Equity’s plan for HF starts to take shape

Through Equity Bank’s 155 branches, HF would enjoy a wider distribution network. Photo/FILE

Equity Bank has set its sights on using Housing Finance to execute a mortgage revolution in Kenya and rev up earnings as the economy recovers from a two-year slump.

HF is among the lynchpins that Mr James Mwangi—the Equity Bank’s chief executive officer —wants to use in the pursuit of his ambition of running the region’s largest integrated financial services outfit.

After steering the bank back to double digit growth in the first quarter of the year and armed with a Sh22.9 billion war chest, Mr. Mwangi is seeking to sweat out Equity Bank’s vast cash pile into viable ventures that will fan growth.

Two years after investing in HF, Mr Mwangi and company have become impatient with the slow pace of growth the mortgage firm and have been pushing for a change of course in the company’s business outlook.“Let me say this, Equity did not invest into HF just to be getting a dividend cheque. “What Equity is saying is, can we realize what we were seeing when we invested in this company?” said Mr. Mwangi during last week’s announcement of first quarter earnings.

Pushing Equity Bank’s goal of riding HF’s mortgage lending experience to grow its earnings has not been a clear cut strategy.

Market players say that although possible, an entire take over of HF could be a powerful affair complicated by the prospect of dealing with minority shareholders.

And while HF is an associate company in view of Equity Bank’s 24.9 per cent stake in the mortgage lender, a merger of operations between both institutions would be at the behest of the much smaller HF.

Through this strategy, Equity Bank would be buying growth through mergers and acquisitions while still using its own distribution channels to sell mortgage products.

For HF, such a major change in direction and strategy can only be reached through a decision made at the boardroom that is now controlled by Equity Bank.

Equity’s chairman and HF director, Peter Munga, engineered a boardroom coup at Housing Finance in brazen disregard of the corporate governance ethos by booting out independent directors Kungu Gatabaki and Nancy Sabana, along with Naphtali Mogere.

The recent appointment of Shem Migot-Adhola and Babatunde Soyoye, both directors in Equity Bank — as board members of HF further cements assertions of Equity Bank’s growing influence within the mortgage financing company.

Mortgage writing is not easy business. Low property inventory, registration bottlenecks, duplicate deeds and preference to self-finance property cripples the Kenyan mortgage market.

With skills and expertise in mortgage lending and a huge concentration of mortgage specialists, places HF as first among equals in the segment.

Only KCB Bank’s mortgage division, S&L can boast of greater expertise in the mortgage business.

For Equity Bank, HF’s value proposition of four-decade experience of selling mortgages in Kenya and with a painful learning curve to show for it is priceless.

HF has branch network of 10 branches which has seen it lose out to other banks in the battle for increasing customer deposits.

Its lending business has also come under threat as other financial institutions race to munch its market share as they seek avenues including the housing loans market to invest the excess cash pile in the hands of commercial banks.

Through Equity Bank’s 155 branches, HF would enjoy a wider distribution network while Equity’s 4.5 million account holders present a wider customer base.

But its through Equity Bank’s lower cost of funds at 2.7 per cent that Mr. Mwangi sees as the clincher for mortgage business in the country.

Should both Equity and HF merge operations, the mortgage lender’s cost of funds at 8.9 per cent is expected to ease downwards, setting the stage for more affordable mortgage financing.

One of Mr. Mwangi’s long term goals has been to venture into low cost mortgage financing based on a similar micro finance model that propelled Equity Bank to continental success.

Analysts foresee that Equity will soon propose a merger of the two banks.

Under a deal like the one pursued by KCB when it merged its S&L division, Equity could possibly fold HF as a department into the group.

Equity at the moment is one of the most well-heeled banks in Kenya with a total capital of Sh22.9 billion.

At this level of capitalisation, it still has room to take on four times more customer deposits than its current level of nearly Sh77.4 billion and grow its loan book by a similar magnitude from the current Sh66 billion.

Regional market

During the first quarter of the year, Equity Bank posted a 43 per cent increase in pre-tax profits from Sh1.2 billion last year to Sh1.7 billion this year.

Marking a return to double digit growth figures, the bank recorded Sh4.65 billion in total operating income compared to Sh3.37 billion within the same period last year.

The bank’s entry and introduction of its banking model into the regional market especially Uganda and Southern Sudan is seen as key in its growth and is poised to pay dividends for the bank.

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