KCB’s market capitalisation has risen to Sh125 billion compared to Equity Bank’s Sh115 billion, while a year ago Equity’s market valuation of Sh77.5 billion exceeded KCB’s by about Sh10 billion.
Equity’s high growth potential and rapid transformation from a building society seven years ago to Kenya’s most profitable bank has seen investors place a premium on the lender’s stock, making it the most valuable based on market capitalisation at the Nairobi Securities Exchange (NSE).
“Valuation is a function of profitability (among others). KCB is becoming more efficient and just from that it can record higher returns,” said Suntra Investment Bank analyst Johnson Nderi.
KCB’s share price has been fairly stable in the past one month, at a time when Equity Bank’s stock dropped by 12.68 per cent. The KCB stock is currently trading at Sh42 each, while Equity’s is at Sh31.25 per share.
A big boost to KCB’s performance has come from ongoing restructuring which helped to cut employee costs. Staff restructuring, which started in 2011, was based on advice from international consultancy firm Mckinsey.
A leaner payroll has seen it frog-jump Barclays and Equity Bank, which were more profitable in 2009, to become the most profitable lender in the country posting after tax earnings of Sh12.2 billion last year.
The bank cut the number of its employees by 409 to 5,162 last year across its 230 branches in the East African region. The restructuring has seen KCB’s cost to income ratio drop to 57.4 per cent as at last year, from 68.9 per cent in 2009.
“Both are good stocks, but KCB is more of a value driven share while Equity is a growth stock,” said Vimal Parmar, head of research at Burbidge Investments.
Equity Bank is the largest retail lender, being home to more than half of the 14 million deposit accounts in the country. Equity’s aggressiveness has seen it compete with KCB, which has a total asset base of Sh367 billion compared to its Sh243 billion.
KCB has also had to deal with a dark past having been weighed down by non-performing loans lent to politically connected individuals in former President Moi’s government.
Expand operations
It rebranded to shake off the parastatal tag attached to it as a result of government ownership of the bank. Equity, on the other hand, has been a success story rising from a building society to rank as one of the six largest banks in the country within a decade.
Analysts at stockbrokerage firm Kestrel Capital say the bank’s premium valuation at the NSE is backed by its fundamentals.
“The high return on assets (ROE) justifies valuation,” said Kestrel Monday in a research note sent to investors after the release of the lender’s first quarter results.
Equity Bank is currently trading at a price earnings (P/E) ratio of 9.1 times, with an ROE of 31.5 compared to the sector averages of 9.9 times and 26.3 per cent respectively.
KCB has been aggressive on the regional front with operations in Uganda, Tanzania, Rwanda, South Sudan and Burundi. It is said to be eyeing the Ethiopian, Somalia, and DR Congo markets. Equity Bank has operations in Uganda, Tanzania, South Sudan and Rwanda.
The bank’s CEO has stated that it will concentrate on consolidating its presence in those markets before expanding further.
Equity Bank has, however, expanded business operations with Equity InvestmentBank and Equity Insurance Agency. It has a 24.85 per cent stake in mortgage lender Housing Finance.
Equity Bank released its first quarter results Monday showing growth of more than a fifth in its net profit to Sh3.2 billion.
The lenders’ performance is expected to reflect a lull in economic activity during the first three months of the year when election campaigns dominated public debate.
“It might not be very good because of the uncertainty which affected credit uptake, but non-funded income may grow,” said Mr Parmar.
- Business Daily
