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African Markets

EQUITY BANK LTD
Strong franchise, 14.6% upside potential, BUY, high valuation risk
Initiating Report
November 25, 2009 We initiate coverage on Equity Bank Limited (“Equity Bank”, “the company” or “the Bank”) with a BUY recommendation, amid caution on high valuation risk. In our opinion: • The bank has a strong retail franchise but valuation risk is high. Recent high growth rates compound forecasting risks. Our potential total return is 14.6%.

BUY
Fair Value: Ksh15.75

Currency risk will compound risks to foreign investors.
Fig 1: Salient Information
Per share data Shares outstanding,mn EPS, Ksh DPS, Ksh BVPS, Ksh Valuation P/E  P/BV Dividend Yield ROE ROA CAMEL ratios C: Total  capital/TRWA C: Equity/Loans A: NPL/Loans A: Provisions/Loans M: Cost/Income  (ex.provisions) M: Efficiency ratio E: NIM E: Fee&Comm/Operating Income L: Loans/Deposits L: Gvnt Securities/Total Loans 2006 2720 0.28 0.2 0.8 15.6 5.7 4.3% 34.2% 3.8% 2006 14% 20.1% 5.2% 1.4% 63.3% 67.3% 8.7% 55.3% 66.9% 15.1% 2007 2750 0.69 0.2 5.4 21.7 2.7 1.3% 12.7% 3.6% 2007 59% 68.3% 4.5% 0.9% 59.8% 59.4% 5.8% 52.6% 69.2% 62.0% 2008 3660 1.07 0.3 5.3 16.4 3.3 1.7% 20.0% 5.0% 2008 38% 44.2% 5.7% 1.7% 52.3% 60.4% 9.6% 47.5% 87.8% 10.0%
1.1

2009F 3660 0.98 0.3 6.3 14.2 2.2 2.1% 15.6% 3.3% 2009F 30% 33.0% 5.9% 1.3% 56.7% 63.2% 8.8% 40.6% 96.6% 7.7%

2010F 3660 1.11 0.3 7.2 12.6 2.0 2.4% 15.6% 3.2% 2010F 29% 31.3% 6.0% 2.0% 56.6% 66.3% 8.6% 45.5% 92.7% 6.4%

2011F 3660 1.57 0.5 8.4 8.9 1.7 3.4% 18.6% 3.9% 2011F 29% 30.7% 6.0% 3.0% 50.9% 64.1% 9.6% 46.4% 92.7% 5.4%

Trading data & Forecast returns
Current Price, Ksh Fair Value 52‐Week range Market Cap, US$mn Shares outstanding,mn Av. Daily traded value, US$ Forecast price return Forecast div. yield Forecast total return Implied P/E ratio,X Implied PBV,X 14.0 15.7 low, 12: high 19 695 3,660 350,500 12.5% 2.1% 14.6% 16.0 2.5

Equity Bank underperforms the NSE 20, YTD
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3
Kenya 20 Equity

Peter Mushangwe Zandisile Mabuya +27 11 551 3675 peterm@legae.co.za

Source: Company Reports, I-Net, Legae Calculations

Contents page
Executive Summary 1. Industry Analysis (vs. Equity Bank) 1.1 Profitability, funding and competition 1.2 Industry capital and credit risks Company Analysis 2.1 Why micro? 2.2 A comment on 3Q09 performance 2.3 Liquidity, concentration and interest rate risks analysis 2.4 Out of Kenya Financial Analysis and Valuation 3.1 Financial analysis and forecasts 3.2 Valuation and recommendation Appendix 1: Company Profile Appendix 2: Governance and management 2 5 5 14 18 18 20 22 24 25 25 31 34 35

2.

3.

4. 5.

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Executive Summary

We initiate with a BUY, high valuation risk: We initiate coverage of Equity Bank, [Bloomberg EQBNK.KN; I-Net, KE.EQBK] with a BUY with a high valuation risk recommendation. Equity bank trades on 14.3X 2009 Legae EPS, but the P/E ratio declines to 8.9X, Legae EPS by 2011. We use the Discounted Future Earnings (DFE) method with a terminal value (TV) of Ksh66.4bn. We obtain the TV by capitalising the book value (BV) and earnings. We assign a 60%:40% weight to the earnings and BV respectively. The cost of equity (CoE) is 18.3%. We obtain a fair value per share of Ksh15.75. The current share price is Ksh14. With a dividend yield of 2.1%, the total return improves to 14.6%. Our fair value’s implied P/E ratio is 16X.

Caveat on potential return: Sources of the high risk are 1) that the potential return provides modest real return for local investors which can negatively affect the local demand; 2) the currency risks for foreign investors which could significantly reduce potential return. A shilling depreciation of 10% will reduce the US$ return to 3.1%. The shilling reached its worst level of 81.4/US$ in March 2009 and is currently trading at 74.3/US$. In our view, global recovery and increase in risk tolerance are supportive of a strong local currency; 3) the historical high earnings growth rates increase forecasting risks; and 4) weaker economic growth than we anticipates.

The industry is competitive but profitable: The Kenyan banking industry is competitive, but still shows strong profitability growth. There are 43 registered commercial banks in Kenya. The top 5 enjoy half the market share on both deposits and loans. Industry profit increased from Ksh5bn in CY2002 to Ksh43bn in CY2008, a CAGR of 43%. The

industry’s net interest margin (NIM) is strong at an average of 7.9% since CY2003. The before tax ROE averaged 18% in CY2008. The industry revenue is dominated by net interest income, which to an extent is an indication of higher interest rate spreads. In our view, the high industry growth rate masks competition intensity in the short to medium term as banks can still grow revenues without taking business away from each other.

Equity Bank’s historical performance has been exceptional but we expect headwinds in 2009: Equity Bank is one of the supreme growth

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stories in Kenya in our view. In CY2004, the bank had customer deposits of Ksh5.1bn. Customer deposits grew by a 4-year CAGR of 77%. By 3Q09, customer deposits were Ksh65.7bn. The bank’s loan portfolio responded accordingly, rising from Ksh3.1bn in CY2004 to Ksh58.1bn by 3Q09. Profit before tax ascended from a mere Ksh218mn in CY2004 to Ksh3.9bn in FY2008.

CAMEL ratios are strong: In our view capital is abundant, and we do not foresee pressures to the capital adequate ratios (CAR). Sector total capital is Ksh142,554bn for CY2008. For Equity bank in particular, its CAMEL ratios are strong. Total capital/Total Risk Weighted Assets (TRWA) is 38% in CY2008 although we expect it to decline to 29% by CY2011. The Bank’s NPL ratio is below industry average at 5.7% in CY2008. Management has controlled the efficiency ratio from 67.3% in CY2006 to 60.4% in CY2008. We expect it to revert to 64.1% by CY2011 mainly due to expansion effects. Industry liquidity is plentiful, with a loan/deposit ratio (LDR) of less than 100%. For Equity Bank, the LDR is 87% (CY2008).

Equity Bank seeks to diversify sovereign risk and boasts of an entrepreneurial board and management: We expect the bank’s growth to be supported by its regional expansion. Already the Ugandan acquisition contributes about 11% of interest income. We also rank the board and management highly, having built a strong brand in Kenya over the past 5 years. Presence across the region should provide strategic value in terms of mergers and acquisitions (M&A).

Acquisition and currency risks could cause headwinds in the short term: As the bank diversifies, ability to obtain fair prices on acquisitions and the associated currency risks could negatively affect the share price in the short-term. We are yet to witness how the management integrate its Ugandan acquisition and the resultant effect to income and costs on a sustained basis. With the capital markets recovering, acquisitions will become pricey. However, the low intangible assets/total assets ratio (only 2%) is impressive in our opinion.

What goes up comes down: We have reduced our growth forecasts on both loans and deposits quite significantly and there is little congruency with historical growth rates/performance. We have reduced growth rate in deposits and customer loans by 17pp and 44pp respectively

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for CY2009 from CY2008 growth rates. Our growth forecast does not compare favourably against historical performance. For example, in CY2008, loans went up by 102% while customer deposits rose by 60%.

Why restrained forecasts relative to history?: Our subdued growth forecasts (still very high, but relatively weak compared to history) are

motivated by 1) the fact that Equity bank is already one of the big banks, with a market share of between 6% and 6.5% on both deposits and loans. Further organic market penetration should now grow at a slower rate; 2) the fact that Equity bank already holds 48% of accounts in the system (CY2008). Management indicate that they now have 4.1mn accounts, which represents about 52% of total system accounts. 3) the bank has little room to improve its cost/income ratio. The cost/income ratio for CY2008 is 52%. We estimate it to rise this year to 57%. This is still better than industry average estimated at 62% (ex-provisions). As a result there is little room in the medium term (up-to 2011), in our view, for the bank to enhance earnings by cutting costs; and 4) our assumption that regional earnings contribution will not be instant. While we expect the regional expansion to support earnings in the long-term, we do not expect material growth contribution in CY2010 and CY2011. Investment in systems and human resources should negatively affect earnings and ROE.

Possible catalysts for stronger out-performance: In our opinion, Equity Bank is a strong franchise with strong fundamentals. We are primarily concerned with the valuation risk (i.e. our fair value provides low real return). Possible catalysts for out-performance in our view are 1) continued higher earnings growth rate than our expectations. As we highlight before, we materially reduced our forecast growth rates; 2) lower company specific premium on the discount rate due to higher liquidity. Institutional interest on the stock remained strong even in a quieter 1H09. 3) possible share strength by association. In our report, Fixed Income dominating, but we expect a rebound in equities, October 16 2009; we reasoned our expectations of a rebound in Kenyan equities between now and 1H10. The share may show a stronger recovery along with the market.

