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Update as at 30th July 2012
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EQUITY RESEARCH
Equity Bank Ltd
Earnings & Valuation Update
Executive Summary
We downgrade our BUY recommendation to a HOLD. Our
target price shifts from Kes.25.80 to Kes.19.90. We expect
Equity to report full year EPS of Kes.2.71 for the 12 months to
December 2012. This is a 3% decrease relative to the previous
year’s EPS of Kes.2.79. We expect the customer base to
expand to 8.3M customers from 7.1M in December 2011.
Our HOLD recommendation is informed by the following;
Dual Listing? In recent times, Equity Bank has hinted
at a dual listing in a developed market possibly South
Africa, London or New York. The drive behind the
move is to escape the relative illiquidity that exists in
the regional markets and access to greater
capitalisation funds. This will be a watershed moment
for fast-growing enterprises in the region and a
positive step in searching for alternative sources of
funds. The time framework is still undecided.
Declining Customer Growth Rate: With 67% banking
penetration we expect tepid growth with the banking
industry nearing maturity. The latest set of results
(30/06/2012) shows the bank has grown its customer
base to 7.8million. This figure already represents 51%
of Kenya’s banked population. Equity’s customer
growth averaged 100,000 accounts per month which
is unchanged from the first quarter of last year. We,
however, remain concerned about the rate of
customer growth because of equity’s high volume-
low margin business model. The Non-Interest
Income (stands at 56% of net interest Income)
continues to contribute greatly to Equity’s revenue.
Furthermore, these revenues are likely to suffer
when customer numbers decline since commissions
are charged on various products offered to
customers.
The figure across shows the percentage change
decline in customer numbers.
Report Date 30 July 2012
Bloomberg Ticker EQBNK:KN
Share statistics
Price (Kes) 25/07/2012 22.75
Rating HOLD
Target Price (Kes) 19.90
Market Capitalisation (Kes) 84,221Mn
52 Week High (Kes) 25/07/2012 24.25
52 week Low (Kes) 25/07/2012 15.50
Common Shares Outstanding 3,702m
Year End 31st
Dec.
EPS (Kes) 2011 2.79
Trailing Twelve Months P/E 25/07/2011 8.15x
Trailing Dividend Yield 2011 4.21%
Share Price Performance
3 month +7.06%
6 months +37.88%
12 months -1.09%
Website: www.equitybank.co.ke
Bloomberg: GNCP <GO>
www.genghis-capital.com
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30 July 2012
Equity Bank
Earnings & Valuation Update
2
Low Barriers to Entry in Regional Markets: Equity
derives 89% of its revenues from Kenya. In a bid to
diversify its markets it entered Southern Sudan,
Ugandan and Rwandan markets that contribute 6%,
4% and 1% respectively to Equity’s top line. It’s
important to note that equity’s formidable Kenyan
brand name has not yet gained prominence in these
markets. Further we do not see any barriers to entry
in these regional markets thus the recent entry of
other banks in the same markets. It remains to be
seen if Equity can successfully export its retail
banking model to these new markets.
Reduced Trading Income: We expect trading income
to reduce to Kes.1.3Bn from Kes.2.4Bn. In our view
equity will not realize the excess trading income
realized last year from shorting the Kenyan Shilling.
The stabilization of the Kenyan shilling albeit through
government intervention, we estimate will see
trading profits reduce by almost 50%.
CBR Cut to 16.5%: On 5th
July 2012 the MPC cut the
base lending rate by 150bps. The effect will be a
revision of its loans downwards possibly resulting in
softening interest margins. It’s important to note that
Equity did not raise interest rates on its old loans
during the high interest rate period (rates peaked at
22%) but instead charged these new rates to its new
loans. These are the rates it will be forced to revise
downwards. Furthermore we expect that interest
income earned as a result of the high interest rates to
buoy HY2012 earnings announcements. The full year
results, that we anticipate will be lower, however
fully capture the effect of the reduced interest rates.
