James Mwangi's Stake in Equity Bank Clocks 100 Million Dollars

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Equity Bank’s Group Chief Executive Officer and Managing Director Dr. James Mwangi saw his stake in the bank valued at US$100 Million Dollars (Kshs. 8.9 Billion) when the stock touched a high of Kshs. 49.50 during Monday’s trading at the Nairobi Securities Exchange. The stock later eased to close at Kshs. 48.00. Dr. Mwangi has a direct stake of 3.45% in the bank, which then ups to 4.88% taking into consideration his stake in the bank’s Employee Share Ownership Program (ESOP) as well as a stake in British American Investments Company (Britam).

The Equity Bank (“The Bank”) share price is up 55% so far this year buoyed by their intention to break up the mobile banking hegemony held by Safaricom. Equity, through its subsidiary Finserve Africa Limited, was awarded a Mobile Virtual Network Operator licence that will enable it to ride on existing operators’ infrastructure to offer Telco services. The strategy, labelled ‘Equity 3.0’, will according to the bank help “continue our mission of furthering financial inclusion and innovative service offerings for all Kenyans by presenting our financial services offering on a single platform which will make banking services more accessible, flexible, convenient and affordable”

In comparison, when the bank listed by introduction at the Nairobi bourse in 2006, Dr. Mwangi’s stake stood at 7.32% worth Kshs. 464 Million at the time, putting into perspective the astonishing growth experienced by Equity. At Kshs. 49.50 and taking into account the 2007 bonus (2 for 1) and the 2009 split (10 for 1), the share has appreciated by 2000% from the introductory price of Kshs. 70 per share, giving a peek of the astronomical returns enjoyed by shareholders over the past 8 years.

It is such returns that have led key management and anchor shareholders to cut their stake and, with that, reaping billions of shillings in profits. Those who have exited the Top Ten Shareholders in the rush for profits include the family of the late poultry billionaire, Nelson Muguku, former CEO John Kagema Mwangi as well as current Chairman Peter Kahara Munga.

Dr. Mwangi himself banked Kshs. 1.5 Billion in a flurry of disposals between 2009 and 2011 once the 2 year lock-in period for senior management expired. Mwangi however argued that he was not seeking to divest from the company and that his sales were only enforced by the regulator which restricted executive directors from owning more than 5% of the banks they head.

In mid to late 2013, Dr. Mwangi bought shares on the open market for the first time. He bought 152,480 shares at an average of Kshs. 32. He had previously told The Business Daily in an interview: “Mine is a perpetual investment not for trading. I am a vision investor, so people should not be expecting me to be trading my shares.” In addition to the share sales, the Group MD has also reaped a billion shillings in dividends since the conversion of the Society into a bank.

Dr. Mwangi traces his roots from Kangema village. After losing his father at an early age, he sold fruit, charcoal and milk to assist his mother make ends meet. He states that he enjoyed working hard but he also knew that his education depended on it. He has previously reminisced “it gave me great experience of selling a product and providing a service at a tender age”. In an interview with Africa Business Magazine, Mwangi cites his late mother as the biggest influence of his life. She insisted that all her children, boy or girl, went to school. After excelling in his studies, he ultimately went to secondary school on a Government scholarship. He also counts Mandela as an idol as well as business moguls Jack Welch and Steve Jobs further crediting Microsoft founder Bill Gates with awakening his philanthropic side.

Indeed, Dr. Mwangi has developed a penchant for philanthropy even going to the extent of intimating that he sees himself moving towards full time philanthropy in the future. Last year, the former accountant made a contribution of Kshs. 100 Million to Meru University of Science and Technology while he is also the biggest individual sponsor to the African Leadership Academy in South Africa where he sits on the Global Advisory Council, with donations of Kshs. 30 Million. He used his position as CEO of Equity Bank to initiate the Equity Group Foundation (EGF) which donates 1% of revenue to social causes. EGF teamed up with The Mastercard Foundation and other partners in 2010 to start the Wings to Fly Program which is an initiative to provide education and leadership training to academically gifted yet economically and socially marginalized young Kenyans.

