Equity Group has announced plans to acquire a 79 per cent stake in a Democratic Republic of Congo bank for $60 million (Sh5.8 billion), marking the Kenyan lender’s entry into central Africa.
Equity, which is Kenya’s largest lender by customer base, said it was buying the combined interest in ProCredit Bank Congo from three institutional investors: German firm ProCredit (61 per cent), Belgian development finance institution BIO (six per cent) and Dutch fund DOEN (12 per cent).
The acquisition is partly being financed by share swaps though the exact number of shares and the strike price were unknown by the time of going to press.
Equity has expressed its preference for financing acquisitions through issuance of own stock and recently created 411.4 million new shares with a par value of Sh205.7 million to this end.
Based on the current share price of Sh47.5, the new shares are worth Sh19.5 billion.
Equity’s chief executive James Mwangi said the deal, which is awaiting regulatory approval in Kenya and DRC, is the first of an ambitious pan-African expansion drive that will see it venture into at least nine more countries.
“We see major opportunities in DRC and ProCredit is compatible with Equity in culture and capabilities,” Mr Mwangi said.
“After this we will expand into southern African markets as we seek a presence in 15 countries in 10 years,” he said, adding that the target markets include Zimbabwe, Bostwana and Malawi.
The deal positions Equity as the first Kenyan bank to venture into DRC.
ProCredit said it was exiting DRC to focus on Eastern European markets.
German fund KfW and the International Finance Corporation (IFC), which have a 12 per cent and nine per cent stake respectively in ProCredit Bank Congo, will remain as co-investors with Equity.
Mr Mwangi said Equity was betting on strong credit and country risk management to realise the opportunities in DRC. The upcoming subsidiary will be bigger than Equity’s combined operations in Uganda, Rwanda and Tanzania.
Mineral resource-rich DRC has a population of about 70 million people, with the uptake of banking services standing at a paltry four per cent.
The DRC has some of the largest deposits of minerals including gold, tin, and tungsten, which account for over 90 per cent of its exports.
Agriculture is also a major contributor to the GDP of $32.6 billion, employing an estimated 60 per cent of the labour force.
The DRC is a member of several African trade communities including the Common Market for Eastern and Southern Africa (Comesa), the Southern African Development Community (SADC) and the Economic Community of Central African States (ECCAS).
DRC has been recognised as one of the most difficult places to do business in Africa owing to its underdeveloped infrastructure and perpetual conflicts linked to control of the mineral wealth.
ProCredit is the leading bank in the SME sector in the DRC with 170,000 customers. It is the seventh largest bank with total assets exceeding $200 million (Sh19.4 billion) and net assets of $25 million (Sh2.4 billion).
The bank has 15 branches, competing in a market with 18 players.
Equity will be competing in a country where the five largest banks control close to 65 per cent of deposits and 60 per cent of total assets according to a study by the International Monetary Fund.
Banks in DRC are highly dollarised, a fact that Mr Mwangi welcomed noting that it will help Equity manage its exposure to currency risks. About 90 per cent of deposits in that market are in US dollars, with 94 per cent of of loans also denominated in the same currency.
Clients are primarily companies with working capital deposits and loans target mainly daily operations and export/import activities, according to the IMF. Banks in DRC are enjoying an average interest margin of 21 per cent, significantly higher than Kenya’s 10 per cent.
The pending transaction is part of Equity’s strategy of growing and diversifying away from the Kenyan market which still accounts for the bulk of its earnings.
It comes after private equity firm Helios announced it has completed the sale of a 12.2 per cent interest in the bank to a consortium led by sovereign wealth fund Norfund.
The lender posted a 10.7 per cent net profit growth in the first quarter, helped by increased lending and higher income from transactions.
The bank’s net profit in the period stood at Sh4.2 billion compared to Sh3.8 billion a year earlier.