Dr. Mwangi’s regional foresight rains dollars

For Dr. James Mwangi of Equity Bank, a challenging macroeconomic environment, currency devaluation, and a high-interest rate setting feel not only familiar but almost as if they had been foreseen.

While Equity Bank’s stock has experienced a 21 percent decline to Kes36.05 per share during the current slump on the Nairobi Securities Exchange, which has earned it the unenviable title of the worst-performing exchange globally, its stock price remains one of the better-performing options.

In contrast, close rival KCB has seen a 46.8 percent decrease in its share price, now standing at Kes20.95 per share, while Co-op has faced a 34 percent decline, with each stock trading at Kes11.7. Only NCBA has seen a share price increase of 18.5 percent to Kes37.65.

Equity’s regional diversification

Equity Bank has managed to stay resilient, partially due to stock recommendations that highlight the bank’s diversification strategy beyond Kenya’s borders, capitalizing on its dominant regional presence to weather the current economic challenges.

“EFG Hermes,” in a note to investors earlier this year, stated, “Equity Bank is our top pick in the sector because of its: attractive valuation; strong execution of growth expansion outside Kenya; higher quality loan portfolio; and management ownership.”

However, it’s worth noting that over a decade ago, Equity Bank found itself in a similar global market upheaval after the 2008 financial crisis, a prolonged drought, and the post-election crisis in Kenya. Dr. Mwangi recognized the concentration risk of his bank in the Kenyan market and sought refuge in the region.

In 2008, during the aftermath of the global financial crisis, coupled with a prolonged drought and political unrest in Kenya, Equity Bank embarked on its expansion into Uganda and accelerated its presence in the region. Dr. Mwangi acquired Equity Bank Uganda Limited, formerly known as Uganda Micro Finance Limited, which the Bank acquired for Kes1.7 billion in June 2008, converting it into a commercial bank by December of the same year.

Read also: Equity turned to region as dollar sales flattened under ex-CBK Governor’s last months

Cyclical economic swings

This move marked the establishment of the sixth subsidiary in the Banking Group and paved the way for expansion into Sudan and other East African countries. Equity Bank evolved into one of the largest regional lenders, which now proves invaluable in the face of challenging local conditions.

Before this regional expansion, the Bank had primarily diversified its investments within Kenya, with five wholly-owned subsidiary companies, including Equity Consulting Group, Equity Investment Services Limited, Equity Nominees Limited, Finserve Africa Limited, and Equity Insurance Agency Limited.

Dr. Peter Munga, the then Chairman of Equity Bank, celebrated this historic expansion in the lender’s annual report: “The year 2008 was truly historic as we embarked on our regional expansion program by rolling out operations in Uganda. Equity Bank Uganda Limited, a wholly-owned subsidiary of Equity Bank Limited, is now operational, while plans to roll out in Sudan are at an advanced stage.”

It appears as though Dr. Mwangi, one of the longest-serving bank CEOs, had anticipated the cyclical nature of economic swings and predicted the return of challenging times.

In 2023, as the Kenyan market grappled with high inflation, a high-interest rate environment, and fiscal strain that led to increased taxes and income deductions by the state, Equity Bank was prepared to invest in growth in East Africa as a silver lining.

Equity Bank’s regional expansion strategy has effectively reduced its reliance on the contribution of the Kenyan banking unit, with other subsidiaries contributing 46 percent of total assets and 45 percent of Profit Before Tax.

Importantly, with a larger share of trade and dollar deposits across the region, Equity Bank, like many other banks that have tapped into the regional market, is earning larger profits in hard currency.

Equity gets bigger share of regional trade

“There could be two benefits in this regard. First, through the expansion, the bank gets a bigger share of the trade between Kenya and the region. As Kenya has a trade surplus, this gives them access to additional FX,” said Sunil Sanger, Managing Director of Orion Advisory Services.

“Second, the regional subsidiaries could be generating deposits in USD – these could be lent to their Kenyan customers. However, the USD from deposits cannot be sold to Kenyan customers.”

A significant portion of Equity Bank’s revenue comes from trading dollars and facilitating cross-border trade, allowing the bank to continue serving customers effectively despite the current market shortages.

According to Equity’s Half-Year results, the bank made three times the amount trading forex in the regional market compared to its earnings from forex trades in Kenya. This significantly boosted the contribution of subsidiaries to the bottom line, accounting for nearly half of the total profit.

The results reveal that Equity Bank generated Kes8.4 billion from trading forex in East Africa during the period, an increase from Kes5 billion in the same period the previous year, while the Kenyan unit’s contribution remained at Kes2.8 billion.

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