Dr. Mwangi has won a raft of awards alongside the bank for his role in the transformation of Equity and the industry in Kenya. Most notable include:
• 2007 Global Vision Award in Microfinance which he shared with Grameen Bank’s head, Muhammad Yunus, the 2006 Bangladeshi Nobel Peace Prize winner
• 2012 Ernst and Young World Entrepreneur of the Year
• 2012 Forbes Africa Person of the Year
• 2013 Africa Investor African Business Leader of the Year

In addition to being the Chairman of the Kenya Vision 2030 Delivery Board, Mwangi also advises the United Nations Environmental Program (UNEP), The Bill and Melinda Gates Foundation, The Group of Eight (G8) leaders, as well as the Clinton Global Initiative on matters pertaining to banking the poor.


Among Dr. Mwangi’s other investments include a Kshs. 2 Billion stake in Britam and the 5-Star Enashipai Resort and Spa in Naivasha. His personal fortune is estimated to be US$300 Million Dollars.

NSE BANKING SECTOR REPORT - THE TOP 5

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With all top 5 banks now having released their 2012 half year results, I did a review of their performance across different banking and business indicators.

I also analysed their performance against the entire banking industry’s Half Year performance

The total banking sector deposit accounts was 14,893,628 from 12.8 Million, a rise of 16.4%, with Equity Bank (Equity) having 7.8 Million accounts, giving it a market share of 52.4%, up from 49% the previous year

Profitability

Standard Chartered (SCBK) leapt past Co-operative Bank (Co-op) and Barclays (BBK) in the pre-tax profitability rankings. SCBK’s profits soared 87.5% to Kshs. 6.5 Billion from Kshs. 3.47 Billion.

Kenya Commercial Bank (KCB) snatched top position from Equity with an impressive 48% growth in pre-tax earnings to Kshs. 8.5 Billion.

Co-op was the least profitable among the top 5 banks with 5 Billion after profits rose 20.8% to Kshs. 5 Billion

Pre-tax profitability for the total banking industry for the half year period to 30^th June rose 30.4% to Kshs. 53.2 Billion

The Top 5 Listed Banks (Henceforth referred to as ‘The Top 5’) though grew at a much faster pace than the industry as a whole. Profitability grew 38% from Kshs. 24.6 Billion to Kshs. 33.95 Billion.

This figure represents 63.8% of all banking sector profits. This is a rise from 60.28% in June 2011 and 56.6% as at June 2010. Such is the dominance of The Top 5 that one is left wondering whether they will account for two thirds of total banking sector profits but this time next year

Customer Deposits

Total banking deposit base increased by 18.6% to Kshs. 1.66 Trillion from Kshs. 1.4 Trillion

KCB with Kshs. 278.5 Billion remains well ahead of other banks in Customer Deposits. Its deposits which grew also grew the fastest (29.11%) among The Top 5, are double that of both Barclays and SCBK.

BBK’s customer deposits declined by nearly Kshs. 6 Billion or 4.6% to Kshs. 122.5 Billion from Kshs. 128.43 Billion. It is the second half in a row that Barclays has reported a drop in deposits as they had a 1.6% reduction for the period ending June 2011

Cumulatively, The Top 5 had deposits of Kshs. 836 Billion, up from Kshs. 708 Billion. The Top 5’s market share however declined slightly to 50.4% from 50.6% of total banking sector deposits. The figure for H1 2010 was 51.4%

Net Loans and Advances

Barclays managed to grow their loan book by 10% which was an improvement from the previous year’s flat growth. However, with a loan book of Kshs. 101.1 Billion, they now possess the smallest loan book among the top 5 as fellow multinational Stanchart grew advances 24.4% to Kshs. 104 Billion

KCB has a loan book of Kshs. 202 Billion, nearly Kshs. 80 Billion more than Equity which grew advances to Kshs. 124.5 Billion, a rise of 27.4% from the previous year

Overall, the loan book of The Top 5 grew by 100 Billion to Kshs. 644 Billion.