Competition in the Agency Banking Space: Equity
bank continues to reap from the Agency Banking
model, with the number of agents rising 472% from
875 to 5,004 agents as at H1 2012. As at Q1 2012, the
number of agent transactions had risen
phenomenally to 724,000 transactions from 42,000 in
January 2012 with a transaction value of Kes.5.56Bn
in deposits vs. Kes.2.95Bn in withdrawals. That said
Equity’s Agency Banking faces stiff competition from
2 fronts:
o Other local banks that have also launched
an agency banking product.
o M-Pesa has 45,861 agents and controls over
90% of Kenya’s mobile money transfer
market. Agency banking allows customers to
deposit and withdraw money at designated
agents. Since customers can also deposit
money into their M-Pesa accounts, it
remains to be seen what Equity Agency
Banking product will offer as a competitive
advantage.
Also note that Equity Bank continues to reap from its Telco
Linkages with “Eazzy 24/7” (SMS Banking) also showing strong
growth from a low base. We expect this will feed into a lower
cost/income ratio going forward (all things constant), with
Equity’s sustainable cost to income ratio seen at 52% (at H1
2012 cost/income ratio is 57%). This is an improvement from
level of a 63.45% registered by the bank over the past four
years.
“M-Kesho”, an innovative flagship product, was launched on
18th
May 2010 with the intention of growing the bank’s
customer numbers through provision of interest bearing
accounts directly to their mobile phones. “M-Kesho” had a
shelf life of two years before its sudden pull out from the
market in early 2012. No official comments were released but
difficulties on reaching a working agreement between Equity
Bank and Safaricom Limited was rumoured to be the downfall
of this hugely popular product.
Valuation
We computed Equity’s Fair Value by averaging 5 valuation
methods obtaining Kes.19.90. This represents a
12.53% downside from the price as at 25th
July 2012.
We assume that income ratio/customer deposits will remain
at 0.17 for purposes of computing our model. Other
assumptions include a WACC of 20% and a Required Return on
Equity of 22% for our FCFE model. We further assumed a beta
of 1.69 and a risk premium of 6%. Our risk free rate was
11.85%; the coupon rate of a 5 year bond as at 21st
July 2012.
We obtained the following fair value computations.
91
93
95
97
99
101
103
105
25-Jul-11 25-Nov-11 25-Mar-12 25-Jul-12
Equity Share Price NSE 20 Share Index
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30 July 2012
Equity Bank
Earnings & Valuation Update
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Appendix:
Financial Forecasts (Kes MN)
2012 E 2013 E 2014 E 2015 E 2016E 2017 E
Interest Income 22,757 26,047 29,337 32,627 35,917 37,713
Interest Expense (3,347) (3,830) (4,314) (4,798) (5,282) (5,546)
Net Interest Income 19,410 22,216 25,023 27,829 30,635 32,167
Net fee and commission Income 2,622 3,002 3,381 3,760 4,140 4,347
Net trading Income 1,332 1,332 1,332 1,332 1,332 1,399
Other operating Income 9,130 10,450 11,770 13,090 14,410 15,131
Net Non-Interest Income 13,084 14,784 16,483 18,182 19,882 20,876
Operating income before impairment losses
32,494 37,000 41,506 46,011 50,517 53,043
Net impairment loss on financial assets
(2,061) (2,298) (2,589) (2,879) (3,169) (3,328)
Operating income after impairment losses
30,433 34,702 38,917 43,133 47,348 49,715
Depreciation and Amortisation (2,163) (2,637) (2,958) (3,278) (3,598) (3,778)
Total Operating Expenses (17,750) (20,350) (22,828) (25,306) (27,784) (29,174)
