RenCap on Equity Bank: Donít Hold Your Breath for a Blow Up
Monday, 22 October 2012
In our recent discussions with investors, we have identified two key areas of concern with regard to Equity Bank. The first relates to the sustainability of the quality of the credit book and the second to the perceived high turnover at the executive management level. The business model, in our opinion, remains robust for the following reasons:
Segmentation of the loan book: The loan book is divided into five sectors: micro credit, small enterprises (SE), corporates, consumer and agriculture. Each of these sectors is managed by separate teams which has driven sector specialisation across the credit staff.
Well-honed IT systems: The innovation centre, working with global IT providers, has developed its own credit score cards and customer profiles. The group has 12 years of data on its customer base (now up to 7.5mn), which allows it to conduct extensive data analysis on consumer behaviour. Age and gender are key determinants of the propensity to repay.
Rigorous collections process: The sectors benefit from six support divisions which include the early arrears centre and the debt recovery unit. Daily monitoring of the portfolio ensures that from day one arrears are identified and remedial action is taken immediately. Credit officers at the branch level are an integral part of managing the book and their performance is assessed on a quarterly basis. Staff are incentivised not only to grow the loan book, but to manage the quality of loans extended.
Management changes overblown: The only one that stands out as a loss, in our opinion, is that of ex-finance director Paul Njaga as we would like to see greater stability in the finance department. We think the noise around other departures overlooks some of the long tenures at the bank.
Valuation: Ahead of the release of 3Q12 results, we have not made any changes to our numbers or valuation. Equity Bank is trading on a FY12E P/B of 2.1x and P/E of 7.2x, on our estimates. We retain our BUY rating with a TP of KES27.9/share

The full report is available here or contact Nothando Ndebele ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ) or Adesojo Solanke ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ).



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