Market Commentary:
- The All Share Index gained by 0.2% to close the day at 132.63 while the NSE 20 Index declined marginally by 0.02% to close the day at 1,900.81. Activity in the banking sector accounted for 66.3% of the day’s traded value with notable price movements on Equity (+3.8% to KES 33.05), I&M (+2.6% to KES 50.25) and Absa (-3.2% to KES 9.20). Equity Group gained on the back of foreign buy-side activity.
- Kenya-Re was among the top gainers (+9.0% to KES 2.18) which we attribute to positive investor sentiment following Global Credit Ratings (GCR)’s positive credit rating (AA+ with a stable outlook). Overall, foreign investors maintained a net-selling position accounting for 88.3% of the day’s sales against 37.4% of the day’s purchases.
News Highlights:
Equity Looking to Obtain KES 50.0 billion Debt in 3 years
Equity Group is looking to obtain KES 50.0 billion in capital in the next three years. The capital, in form of medium- and long-term debt, is to be acquired from international lenders in a bid to boost both liquidity and capital positions.
We note that as at 1Q2020, the Kenyan banking subsidiary had a lower capital buffer compared to the group. The excess core capital/total risk weighted assets and excess total capital/total risk weighted assets for the Kenyan unit stood at 2.1% and 2.3% respectively compared to 7.0% and 6.5% respectively for the group. The bank’s and group’s liquidity ratios were relatively high at 54.9% and 51.6% compared to a statutory minimum of 20.0% for both.
The group’s borrowing stood at KES 52.6 billion as at the 1Q2020(KES 56.6 billion as at FY2019). Equity is set to receive KES 5.0 billion from the International Finance Cooperation (IFC). As at FY2019, Equity’s debt from the IFC stood at KES 17.4 billion, incurring finance costs of KES 1.1 billion.
According to the CEO, the decision against a dividend payout for the FY2019 was a good gesture to partners as the lender called on them to support customers. The move had been driven by a need to preserve capital and liquidity with management expecting the pandemic and its impact to last 18 months.
Commentary
We expect the bank to target Development Finance Institutions (DFIs) for lenient terms (lower interest rates and longer maturity) as majority (90.0%) of the bank’s borrowings are long term and medium-term loans. Generally, interest rates are relatively lower and Equity Group is likely to benefit.
We expect the bank to use the proceeds for onward lending, particularly to SMEs that have been affected by the Covid-19 pandemic. This does come at a higher cost of risk especially if the effects of the pandemic drag out into the medium term.
Recommendations:
Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA
Hold- Safaricom
Sell- Stanchart, Bamburi, HF
