Why is Equity worth more than KCB?

KCB and Equity Bank were valued in the same league at the beginning of 2010.

KCB’s market capitalisation, the value of all of a firm’s listed shares, was put at Ksh47.5 billion ($594 million) on the Nairobi Stock Exchange and Equity Bank was worth Ksh56 billion ($703 million).

But eight months on, the two banks have had widely differing fortunes.

Equity’s valuation has grown to Ksh89.8 billion ($1.1 billion) as its share price has rallied to new highs while KCB’s value has shrunk to Ksh41.8 billion ($500 million).

KCB’s share price is clearly underperforming and in the language of the stock market, it is selling at a steep discount compared with its peers, in particular Equity Bank.

This, in theory, underlines the pessimism in the market about the ability of KCB’s management to outperform its peers in delivering profits.

The market is hugely confident that Equity will beat its peers.

Since 2004, KCB has asked shareholders thrice to put in more money in the bank to boost its capital base and this has enabled the management to come out of its bad debt troubles of the 1990s and grow its balance sheet fivefold.

At the beginning of the year, it had used up most of the capital it raised in 2008 and was running out of headroom to grow as it expanded to the East African region.

Last week, it raised Ksh12.4 billion ($155 million), through a rights issue where it sought Ksh15 billion ($187 million). With this new capital, KCB could easily double its balance sheet and future profits.

The current situation, however, begs the question: Why would the market value KCB, the region’s biggest bank with assets of Ksh240 billion ($3 billion), at nearly half the value of Equity, which is just half its size?

Is Equity’s management that good at making money? Some in KCB’s top management ranks believe the market is being too harsh on KCB and does not appreciate its growth potential.

Though most analysts are optimistic about Equity, they are divided over KCB’s share price outlook, though they largely believe in its prospects and regional growth strategy.

They say that, in coming months, the issue is a question of timing: Whether you are buying these shares as a long-term investment or for short-term speculation.

Faida, a stockbrokerage firm, recently issued a report in which it hopes that the market premium that Equity enjoys will be eroded as its profitability grows to match the market’s expectations.