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Investment Recommendation Report: Equity

Faida Research - November 8, 2019 - 0 comments

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We recommend a LONG TERM BUY on Equity Group Holdings. Currently, Equity is trading at a P/B of 1.94x (at a price of KES 48.85) compared to the average banking sector P/B of 0.98x as at 8th November 2019. We attribute the high P/B ratio to high growth expectations by investors. Equity has a high ROaE of 21.1% (the second highest in the banking sector) which is well above the industry average of 13.5%.

The current business model, hinged on technology, innovation and business diversification affirms the group’s competitive advantage in an industry adapting to the digitization strategy amidst the current regulatory challenges. Thus, we believe this business model will support growth in the long-term.

The group’s business model is tailored to address the emerging challenges in the banking sector. The model is hinged on the following focus areas:

  • Non funded income growth – to support net interest income
  • Regional diversification – to mitigate against regulatory risk
  • Strengthening liquidity and balance sheet agility
  • Treasury operations – to enhance treasury income
  • Asset quality (especially with tougher regulations in the horizon)
  • Innovation and digitization
  • Efficiencies and cost optimization

In a bid to increase their footprint across Africa, the bank announced plans to acquire four banks in Rwanda, Zambia, Tanzania and Mozambique.  Equity Bank plans to acquire (currently carrying out due diligence enquiries on the banks) a 62% stake in Banque Populaire du Rwanda and full ownership of BancABC Zambia, BancABC Tanzania and BancABC Mozambique in a share- swap deal with London-listed Company Atlas Mara. This will expand the bank’s operations to 8 countries within the African Continent. In addition the bank is set to acquire Banqué Commerciale du Congo (BCDC) in DRC.

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