East Africa’s largest lender by assets Equity Group Holdings (EGH) Ltd is fighting to keep its underperforming subsidiaries in Tanzania, South Sudan and Rwanda afloat through additional funding to strengthen its ‘vertical’ growth plan, mooted after abandoning further cross-border acquisitions last year.
The bank, which is listed on the Nairobi Securities Exchange, was targeting to hit a Ksh1 trillion ($9 billion) in asset base and 100 million customers by 2024 through a pan-African expansion programme that failed last year, after the Ksh1.18 trillion ($10.63 billion) lender failed to acquire four banks in Rwanda, Tanzania, Zambia and Mozambique, which it considered key to its ambitious plan.
Failure to proceed with the acquisition of more banks in the continent prompted the lender’s board to consider achieving the same feat through vertical (organic) growth that involves strengthening and consolidating its existing businesses in six markets including Kenya, Democratic Republic of Congo (DRC), Tanzania, Rwanda, Uganda and South Sudan.
However unaudited financial statements for the nine months to September 30 shows underperformance of Equity’s three subsidiaries (South Sudan, Tanzania and Rwanda), which contributed a paltry Ksh1.42 billion($12.79 million) to the Group’s overall net profit of Ksh26.9 billion ($242.34 million).
The South Sudan subsidiary contributed the least profit of Ksh20 million ($180,180.18) followed by Tanzania (Ksh200 million, $1.8 million) and Rwanda (Ksh1.2 billion, $10.81 million).
Sovereign risk factor
On the other hand the best performing subsidiaries included Kenya (Ksh21 billion, $189.18 million), EquityBCDC (Ksh2.2 billion, $19.81 million) and Uganda (Ksh2.1 billion, $18.91 million).
The three subsidiaries are also struggling in deposit mobilisation with Equity bank South Sudan collecting the least of Ksh8.3 billion($74.77 million), followed by Tanzania (Ksh22.1 billion,$199.09 million),Rwanda (Ksh34.9 billion,$314.41 million).
This compares unfavourably with Equity Bank Kenya which mobilised deposits valued at Ksh604.1 billion ($5.44 billion), Equity BCDC (Ksh304.6 billion, $2.74 billion) and Uganda (Ksh64.3 billion, $579.27 million).
“Essentially, we have diversified our sovereign risk among the six countries so there is no concentration after learning lessons from South Sudan that sovereign risk can derail business,” Group Chief Executive James Mwangi told investors in Nairobi last week.
In 2017, Equity shut down seven of its branches in South Sudan citing currency devaluation and persistent political instability.
Last year, its subsidiaries in Uganda and the DRC were the most profitable and resilient investments in a period characterised by slowing economic activities and investor uncertainty as a result of the Covid-19 pandemic.
Equity Bank Uganda’s net profit for the year ended December 31, 2020, surged 62 percent year-on-year to Ksh1.7 billion, followed by Equity BCDC whose net income grew by four percent to Ksh1.3 billion.
During the year, Equity Bank Tanzania made a net loss of Ksh300 million ($2.7 million).
Uganda and DRC subsidiaries maintained their good performance for the nine months period to September 30 this year.
“We have seen some of our subsidiaries like Uganda growing its deposits by 47 percent and its asset base by 43 percent and beaten by Equity BCDC in DR Congo who have grown their deposits 51 percent and the assets by 47 percent. And for the first time we now see Kenya reduced to contributing only 58 percent of our total deposits and subsidiaries contributing 42 percent,” said Dr Mwangi.
Group statements show Equity’s South Sudan operations as the most inefficient subsidiary with the cost-to-income ratio (CIR) going as a high as 93.5 percent followed by Equity BCDC (73.5 percent), Equity Bank Tanzania (64.4 percent), Equity Bank Uganda (51.1 percent) and Equity Bank Kenya (39.8 percent).
Cost-to-income ratio is an important financial indicator in determine the profitability of banks that looks at the cost of operations compared with the income generated.
Lower ratios mean that a bank is running more profitably whereas higher ratio shows that the bank is not operating profitably since operating expenses are higher than the revenues.
Equity Group has a total of 337 branches across the region with South Sudan (five branches), Tanzania (14 branches) and Rwanda (15 branches) having the lowest number of outlets compared with Kenya (190), DRC (70) and Uganda (43).
Last year, Equity invested an additional Ksh13.67 billion ($123.15 million) to strengthen its subsidiaries.
Prior to its acquisition of the Congolese second largest bank by assets (BCDC) in a deal valued at $95 million last year, Equity Bank, had put an additional $42.81 million in Tanzania, Uganda and the DRC units.
These included $22.5 million in the Tanzanian subsidiary in exchange for 226,000 new shares and $10 million for additional capital of 345,000 new shares in Equity Bank Uganda.
The Group also injected $1.25 million in Equity Bank Congo (EBC) SA to establish an employee trust scheme and bought shares previously held by KfW in EBC for a consideration of $9.06 million.
On August 7, 2020,it acquired 66.53 percent shareholding in BCDC (226,000 new shares) with a par value of $100,000 from George Arthur Forrest for a consideration of $95 million and later merged its existing EBC with BCDC to form a new bank, Equity BCDC.