A quarter-on-quarter analysis shows that the 2^nd Quarter the tough macro-economic environment had started taking its toll on the banks with only single digit growth in net loans and advances. The Top 5 as a whole grew the loan book by 2.8% in Q2 2012 from Q1 2012

	LOAN BOOK Q1 2012 Kshs.	LOAN BOOK Q2 2012 Kshs.	% CHANGE
KENYA COMMERCIAL BANK GROUP	195.3 BILLION	202 BILLION	+3.5%
EQUITY BANK GROUP	121.1 BILLION	124.5 BILLION	+2.8%
STANDARD CHARTERED BANK OF KENYA	96.5 BILLION	104.1 BILLION	+7.8%
BARCLAYS BANK OF KENYA	100.3 BILLION	101.1 BILLION	+0.8%
THE CO-OPERATIVE BANK OF KENYA	113.6 BILLION	112.6 BILLION	-0.9%

Quality of The Loan Book

Net non-performing loans (NNPL) for The Top 5 went down by 3% to 10.8 Billion.

The quality of the loan book, measured as a proportion of net non performing loans to net loans and advances, improved to 1.67% from 2.04%. As at June 2010, net non-performing loans consisted of 3.15% of the loan book.

The Central Bank of Kenya (CBK) registered the first Credit Referencing Bureau (CRB) in Kenya, CRB Africa in February 2010 in order for financial institutions to share credit history. A second CRB, Metropol CRB was registered in April 2011

	NNPL/NET LOANS H1 2011	NNPL/NET LOANS H1 2012
KENYA COMMERCIAL BANK GROUP	3.5%	2.47%
EQUITY BANK GROUP	2.02%	0.86%
STANDARD CHARTERED BANK OF KENYA	0.883%	1.53%
BARCLAYS BANK OF KENYA	0.879%	0.96%
THE CO-OPERATIVE BANK OF KENYA	1.53%	1.91%

Balance Sheet

Top 5 total assets sailed past the trillion shilling mark to stand at Kshs. 1.1 Trillion, up 16.7% from the previous year, keeping up pace with the entire banking sector which grew 15.8% to Kshs. 2.2 Trillion from Kshs. 1.9 Trillion.

KCB, with an asset base of nearly Kshs. 350 Billion, comes out top

BBK’s total assets decreased by 4.5% to Kshs. 168.9 Billion

SCBK, Co-op, and Equity saw their total assets increase by 22.8%, 7.8%, and 28.3% to Kshs. 188 Billion, Kshs. 177 Billion and Kshs. 220 Billion respectively

The Top 5 have maintained their 50% holding total banking sector assets

Subsidiaries

All of KCB’s regional units with the exception of Burundi (opened on 8^th May 2012 and expected to break even in 2 years) have broken even. KCB’s operations outside Kenya contributed Kshs. 628 Million in pre-tax profits, nearly double the Kshs. 320 Million they made the previous years.

Equity’s subsidiaries made 741 Million in profits compared to Kshs. 628 Million the previous year. Equity commenced operations in Rwanda in October 2011 and now has 8 Branches (KCB - 10). In February of this year, the bank opened a Tanzanian subsidiary. They now have 4 branches in the country (KCB - 11)

Meanwhile, the likes of Kingdom Securities, Co-op Trust Investment Services and Co-op Consultancy Limited contributed Kshs. 134 Million to Co-op’s profits, down from Kshs. 153 Million over the corresponding period last year. Co-op has recently launched a bank in South Sudan

Interest Expenses

The half saw a very significant increase in the cost of funds as aggregate interest expenses for The Top 5 catapulted by 332% as banks clamoured for deposits during a high inflation period.

The rise was much higher than the increase in Total Interest Income which rose by 72%. Interest expenses rose by at least 300% in 4 of the 5 banks with KCB seeing a 400% rise. Equity’s interest expenses rose at the slowest rate, but this still translated to a 240% jump.

Banks will be hoping this trend reverses in the 2^nd Half of the year

Operational Efficiency

There was a drop in the Cost:Income ratio in 4 of The Top 5. Stanchart’s drop was the steepest and now stands at 40.88%, the lowest among the group.

Equity’s Cost:Income ratio meanwhile rose to 56.96% from 55.63%

Agency Banking

Nearly a quarter of banks in the country have now undertaken agency banking. As at the end of June 2012, 10 banks had contracted 12,054 agents compared to 6 banks that had contracted 6,513 agents during the first half of 2011. This is an 85% rise in the number of agents compared to the branch network by 94 branches or 8.5% to 1,196.