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1.
1.1

Industry Analysis (vs. Equity)
Profitablity, funding and competition

Below we provide an analysis of the Kenyan banking sector, and where necessary we make comparisons against Equity Bank. We note the following:

Favourable factors are supportive of growth on both the asset and liability side of banks’ balance sheets, industry ROE is robust: We note that the Kenyan banking sector still produce significant profit growth. In CY2008 banking sector profit before tax rose to Ksh43bn from Ksh14.7bn in CY2004. Profitability is supported by strong growth in deposits and banking assets as penetration increases to the areas outside main cities and to the rural areas. Average industry ROE, based on profit before tax is 18% (see Fig 4-9) and only 4 banks on the top 30 had negative ROEs in CY2008.

In our view, loan growth is influenced by 1) loan penetration. Low penetration in Kenya provide upside potential to the sector. We estimate the loan/GDP at 30% and the deposit/GDP at 39%. Product development should also support growth in deposits 2) per capita income. Granted, per capita income is still low, and convergence with RSA’s per capita income is not conceivable at this stage, but the growth will support financial sector development nonetheless. Increasing wealth levels, as indicated by rising per capita income which is estimated to reach US$1,410 by 2014 (IMF World Economic Outlook, Oct.09) should support loan growth and 3) population. Kenya’s population is expected to reach 51mn by 2025, (World Population Datasheet 2009) and this bode well for financial services demand. Bankable population is estimated at around 15.1mn (about 39% of the population), mainly composed of the employed and the self-employed. The positive demographic outlook is a long-term theme in our outlook.

Fragmented

sector

intensifies

competition:

Our

concern

is

the

sustainability of high industry ROE given the competition. There are 43 registered commercial banks in Kenya, although the market is dominated by the biggest 15, which account for greater than 80% of the industry’s assets and deposits. The current high industry growth masks competition

intensity in the short- to-medium term. Banks can increase revenue without necessarily taking business from each other. Smaller banks may

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struggle if they choose to compete with bigger banks. Our view is that smaller banks that cannot create reasonable economies of scale may die over time.

Consolidation is not the theme for the Kenyan banking sector in our opinion: While we concede that the industry is fragmented, we do not see a wave of bank consolidation in the short term. Consolidation could be necessary, but our view is that it will only come about if it is regulatorinduced. Unfortunately, we have not heard such comments or expectations from the Central Bank of Kenya (CBK). Bigger banks would offer size and scale and we would argue that bigger is better for Kenya.

System funding is plentiful: Funding risk is rising, as indicated by the growing LDR, but it is still 27pp below 100%. The industry LDR rose from 42% in CY2003 to 73% in CY2008. In our opinion, when the LDR is below 100%, it provides the sector with capacity to absorb system-wide funding shocks. Loan growth has been higher than deposit growth hence expanding LDR. The industry surplus (i.e. industry deposits minus industry loans) has reduced to Ksh207bn in CY2008 from Ksh245bn in CY2004. (see Fig 8). According to management Equity Bank’s long term LDR target is 80%.

Strong NIM nonetheless, but we see little room for improvements: The interest spread and NIM remain in good shape, with savings and fixed deposits attracting about 2%p.a and 4%p.a respectively while loans and advances produce between 14%p.a and 15%p.a. Equity Bank’s average cost of funds is 2.3% (according to management) versus the industry’s 4.3%. (Total interest expense as a percentage of customer deposits plus other money market deposits plus other liabilities is 1.5% for 3Q09). NIM oscillates around 8%, and we do not foresee room for significant improvements given the fragmentation of the industry. New current accounts and saving accounts (CASA) penetration could sustain NIM going forward but we believe improvements in industry NIM is muted provided the sector structure and limited pricing power from bankers. (see Fig 5).

Interest income dominates industry revenue, and advances and loans dominate industry assets: Interest and fee income charged on loans and advances continue to contribute most of the revenue. About 70% of sector’s revenue is derived from the loans and advances asset class while income from placements with other banks has continued to decline. Income from

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government securities is fairly flat, and contributed about 20% of the industry’s revenue in CY2008. (see Fig 6). The domination of interest income indicates the high interest spreads. As spreads narrow i.e. lending rates coming down due to moral suasion or monetary policy changes, banks’ revenues could come under pressure as we do not foresee room to increase fees. Equity Bank’s model seeks to create more revenue from transactional fees than interest income, hence its fee income/total revenue is above industry average (Equity Bank = 47.5% vs. Industry = 40% for CY2008).

Equity Bank has been progressively gaining market share on both loans and deposits: Of interest to us are the gains that Equity Bank has made in the market since conversion to a commercial bank. While the industry’s deposits have grown by a simple average of 15% from 2004 to 2008, Equity bank’s deposits have increased by a simple average of 72%. Growth in deposits was still strong at 51% in CY2008. In our view, deposits gathering strategies are important for loan-book growth, particularly in this congested market. Equity Bank’s deposit market share increased from 1% in CY2004 to 6% in CY2008. The bank registered a strong growth in assets as well. Assets went up to Ksh77.1bn in CY2008 from Ksh3.9bn in CY2004. The bank has a reasonable portion of the industry’s total assets, now at around 6.5% from 1% in CY2004. (see Fig 3)

Equity Bank’s growth slowed in CY2008, and we expect it to continue to grow below its 2004-2008 average. In CY2008 growth in both assets and deposits has reduced by 48pp and 119pp respectively, but we are not overly concerned as we do not expect growth to remain above 50%. Growth in deposits and assets should still be supported by regional penetration in the medium to long-term, and we would expect the bank’s earnings growth rate to eclipse industry’s average, at least up-to CY2011. Equity bank’s deposit franchise (former Society members) remains strong. As at end of 3Q09, total customer deposits and total assets stand at Ksh65.7bn and Ksh97.4bn in that order.

Equity bank’s ROE is above industry average: The industry’s ROE is fairly strong. The average before tax ROE of the industry is 18% for CY2008. Only four banks had negative ROEs in CY2008. Equity Bank’s ROE (PBT CY08,

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as per the Central Bank of Kenya) is 24% which is 33% above the industry average, despite the decline in growth rate. (see Fig 9)
Fig 2: Strong growth in industry deposits and assets masks competition.
•  Industry deposits grew by CAGR of 14.9% since 2004 vs. Equity bank's 70.1% • Equity bank's deposits grew to Ksh48.9bn in CY2008 • We expect industry deposits to hit Ksh1trn by CY2010 as penetration increases
1,000,000  900,000  800,000  700,000  600,000  500,000  429,736  400,000  300,000  200,000  400,000  488,315  616,480  600,000  487,024  553,708  597,874  537,322  800,000  731,988  695,348  1,000,000  928,947  Total banking deposits Equity bank 864,010  1,200,000 

•  Industry assets show strong growth. CARG = 19.4% since 2004 •  Equity bank continue to outpace the industry growth rate. CAGR  = 81.4% •  Equity Bank's totals assets hit Ksh77bn in CY2008
1,400,000  Total banking assets Equity Bank 1,183,654 

77,136 

200,000 

53,129 

20,024 

48,977 

11,453 

32,536 

6,707 

3,924 

16,337 

100,000  ‐

9,048 

5,081 

2003

Fig 3: Equity Bank gained market share on both assets and deposits. The bank’s growth rate outsize industry.
•  Strong growth in deposits  between 2004 and 2007 led to market share increasing to 6% •  Growth in 2008 receded from 99% , but still very strong at 51% •  Growth in deposits for Equity Bank outpace the industry growth rate, av.15% since 2004
120% Industry Equity Bank 100% Market share (RHS) 99% 5% 140% 80% 78% 81% 4% 120% 100% 60% 51% 51% 3% 80% 2% 60% 45.2% 40% 20% 1% 20% 0% 2004 2005 2006 2007 2008 0% 0% 2004 2005 2006 2007 2008 1.0% 2.0% 71% 70.8% 74.8% 3.0% 4.0% 5.0% 160% 6% 180% Industry  Equity Bank Market share (RHS) 165.3% 6.0%

3,369 

‐ 2003 2004 2005 2006 2007 2008 2008

2004

2005

2006

2007

Source: Central Bank of Kenya, Legae Calculations

•  Strong growth in deposits fueled asset growth over the same period •  Assets grew by simple average of 85% from 2004 vs. industry's 20% •  Market share on the asset side grew to 6.5% in 2008 from 0.8% in 2004
7.0%

40%

0.0%

Source: Central Bank of Kenya, Legae Calculations

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Fig 4: Interest spreads are health. Declining interbank rate could hurt bigger, more liquid banks that have more assets in the interbank market.
16% 14% 12% 10% 8% 6% 4% 2% 0%
Nov‐05 Jan‐06 Nov‐06 Jan‐07 Nov‐07 Jan‐08 Nov‐08 Jan‐09 Sep‐05 May‐06 Sep‐06 May‐07 Sep‐07 May‐08 Sep‐08 May‐09 Mar‐06 Jul‐06 Mar‐07 Jul‐07 Mar‐08 Jul‐08 Mar‐09 Jul‐09

16.00% 14.00% 12.00% 10.00%
Lending Savings Deposit

8.00% 6.00% 4.00% 2.00% 0.00%
Sep‐05 Nov‐05 Jan‐06 Mar‐06

91‐Day TB Interbank Lending
May‐… May‐… May‐… May‐…

Sep‐08

Nov‐06

Nov‐07

Nov‐08

Sep‐06

Sep‐07

Jan‐07

Jan‐08

Jan‐09

Jul‐06

Jul‐07

Jul‐08

Source: Central Bank of Kenya, Legae Calculations

Fig 5: Industry profitability rose significantly between 2002-2008. NIM is appealing at an average of 7.9%