EBIT 12,682 14,352 16,089 17,826 19,563 20,542
EBITDA 14,845 16,989 19,047 21,104 23,162 24,320
EBITDA MARGIN 45.7% 46% 45.9% 45.9% 45.8% 45.8%
Share of profit in associate 186 223 268 321 386 405
Profit before income tax 12,868 14,575 16,357 18,148 19,949 20,947
Income tax expense (2,831) (3,207) (3,599) (3,992) (4,389) (4,608)
Tax rate (Effective) (22%) (22%) (22%) (22%) (22%) (22%)
Profit for the year 10,037 11,369 12,758 14,155 15,560 16,338
EPS 2.71 3.07 3.45 3.82 4.20 4.41
DPS 0.92 1.04 1.17 1.29 1.42 1.49
DISCOUNTED CASHFLOW VALUATIONS
METHOD FAIR VALUE
FCFE 22.97
FCFF 18.62
DDM 17.35
RELATIVE VALUATIONS
P/B 20.97
P/E 19.40
AVERAGE 19.88
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Equity Bank
Earnings & Valuation Update
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CONSOLIDATED FINANCIAL STATEMENT
2012E 2013E 2014E 2015E 2016E 2017E
ASSETS
Cash and cash equivalents 32,494 37,000 41,506 46,011 50,517 53,043
Loans and advances to customers 133,863 153,217 172,571 191,924 211,278 221,842
Finance lease receivable 1 1 1 1 1 1
Investment securities 32,998 38,304 43,143 47,981 52,820 55,460
Amounts due from related parties 124 124 124 124 124 124
Other Assets 5,622 6,401 7,181 7,960 8,740 9,177
Tax Recoverable 107 128 144 160 176 184
Investments in associates 1,548 1,763 1,978 2,192 2,407 2,527
Investments in subsidiary companies - - - - -
Property and equipment 11,712 13,187 14,789 16,390 17,992 18,892
Prepaid Leases 30 30 30 30 30 30
Intangible assets 1,532 1,745 1,957 2,170 2,382 2,501
Goodwill 877 877 877 877 877 877
Deferred tax assets 283 321 360 399 439 461
Total Assets 221,192 253,099 284,659 316,221 347,782 365,120
LIABILITIES
Deposits from Customers 167,329 191,521 215,713 239,905 264,098 277,302
Tax payable 832 930 1,044 1,158 1,273 1,336
Other Liabilities 2,907 3,310 3,713 4,116 4,520 4,746
Borrowed funds 14,016 16,819 20,152 24,152 28,952 29,210
Deferred tax liability - - - - - -
Total Liabilities 185,085 212,580 240,622 269,332 298,842 312,594
EQUITY
Share capital 1,851 1,851 1,851 1,851 1,851 1,851
Share premium 12,161 12,161 12,161 12,161 12,161 12,161
Retained earnings 17,873 21,697 24,610 26,854 28,294 31,542
Loan loss reserve 937 1,073 1,208 1,343 1,479 1,553
Other reserves (113) (113) (113) (113) (113) (113)
Proposed dividends 3,398 3,849 4,320 4,793 5,268 5,532
Total Equity 36,107 40,518 44,037 46,889 48,940 52,526
Total Liabilities and Equity 221,192 253,099 284,659 316,221 347,782 365,120 Source: Genghis Capital Estimates
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30 July 2012
Equity Bank
Earnings & Valuation Update
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Contacts
Report By: Anthony Kimani, Research Analyst | Tel: +254 20 2774781 | Email: [email protected] Evelyne Wanjiku, Research Analyst | Tel: +254 20 2774781 | Email: [email protected]
Report By: Moses Waireri, Research Analyst | Tel: +254 20 2774781 | Email: [email protected] Edgar Wamalwa, Head of Research | Tel: +254 20 2774767 | Email: [email protected]
Mbuthia Irungu, Head Dealer | Tel: +254 20 2774777 |+254 721 257472 Email: [email protected] George Guy, Fixed Income Dealer | Tel: +254 20 2774756 | Mob: +254 720 766078 | Email: [email protected] Andrew Maina, Equity Dealer | Tel: +254 20 2774789 | Mob: +254 722 667936 | Email: [email protected]
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Genghis Capital Ltd, Prudential Assurance Building, Wabera Street, Nairobi. Tel: +254 20 2774760 Fax: +254 20 246334
