Business
Why is Equity worth more than KCB?
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. If this does not happen, the report does not state that investors will be holding overpriced shares. Photo/FILE
Posted Monday, August 16 2010 at 00:00
The bank has an average interest margin of 12 per cent for 2010.
The interest margin rose in the second quarter of 2010, to 14 per cent, thanks to increased liquidity as the Central Bank of Kenya eased monetary policy to encourage banks to lend.
More money in circulation meant that banks could get deposits cheaply but on the other hand lower the lending rates piecemeal.
Equity Bank’s half-year interest income jumped 45 per cent to Ksh7.3 billion ($91.25 million) compared with the period ended June 2008, when it stood at Ksh5 billion ($62.5 million).
While KCB is also enjoying growing interest income, as net interest margin rose to 10.62, its cost of funds remains high.
Analysts highlight the fact that term deposits — deposits made by customers for a fixed number of days that are generally more expensive compared with regular savers — account for 20 per cent of the bank’s total deposits.
This will serve to increase the costs of funds for KCB.
It is not only the cost of funds that is increasing, but also the bank’s operating costs, measured by cost-to-income ratio, which at 67 per cent remain higher than Equity Bank’s.
KCB’s high costs have been associated with high staff numbers and running an extensive branch network.
Equity too has been a victim of rising branch costs lately.
Although KCB’s net profit per branch is high, at Ksh30 million ($375,000) for the full year ended December 2009, the ease with which Equity Bank is opening up alternative delivery channels is boosting its transactional income.
The M-Kesho account, a revolutionary tie-in with Safaricom, is estimated to increase the bank’s transactional income.
But even as KCB lags behind Equity in some metrics, it is one step ahead when it comes to mortgage lending, a possible growth avenue in the East African region.
Part of the Ksh12.4 billion ($155 million) from the rights issue is expected to go into the mortgage business.
Equity bank has faltered, thus far, in its attempts to acquire a controlling stake in Housing Finance, which would see it gain a foothold in the mortgage market.
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