Equity Group is looking at adding to the capital of its Tanzanian and Ugandan subsidiaries by up to $30 million (Sh3.9 billion) this year to build up their buffers to keep up with growth in assets.
Chief executive James Mwangi said last week the regional subsidiaries have seen their balance sheets expand at a faster pace than their profits can fund them, hence the need for capital injections from the group.
Banks normally need to add to their capital in order to expand their lending capacity while meeting adequacy ratios, which are pegged on assets and liabilities. In Kenya, a bank is also limited to lending no more than an equivalent of 25 percent of core capital to a single borrower.
Mr Mwangi said the Tanzania subsidiary has now moved into a growth phase after dealing with its issues of high non-performing loans.
The NSE-listed lender previously injected $10 million (Sh1.3 billion) into the Tanzania unit two years ago, at a time when it was also capitalising its Democratic Republic of Congo (DRC) to the tune of $70 million (Sh9 billion).
“This year, Tanzania will require an additional $20 million (Sh2.58 billion), and there is also a possibility that Uganda might require $10 million. Uganda is profitable, but they are growing faster than their profits can fund them,” said Mr Mwangi.
“We will not need capitalisation in DRC this year and had none last year, but we are ready if it requires money. When we acquired the DRC subsidiary in 2015, it had a balance sheet of $150 million (Sh19.3 billion), but it is now at $5.1 billion (Sh660 billion…profit alone wouldn’t be able to cope with that in terms of capital needs.”
The bank’s decision to turn inwards to fund the capital needs of regional subsidiaries has been informed by tough market conditions that undervalue the lender, making it imprudent to seek external capital at present valuations.
Mr Mwangi added that this is why the lender has adopted a more conservative dividend policy compared to some of the other tier one lenders. Equity’s proposed distribution of Sh16 billion for the year ended December 2024 is equivalent to 33 percent of its net earnings.
“It is simply to cushion ourselves so that we are able to fund the growth without diluting existing shareholders,” he said.
Equity’s regional subsidiaries accounted for 48 percent of the lender’s total deposits and loans, which stood at Sh1.4 trillion and Sh819 billion, respectively.
There was also an even split between the regional units and the Kenyan banking unit in terms of contribution to net profit, which stood at Sh46.5 billion.
In addition to DRC, Uganda, and Tanzania, Equity also operates subsidiaries in Rwanda and South Sudan.
