EQUITY BANK HALF YEAR 2011 ANALYSIS: EARNINGS UP 57.4% BUT INFLATION STARTS TO BITE

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Equity Bank Group today morning released its financial results for the Half Year ending June 30^th 2010

Profit After Tax was up 57.4% to stand at Kshs. 4.74 Billion. The Bank registered a Profit Before Tax of Kshs. 5.84 Billion, a growth of 51.8%

The difficult business environment which has seen inflation jump to 14.4% and forecast to get higher has begun to show as the bank registered a minimal Quarter on Quarter growth. Others would even argue that the Q2 performance was flat in comparison to Q1

A few weeks ago, I wrote on the LIKELY IMPACT OF HIGH INFLATION ON THE NSE

For its 1^st Quarter results for 2011, Equity Bank had seen Profit Before Tax shoot up by 72.77% to Kshs. 2.89 billion. Profit After Tax had increased from Kshs. 1.25 billion in 2010 Q1 to Kshs. 2.33 billion in Q1 2011, a growth of 86.4%.

With its huge retail base, consisting of clients many of whom sit at the bottom of the earning scale and have borne the brunt of inflation, Equity is expected to suffer more than the other top 5 banks, with the exception of The Co-operative Bank

The bank increased its Government Securities by 4% to Kshs 27.46 billion up from Kshs 26.39 billion.

Equity though, managed to sign up more than 1.3 million new customers, now totaling 6.3 million, representing a 28% growth.

Speaking during the release of the bank’s half year trading results, Equity Bank Group CEO Dr. James Mwangi expressed optimism that the bank is geared towards maintaining the growth momentum.

He added: “our success has been driven by prudent risk management practices, increased efficiency and innovation on the delivery channels, products and services front.”

The cost income ratio has come down from 62% to 56% during the period.

Reflecting its capital strength and liquidity, Equity Bank Group also maintained a more than 11% and 13% score above the statutory capital and liquidity requirements respectively.

Q1 2011 vs. Q2 2011 (Quarter on Quarter Analysis)

	Q1 2011          Kshs.	Q2 2011          Kshs.	% CHANGE
TOTAL INTEREST INCOME	4 BILLION	4.31 BILLION	+7.8%
TOTAL INTEREST EXPENSE	424.3 MILLION	620 MILLION	+46.1%
NET INTEREST INCOME	3.6 BILLION	3.67 BILLION	+1.8%
TOTAL OPERATING INCOME	6.5 BILLION	6.65 BILLION	+2.3%
TOTAL OPERATING EXPENSE	3.65 BILLION	3.67 BILLION	0%
COST:INCOME RATIO	56%	55.1%	-0.5%
PROFIT BEFORE TAX	2.89 BILLION	2.95 BILLION	+2%
PROFIT AFTER TAX	2.34 BILLION	2.40 BILLION	+2.5%

The Quarter on Quarter analysis shows that the bank grew by low single digits from the previous quarter. 

Interest expense was up 46%

It would not be unlikely if the bank does not grow in Q3 in comparison to Q2. Despite the IMF revising the growth targets of the Kenyan economy, banks are not expected to have as rosy a year as they did in 2010.

H1 2010 vs. H1 2011 Analysis

	H1 2010  Kshs.	H1 2011  Kshs.	% CHANGE
TOTAL ASSETS	122.5 BILLION	171.35 BILLION	+39.9%
NET LOANS AND ADVANCES	68.25   BILLION	97.71   BILLION	+43.2%
CUSTOMER DEPOSITS	87.82 BILLION	130 BILLION	+59.4%
LOAN:DEPOSIT RATIO	77.7%	75.2%	-2.5%
TOTAL INTEREST INCOME	6.42 BILLION	8.31 BILLION	+29.4%
TOTAL INTEREST EXPENSE	1 BILLION	1.04 BILLION	+3.7%
NET INTEREST INCOME	5.41 BILLION	7.27 BILLION	+34.2%
TOTAL OPERATING INCOME	10.12 BILLION	13.15 BILLION	+30%
TOTAL OPERATING EXPENSE	6.28 BILLION	7.36 BILLION	+16.5%
COST:INCOME RATIO	62%	55.6%	-6.4%
NET NON PERFORMING LOANS	2.57 BILLION	1.98 BILLION	-23.3%
PROFIT BEFORE TAX	3.84 BILLION	5.84 BILLION	+51.8%
PROFIT AFTER TAX	3.01 BILLION	4.74 BILLION	+57.4%
FORWARD PRICE/EARNINGS RATIO	-	9	-

The Rwandan market still beckons for Equity Bank

Kenya Commercial Bank (KCB) releases its results tomorrow. In the Half Year 2010, KCB had a Profit Before Tax of Kshs. 4.2 Billion

BANK OF KIGALI IPO ANALYSIS PART 2

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There are 12 licensed banks in Rwanda.

