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Investment Recommendation Report: Equity

- May 4, 2020 - 0 comments

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We recommend a LONG TERM BUY on Equity Group Holdings. The
counter is currently trading at a trailing P/B of 1.27x (at a price of KES
37.65) compared to the banking sector P/B of 0.80x as at 30th April 2019.
Our recommendation is based on the company’s 1) Superior digital
banking capabilities ii) Agile Balance Sheet- liquidity ratio of 52.1% and
core capital/risk weighted asset ratio of 19.8%.

Key Drivers
 We expect the bank to continue reaping the benefits of its
digitization strategy. With the current economic shock due to
Covid19, we expect the bank to leverage on its robust digital
capabilities to increase its service offering on digital platforms.
As at FY2019, 97% of all transactions took place on alternative
channels. We expect to see a significant growth in retail
transaction numbers on mobile and internet banking.

 With expected retail migration to alternative channels, we see
potential for improved efficiency. The group has recorded a 3
year declining trend from 53.5% in FY2017 to 51.0% in FY2019.

Key Risks
 We expect to see asset quality deterioration should the
Covid19’s economic impact worsen with expected default to
hit SMEs the hardest (59% of Equity’s loan book). The NPL ratio
and cost of risk as at FY2019 stood at 9.0% and 1.3% respectively.
From a sectoral perspective, manufacturing, trade, transport,
agriculture and personal loans will bear the brunt of which the
group’s total contribution to these sectors is a total of 62%. We
expect this to be partially mitigated by the bank’s strong liquidity
position further supported by its adequate capital adequacy

In adaptation to challenges brought up by Covid19, Equity has:
 Increased services on its digital platforms targeting
especially retail and SMEs and introduced online forex
trading and web banking for chamas.
 Customers with existing loan facilities can renegotiate
 Free bank to mobile transfers.
 No charge on customers using cards to pay bills, utilities,
shopping, fuel as well as other services.
 Activation of digital account opening and
management of mobile and internet apps.
 Debit and prepaid cards both Visa and MasterCard now
Some of these measures may lead to lower NFI.

FY2019 Results Commentary
 Equity Group reported a 14.1% y/y growth in profit after tax at
KES 22.8 billion, in line with expectation. RoAE increased to 21.8%
from 21.1% in FY2018 while RoAA was flat at 3.6%.
 Interest income grew by 12.2% y/y to KES 59.7 billion. This was
offset by a 24.6% y/y growth in interest expense to KES 14.7 billion
as cost of funds grew by 20bps y/y to 2.9%. As a result, net
interest margin grew by 8.7% y/y to KES 45.0 billion (NIMs
declined by 20bps to 8.3%)
 Non-funded income grew by 19.1% y/y, above our estimates
driven by bond trading income (+122.0% y/y), Eazzy Platform
(+82.0%y/y) and mobile banking income (+15.0%), growing the
group’s quality of earnings. Non funded income contributed
40.0% to total income from 38.0% in FY2018
 Loan loss provision significantly increased by 51.7% y/y to KES 4.4
billion. Gross NPLs stood at 9.0% from 7.6% in FY2018 driven by
the SME (NPL 11.3%) and Large enterprises (NPL 9.4%) segments.
As a result, cost of risk went up to 1.34% from 1.02%.
 Other operating expenses grew by 9.5% y/y to 38.2 billion.
Despite this, cost to income ratio declined to 51.0% from 52.4%
in FY2018 as a result of the digitization strategy, signalling
improved efficiencies.
 In line with expectation, there was a reallocation of funds from
government securities (y/y growth of KES 7.0 billion) to the loan
book (23.3% y/y growth to KES 366.4 billion). Loan book
segmentation included: 59% SMEs, 22% consumers, 13% large
enterprises, 3% agriculture and 3% micro enterprises.
 Growth in loan book was also funded by customer deposits,
which grew by 14.2% y/y to KES 482.2 billion and 26.0% growth in
 As highlighted in the banking sector report, the group continued
to record positive performance in its subsidiaries’ performance.
Subsidiaries accounted for 18% and 27% of group’s total assets
and PAT respectively.

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