Wednesday July 26, 2017

Equity Bank sees a bleak future for the South Sudan market

EQUITY GROUP CHIEF EXECUTIVE JAMES MWANGI. FILE PHOTO

MUTHOKI MUMO* – Equity Bank EQTY • 38.00 ▲ 0.66% has declared its South Sudanese business “dormant”, casting doubts on the future of the Sh11 billion operation that at its peak only four years ago contributed Sh1.1 billion to the company’s pre-tax profit.

South Sudan has been hit by political and economic upheaval since 2013 when the world’s youngest nation plunged into civil war.
What was then a magnet for Kenyan banks and manufacturers has now turned into a graveyard, with many closing branches and others pulling out of the country.

Equity chief executive James Mwangi yesterday said the company has shut down seven out of its 12 branches in the country.
“I would like to ask shareholders to treat South Sudan as a dormant company. We are just maintaining a licence and you can’t maintain a licence unless you’re open,” Mr Mwangi said at the company’s annual general meeting (AGM) yesterday.

Equity’s main rival, KCB KCB • 38.75 ▼ 3.13%, recently announced it had closed five out of its 15 branches in South Sudan.

Not closing shop

Equity, however, does not yet have plans to quit the South Sudan market, and has adopted a wait-and-see approach, hoping that the country will stabilise in the near future.

Mr Mwangi said that Equity would keep some bank branches open just to stay on the right side of Juba’s regulators. In the year to December 2016, Equity held assets worth Sh11.1 billion in South Sudan.

However, the business was operating in the red, recording net interest loss of Sh55 million and a loss before tax of Sh528 million. Customer deposits fell 50 per cent in the year to Sh7.4 billion.

Mr Mwangi said that he does not expect the South Sudan unit to make any money for at least two more years.
“I don’t want to say that this is a cow that we bought and then it died. But we’re saying it’s a cow that might not give us milk for the next two years,” he told shareholders.

Kenyan businesses entered the South Sudan market in the latter half of the last decade on an optimistic note. For banks like Equity, KCB and Stanbic CFC • 72.00 ▲ 1.41%, Juba presented a ripe growth market.

Oil money

Following its entry into South Sudan in 2009, Equity quickly began turning a profit as it relied on the cash-rich oil business and positioned itself as a bank of choice for the United Nations.

South Sudan banks also relied heavily on transaction income from servicing oil dealers, civil servants, state and international aid agencies.
Equity’s fortunes in the country peaked in 2012 when it reported a profit before tax of Sh1.1 billion. Civil war broke out in 2013 and the journey since then has been turbulent.

A volatile political situation has come with its own economic challenges. South Sudan’s inflation rate hit 830 per cent in 2016, meaning that companies saw their assets drastically devalued.

The South Sudanese pound was yesterday trading at 118.91 units against the US dollar, compared to 2.95 units at which it was fixed until December 2015.
Foreign workers living in South Sudan, who would have contributed a significant percentage of business for banks, have fled.

Salaries of civil servants, another large source of revenue for banks, are paid sporadically and oil export is all but non-existent.
Nevertheless, Equity says it still runs 41 United Nations humanitarian accounts in South Sudan.

Kenyan banks have moved to reduce their exposure in South Sudan. KCB earlier this month said that it plans to shut down some of its branches in the country after reporting a loss of Sh759 million in 2016 from a net profit of Sh1.78 billion in 2015.

Another Kenyan lender, Stanbic, has said that it will not withdraw from South Sudan despite a loss of Sh1.1 billion last year from its Juba unit.
Co-operative Bank ticker:COOP made a loss of Sh498.3 million in South Sudan and the lender recently said that the difficult operating environment in the country had affected its quarter one results. However, Co-op Bank is yet to announce an exit from the South Sudanese market.

The headwinds in the South Sudanese market come at a time when Kenyan banks are already facing tough times domestically.
Equity’s profits last year fell 4.1 per cent to Sh16.6 billion, a drop which the bank has attributed to the introduction of interest rate caps as well as difficult economic times, including drought that has eaten into the country’s agricultural productivity. The company saw its gross non-performing loans double to Sh18.7 billion.

Equity, which paid out a dividend of Sh2 per share this year, said that it will focus its energy on other subsidiaries to make up for the woes in South Sudan.
Mr Mwangi said that a directive had been given to the Uganda business to compensate for the lost South Sudanese revenue through their operations.
He also expects Tanzania, where Equity doubled its branch network last year, to become a big source of revenue in the future.

* This article first appeared on BUSINESS DAILY AFRICA

Times Wire Staff
Filed in

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