Why Equity shares fell 6.4% last month

Equity CEO James Mwangi

Shares in Equity Group Holdings Ltd (EQTY) fell 6.7% last month. Equity stock closed May at Ksh35.25, down from Ksh37.65 at the end of April.

Last month’s decline in Equity shares came on the back of a drop in first quarter profit and management’s decision to yank a proposed dividend payout. Moreover, Equity shares fell victim to the broad selloff in stocks in the wake of the coronavirus outbreak.

The NSE 20-Share Index, which tracks the performance of blue chip stocks on the Nairobi Securities Exchange, has declined more than 8% since Kenya reported its first coronavirus case on March 13. Equity is a component of the blue chip index.

The virus fallout has forced shutdown of businesses and loss of jobs and income for households. In this situation, businesses and individuals have turned to cashing out investments like company shares to raise money to stay afloat, hence the selloff in stocks.

Equity profit drops 14% as the bank prepares for a deluge of loan defaults

Equity posted a profit of Ksh5.3 billion for the first quarter of 2020, marking a 14% drop from a similar period last year.

Although the profit dip weighed on Equity shares, it didn’t stem from the bank losing customers or its products lacking demand. Instead, it stemmed from the bank doubling down on loan loss provision. Equity set aside Ksh3 billion in the first quarter to cover loan losses, a tenfold increase from a year ago.

Banks are generally beefing up their loan loss provisions as they gird for what could be a deluge of loan defaults because of the coronavirus crisis.

To mitigate the blow to its loans business and cushion its customers, Equity has revised the repayment terms for more than Ksh92 billion in loans, representing a quarter of its total loan volume at the end of the first quarter. The revised repayment terms include allowing borrowers to extend their loan repayment period by up to three years.

Equity rescinds dividend to conserve cash
Equity has decided to withdraw its proposal to pay out Ksh9.5 billion in cash dividend from the profit it made last year. The bank had intended to pay dividend of Ksh2.50 per share. However, it has rescinded the dividend as a measure to conserve cash and shore up its liquidity during this coronavirus pandemic.

Banks rely to a great extent on customer deposits for cash that they in turn lend out to borrowers and earn interest. But the Covid-19 situation means banks could see a sharp drop in deposits, which could lead to liquidity shortages.

Banks can borrow from other banks to plug their liquidity shortages, but that comes at a cost because of the interest charged on the loans. Therefore, Equity believes suspending dividends will enable it boost its cash reserve in this crisis without taking on additional costs in the form of interests if it were to borrow from another lender.

Pandemic selloff leaves Equity shares trading at more than 36% discount
Finally, the pandemic-driven selloff has opening a rare bargain opportunity in one of Kenya’s premium bank stocks. At Ksh35.25 a share, Equity stock trades at more than 36% below its 52-week peak of Ksh55.50. In other words, investors can now purchase Equity shares at 36% discount to what others were paying for it in January.