Posted on April 6, 2009 - by Gavin

Equity’s courtship of NBK will shake the financial landscape…

Business Daily AFrica

Once upon a time there lived Blue hare, Marathon hare and Tortoise in a small corner of a big forest that had a little pond.

As the leaves and bushes that they used to feed on were getting scarce, they decided to have a race around the pond with the losers to move out of the habitat. The race began, and the two hares shot off with the wind in their tails and their whiskers twitching with delight at the prospect of winning.

Tortoise trudged along and accidentally turned left when he should have turned right, finding himself moving deeper into forest. He marvelled at the lush vegetation that had never been touched by any hare.

An Equity Bank branch in Nairobi

Being a pragmatic tortoise, he quickly decided to ditch the race and set up camp in this part of the forest where he could slowly but steadily eat to his heart’s desire without worrying about the two hares.

Meanwhile, back at the pond Blue-hare shouted “this part of the forest needs my bouquet”. Marathon-hare shouted back “who needs a bouquet when I can give them a garden?” and they kept running.

Pretty soon they had run around the pond and arrived at the starting point at the same time, breathless and exhausted. Since there was no clear winner, they chose to race again.

Tortoise by this time had forgotten all about the race and had established himself in the new part of the forest. With his head spinning at his new found fortune, he made a strategic decision to expand his base as he knew that it was only through wide coverage that he would ensure continued prosperity for himself and his children.

Before long the tortoise was in control of the larger forest, had discovered many more leaves and fruits to eat and was now three times heavier in weight and size!

Equity Bank looks a lot like this proverbial tortoise. And with the capital injection by Helios EB of Sh11 billion in 2007, it is now a significantly strong financial player.

An investment of that magnitude demonstrates that the investors believe there still remains an untapped forest of opportunity that the bank should take advantage of.

Growth for a bank can take two forms, organic — which is to boost revenue and market share by increasing sales or output — or inorganic, which would be to merge or acquire other financial institutions.

Armed with an enviably large capital war chest, Equity has begun to execute what appears to be a dual organic and inorganic growth strategy in the greater East African region. In the fourth quarter of 2007, Equity in a joint venture with British American Investment Company purchased up to 24 per cent of Housing Finance.

In 2008, the bank undertook an outright acquisition of Uganda Microfinance Limited when it purchased the bank’s shares for Sh1.66 billion.

The CEO, James Mwangi, was quoted in the subsequent Press releases as saying, “Since the investment by Helios EB, we have been actively engaged in strategically consolidating our dominant banking position in the country and seeking prudent regional entry points.”

The month of April 2009 finds Equity opening its first branch in Juba, Sudan, firing the first salvo of the year in its expansion drive.

What we are all witnessing here is strategy in action. Investors demand a return on their capital and for Equity, the strategy is to sweat its balance sheet fervently to deliver those returns.

The Ugandan acquisition and organic growth in Sudan are definitive indicators of market diversification and regional consolidation, but it was Mr Mwangi’s comments at the March 2009 AGM that caught my attention.

The CEO alluded to the possible interest of Equity Bank in becoming a strategic investor in National Bank of Kenya. Let’s look at NBK as a potential bride.

It has a very strong brand demonstrated by its unwavering loyal client base which stood by it even when the bank had virtually a negative capital base.

Secondly, NBK is the primary banker to over half of the parastatals in Kenya following a Government instruction in the late nineties to parastatals to direct their banking needs to KCB and NBK.

The objective of the government at the time was to shore up a flagging financial institution that was struggling with deep liquidity issues as a result of a bad loan legacy.

NBK therefore has a considerable amount of low cost deposits from the Government that makes their cost of funding quite enviable at a time when commercial banks are competing for deposits and raising the costs of those deposits in the process.

In banking, he who has the lowest cost of funds rules the roost. This is due to the fact that a bank can enter into a loan pricing war with its competitors by dropping interest rates without necessarily hurting its margins (spread between what is paid on deposits and what is earned on loans).

Banks establish what their deposit to loan margins should be, which takes into account the operating costs of the institution. So for example if Bank X pays an average of three per cent on its deposits and charges 18 per cent on its loans, it has a margin of 15 per cent  which factors in its operating and capital costs (about seven  per cent) and profits, which is about eight per cent.

If it can drop its cost of deposits to one per cent, it can drop its interest rates on its loans by a similar margin to 17 per cent and still maintain a profit spread of 8 per cent.

Alternatively, it can drop interest rates on loans to an even lower amount of 14 per cent and use the expanded branch network that an acquisition such as NBK will provide to drive volume loan sales that will make up for the lower revenue on the loans.

Finally, the country wide branch network that NBK will augment to Equity’s existing network enables the latter to become the premier collecting bank for volume cash collectors such as Kenya Revenue Authority and utilities such as KPLC and money transfer services.

In essence, NBK provides an excellent vehicle for Equity to entrench its positioning in the Kenyan financial landscape, diversify its client base and gain access to a significant pool of much sought after Government deposits. We will wait and see with bated breath as the dance for the NBK suitor plays out in the media in the coming months.

Back at the forest, the two hares had run around the pond until they collapsed under the mugumo tree from sheer exhaustion.

The heron perched on top of the mugumo tree could see the tortoise in the neighbouring forest and told the hares how the tortoise was prospering. Blue -hare stretched his arms, yawned in feigned boredom and told Marathon -hare that he was going to sleep, the race could continue the next day.

Cautious approach

But as soon as he had turned the corner, he shot off into the neighbouring forest and decided to try his luck there: “if you can’t beat them, join them” he thought.

Marathon hare went to sleep and his last thought as he drifted into slumber was “I know that Blue-hare has gone to follow tortoise, I’ll wait and see if they make any mistake before I venture out to the bigger forest”.

The moral of this story is that while the big banks competed relentlessly for the same customer segments, Equity has demonstrated that looking beyond the traditional, safe customer portfolios pays off handsomely in the long run.

Source: http://www.bdafrica.com/index.php?option=com_content&task=view&id=13855&Itemid=5821