•  Industry profitability rose to Ksh43bn from Ksh5bn in CY2002 •  Net interest margin fairly static around 8%, with an average of 7.9% •   Growth in profitability went down  by 11pp in CY2008, but is still above 20%
9.0% 45% 40% 35% 30% 25% 25,000  20% 20,000  15% 10% 5% 0% 2002 2003 2004 2005 2006 2007 2008 3.0% 15,000  10,000  5,000  ‐ 2.0% 1.0% 0.0% 2003 2004 2005 2006 2007 2008 PBT,Ksh mn Growth,LHS 50,000  8.0% 45,000  40,000  35,000  30,000  7.0% 6.0% 5.0% 4.0% 7.5% 6.5% 8.2% 8.5% 8.5% 8.2%

Source: Central Bank of Kenya, Legae Calculations

Mar‐07

Mar‐08

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Mar‐09

Jul‐09

Fig 6: Net Interest income dominated banks revenues, supported by interest and fees from loans and advances

•  Net interest income contributes the most. Fees  contributes 25%

•  Interest and fees from loans and advances contribute the most •  Interest from placements with other banks continues to decline
100% 90% 80% 70% 60% Advances Placements Gvnt Securities Other

Net Interest Income Fees & Commissions Foreign Exchange Other

5% 10%

25%

50% 59% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008

Source: Central Bank of Kenya, Legae Calculations Fig 7: Population growth is supportive of demand for financial services, but per capita income has a long way to converge with RSA’s
•  After catching up with RSA in 2025, Kenya's population will exceed RSA's by 2050
70 Kenya 60 South Africa 54.8 51.3 50 48.3 51.5 350 300 40 38 250 30 200 150 20 100 10 50 0 1,000 2,000 4,000 5,000 400 65.2 450 500 Kenya GDP,LHS US$bn South Africa GDP, LHS, US$bn Kenya per capita,US$ South Africa per capita,US$

•  Kenya's GDP per capita is rising, but still a long way to catch up with RSA
8,000

7,000

6,000

3,000

0 2008 2025 2050

0

Source: Population Datasheet, IMF, Legae Calculations

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

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2008

2009F

2010F

2011F

2012F

2013F

2014F

Fig 8: Industry funding surplus has declined but LDR is still <100%.

•  Industry funding surplus has reduced  to Ksh207bn • Industry  loans are growing faster than deposits
250,000  Industry surplus Kshbn, LHS Loan growth Deposit growth 40% 80% 75% 70% 30% 230,000  25% 65% 60% 55% 50% 45% 10% 40% 200,000  5% 35% 30%

•  Industry LDR is <100% (CY2008).  •  Funding risk is low, but rising

35%

240,000 

220,000 

20%

15% 210,000 

190,000  2003 2004 2005 2006 2007 2008

0%

2003

2004

2005

2006

2007

2008

Source: Central Bank of Kenya, Legae Calculations

Fig 9: Industry ROEs (before tax) in CY2008 averaged 18%. Equity Bank’s ROE is >18% at 24%
45%

35%

ROE Average

25%

15%

5%

Stanchart Barclays Citibank Bank of India Imperial Bank Commercial BoA Family Bank Bank of Baroda I & M Bank NBK KCB NIC Bank Diamond Trust Equity Bank Co‐operative Bank Habib  Bank ABC Ltd Giro Bank CFC Stanbic Fidelity Consolidated BoK Fina Bank Bank of Africa Guardian Bank Ecobank Chase Bank Dubai Bank City Finance Equitorial Gulf African Bank First Community 

‐5%

‐15%

‐25%

‐35%

‐45%

Source: Central Bank of Kenya, Legae Calculations

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Competition in perspective: The competition on both the asset (chasing revenue) and the liability (chasing funding) is intense. Top 5 banks enjoy market shares of 51.5%, 52% and 51% on asset, advances and deposits correspondingly. South Africa has a higher concentration, with the Top 5 banks accounting for greater than 70% of the market share (both assets and deposits). The higher competition level and lower per capita GDP provide an unfavourable industry risk profile in the long-term.

Declining inter-bank rates could hurt liquid, bigger banks: Bigger banks tend to be more liquid, and thus depend less on the inter-bank market for funding. Equity bank is one of them. The falling interbank rate should hurt bigger banks’ NIMs as they tend to have more assets than liabilities in the interbank market. As inter-bank rates rise, the reverse would apply due to benefits from higher interbank placement rates. The question to investors would be how soon will interbank rates take a rebound? Currently, liquidity is abundant, with the market often in surplus. Reserves were about Ksh168bn for the week ending 20 Nov. 09. As demand for loans soar due to recovery, the position of the market liquidity could turn to negative, raising interbank rates, positively affecting NIM.

Fig 10: Equity Bank is #6 largest bank by advances and deposits.

•  Equity ranks #6, with a  market share of 6.5% on loans and advances

•   The bank ranks #6 again on the deposits side, with a  market share of 5.7%

1.4% 1.4% 1.5% 3.2% 4.0% 4.1% 4.2% 4.8% 6.5% 6.9% 7.0% 8.4% 12.6% 17.0% 17.1%

Barclays KBC Co‐operative Bank CFC Stanbic Stanchart Equity Bank NIC Commercial BoA I&M Bank Diamond Trust Citibank Prime Bank NBK Bank of Baroda Others

Barclays

1.7% 1.8% 3.3% 3.6% 3.8% 4.0% 4.1% 4.8%

16.4%

14.6%

KBC Stanchart

12.7%

Co‐operative Bank CFC Stanbic Equity Bank Commercial BoA

8.9%

NIC NBK

7.6% 5.7% 7.1%

Diamond Trust Citibank I&M Bank Prime Bank Bank of Baroda Others

Source: Central Bank of Kenya, Legae Calculations

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Fig 11: Top 5 banks enjoy half the market share in deposits as well as in loan and advances
90.0% 80.0% 70.0% 60.0% 51.5% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Assets Advances Deposits 52.0% 51.0% Top 5 Top 15 83.3% 83.8%

82.7%

Source: Central Bank of Kenya, Legae Calculations

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1.2

Industry capital and credit risks
Industry capital position is strong, risks to capital are manageable: We do not expect significant Capital Adequacy Ratio (CAR) pressures, except for banks that may focus more on regional expansion. Equity Bank is one of the banks with a regional expansion programme. Overall, the Kenyan banking system has sufficient capital in our opinion. In CY2008, the industry’s Equity/TA ratio stood at 13%.

Equity bank’s capital position is healthy: The core capital/TRWA ratio increased from 18% in CY2007 to 20% in CY2008. The core capital-todeposit ratio remains fairly static at 15% due to the rising deposits which diluted the rising capital (Ksh-terms). Sector core capital ascended by 13.5% from Ksh111,241bn in CY2007 to Ksh126,265bn in CY2008. Total capital increased by a higher rate of 19.8% to Ksh142,554bn.

As at end of CY2008, Equity bank was the second best capitalised bank in Kenya in terms of total capital/TRWA ratio with a ratio of 40.8%. The sector’s average total capital/TRWA ratio is 23.2%. The minimum statutory required is 12%. In our view, the excess capital provides the bank with ample room to assume more credit risks by growing its loan book. (see Fig 12-13).

Credit risks ascended in CY2008, and we expect further deterioration in CY2009, but write-backs could benefit banks starting in 2H10: Credit risks increased in CY2008, with the downward trending NPLs figure showing a recovery from Ksh41.6bn to Ksh48.2bn. As a percentage of loans, the ratio however continued to decline although our view is that this year an upturn could occur. For Equity Bank, the gross NPL ratio went up from 5.8% in CY2008 to 7.3% in 3Q09. (see Fig 14-15). We are sceptical of possible write-backs in 1H10, but we are confident that starting 2H10 industry profit should expand on write-backs. We should highlight the risks, and in our opinion 1) the weaker demand for agro-exports in EU and US, 2) lower tourists arrivals due to the recession and political risks 3) reduced internal demand due to unemployment and lower remittances in CY2008 and 4) higher inflation rate all point to weaker top line growth for major sectors of the economy hence default risk increases.

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GDP recovery is the catalyst as it is negatively related to NPL formations. While reduced NPL formation will be provoked by corporate earnings recovery, we remain concerned with the consumer segment. The agriculture sector could take longer to add to their payroll until when convinced of the growth path. As a result, joblessness may remain high and retrenchment in spending could continue. In addition, a reasonable number of individuals in Kenya have exposure to the equity market which has declined since CY2007. It is also important to highlight that according to management, 60% of the loan book is unsecured. However, credit monitoring is firm and collection methods are efficient. This supports the bank’s NPL ratio that is below sector average. The recovery rate is 20% and management expects it to improve in the long term.

Loan restructuring should positively affect NPLs in CY2010. In CY2008, NPL in Ksh-terms went up. In 3Q09, gross NPL ratio for the bank recovered from a falling trend. When loan repayments are under pressure, restructuring is often natural for banks. The current phase of loan restructuring should reduce pressure on provisions in CY2010.

Fig 12: Industry’s capital position is strong in our view
25%

20%

15%

10% 8% capital/deposits 5% core capital/TRWA Minimum statutory  ratio

0% 2002 2003 2004 2005 2006 2007 2008

Source: Central Bank of Kenya, Legae Calculation

Page 15 of 40

Fig 13: Equity bank stands out as one of the best capitalised banks in the sector

•  Equity Bank's core capital of Ksh19.9bn ranks second to Barclays •  Core capital is Ksh14.3bn
30,000  Core capital 25,000  Total Capital 45.0% 40.0% 20,000  35.0% 30.0% 15,000  25.0% 10,000  20.0% 15.0% 5,000  10.0% ‐
City Finance Dubai Bank Fidelity Giro Habib Bank Credit Bank Equatorial Consolidated First Community Guardian Chase ABC Ltd Fina Bank BoA Ltd Ecobank Development Bank Gulf Bank Family BoIndia BoBaroda Imperial  CBoA NIC Diamond Trust NBK CFC stanbic Citibank Stanchart Co‐operative KCB Equity bank Barclays

•  Total capital/RWA is high at 40.8%. There is room to grow the loan book •  Capital risks is low for Equity bank. The industry's capital risk is strong as well
50.0%
Core/RWA Total/RWA Average, Total Average, Core

5.0%
Diamond … Imperial  Equatorial ABC Ltd Guardian Co‐operative Citibank Dubai Bank Credit Bank Developm… BoIndia Gulf Bank NBK First … Equity bank Habib Bank Chase CBoA BoA Ltd Fina Bank Fidelity CFC stanbic NIC Ecobank Stanchart KCB Barclays Consolidat… Giro Family BoBaroda

0.0%

Source: Central Bank of Kenya, Legae Calculations

Fig 14: NPL trend downwards, from Ksh70.7bn in CY2002 to Ksh48.2bn in CY2008. NPL/Loans ratio fell below 10% in CY2007.