During its half year results presentation, Equity Bank announced that it had more than doubled its number of agents to 5,004 from 2300. Their agents now handle 24% of bank transactions, up from 8%, with the C.E.O Dr. James Mwangi projecting that agencies will overtake branches in terms of transactions and volume of money, though he did not give a specific timeframe.

CBK said that at the end of June, the agency network facilitated 18.7 Million transactions valued at Kshs. 93 Billion

The Kenyan Economy

Monetary tightening over the past year led to the Kenyan Shilling strengthening to 87.75 to 83.51 as at the end of June 2012. A drop in crude prices to $95.65 from $107.95 coupled with good rains resulting in the reduction of staple agricultural commodities led to inflation during the period eased from 14.49% in June 2011 to 10.05% in June 2012. This subsequently fell to 7.74%

This prompted CBK to cut the Central Bank Rate (CBR) to 16.5% from 18%. The Governments cost of borrowing also reduced during the period. The 91 Day Treasury Bill rate is now in the 12% range. In January 2012, it was past the 20% mark. All eyes will be on CBK’s Monetary Policy Committee when they meet on 5^th September with anticipation whether we will see a further cut in the CBR.

Granted, risks to the economy still exist. Since June 2012, the price of crude has rallied past the $100 mark. Indeed, when announcing the latest fuel prices, the Energy Regulatory Commission (ERC) warned that rising oil prices might lead to an increase in pump prices in the next review. Super petrol is now at Kshs. 106.48 from a high of Kshs. 121.13 in May

Sectors such as horticulture and tourism still face uncertainties owing to the Euro Crisis. The tourism industry is being hit by a double blow as it is also reeling from travel advisories against travelling to Kenya were issued in light of recent security threats that the country is facing

Kenya’s economy grew by 3.5% in the first quarter, down from 5.1% a year earlier. This was the slowest growth since 2008. Fitch recently affirmed the country’s Credit rating at B+ with a stable outlook. Kenya doubled its planned Eurobond to 1 Billion Dollars with a tenor of 10 years set for the 2013/2014 fiscal year.

Valuations

	Return on Equity	Return on Assets	Price/Book Ratio	Market Capitalisation         Kshs.	Forward Price:Earnings Ratio
Kenya Commercial Bank	26.2%	3.48%	1.59	73.7 BILLION	6.1
Equity Bank	30.18%	4.9%	2.2	79.6 BILLION	7.4
Standard Chartered Bank of Kenya	38.12%	4.82%	2.36	56.3 BILLION	6.2
Barclays Bank of Kenya	33.35%	5.05%	2.96	75.8 BILLION	8.8
Co-operative Bank of Kenya	30.96%	4.5%	1.47	38.4 BILLION	5.7

Note: All figures were arrived at using closing day data on Wednesday 15^th August 2012. Price/Book Ratio figures include intangible assets

New Developments and Outlook for the Second Half

KCB’s rolled out a mobile banking platform (KCB Mobi) which is not limited to any network. The bank also launched Diaspora Banking intended to serve East Africans working and living in the diaspora.

A lot of players in the banking sector have announced plans for raising capital. Stanchart has already begun the process of raising Kshs. 3.2 Billion in a rights issue. Several banks will be going through similar motions in the months to come.

Diamond Trust Bank and NIC Bank are seeking to raise Kshs. 1.81 Billion and Kshs. 2.07 Billion respectively. Consolidated Bank earlier managed to raise Kshs. 1.7 Billion in a bond offering

Banks are also positioning themselves to benefit from the activities in Kenya’s nascent hydrocarbon industry. KCB has indicated that the recent oil and gas discoveries may boost earnings by as much as 30%. Stanchart was also reported to have scooped the account for Tullow Oil which is prospecting for oil in the country

Co-op Bank is now the 4^th Kenyan bank to have operations in South Sudan, a move which makes it its first foray outside Kenya. Co-op will take a 51% stake in the subsidiary in a joint venture with the Government of South Sudan (G.O.S.S). The bank plans to open 5 branches in Juba by December 2012. G.O.S.S will sell 11% of its stake after 3 years. According to Central Bank of Kenya data, South Sudan accounted for 42% of the Kshs. 2.3 Billion shillings profit that was made by Kenyan banks outside Kenya.

