114 Billion while deposits climbed by 34% to KES 140 Billion. The loan to deposit ratio fell from 0.75 to 0.81. The company is still in a strong liquidity position and has a significant buffer in terms of prudential ratios.
The Group’s total assets grew by 37% from KES 143.0 Billion to KES 196.3 Billion.
Over the five year period from 2006 to 2011, Equity Bank’s total assets have grown 9.8 times (over 900%). Profits before tax have increased 11.6 times (over 1,100%). In a span of five years Equity Bank Group has moved from mid-tier status to being the second largest bank in the region by assets and profitability.
Operating environment and outlook
Equity Bank Group posted a strong performance despite a difficult operating environment. 2011 was occasioned by a big spike in interest rates in Kenya and a steep fall in the Kenya Shilling relative to the dollar.
The bank aggressively grew its loan book even as other lenders such as Barclays Bank of Kenya tightened lending. The bank is now generating a much larger portion of its income from interest rather than from transaction charges.
In the past two years, Equity Bank strengthened its executive suite. The bank has hired several senior staff from other leading banks some of whom have been headhunted from global players such as Deustche Bank and Bank of America Merrill Lynch. While this may add to staff costs; we expect that the strong management team will enhance the company’s risk management and sustain the innovation drive that has been instrumental to the success of the bank to date.
2012 is likely to be a challenging year with the uncertain political environment. The bank should continue to grow profits and assets albeit at a slower rate.
Investment analysis/Recommedation
The share price closed at KES 19.00 (March 9, 2012); a 16% gain from the closing price on last day from trading in 2011 (December 30, 2011), KES 16.40.
Even after the rally in the year to date the share is inexpensive, trading at a PE of only 6.8.
Equity Bank has declared a dividend of KES 1 which translates to a yield of 5.26% at the current share price
Recommendation:
Equity Bank has declared a dividend of KES 1 which translates to a yield of 5.26% at the current share price
Recommendation:
Strong buy
Banking sector stocks as a whole are trading at huge discounts at the Nairobi Stock Exchange. Equity Bank is cheap on a P/E basis. Investors with a time horizon of at least two years should accumulate this stock. In the short term (2012) there is likely to be a lot of volatility on this and other counters as Kenya faces an uncertain election year.
Quote
Life's most persistent and urgent question is, 'What are you doing for others?'
- Martin Luther King, Jr.
- Martin Luther King, Jr.