•  Significant improvements in credit risk management • NPLs(Ksh‐term) and provisions went down despite a spike in 2008
700,000 
Loans

•  NPLs/Loans improved to 7.3% in 2008 from 8.7% in 2007 •  Current risk aversion should improve credit risk management processes
40.0% NPLs/Loans Provisions/Loans

35.0%

600,000 

Total NPLs Provisions

30.0%

500,000  25.0% 400,000  20.0% 300,000  15.0% 200,000 

10.0%

70,799 

67,087 

64,949 

64,441 

62,416 

48,175 

41,699 

100,000 

5.0%

‐ 2002 2003 2004 2005 2006 2007 2008

0.0% 2003 2004 2005 2006 2007 2008

Source: Central Bank of Kenya, Legae Calculations

Page 16 of 40

Fig 15: Gross NPL ratio for Equity bank shows a downward trend but recovered to 7.3% in 2009
16%

14%

12%

10%

8%

6%

4%

2%

0% 2003 2004 2005 2006 2007 2008 2009

Source: Company reports, Legae Calculations

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2. Company Analysis
2.1 Why micro?

Equity bank’s main market segment is the micro-finance. The Bank’s model, through its widespread branch network, is to penetrate the lower mass market segment and the unbanked population. We expound the benefits.

Defensive: Micro-finance institutions (MFIs) in Africa often lend to defensive industries such as food, education, shelter etc. MFI often do not play high risk projects and the capital markets. This often makes their assets defensive.

Higher NIM: MFIs’ NIMs are often high as a result of higher lending rates. Lending rates for smaller MFIs are above 30% p.a. in most countries. Bigger MFIs tend to employ partial convergence of their lending rates with mainstream commercial banks. Equity Bank’s prime rate in Kenya is 18% p.a, and 28% p.a and 32% p.a in Uganda and Sudan respectively.

Longer-term liabilities: The reaction of small deposits to changes in market liquidity conditions and monetary policies tend to be less than of the large deposits from corporates. This makes the tenor of the liabilities longer. MFIs also tend to borrow from developmental institutions with longer tenors, which aid the asset-liability management.

Diversification: The small value of deposits and loans means that volumes are important to profitability. Concentration risk is low due to the fact that deposits and loans are spread over a number of small depositors and borrowers.

In Kenya, individual/consumer market is becoming more important: More importantly for Equity Bank, the consumer segment is gaining market share of the credit market. As indicated below, individual lending doubled to 24% of total sector lending book in CY2008 from 12% in CY2003. (see Fig 16) As this segment becomes more important, the risk to MFIs is the possible downscaling by main-stream commercial banks. More mainstream commercial banks in Kenya are increasing focus on the “bottom-end of the pyramid”, but our view is that Equity Bank is in a good position to defend its market share. Infrastructure and system that can handle large volumes of accounts at an optimal cost are key to gaining/defending market share.

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According to management, its centralised system has capacity to optimally handle 35mn accounts.

The structure of the economy(ies) is supportive of Equity Bank’s strategy: In our opinion, the SME, retail and the region are the most under-penetrated segments and exposure to these segments should offer value in the long-term. The biggest GDP contributor is agriculture, at about 20%. SMEs in the agriculture sector, as well as other sectors of the economy are widespread. In Uganda, and other East African countries such as Rwanda, Tanzania and Burundi, SMEs are customary.

The Achilles heels: The SME sector comes with its own risks. SMEs capital levels are often thin and expose them to bankruptcy risk, particularly during times of receding demand. Compounded with poor governance chiefly due to ownership domination by one individual and lack of institutionalisation, access to working capital becomes difficult, negatively affecting returns.

Fig 16: Consumer sector borrowing is rising

•  Consumer  sector borrowing is rising in the industry
90%
Corporate

•  Consumer lending makes up 37% of Equity bank's loan book
Consumer Corporate Inside  Mortgages

80% 70% 60% 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 2007 12% 13% 13% 17% 19%

Individual  Commercial

41.1%

37.1%

2.6%

19.2%

24%

2008

Source: Central Bank of Kenya, Company Management, Legae Calculations

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2.2

A comment on Q309 performance

The bank’s 3Q09 set of results point to continued strong growth. Below we highlight the salient features.

Fig 17: 3Q09 performance analysis
3Q09  58,143.95      2,905.36 4.0%  65,660.67               ‐ 2Q09      53,802.67          1,640.15 2.5%      57,489.66                   ‐ 1Q09    48,236.57     3,396.50 5.5%    53,720.37               ‐                       Growth rate 4Q08 3Q09 2Q09           44,193.75 8.1% 11.5%               5,160.78 77.1% ‐51.7% 8.8% 59.4% ‐54.4%           50,334.53 14.2% 7.0%                        ‐ 0.0% 0.0% 54.9% 59.3% 54.2% 39.4% 3.9% 68.1% 54.4% 35.9% n/m 42.1% 55.7% 2.0% 4.8% 10.6% ‐7.4% 5.5% 5.7% 5.4% 14.3% ‐2.4% 102.2% 84.5% 105.4% 90.9% 12.8% 146.7% 117.4% 1209.2% 0.0% 43.7% 114.1% 5.6% 1.3% 14.1% ‐3.6% 9.9% 21.5% 8.4% 26.8% ‐2.8% 1Q09 9.1% ‐34.2% ‐37.9% 6.7% 0.0% ‐68.6% ‐71.8% ‐68.0% ‐70.4% ‐15.3% ‐81.0% ‐74.8% ‐98.9% 0.0% ‐14.4% ‐73.2% ‐14.5% 2.6% 10.9% ‐3.4% 39.8% 98.1% 34.7% ‐12.1% 23.4%

Loans and advances Deposits due from local banks Deposits due from banks,% of IEA Customer deposits Deposits due to local banks Interest Income Interest expense Net Interest income NIM Cost/Income Fees & Commission (loans & advances) Other fees and commissions Foreign exchange trading Dividend income Other income Operating Income Fees &Commission,% of Operating In. Core capital Total Risk Weighted Assets Core capital/total deposits Gross NPL Suspended Interest Non‐performing loans Provision NPL/Customer loans

     7,839.60          5,060.89     2,502.76               7,979.02   (1,130.04)            (709.42)       (384.46)            (1,362.23)      6,709.56          4,351.47     2,118.30               6,616.79 10.7% 7.7% 4.0% 13.6% 54.1% 52.1% 46.2% 54.5%      1,470.87      2,775.09        149.97            17.18        146.68  11,269.34 38%            875.01          1,797.23            110.38                   ‐            103.21          7,237.29 37%          354.75          826.50             8.43               ‐           71.82     3,379.80 35%               1,869.20               3,281.10                 754.41                        ‐                     83.87           12,605.37 41%

 15,555.29      14,837.32    14,642.24           14,272.34  68,346.59      61,815.50    54,155.35           48,833.99 25% 27% 28% 29%      4,464.40        567.10      3,897.30        955.58 6.7%          4,233.06            536.64          3,696.42            835.89 6.9%     3,851.66          441.78     3,409.88          659.23 7.1%               2,754.75                 222.98               2,531.77                 750.11 5.7%

Source: Company Reports, Legae Calculations, IEA = interest earning assets

Revenue: Operating income went up by 56% in 3Q09, supported by strong growth in fees and commission, which went up by 68%. Net interest also shows a strong growth, jumping by 54% in 3Q09. Fees and commission contribution to operating income went up slightly to 38% from 37% in 2Q09. The contribution has however declined when compared to 41% in 4Q08.

Margins: NIM went up to 10.7% in 3Q09 from 7.7% in 2Q09. Compared to 4Q08, NIM has declined by 2.9pp. NIM of 10.7% is still higher than the industry’s average. For 4Q09, falling interbank rates could negatively affect NIM for the bank as it is a net lender in the inter-bank market. In

Page 20 of 40

fact, Equity Bank has no deposits from other banks, but has placement with local banks that constitute 4% of the bank’s total interest earning assets. We are impressed by the fact that the bank has managed to increase operating profit in 3Q09 without increasing credit risks significantly. (i.e. net interest income increased by 54.2%, loans and advances went up by 8% and NPLs went up by 5.4%)

Costs: Operating costs minus provisions went up by 53% in 3Q09 to Ksh7.1bn. The growth rate has however gone down by 54pp from 103% in 2Q09. The bank recorded a cost/income ratio of 62.6%, which is 8.4pp below the industry’s average of 71%. Our cost/income ratio (ex. provisions) is 54%. Management is confident that the LT cost/income ratio will fluctuate around 48%.

Profitability: The bank reported strong ROE and ROA for Q309 at 27% (annualised) and 6.5% respectively. Operating income went up by 55.7%. Fees and commission income continue to show strong growth. According to management, 32/112 branches in Kenya are not profitable chiefly because they were recently opened.

Customer deposits and loans and advances: Customer deposits increased by 14% in the quarter. However, loans and advances increased by a lower rate of 8%. Management highlighted to us that drought negatively affected loan demand from farmers.

Capital: Core capital enlarged 5% to Ksh15.5bn. Core capital as a percentage of deposits remain healthy at 25%, notwithstanding the fact that this is deterioration from 2Q09’s 27%. This is 3X above the minimum required of 8%.

