Equity applies brakes on expansion after Mara flop

Equity Group Holdings (EGH) has halted its cross-border expansion bid after the failed acquisition of four banks in Rwanda, Zambia, Tanzania and Mozambique last week.

Chief executive James Mwangi told The EastAfrican the lender which is listed on the Nairobi Securities Exchange (NSE) will now focus on “vertical” growth by consolidating and strengthening its business operations in the existing six markets, with the aim of transforming into a Ksh1 trillion ($10 billion) bank with 100 million customers.

“Our expansion is in two ways; horizontal and vertical. We have opted for vertical expansion where you deepen and then scale up your market share in the countries you are operating in,” said Mwangi.

“So, meanwhile what will we do because we already have six banks? We will focus on those banks, deepen them and make them stronger. We are also targeting to increase the market share in the countries we are in. The DRC that transaction is complete and we will be doubling our market share and then using the new capability to really try to grow significantly.”

PRUDENCE AND CAUTION

Equity Bank’s plan to acquire 100 per cent shareholding in BancABC of Zambia, Mozambique and Tanzania including 62 per cent of the shares of Banque Populaire du Rwanda Ltd fell through last week after 16 months of negotiations with Atlas Mara Ltd (ATMA). If successful, the transaction could have lifted Equity Bank’s presence in nine African countries.

“ATMA is an event that has made it prudent for us to be cautious. You already don’t understand the risk of Covid-19 and nobody understands.  So Covid-19 situation has made us to sit back.  We also don’t want to be telling shareholders that we are being cautious that is why we are withholding dividends for them and on the other side you are demonstrating offensive expansionist psychology of buying the banks,” said Mwangi

According to Dr Mwangi, growing the existing businesses will require minimum resources, free of uncertainty compared to cross border expansion (horizontal growth) under the current operating environment triggered by Covid-19 Pandemic.

“We are not going to change our ambition of a Ksh1 trillion ($10 billion) bank but we don’t have to go to Zambia and Mozambique to achieve a Ksh1 trillion ($10 billion) worth of assets. I just need to increase Kenya’s market share by two percentage points. It is a vertical expansion with minimal resource requirement and without taking the uncertainty of new markets. This is because I understand the markets and I’m already there, so I will just have to deepen them,” he said.

“Remember we are still aggressive on our strategy to reach to reach 100 million customers. If we can get 100 million customers in Kenya, Tanzania, Rwanda, DR Congo and Uganda, I would have achieved my objective. That is what I have turned to pursuing. The energy I had built up and resources are fully deployed there.”

The Equity-ATMA deal was first made public in April 2019 with a timeline of being concluded before the end of the year.

However, in January, Equity announced the extension of discussions with ATMA for reasons they preferred to remain unknown.

The deal finally collapsed last week after Equity Bank changed plan in view of the Covid-19 pandemic.

“After careful consideration, EGH and ATMA have mutually agreed to discontinue discussions on the transaction for the foreseeable future.”

Market analysts said the move will give the lender the time to rethink its investment plans and strengthen its cash flow position amid   increased non-performing loans and huge loan restructuring triggered by Covid-19.

“We had strong reservation on Equity’s acquisition of Atlas Mara subsidiaries in Tanzania, Zambia and Mozambique given the tough macroeconomic environment and the performance of these subsidiaries,” said Martin Kirimi, a senior associate, research, at Standard Investment Bank.

MARKET CONSOLIDATION

“We view this failed acquisition as a positive development for Equity because right now is all about having strong capital buffers to make sure that you weather the nasty storm triggered by Covid-19.”

Equity Bank’s net profit for the three months to March 31 fell by 14 per cent to Ksh5.28 billion ($52.8 million) from Ksh6.15 billion ($61.5 million) in the same period last year   as a result of increased loan loss provisioning   to cushion the business against uncertainties related to Covid-19.

“I think now they will probably have to start from scratch and their target markets will have to change because of the prevailing conditions. However, for the time being the bank will be more concerned about having a healthier balance sheet than expanding its operations,” said Daniel Kuyoh, an independent financial analyst based in Nairobi.

Under the deal Equity bank would have surrendered about 252.5 million new ordinary shares representing 6.27 per cent of the bank to ATMA valued at Ksh10.7 billion ($107 million).