According to the Central Bank of Rwanda, in the first quarter of 2011, consolidated net profit for the banks for the period rose to Kshs. 687 Million from a net loss of Kshs. 42.4 Million in the same period last year.

Bank of Kigali made Kshs. 286.4 Million in the first quarter of 2011, representing 41.7%. In 2010, Bank of Kigali was the most profitable bank in Rwanda, accounting for more than half of total banking sector profits

The central bank said the performance is a result of a strong asset growth and competition in the mobilisation of deposits after banks strengthening their activities.

The Rwandan financial markets are heavily skewed in favour of the 3 largest banks which account for almost two-thirds of total loans advanced, plus 59% of deposits.

Market share in the Rwandan Banking Sector between Bank of Kigali and Bank Populaire du Rwanda (number 2 bank in Rwanda) as at 31^st December 2010

	BANK OF KIGALI                                   Kshs.	BANK OF KIGALI        MARKET SHARE	BANK POPULAIRE  du RWANDA          Kshs.	BANK POPULAIRE  du RWANDA MARKET SHARE
TOTAL ASSETS	29.6 BILLION	27.4%	16.4 BILLION	19.1%
CUSTOMER DEPOSITS	20.3 BILLION	25.9%	12.9 BILLION	19.8%
NET LOANS	15.2 BILLION	31.5%	10.3 BILLION	24.3%
SHAREHOLDERS EQUITY	4.8 BILLION	32.2%	2.4 BILLION	19.5%

Management cites the following competitive advantages it possesses in the banking industry:

-leading market position

-diversified and evolving product offering

-a trusted and recognized brand

-wide and expanding distribution network

-experienced management and board

-access to long-term wholesale funding

Bank of Kigali will be betting on its expansion strategy to maximize shareholder value. The bank intends to increase its footprint to 60 branches in the next 2 years from the current 33 branches. It also aims to increase its Point of Sale terminals to 500 by the end of 2011. As at 31 March 2011, this stood at 100 POS terminals. This shows the banks intent not to rest on its laurels, but further keep enhancing value of its business

By further improving its internet and mobile banking channels, Bank of Kigali aims to serve over 500,000 clients over the next 5 years

Bank of Kigali Retail Lending Breakdown as at 31^st December 2011

	AMOUNT IN KSHS.	% OF RETAIL LOANS
MORTGAGES	1.51 BILLION	48.6%
CONSUMER LOANS	1.23 BILLION	39.6%
OVERDRAFTS	301 MILLION	9.7%
OTHERS	66.1 MILLION	2.1%
TOTAL	3.11BILLION	100%

Bank of Kigali Corporate Lending Breakdown as at 31^st December 2011

	AMOUNT IN KSHS.	% OF CORPORATE LOANS
Corporates	9.25 BILLION	72.9%
Small and Medium Enterprises	3.08 BILLION	24.3%
Non-Business Associations	351 MILLION	2.8%
TOTAL	12.681 BILLION	100%

Bank of Kigali Total Loan Portfolio Breakdown by Industry as at 31^st December 2011

INDUSTRY	AMOUNT IN KSHS.	% OF TOTAL LOANS
COMMERCE % RESTAURANTS	7.2 BILLION	45.7%
CONSTRUCTION	4.61 BILLION	29.2%
MANUFACTURING	1.72 BILLION	11%
OTHERS	1.124 BILLION	7.1%
TRANSPORT & COMMUNICATION	1.102 BILLION	7%
TOTAL LOANS AND ADVANCES	15.8 BILLION	100%

At the end of the 2010 financial year, the bank had Kshs. 215 Million in Treasury Bills and Kshs. 332.8 Million in Treasury bonds. These figures were however scaled up by 31^st March 2011, as the Total investment in Government Securities at that point stood at Kshs. 1.83 Billion, an increase of 134% in just 3 months.