Credit risks: NPLs went up in Ksh-terms to Ksh3.9bn from Ksh3.7bn in 2Q09. As indicated already gross NPL ratio (i.e. including suspended interest) shot up to 7.2%. However, the NPL ratio declined slightly to 6.7% from 6.9% in 2Q09. The rising gross NPL ratio indicates the heightened credit risks for Equity Bank in particular and for the sector in general. Provision rose by 14% to Ksh955.6mn in 3Q09.

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2.3 Liqudity, concentration and interest rate risks analysis
We assess the bank’s liquidity and interest rate risks. Overall, we note that the risks are low and manageable. We make a note of the following:

Equity bank’s business is predominantly retail funded. Wholesale funds are more expensive (despite the recent decline of the interbank rate). More importantly wholesale funds are more volatile hence the liquidity risk is heightened. Concentration risk also tends to be higher for banks that rely heavily on the wholesale market. In our point of view, Equity’s nondependence on the wholesale market is an invaluable positive to 1) lower cost of funds hence positive impact on NIM, and 2) lower liquidity risk as retail deposits are “stickier” than interbank deposits.

The bank is not under pressure to raise deposits to fund its loan book. 63% of the assets are loans but liquid assets which we defined to consist cash and securities, balances due from CBK, government securities and funds due from local and foreign banks is sizeable at Ksh25.3bn, making up 26% of the balance sheet. In our view, Equity bank has ample cash resources to expand its loan book without putting itself under funding pressure. Put simply, the funds could be redeployed to loan should the bank deems it fit.

The bank’s cash assets are 6% of interest earning assets, CY2008 and we expect it to rise marginally to 6.3% in CY2009. Government securities (local and foreign) and balances due from CBK add up-to Ksh6.88bn in CY2008. We anticipate these liquid assets to rise to Ksh8.965bn in FY2009, largely due to a slower growth in the loan book. The bank also has substantial liquidity in securities for dealing which stand at Ksh7bn in 3Q09.

In summary we like that fact that Equity Bank: 1) is not excessively leveraged, as of now, 2) does not depend on short-term interbank market and 3) has minimal, if not immaterial dependence on external debt market (deposits from foreign banks is less than 1% of total assets).

The caveat however is the rising loans/deposits ratio. Equity bank’s loans/deposits ratio in 3Q09 is 88%. We expect it to close CY2009 at 96%. As the loans/deposits ratio rises above 100%, the bank will need to rely on

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external borrowing. The low industry LDR, however, mitigates the risk as the bank can expand its interbank market activities.
Fig 18:In our view, the bank has ample liquidity to deploy to loans

•  In our view the bank has ample liquidity to deploy to loans…
100% 90% 4.91 2.78 80% 70% 60% 0.676 2.905 1.815 40% 30%
Cash Balances due from CBK Government Securities Foreign Bills Due from local banks Due from foreign banks Loans and advances

•   …and lower cost CASA should continue to support deposits
% of Total deposits Cost of funds, RHS 8.6% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.3% 2.0% 1.0% 0.4% 0% CASA Term deposits Interbank deposits 0.0% 10.0% 9.0%

12.297

50%

58.143

20% 10%

Source: Company reports, Company management, Legae Calculations

Concentration risk: Diversification of deposits is important in liquidity management. On the other hand, diversification of loans is important to management of credit risks, particularly default risk. Management could not provide us with the concentration profiles, but we assume that due to the smaller number of depositors and borrowers, concentration risk is low.

Interest rate risk: Management could not provide us with the current (3Q09) funding gaps to enable us to carry out a gap analysis. However, they indicated that interest rate risk is low in their view. They also highlighted that the average tenor of their loan book is 60 months. This could make the balance sheet “liability sensitive” (i.e. rate sensitive liabilities greater than rate sensitive assets in various time buckets and cumulatively for a year.) despite the stickiness of deposits. Rising interest rates would therefore be unconstructive to the bank’s balance sheet.

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2.4

Diversification: Out of Kenya

Management indicated that Equity bank will expand into the region. Already, the bank has footprints in Uganda and Southern Sudan.

Uganda: The bank acquired 100% of Uganda Microfinance Limited in 2008. The acquired is now a wholly owned subsidiary. Consequently, Uganda Microfinance was licensed as a commercial bank by the Bank of Uganda. Uganda Microfinance will continue to build its franchise in the micro-finance segment rather than fight for market share against more established commercial banks. The acquired has 327,062 accounts and contributes 11% of the Group’s interest income. In our view, Uganda holds significant growth prospects in this segment.

Southern Sudan: Expansion into Southern Sudan also took effect in 2008. A branch was opened in Juba, Southern Sudan and a Chief Operating Officer was dispatched to the region. As shown below, the Office has 3,487 accounts.

Where else from here? Management indicated that the bank intends to establish presence in all members of the East African community. The members of the East African community include Tanzania, Uganda, Rwanda and Burundi, in addition to Kenya and Uganda.
Fig 19 : Loan yields are higher in Sudan and Uganda
4500 4100 4000 3500 3000 2500 18% 2000 Customers, 000, LHS 1500 1000 500 0 Kenya Uganda Sudan 5% 327 3 0% Loan yield 10% 15% 20% 28% 25% 32% 30% 35%

Source: Company management, Legae Calculations

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3.
3.1

Financial analysis and Valuation
Financial Analysis and Forecasts
What goes up comes down: We have reduced growth rates for both loans and deposits by noteworthy margins. Our rationale is premised on 1) the fact that Equity bank is now one of the major banks in Kenya, and market share penetration should now grow at a lower rate. We do not expect high organic growth in Kenya 2) Equity bank closed CY2008 with 3mn accounts. This represents 49% of the total sector accounts. On its website, the bank declares it now has 4.1mn accounts. (this is 52% of accounts in the system). Further market share acquisition of the banked population should be impeded although the bank can grow by penetrating the bankable population; 3) little room for further improvements in the cost/income ratio. The basic way to increase earnings by reducing costs could prove difficult for Equity Bank. The bank’s cost/income ratio is already below industry average. In our view, this ratio could only improve as a result of the denominator increasing, and not the numerator being reduced; and 4) our expectations of muted contribution from regional expansion in the short-term. Investment in systems, branch network (14 were opened in Uganda) and human resources should be unhelpful to earnings in the shortto medium term. The bank has one branch in Southern Sudan.

CAMEL analysis: Below we provide select ratios that give us an indication on CAMEL strength. The capital position is strong in our view, with equity/loan ratio of 44.2% in CY2008 and our expectation of 33% in CY2009. Asset quality as indicated by NPL ratio is fair. The NPL ratio in CY2008 was better than the industry average and we expect CY2009’s 5.9% to be better than the industry’s 8%. Cost to income ratio in CY2008 is 52%, which again is better than the industry’s estimate of 62% (ex-provisions). NIM fluctuates around the industry’s average at 9.6% in CY2008 and we expect it to reduce to 8.8% in CY2009. As we already mentioned, liquidity risks are also manageable in our view. Government securities/total loans ratio is 10% in CY2008 but we estimate it to decline to 7.7% in CY2009. Overall, Equity Bank’s CAMEL ratios are strong.

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Fig 20 : CAMEL ratios are strong

CAMEL ratios C: Total  capital/TRWA C: Equity/Loans A: NPL/Loans A: Provisions/Loans M: Cost/Income  (ex.provisions) M: Efficiency ratio E: NIM E: Fee&Comm/Operating Income L: Loans/Deposits L: Gvnt Securities/Total Loans

2006 14% 20.1% 5.2% 1.4% 63.3% 67.3% 8.7% 55.3% 66.9% 15.1%

2007 59% 68.3% 4.5% 0.9% 59.8% 59.4% 5.8% 52.6% 69.2% 62.0%

2008 38% 44.2% 5.7% 1.7% 52.3% 60.4% 9.6% 47.5% 87.8% 10.0%

2009F 30% 33.0% 5.9% 1.3% 56.7% 63.2% 8.8% 40.6% 96.6% 7.7%

2010F 29% 31.3% 6.0% 2.0% 56.6% 66.3% 8.6% 45.5% 92.7% 6.4%

2011F 29% 30.7% 6.0% 3.0% 50.9% 64.1% 9.6% 46.4% 92.7% 5.4%

Source: Company reports, Legae Calculations, ratios are not based on averages

ROE (after tax) analysis: Our decomposed ROE attempts to indentify the major drivers of the ROE going forward. We expect ROE to decline to 15.4% in CY2009 from the previous year’s 19.8%. We anticipate that ROE will recover to 18.6% in CY2011. The major push factor will be the equity multiplier (leverage) which we expect to increase to 4.8X.

Fig 21: ROE decomposition

Operating income/Total assets Expenses/Total assets Taxes/Total Assets ROA Equity multiplier ROE

2006 16.8% ‐11.3% ‐1.7% 3.8% 9.1 34.2%

2007 11.0% ‐6.5% ‐0.9% 3.5% 3.6 12.6%

2008 16.0% ‐9.7% ‐1.4% 4.9% 4.0 19.8%

2009F 12.7% ‐8.0% ‐1.4% 3.2% 4.8 15.4%

2010F 13.5% ‐8.9% ‐1.4% 3.2% 4.9 15.6%

2011F 15.3% ‐9.8% ‐1.7% 3.9% 4.8 18.6%

Source: Company reports, Legae Calculations

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Efficiency: The basic measures of staff productivity, assets/employee and the deposits/employee show a stable improvement from CY2004 despite deterioration in CY2008. The bank’s efficiency ratio is still fairly high, 5pp above our preferred 55%. However, management’s ability to reduce it from 79% in CY2004 to 60% in CY2008 is a great achievement in our view. We expect the efficiency ratio to rise slightly to 63% in CY2009.