Tabular Summaries of The Top 5’s Half Year

	KENYA COMMERCIAL BANK GROUP	EQUITY BANK GROUP	STANDARD CHARTERED BANK OF KENYA	BARCLAYS BANK OF KENYA	THE CO-OPERATIVE BANK OF KENYA
TOTAL ASSETS	349.3 BILLION	220 BILLION	188.3 BILLION	168.9 BILLION	177.7 BILLION
NET LOANS AND ADVANCES	202.1 BILLION	124.5 BILLION	104 BILLION	101.1 BILLION	112.6 BILLION
CUSTOMER DEPOSITS	278.5 BILLION	151 BILLION	138.2 BILLION	122.5 BILLION	145.7 BILLION
LOAN:DEPOSIT RATIO	72.5%	82.4%	75.3%	82.5%	77.3%
TOTAL INTEREST INCOME	20.6 BILLION	14.9 BILLION	9.9 BILLION	10.6 BILLION	13 BILLION
TOTAL INTEREST EXPENSE	6.3 BILLION	3.6 BILLION	2.6 BILLION	1.7 BILLION	5.5 BILLION
NET INTEREST INCOME	14.3 BILLION	11.3 BILLION	7.3 BILLION	9 BILLION	7.4 BILLION
TOTAL OPERATING INCOME	21.9 BILLION	17.6 BILLION	11 BILLION	13.7 BILLION	11.5 BILLION
TOTAL OPERATING EXPENSE	13.4 BILLION	10 BILLION	4.5 BILLION	7.4 BILLION	6.6 BILLION
NET NON PERFORMING LOANS	5 BILLION	1.1 BILLION	1.6 BILLION	971 MILLION	2.2 BILLION
PROFIT BEFORE TAX	8.5 BILLION	7.6 BILLION	6.5 BILLION	6.3 BILLION	5 BILLION
PROFIT AFTER TAX	6.1 BILLION	5.4 BILLION	4.5 BILLION	4.3 BILLION	4 BILLION

	KENYA COMMERCIAL BANK GROUP	EQUITY BANK GROUP	STANDARD CHARTERED BANK OF KENYA	BARCLAYS BANK OF KENYA	THE CO-OPERATIVE BANK OF KENYA
TOTAL ASSETS	+24.9%	+28.3%	+22.8%	-4.5%	+7.8%
NET LOANS AND ADVANCES	+15.3%	+27.4%	+24.4%	+10.1%	+18.4%
CUSTOMER DEPOSITS	+29.1%	+21.9	+26.5%	-4.6%	+11.5%
LOAN:DEPOSIT RATIO	-8.7%	+3.6%	-1.3%	+11%	+4.5%
TOTAL INTEREST INCOME	+136.9%	+78.8%	+96.7%	+36.2%	+78.4%
TOTAL INTEREST EXPENSE	+404.9%	+242.8%	+397.6%	+301.5%	+317.8%
NET INTEREST INCOME	+35.9%	+55.2%	+61.9%	+21.4%	+25%
TOTAL OPERATING INCOME	+29.8%	+33.5%	+54.2%	+9.7%	+23.1%
TOTAL OPERATING EXPENSE	+20.3%	+36.7%	+22.7%	+3.5%	+24.8%
NET NON PERFORMING LOANS	-18.7%	-45.6%	+115.8%	+20.3%	+47.9%
PROFIT BEFORE TAX	+48.2%	+29.3%	+87.5%	+18.1%	+20.8%
PROFIT AFTER TAX	+50%	+14%	+81.5%	+17.2%	+22%

Disclaimer

The information in this report originates from public sources that are deemed reliable. This document does not constitute an offer, or the solicitation of an offer, for the sale or purchase of any security. Whilst every care has been taken in preparing this document, no representation, warranty or undertaking is given and no responsibility or liability is accepted by @kenyainvestor as to the accuracy of the information contained and opinions expressed herein.