We recommend a LONG-TERM BUY on Equity Group Holdings. The counter is currently trading at a trailing P/B of 1.22x (at a price of KES 36.10) compared to the banking sector P/B of 0.73x as at 25th September 2020. It is also trading at a 24.2% discount to its 3-year average P/B multiple of 1.61.x. The group remains fundamentally sound hence our recommendation is to investors with a long term view.
Management guidance is towards a loan book growth of 8.0%-9.0% with deposit growth maintaining the same momentum as 1H2020. We expect cautious lending towards high COVID-19 impacted sectors with increased focus on health, agriculture and manufacturing.
With the repeal of the interest rate caps, we expect interest income growth to be driven by loan book growth with management expecting loan yields to remain static for 2H2020 (to manage asset quality pressures).
With focus on mobilizing more current and transactional deposits, particularly through digital channels, and with subsequent repricing of borrowed funds (due to LIBOR declining), we expect funding costs to remain relatively stable.
We expect the group to maintain its conservative approach with the growth in government securities expected to be higher than that of the loan book for FY2020. As at 1H2020, treasury income accounted for 31.0% of total interest income, with the government securities portfolio increasing by 20.0 % y/y.
Non Funded Income
Non-funded income has been a key growth driver for the group, managing income volatility from interest income. With the extension of the mobile money fee waivers, we expect continued impact to mobile banking commissions. Management expects to focus on treasury and trade finance to mitigate the loss of mobile commissions.
With 98.0% of the bank’s transactions now outside branches, the group has leveraged on its robust digital capabilities to increase its service offering on digital platforms. In 1H2020, the Eazzy Platform recorded strong double-digit growth in transaction numbers (EazzyApp +37%, EazzyFX +550%, EazyBiz +11%, EazzyPay +49% and EazzyNet +33%). We expect this momentum to sustain for 2H2020.
We expect the bank to continue reaping cost optimization benefits of its digitization strategy through its variable cost structure. With continued retail migration to alternative channels, we see further potential for improved efficiency. The group has recorded a 3-year declining trend in its cost to income ratio (excluding provisions) from 53.5% in FY2017 to 51.0% as at FY209 (48.8% in 1H2020).
11.0% of the loan book is non-performing with 48.9% of the performing loans impacted by Covid-19. Out of these 65% are in SME and 26% in large corporates. From a sector perspective, 34% are in real estate, 23% in trade, 10% in transport and communication, 7% in tourism and hospitality and the rest across different sectors. The restructuring on the covid impacted loans allows for a moratorium of upto 3 years. With exposure to highly impacted customer categories and sectors, we expect continued pressure on the asset quality. The cost of risk is expected to remain elevated within the same levels of 1H2020. The bank’s high liquidity ratio (54.2% as at 1H2020) will help mitigate the asset quality pressures.
We expect the group to focus more on regional economies, spreading its business risk. In 1H2020, Rwanda and Uganda subsidiaries reported a 7.0% and 6.0% increase in profitability despite the prevailing economic uncertainties. While we are positive on business diversification though regional expansion, we remain concerned around: i) high cost of running these subsidiaries (average cost to income ratio of about 64.1%) ii) economic shocks within all subsidiaries due to the pandemic has potential to drag out group’s overall profitability.
With completion of the BCDC acquisition (amalgamating it with the Equity DRC subsidiary), we see potential for a high growth business. We believe DRC has scaling potential given more than 25 million people are excluded from the financial system. Equity is armed with superior digital capabilities of which we expect them to replicate the Kenyan subsidiary digitization strategy. Management expects the subsidiary to generate returns above cost of capital in the medium-term.