Fig 22: Efficiency has increased, but CY2008 presented difficulties, asset/employee and deposit/employee KShmn
•  Deposit per employee declined slightly in CY2008 •  Efficiency ratio highlights Equity bank's success
0.85  25.0  Assets/Employee Deposits/Employee 20.0  18.0  0.70  15.0  12.7  9.6  13.0  10.2  14.8  12.1  13.0  11.5  0.60  0.55  5.0  0.50  0.45  ‐ 2004 2005 2006 2007 2008 0.40  2004 2005 2006 2007 2008 0.65  0.59  0.60  0.75  0.72  0.67  22.0  0.80  0.79 

10.0 

Source: Company reports, Legae Calculations

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Salient assumptions Our major assumptions on our forecasts are detailed below:

Interest income: We assume that interest income from loans and advances will grow by 36% in CY2009, receding to 20% for CY2010. The interest income recovers to 30% for 2011. Interest income from government securities will grow by -20% in CY2009.

Interest expense: We grow interest expense for customer deposits by 37% in CY2009 before it jumps by 85% in CY2010. We estimate that interest due to local banks placements will remained low as Equity bank is a net lender in the interbank market.

Fees and commission: We estimate the fee and commission line item will register a 6% reduction in CY2009. This is a result of lower deal flow, particularly on the loan side which has only gone up by 8%. The growth however recovers in CY2010 and CY2011.

Costs: The cost /income ratio slides down from 56.7% in CY2009 to 50% in CY2011. The decline in cost/income ratio is not a result of declining costs, but rather the increasing income. We increase staff costs by 25% in CY2009, 35% and 20% for CY2010 and 2011 respectively. Regional expansion will push costs by a higher rate than revenue in the short-term. We increased loan loss provision by 85% in CY2010. Consequently total operating expenses went up by 16% (revenue 11%) in CY2009 and 30% in CY2010 (revenue 24%).

Loans and advances: We grow loans and advances by 58% for CY2009 and 20% for CY2010 and CY2011. This notable reduction is motivated by our expectations of a muted SME loan demand, lower IPO financing and possible tightening in the lending criteria.

Deposits: Our deposits growth forecasts reduced steeply from historical growth rates to 43%, 25% and 30% for CY2009, CY2010 and CY2011 in that order.

Profitability: We expect NIM to decline to 8.8% in CY2009 before it goes down to 8.6% in CY2010 and recovers to 9.6% in CY2011.

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Income Statement Forecast The major risks

• • •

Bad loans and loan loss provision could take a higher spike than anticipated; Income from regional operations could grow higher than expected; and Dividends payout ratio could be modest than our forecasts as the bank build up capital for its regional expansion.

Fig 23: Equity Bank’s Earnings model
Interest Income Loans and advances Government Securities Placements with banks Other  Interest income Interest Expense Customer deposits Placements from banks Other interest expense Total interest expense Net Interest Income Fees & Commission on loans Other fees & commission Foreign exchange trading Dividend income Other non‐interest income Total non‐fee income Operating Income Loan loss provision Staff costs Directors' costs Rental charges Depreciation Amortization charges Other operating expenses Total operating expenses Profit before exceptional items Exceptional items Profit before tax Taxation: current tax                      Deferred tax Profit/(Loss) 2006       1,435.7            103.1             95.7               ‐       1,634.5 2007       2,512.4            545.5            196.7               ‐       3,254.6 2008         6,175.5         1,540.6             262.9                 ‐         7,979.0 2009F           8,383.5           1,231.2                150.8                   ‐           9,765.5 2010F       10,047.3         1,236.9             188.8                 ‐       11,473.0 2011F       13,061.5         1,236.9             141.6                 ‐       14,440.0 Growth rates Loans and advances Government Securities Placements with banks Other  Interest income Interest expense Customer deposits Placements from banks Other interest expense Total interest expense Net Interest Income Fees & Commission on loans Other fees & commission Foreign exchange trading Dividend income Other non‐interest income Total non‐fee income Operating Income Loan loss provision Staff costs Directors' costs Rental charges Depreciation Amortization charges Other operating expenses Total operating expenses Profit before exceptional items Exceptional items Profit before tax Taxation: current tax                      Deferred tax Profit/(Loss) 2007 75% 429% 105% 0% 99% 2008 146% 182% 34% 0% 145% 2009 36% ‐20% ‐43% 0% 22% 2010 20% 0% 25% 0% 17% 2011 CAGR (06‐11) 30% 55.5% 0% 64.4% ‐25% 8.1% 0% 0.0% 26% 54.6%

           118.1               6.0               2.6            126.6       1,507.8            366.1       1,430.2             23.3               ‐             44.0       1,863.6       3,371.4        (133.13)        (942.96)         (15.70)        (102.28)        (242.55)         (37.32)        (794.61)   (2,268.55)      1,102.88               ‐      1,102.88        (333.99)         (15.51)        753.38

           244.6               2.6            247.3            494.5       2,760.1            883.3       1,948.9            147.4               ‐             83.0       3,062.5       5,822.6            25.34   (1,453.47)         (16.09)        (181.87)        (357.51)         (65.67)   (1,409.51)   (3,458.78)      2,363.82            14.70      2,378.52        (454.28)         (33.96)      1,890.28

            552.3               22.8             787.1         1,362.2         6,616.8         1,869.2         3,281.1             754.4                 ‐               83.9         5,988.6       12,605.4     (1,019.63)     (2,937.86)           (16.66)         (375.43)         (649.38)           (99.78)     (2,518.46)     (7,617.19)       4,988.18             34.08       5,022.26     (1,062.60)           (49.40)       3,910.26

               755.8                 14.2                697.1           1,467.2           8,298.3           1,765.0           3,524.4                180.0                 17.2                177.5           5,664.1          13,962.4            (904.09)       (3,681.87)             (20.95)            (537.38)            (874.73)            (117.72)       (2,687.57)       (8,824.31)          5,138.10                55.28          5,193.38       (1,593.90)                   ‐          3,599.48

        1,354.3               14.1             687.0         2,055.4         9,417.6         2,511.8         4,990.4             269.9                 ‐               95.2         7,867.3       17,285.0     (1,674.55)     (4,970.52)           (25.14)         (644.85)     (1,049.67)                 ‐     (3,090.71)   (11,455.44)       5,829.53                 ‐       5,829.53     (1,748.86)                 ‐       4,080.67

        1,625.1               14.1             568.6         2,207.9       12,232.1         3,516.5         6,613.5             350.8                 ‐             119.1       10,600.0       22,832.1     (3,014.18)     (5,964.62)           (25.14)         (709.34)     (1,207.12)                 ‐     (3,708.85)   (14,629.26)       8,202.84                 ‐       8,202.84     (2,460.85)                 ‐       5,741.99

107% ‐56% 9394% 290% 83% 141% 36% 533% 0% 89% 64% 73% ‐119% 54% 3% 78% 47% 76% 77% 52% 114% 0% 116% 36% 119% 151%

126% 768% 218% 175% 140% 112% 68% 412% 0% 1% 96% 116% ‐4124% 102% 4% 106% 82% 52% 79% 120% 111% 132% 111% 134% 45% 107%

37% ‐38% ‐11% 8% 25% ‐6% 7% ‐76% 0% 112% ‐5% 11% ‐11% 25% 26% 43% 35% 18% 7% 16% 3% 62% 3% 50% 0% ‐8%

79% 0% ‐1% 40% 13% 42% 42% 50% 0% ‐46% 39% 24% 85% 35% 20% 20% 20% 0% 15% 30% 13% ‐100% 12% 10% 0% 13%

20% 0% ‐17% 7% 30% 40% 33% 30% 0% 25% 35% 32% 80% 20% 0% 10% 15% 0% 20% 28% 41% 0% 41% 41% 0% 41%

68.9% 18.9% 193.6% 77.1% 52.0% 57.2% 35.8% 72.0% 0.0% 22.0% 41.6% 46.6% 86.6% 44.6% 9.9% 47.3% 37.8% n/m 36.1% 45.2% 49.4% n/m 49.4% 49.1% n/m 50.1%

Source: Company Reports, Legae Calculations

Page 29 of 40

Balance Sheet The major risks

• •

Deposits could grow at a lower rate than predicted. This will negatively affect the loan book growth and the resultant revenues; and Loans and advances could grow at a slower rate, irrespective of the development on deposits. A higher liquid balance sheet would compress revenue due to squashed interest income.

