NEWS WIRE: Kenya: Equity Gets a Greenlight to Buy Housing Finance

Original article available here.

NAIROBI, October 17 – The approval from the Treasury, Central Bank and Capital Markets Authority is a milestone that will pave the way for the transaction’s conclusion. It also ends months of speculation about the future of Housing Finance and brings into fruition the bank’s dream of venturing into the mortgage market.

Housing Finance is expected to proceed with a rights issue planned as a strategy of raising more funds and bringing in new anchor shareholders.

Speculation on the approval has since Friday last week spurred demand for the shares of both Equity Bank and Housing Finance at the Nairobi Stock Exchange, as their stock prices gained by the maximum allowed price change for two days in a row.

“There was huge demand for the both the firm’s shares especially on Monday, but interestingly enough, there were no forthcoming sellers,” said Mr Chris Ruenji, the chief dealer at Sterling Securities.

Housing Finance on Monday closed at 9.1 per cent up to stand at Sh27 on a demand of 182,000 shares but with no registered supply, while Equity stood at Sh115, marking a 9.5 rise in its share price as bids of 316,000 shares were placed although no sellers were forthcoming at this price.

Yesterday, Equity nudged up to Sh119.40 per share, while Housing Finance improved to Sh28.20 on thin supplies as demand overwhelmed supply, standing at 633,700 shares at one time with offers of just 14,600.

In the case of Housing Finance, only 8,500 shares were available against a demand of 122,400 shares. The rise in share prices signals a reversal of fortunes of Housing Finance and Equity Bank following a downward share decline in recent months.

CDC Group, which has a 24.9 per cent stake in HF, waived its rights in a planned Housing Finance rights issue and it is involved in talks with a number of suitors to take over its holding in the mortgage company.

Takeover efforts by a number of interested parties among them Transcentury Group and Baraka Africa Fund failed to bear fruit last year, when news filtered into the market about the deal, leading to CDC’s demand for a higher price.The move by the CDC group to offload its stake before the rights issue had been informed by the fact that its holding in the mortgage provider would diminish to below 12 per cent should the issue proceed without its participation.

The Housing Finance rights issue is yet to commence as it is predicated on the regulatory approval of the deal.

“We have to wait and produce a prospectus that has the names of the actual shareholders since everyone knows that CDC is about to sell their stake,” said Mr Ken Kinyua, the director of business development at Housing Finance.

Equity Bank recently entered into talks to acquire the 20 per cent of the stake held by CDC, while British American Investment Company (Britak) set out to buy the other 4.9 per cent.

With Britak’s stake in Equity estimated at 10.99 per cent, an acquisition of 4.9 per cent in Housing Finance would firmly put local shareholders in the drivers seat of three of Kenya’s largest financial institutions.

Equity Bank had earlier raised Sh7.5 billion from a long term debt it received from Blue Orchard, part of which it had intentions of providing construction finance and mortgage targeting the mid and low end market.

The slow growth in the firm’s deposit is attributed to stiff competition for deposits in the banking industry, which has seen banks such as Kenya Commercial Bank draw in huge deposits due to its wide branch network that currently stands at 131. Housing Finance has a 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.

In their Kenya banking sector report, analysts at African Alliance were of the opinion that Housing Finance has not cashed in on the huge opportunities in the mortgage market, a situation they blamed on the mortgage financiers inadequate funding that has curtailed the growth of its loan book.

The tie up with Equity is however expected to solve Housing Finance’s funding and distribution problems.The combined operations will be able to tap deeper and wider into the Kenyan financial markets and revolutionalize the ways home loans are given in the country.

The Central Bureau of Statistics indicates that demand for housing, which stands at 150,000 units, has outstripped supply by five times — at 30,000.

“To cash in on the opportunities, HF must put the right funding in place including more robust deposit growth,” African Alliance notes in the report. HF has continued to rely heavily on customer deposits to drive its lending business.

The firm’s deposits declined by 9.7 per cent to Sh7.6 billion in the 12 months to December 2006, but showed signs of recovery in the first quarter of this year, which saw a marginal increase of four per cent to Sh7.9 billion.

Analysts had forecast a 20 per cent deposit growth this year, driven by a string of new products the mortgage firm plans to unveil in the coming months.

With its loan-to-deposit ratio standing at 85 per cent, it’s clear the mortgage firm has little room to plan and grow with its current funding base, analysts note.

Written by James Makau.

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