Equity raises stake in Congo subsidiary through buyout, cash call
Saturday April 15 2023
Equity Group CEO James Mwangi (left) and former Kenyan President Uhuru Kenyatta (2nd left) during the unveiling of EquityBCDC in DR Congo in 2021. Equity Group Holdings Ltd has increased its investment in DRC by $76.7 million. PHOTO | FILE
Kenyan lender Equity Group Holdings Ltd has increased its investment in the Democratic Republic of Congo (DRC) by $76.7 million after a buyout of smaller stakeholders.
The bank says it acquired additional 6.6 percent shares in EquityBCDC, DR Congo’s second largest bank by assets, through a buyout of minority shareholders and dilution of other shareholders through a cash call.
This latest investment signals the lender’s assessment of the Congolese market as the lender seeks to control the East and Central African banking market, which will have an expected clientele base of 100 million customers by 2030.
The group disclosed in its 2022 annual report that it acquired additional shares (2.3 percent) in EquityBCDC from minority shareholders at a cost of $6.2 million in a transition completed on August 25.
During the year, the Kenya-based lender also increased its shareholding in the Congolese subsidiary by acquiring 452,659 shares for a consideration of $70.5 million through a rights issue.
The new shares – from the rights issue and the minority shareholders – increased Equity’s shareholding in EquityBCDC to 84.1 percent from 77.5 percent in 2021.
Regional expansion
According to the report the bank also injected an additional capital of $10 million in Equity Bank Tanzania and capitalised retained earnings of Ush25.75 billion ($6.85 million) in Equity Bank Uganda, leading to an increase in Uganda’s share capital from Ush94.24 billion ($25.07 million) to Ush120 billion ($31.92 million).
The lender, with about 17 million customers, is consolidating and strengthening its operations in six markets after its plan for cross-border expansion was adversely impacted by a failed bid to acquire four banks in Rwanda, Zambia, Tanzania and Mozambique in 2020.
Currently, Equity Group, which is listed on the Nairobi Securities Exchange, has a presence in six regional countries – DRC, Kenya, Uganda, Tanzania, South Sudan, Rwanda and a representative office in Ethiopia.
It had hoped to establish a presence in 15 to 18 countries by 2024, with a customer base of more than 100 million clients.
Return on assets
In DRC, Equity bank’s return on assets employed improved marginally by 0.8 percentage points to 15.7 percent in 2022 from 14.9 percent in 2021, while in Tanzania this increased to 7.2 percent from 1.6 percent.
In Uganda, the ratio – which measures the profitability of a business in relation to the total assets – declined to 15.1 percent from 24.2 percent while in South Sudan it improved from negative 5.2 percent to 54.8 percent
Equity’s return on assets employed in Rwanda increased to 36 percent from 20.8 percent
However, in DRC, Equity faces the second highest cost of capital in the region at 22 percent after South Sudan (25 percent) compared to Tanzania (20 percent), Rwanda (19 percent) and Uganda at 19 percent.
Customer deposits at the Congolese subsidiary grew at a paltry two percent to Ksh367.7 billion ($2.76 billion) compared to loans that accelerated at 53 percent to Ksh170.7 billion ($1.28 billion). Its net profit grew by 45 percent to Ksh5.8 billion ($43.6 million).
Rwanda reported a 104 percent growth in net earnings to Ksh2.8 billion ($21.05 million), the Tanzania subsidiary grew by 409 percent to Ksh400 million ($3 million) while the Uganda subsidiary’s net profit declined by 25 percent to Ksh2 billion ($15.03 million).
South Sudan grew by 1,318 percent to Ksh2.3 billion ($17.29 million).
Promising subsidiaries
According to Equity, regional subsidiaries are high growth assets with Uganda and Rwanda becoming high return subsidiaries.
The lender reckons that its operations in Congo remain in investment phase for the medium term, with the country remaining a high growth investment destination.
Equity Bank began operations in the DRC through a subsidiary, Equity Bank Congo (EBC) SA, which it established by acquiring 86.6 percent stake in a German bank ProCredit between 2015 and 2017.
On August 7, 2020 Equity Group acquired 66.53 percent shareholding in BCDC (226,000 new shares) at a par value of $100,000 from George Arthur Forrest for a consideration of $95 million and later merged its existing Equity Bank Congo with BCDC to form a new bank, EquityBCDC.
After the merger Equity Group held a majority 77.5 percent stake in the new entity, with the remainder being held by IFC, the government of DRC and minority shareholders.
Fresh capital
In 2021 the Group injected $ 100 million of fresh capital in Equity BCDC to enhance the lender’s capacity to fund development projects and large mining & manufacturing companies in DRC
DRC has huge copper and cobalt reserves, with population of about 93 million, of which an estimated 45 percent of them live in urban centres presenting huge consumption opportunities.
Equity Bank is positioning itself to reap from increased business in the DRC following the admission of the mineral-rich central African nation into the East African Community in July 2022.
In 2021 former President Uhuru Kenyatta and his Congolese counterpart Felix Tshisekedi signed a bilateral agreement that led to a Kenyan trade delegation comprising members from both government and private sector going to DRC to explore trade and investment opportunities.