Fig 24: Equity Bank’s Balance Sheet model
Assets Cash Balances due from CBK Government Securities Foreign treasury bills Placements with local banks Placements with foreign banks Securities for dealing Tax recoverable Loans and advances Investment securities Balances due from Group cos Investment in associates Investment in subsidiaries Investment in JV Investment in properties Property & Equipment Pre‐paid lease Intangible assets Deferred tax Retirement benefit asset Other assets Total assets Liabilities Balances due to CBK Customer deposits Placements due to local banks Placements due to foreign banks Other money market deposits Borrowed funds Balances due to group cos Tax payable Dividends payable Deferred tax liability Retirement benefit liability Other liabilities Total liabilities Shareholders' Funds Paid up capital Share premium/discount Revaluation reserve Retained Earnings Statutory reserves Proposed dividends Total shareholders' funds Total Liabilities and Equity 2006            1,545              923            1,651               ‐            1,786              459               ‐               ‐        10,930               ‐               ‐               ‐               ‐               ‐                  11            1,465                   4              161               ‐               ‐            1,089        20,024 2007      3,015.01      2,138.35  13,542.94               ‐      4,105.15      2,786.25               ‐               ‐  21,836.44               ‐               ‐        441.83               ‐               ‐            11.27      2,602.88             4.15        224.34               ‐               ‐      2,420.66        53,129 2008       3,652.14       2,468.49       4,329.66             88.77       5,160.78       1,162.11       8,145.45             13.31      44,193.75                 ‐                 ‐       1,155.56             51.00                 ‐             11.27       4,824.26               4.10       1,465.43                 ‐                 ‐       2,110.73            78,837 2009F          4,906.92          2,786.22          5,314.09                67.70          2,905.36          1,815.85          6,987.15                10.79      69,772.74                30.21                   ‐          1,192.42                 1.10                   ‐                11.27          6,315.74                 5.28          1,853.44                   ‐                   ‐          6,349.76          110,326 2010F       5,397.61       2,925.53       5,314.09             67.70       2,905.36       1,815.85       6,987.15                 ‐      83,727.28             30.21                 ‐       1,192.42               1.10                 ‐             11.27       6,315.74               5.28       1,853.44                 ‐                 ‐       9,524.64        128,075 2011F       7,016.89       2,925.53       5,314.09             67.70       2,905.36       1,815.85       6,987.15                 ‐  100,472.74             30.21                 ‐       1,192.42               1.10                 ‐             11.27       6,315.74               5.28       1,853.44                 ‐                 ‐      11,905.80        148,821 Growth rates Cash Balances due from CBK Government Securities Foreign treasury bills Placements with local banks Placements with foreign banks Securities for dealing Tax recoverable Loans and advances Investment securities Balances due from Group cos Investment in associates Investment in subsidiaries Investment in JV Investment in properties Property & Equipment Pre‐paid lease Intangible assets Deferred tax Retirement benefit asset Other assets Total assets 2007 95% 132% 720% 0% 130% 507% 0% 0% 100% 0% 0% 0% 0% 0% 0% 78% 0% 39% 0% 0% 122% 165% 2008 21% 15% ‐68% 0% 26% ‐58% 0% 0% 102% 0% 0% 162% 0% 0% 0% 85% ‐1% 553% 0% 0% ‐13% 48% 2009 34% 13% ‐30% ‐24% ‐44% 56% ‐14% ‐19% 58% 0% 0% 3% ‐98% 0% 0% 31% 29% 26% 0% 0% 201% 40% 2010 10% 5% 0% 0% 0% 0% 0% 0% 20% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 50% 16% 2011 CAGR (06‐11) 30% 35.3% 0% 26.0% 0% 26.3% 0% 0.0% 0% 10.2% 0% 31.7% 0% 0.0% 0% 0.0% 20% 55.8% 0% 0.0% 0% n/m 0% n/m 0% n/m 0% n/m 0% 0.0% 0% 33.9% 0% 4.9% 0% 63.0% 0% n/m 0% n/m 25% 61.3% 16% 49.4%

              ‐  16,336.73               ‐               ‐               ‐        485.45               ‐        147.03               ‐            10.92               ‐        843.36        17,823

              ‐  31,535.52               ‐            53.32               ‐      4,521.39               ‐        209.04               ‐            44.88               ‐      1,848.44        38,213

                ‐      50,334.53                 ‐               0.90                 ‐       6,463.14                 ‐            513.73                 ‐             94.14                 ‐       1,892.57            59,299

                  ‐      72,226.74                   ‐                31.43                   ‐          7,816.54                   ‐                 2.68                 1.01                92.58                   ‐          7,115.70            87,287

                ‐      90,283.43                 ‐             31.43                 ‐       7,034.89                 ‐               5.36               1.01             94.43                 ‐       4,415.04        101,866

                ‐  108,340.11                 ‐             31.43                 ‐       5,979.65                 ‐               5.36               1.01             94.43                 ‐       3,497.27        117,949

Balances due to CBK Customer deposits Placements due to local banks Placements due to foreign banks Other money market deposits Borrowed funds Balances due to group cos Tax payable Dividends payable Deferred tax liability Retirement benefit liability Other liabilities Total liabilities

0% 93% 0% 0% 0% 831% 0% 42% 0% 311% 0% 119% 114%

0% 60% 0% ‐98% 0% 43% 0% 146% 0% 110% 0% 2% 55%

0% 43% 0% 3396% 0% 21% 0% ‐99% 0% ‐2% 0% 276% 47%

0% 25% 0% 0% 0% ‐10% 0% 100% 0% 2% 0% ‐38% 17%

0% 20% 0% 0% 0% ‐15% 0% 0% 0% 0% 0% ‐21% 0%

n/m 46.0% n/m n/m n/m 65.2% n/m ‐48.4% n/m 54.0% n/m 32.9% 45.9%

       452.82        480.36             1.20      1,085.48               ‐        181.13      2,200.99        20,024

     1,811.05  10,543.04            12.13      1,754.07        252.91        543.39  14,916.58        53,129

      1,851.39      12,161.02         (349.32)       4,455.47            308.42       1,110.83      19,537.80            78,837

         1,851.39      12,157.31            119.99          7,397.43            433.36          1,079.84      23,039.31          110,326

      1,851.39      12,157.31                 ‐      10,253.90            722.27       1,224.20      26,209.06        128,075

      1,851.39      12,157.31                 ‐      14,273.29            866.72       1,722.60      30,871.30        148,821

Paid up capital Share premium/discount Revaluation reserve Retained Earnings Statutory reserves Proposed dividends Total shareholders' funds Total Liabilities and Equity

300% 2095% 907% 62% 0% 200% 578% 165%

2% 15% ‐2981% 154% 22% 104% 31% 48%

0% 0% ‐134% 66% 41% ‐3% 18% 40%

0% 0% ‐100% 39% 67% 13% 14% 16%

0% 0% 0% 39% 20% 41% 18% 16%

32.5% 90.8% ‐100.0% 67.4% n/m 56.9% 69.6% 49.4%

Source: Company Reports, Legae Calculations

Page 30 of 40

3.2

Valuation and recommendation

Valuation

We use the Discounted Future Earnings (DFE) method to estimate the bank’s value. Theoretically, the DFE method is often employed when future earnings are expected to be significantly different from the recent past. It is our view that Equity’ Bank’s future earnings growth rate will become anaemic and lose likeness to the recent high growth rates. The DFE method captures the present values of the near term earnings, and capitalises the terminal value (normalise earnings). This provides a way to capture the near term growth differentials.

We estimated the CoE as 18.3%, being 10-year Kenya Government bond yield of 11.84%; equity risk premium of 5.5% and company specific risk premium of 1.0% We assign a BUY, with caution of high valuation risk on the stock. The upside potential return provides little real return to local investors.
Fig 25: Discounted Future Earnings model
2008 2009F 2010F 2011F      3,910.26         3,599.48       4,080.67  5,741.99 n/a n/a n/a n/a      3,910.26         3,599.48       4,080.67  5,741.99         3,539.50       3,391.94  4,034.54  57,642.03            15.75            16.01            14.00 12.5% 2.1% 14.6% 3660 18.3% Terminal Value Calculation Book value capitalization CY2011 Equity       30,871.3 CY2011 Assets       148,820.5 Industry Equity/Assets                   0.14 Normalized Equity       20,819.8 Excess Equity       10,051.5 Earnings Terminal Value Total Earnings Present Value of Earnings Value Per share value Implied PER Current price Capital Gain Dividend Yield Total return Number of shares Cost of Equity Normalized Equity Industry average PBV Capitalization of Normalized Equity Excess equity Capitalized Book value Weight Concluded Terminal Value       20,819.8                   1.9       39,326.4       10,051.5       49,377.8 40% Terminal Value              66,429.7             66,429.66             46,676.05 We assign a 60:40  weight to TV values   from  earnings capitalisation and PB  methods to arrive at a weighted TV of  Ksh66.4bn. Our CoE of 18.3% is not  excessive in our opinion. Our capitalisation  (exit) PER of 13.5X is fair at 30% above  industry average. The total return of 14.6%  provides immaterial real return in our view.

Earnings capitalization Industry average PER Equity Bank premium Adjusted capitalization PER CY2011 Earnings PER Capitalized Earnings

10.4 30% 13.5         5,742.0 13.5       77,797.5

60%      66,429.66

Source: Company reports, Legae Calculations

Page 31 of 40

High valuation risk, relative to peers: Guilty as charged

The current price is 13.1X 2008 EPS, and 14.3X Legae 2009 EPS. During the bull periods, such multiples are hardly demanding, but in light of the current market conditions, the PER looks excessive. Some investors compare the historical P/E ratio to the historical multiple, but our view is that focusing on historical P/E ratio could make us miss the crucial point – our expectation of a material change in the growth rate going forward.

Fig 26: Sensitivity analysis

TV       50,000       60,000       66,430       70,000       75,000       90,000

13.0% 13.7 15.8 17.2 18.0 19.0 22.2

17.0% 12.9 14.8 16.1 16.8 17.8 20.8

Cost of Equity 18.3% 20.5% 12.6 12.2 14.5 14.0 15.8 15.2 16.4 15.9 17.4 17.1 20.3 19.6

22% 11.9 13.7 14.9 15.5 16.4 19.1

At a TV of Ksh90bn and a generous CoE of 13%, the fair  value provides  58% upside potential.  A TV of Ksh90bn at  our CoE provides upside potential of 45%. A pessimistic TV  of Ksh50bn and our CoE  provide a  potential capital loss of  10%. Rising TV provides massive upisde risk

Source: Legae Calculations Fig 27: Public market pricing. Equity bank’s share seems relatively expensive
Company name Barclays Equity Bank KCB Stanchart Bank Co‐operative Bank CFC Stanbic Diamond Trust NIC Bank National Bank Median Average Maximum Minimum Ticker BCBL KN EQBNK KN KNCB KN SCBL KN COOP KN CFCB KN DTKL KN NICB KN NBKL KN Market cap  Price,  US$, mn Ksh 12M High 12M Low 811 45 58 36 695 14 19 12 602 20 24 15 533 146 166 129 429 8.8 10.35 6 169 46 84 46 148 68 77 45 123 28 47 28 91 34 44 28 ROE 24.8% 17.4% 17.7% 33.5% 17.4% 4.5% 17.2% 17.1% 22.5% 17.4% 19.1% 33.5% 5% PER 10.5 13.3 11.4 9.0 11.9 14.5 9.9 8.2 5.1 10.5 10.4 14.5 5.1 PBV 2.6 2.3 2.0 3.0 2.1 0.7 1.7 1.4 1.2 2.0 1.9 3.0 0.7 Div Yield 4.5% 2.2% 4.9% 6.8% 1.1% 0.6% 2.1% 2.6% 0.0% 2.2% 2.8% 6.8% 0.0% YTD ‐11.9% ‐25.9% ‐14.7% ‐8.8% ‐12.0% ‐22.0% ‐5.6% ‐35.6% ‐21.5% ‐15% ‐18% ‐6% ‐36%

ROE is  < than the industry average. Div. yield  is < industry average. PER and PBV ratios are >  than median.