Staff loans stood at Kshs. 294 Million, reflecting 2 percent of Net Loans

The Bank of Kigali is also set to increase its lending to the private sector by 30% after the bank earlier this year secured a credit line from the French Development Agency (AFD)

The agreement obtained from the AFD is worth $20 million (Kshs. 1.8 billion) and has a guarantee fund of $6 million to support Small and Medium Enterprises (SMEs).

It provides a 10-year $20 million line of credit to the Bank with a two-year grace period at the interest rate equal to six-month US$ LIBOR (London Inter-Bank Offered Rate) plus 354 basis points. The credit line will be disbursed in tranches of up to $5 million drawn in advance and is meant to facilitate lending to the SMEs by the Bank.

As at 31^st March 2011, the total retail accounts had grown by 14.3% to 74,145, in comparison to account numbers at 31^st December 2010. Meanwhile, the corporate accounts grew by 37.4% to 11,858 for the same period. This shows that bank’s corporate clientele is growing at a faster rate than the retail one.

The ratio of total banking sector assets to GDP was approximately 22% in Rwanda in 2010, as opposed to 66% and 33% in Kenya and Uganda respectively, implying there is much room for growth

The Rwandan economy has grown by an average of 8.4% over the last 5 years (GDP), with the Services Sector of the economy contributing 47% of GDP.

The country has a Vision 2020 which aims to transform the country into a middle income country by 2020. By 2017, the Government aims to have extended financial services to 80% of the population, further demonstrating the huge void that lies in the Rwandan Financial Services sector waiting to be filled by Bank of Kigali and others

The retail interest rates of Bank of Kigali range from 17.25% to 19.25%. This is quite high. In Kenya, the average lending rate as at January 2011 was 14%. Thus, with the continued march of Kenyan banks into Kigali and other Rwandan towns, these interest rates might come under intense pressure. Equity Bank, whose mass market model has worked brilliantly in Kenya, is planning operations in Rwanda with the opening of a couple of branches in the next few months.

As we had seen in Part 1 of my analysis, the bedrock of Bank of Kigali’s business is the corporate scene which contributed 73% and 80% of the Total Customer Deposits and Total Loans Advanced by the Bank of Rwanda respectively. With the bank of Kigali quoting that 90% of Rwandans are unbanked, they should brace themselves for a massive battle with Equity Bank. Another Kenyan behemoth, Kenya Commercial Bank, has been in Rwanda since 2007 and is looking to tap into the country’s real estate sector. FINA Bank has been in Rwanda since 2004.

In winding up my analysis of Bank of Kigali, the following is a comparative analysis of the bank and Family Bank, a bank of similar size

	BANK of KIGALI 2010                                                                      Kshs.	% CHANGE FROM 2009	FAMILY BANK 2010                      Kshs.	% CHANGE FROM 2009
TOTAL ASSETS	29.6 BILLION	+30.4%	20.19 BILLION	+51.7%
NET LOANS AND ADVANCES	15.2 BILLION	+32.2%	10.21 BILLION	+33%
TOTAL DEPOSITS	23.1 BILLION	+23.9%	15.73 BILLION	+50%
LOAN TO DEPOSIT RATIO	65.6%	+3.9%	64.9%	-8.3%
TOTAL INTEREST INCOME	2.45 BILLION	+20.1%	1.9 BILLION	+38.2%
TOTAL INTEREST EXPENSE	625.6 MILLION	+22.6%	226 MILLION	+13.6%
NET INTEREST INCOME	1.8 BILLION	+17.65%	1.67 BILLION	+42.4%
TOTAL OPERATING INCOME	3.2 BILLION	+33.33%	3.12 BILLION	+42.4%
TOTAL OPERATING EXPENSE	1.5 BILLION	+41.5%	2.62 BILION	+41.7%
COST:INCOME RATIO	46.875%	+2.775%	83.9%	-0.5%
PROFIT BEFORE TAX	1.66 BILLION	+23.9%	501 MILLION	+46.1%
PROFIT AFTER TAX	924 MILLION	+16.8%	391 MILLION	+76.9%

Bank of Kigali has scooped many awards in Rwanda including the 2009 & 2010 Rwandan Bank of The Year in addition to being the being awarded the prize for Best Tax Payer for 8 years running from 2002 to 2009

However, the management would do well to cross-list the shares on the more vibrant Nairobi Stock Exchange to give the company some liquidity.

Announcement of allotment results will be on 12^th August 2011