Source: I-net, Kestrel Capital as at 23.11.09

Page 32 of 40

Share price performance and liquidity

Fig 28: Equity bank underperforms other banks on the NSE as well as the Kenya 20 Index on a YTD basis
1.20 ‐6% Diamond Trust 1.10 ‐9% 1.00 ‐12% 0.90 ‐13% 0.80 ‐15% 0.70 ‐22% 0.60 0.50 0.40 Jan‐09 Feb‐09 Mar‐09 Apr‐09 May‐09 Jun‐09 Jul‐09 Aug‐09 Sep‐09 Oct‐09 Nov‐09 ‐30% ‐25% ‐20% ‐15% ‐10% ‐5% 0% Stanchart ‐22% CFC  Stanbic ‐26% CFC Stanbic Equity Housing Finance KCB Kenya 20 Co‐operative Bank Stanchart

Source: I-net prices as at 23.11.09, Legae Calculations,

Fig 29: External liquidity is growing, showing increasing institutional investors’ interest, Kshmn
350 

300 

Daily traded value Average daily traded value

250 

200 

Daily traded value has been streadly  increasing  since July 09. The trend  line in recent months is higher than  the average . YTD  traded value is  Ksh5.7bn (about US$74.8mn)

150 

100 

50 

‐ Jan‐09 Feb‐09 Mar‐09 Apr‐09 May‐09 Jun‐09 Jul‐09 Aug‐09 Sep‐09 Oct‐09 Nov‐09

Source: I-net, Legae Calculations

Page 33 of 40

Appendix 1: Company Profile
Equity Bank is a licensed commercial bank in Kenya. Below we detail the milestones for the bank.

• •

Registered in 1984 as Equity Building Society. The main business strategy was to provide mortgage finance to the Society’s members. Converted to a commercial bank, Equity Bank Limited, in 2004. This allowed the company to carry our banking activities. The bank focuses on SMEs and consumer lending.

• •

Listed on the Nairobi Stock Exchange in 2006, August. In 2007, Hellios EB Investors acquired 24.5% shareholding of the bank. In 2007 the Group acquired 20% of Housing Finance Company Kenya (HFCK) a mortgage lender. Regional expansion was kick-started by the 100% Uganda Microfinance acquisition in 2008.

As at the end of CY2008, the major shareholders are tabulated below:

Fig 30: Major shareholders, number of shares before the share split.

Shareholders Number of shares Percentage Helios EB Investors                   90,516,255 24% British‐American Investment                   41,910,289 11% Nelson Muguku Njoroge                   22,545,255 6% James Njuguna Mwangi                   19,898,505 5% John Kagema Mwangi                   15,139,690 4% Equity Bank ESOP                   15,018,400 4% Andrew Mwangi Kimani                   10,928,040 3% Fortresss Highlands Limited                   10,101,000 3% AiB Nominee A/C Solidus Holdings                       9,011,400 2% Peter Kahara Munga                       6,469,379 2% Other sharehodlers                 128,739,489 35%

Source: Company reports, Legae Calculations

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Appendix 2: Governance and Management
The Board

In our view, governance structure is critical for banks. Superior risk management are essential for a bank to stand out and claim a premium valuation in the capital markets.

Equity Bank’s board is made up of 11 members, with only Dr Mwangi being an executive director. Dr Mwangi, who is a founding CEO, holds 4.32% of the company. According to management, 2 board members represent shareholders and 8 are independent directors.

Below we provide the profiles for members of the board.
Fig 31: Directors’ profiles

Name
Mr. P Munga Mr B Wairegi Dr J Mwangi Mr J Kipngetich Prof. Migot‐ Adholla Mr E Nzovu Mr T Lawani B B Soyoye Mr F Muchoki Dr E Alembi Mr W Diouf Ms M Wamae

Position
Chairman Vice Chairman CEO Non‐Executive Director Non‐Executive Director Non‐Executive Director Non‐Executive Director Non‐Executive Director Non‐Executive Director Non‐Executive Director Non‐Executive Director Company Secretary

Experience
Immense experience in both public and private sector.  Sits on several boards. Managing Director of BAIC. Director of Agriculture  Finance Corporation.  Experience in the banking industry for 19 years CEO of Kenya Wildlife. Previously MD of Investment  Promotion Centre. Previously PS of MoAgriculture. Vast experience as a  consultant Vast experience as a consultant. Director of KHI  Training Co‐founder of Helois investment Partners. Enormous  experience as Corporate Development Analyst. Co‐founder of Helois Investment Partners. MD of Continental Business System. He has vast  experience as a businessman.  Senior lecturer, and author of numerous articles and  books. Managing Partner of AfriCap. 13 years experience in private practice. She is Certified  Public Secretary.

Qualification(s)
Certified Public Secretary CPA PhD Entrepreneurship, CPA B.Comm, Acc PhD Sociology of  Development BA Economics B.Engineering MBA, B.Engineering

PhD, MA MBA, BSc Computer Science LLB, CPS

Source: Company Reports, Legae Calculation

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Below provide an overview of the various board committees namely the audit committee, the credit committee, risk management and governance, board nomination and staff remuneration committee.

Credit committee: The committee is made up of four members. Mr Muchoki chairs the credit committee. The other members of the committee are Mr Nzovu, Prof Migot-Adholla and Dr Mwangi. We like the fact that a nonexecutive director is the chairman of this committee.

Audit committee: The committee consists of three members. Mr Wairegi is the Chair. The committee is entirely made up of non-executive directors, which in our view is a credible position.

• •

Risk Management & ALCO committee: The committee is made up of three members. Mr Kipng’etich chairs the committee. Governance, Board nomination and Staff remuneration committee: The board committee is made up of five members. It basically doubles up as a nominating and compensation committee. Mr Soyoye is the chair and Dr Mwangi is a member of the committee. Although he is outnumbered by nonexecutive directors, this is a committee we would have suggested to be made up of non-executive members only.

Our perception on governance: In our opinion, the board is strong and largely independent. This could also explain the low levels of inside loans, which in our view is often a prelude to diluted risk management procedures. The board is also highly qualified and boast of widespread experience in various sectors of the economy. The size of the board at 11 is fair in our view, and is above our minimum preferred of 7 members.

The Executive Management

We

believe

the

management

exhibit

strong

experience.

The

Executive

management is headed by Dr Mwangi. In our view the Executive management possesses strong experience and qualifications. It is made up of 14 members. The members’ profiles are provided below:

Gerald Warui, Director of Operations & Customer Services: He has over 14 years experience in banking. He worked for Fidelity Bank previously and is a Certified Public Accountant;

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Peter Makau, Director of Corporate Banking: He has over 21 years experience at senior levels with major banks. Worked for Citibank NA, ABN Amro, Standard Chartered Kenya, Stanbic Kenya and NIC Bank before joining Equity Bank. He is an Associate of the Chartered Institute of Bankers (London);

Mbaabu Muchiri, Director of Retail Banking: He acquired over 17 years management experience having worked for the Central Bank of Kenya and Coca-Cola Africa. He is a Certified Public accountant and holds an MBA;

Rodney Schuster, Director of Regional Expansion: He boasts over 10 years experience in micro-finance. He is a founder of Uganda Microfinance. He holds a Masters of Arts;

Dr Wahome Gakuru, Director of Marketing, Advocacy and Policy: He was Acting Director in charge of Kenya Vision 2030 and Director of Social Sector Department at the National Economic and Social Council. He was also Head of Strategy Development at the National AIDS Control Council. He has over 15 years lecturing experience. He holds a PhD in Public Administration from Arizona State University;

Henry Karugu, Director of Product Development, Innovation and Research: His experience comprise over 16 years in marketing. Previously worked as Marketing Director for GlaxoSmithKline responsible for East and West Africa. Holds a degree in Pharmacy and diploma in marketing;

John Njoroge, Director of Finance: His banking experience span over 40 years. He earlier worked for Standard Chartered as Head of Finance. He holds an MBA and is a Chartered Public Accountant;

Allan Waititu, Director of Projects: He has over 18 years experience in the information technology industry. He previously worked for Trade Bank, Daima Bank and Phoenix Insurance. He is a Certified Network Engineer;

Winnie Kathurima-Imanyara, Director of Leadership Development and Corporate Change: She has over 22 years management experience. She worked for Reckitt and Colman, SmithKline Beecham, Safaricom and Kenya Petroleum before joining the bank. She holds a MBA and a Post graduate diploma in Human resources;

Samuel Kamiti, General Manager Alternate Business Channels: He commands over 28 years in the information and communication technology

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field. He worked for CRDB, Central Bank of Kenya and Standard Chartered Bank Kenya. He holds a Bachelor of Science in Mathematics and Computers;

Peter Gachau, General Manager, IT: He possesses over 15 years experience in IT. He worked for ABC Bank, ABN Amro among other banks before joining Equity bank. He holds a Bachelor of Education; and

Bildard Fwamba, Head of Internal Audit: He has over 11 years auditing experience. He previously worked for Central Bank of Kenya and the British American Insurance Company. He holds a Bachelor of Commerce and is a Certified Public Accountant.

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