[2008-05-02]  Is there more to Equity’s share price rise?
Since listing at the Nairobi Stock Exchange in August 2006, the rise in Equity Bank’s share price has mirrored a classic fairytale story.

A small bank with deep rural roots lists on the stock market and happily trudges along, becoming the biggest thing in the market.

Equity Bank, currently Kenya’s largest in terms of depositors, has for the better part of the last two years remained one of the NSE’s steadily rising cherry picks, outperforming both the local market and emerging market indices even in trying periods. Starting with a market capitalization of Sh8.4 billion, Equity is worth Sh93 billion, making it a venerable value creator for investors among Kenya’s top 10 most valuable public companies.

Since it was listed, only few companies can rival the speed at which it has minted a new breed of billionaires almost overnight.

Though Equity today is trading at Sh257, when this share price is adjusted to reflect the massive bonus issued last year, its value has risen by 450 per cent from the original listing price of Sh164 to an equivalent of Sh738 now.

But for all the happily-ever-after-tales that have characterised the bank’s existence, one dark cloud has hung low over the movement of its shares.

Prior to every big announcement— either for merger and acquisition deals or spectacular result announcements — the share has steadily gained momentum and then risen sharply. Normally, huge volumes of shares have been traded before the material announcement date.

Last month, just before Equity announced it was acquiring a microfinance bank in Uganda, the share price rose by more than Sh50 in a matter of days.

But this seemed to be a preamble to this week’s quarterly results announcements that showed the bank’s profits rising by 81 per cent as it posted Sh908 million in pre-tax profits compared to Sh503 million in the same period last year.

In the last one month, Equity has risen 47.40 per cent and in the last six months, it is up 99 per cent, opening the questions as to what investors have suddenly started seeing in the performance of the bank that was previously not there.

In April last year, when news filtered into the market that a large commercial bank with plans of making a foray into the homes loan market was keen to acquire a stake in HF, market watchers were quick to zero in on Equity Bank.

In November, the bank gained 15 per cent in a span of three weeks to stand at Sh137, weeks before the announcement that Helios, the UK-based private equity fund was investing Sh11 billion in Equity.

The big question emerging now is whether there is a consistent pattern of an emerging class of Equity watchers with superior trend spotting skills or a cartel of investors illegally profiting from insider information. Whichever it is, no accusations have been officially lodged so far and no evidence of impropriety on the part of the company has surfaced.

But still, while speculation may abound on what has pushed Equity Bank’s share price on many occasions prior to a material announcement, the question on how airtight non-public information is kept confidential to maintain the integrity of the market remains a thorny issue.

“This is a very sensitive issue in all markets. Such share price movements would suggest that there are investors who have access to information that others don’t,” says Mr Peter Wachira, senior investment manager at AIG Investments.

Investment analysts had attributed the appreciation of the bank’s share to increased investor demand for the stock, notably from institutional and high net investors.

Stockbrokers said millions of orders for Equity Bank stock were not realized in that week following the sudden surge in demand for the stock by high net investors, who previously had turned their back on the share.

The interest of institutional investors had been underlined by huge blocks of the bank’s stock that have been exchanging hands in weeks prior to the announcement.

For instance, in that week of June last year, 2,595, 511 million shares were traded compared to a weekly 1, 189, 150 million shares in the last week of May 2007.

Since being listed in August 2006, a huge chunk of the stock has exchanged hands between speculative retail investors looking to make quick capital gains before exiting.

In the market downturn in March 2007, Equity Bank’s share price continued rising despite the NSE-20 Share index taking a major dip.

Equity Bank had been the one firm at the NSE that had remained largely unscathed in the wake of the market correction early last year and during the market slump in January this year.

When the HF deal was finally concluded last year, the bank’s share price yet again rallied by the daily maximum allowed share price movement of 10 per cent.
As was the case earlier on in the year, huge blocks of shares were moved during this time, with the feeling of leaked information engulfing the market.
However, there is no evidence or accusation that Equity’s management or its directors have broken any law.

But when the share price is driven by material information that is not in the public domain, the issue takes a dangerous dimension.

Insider trading occurs when an insider or a related party trades shares based on material non-public information obtained during the performance of their duty at the corporation. Insider trading is scorned upon because it gives a certain class of investors undue advantage over the others and this distorts the share price.

“In Kenya, we have lots of vested interests in both the listed companies’ management and most of the members of the NSE (brokers) to the extent that information leaks have worked to their advantage,” says Resa Imbuye, equity analyst at Old Mutual Asset Managers.

Trading ethics require that those with privileged information do not take advantage of their position at the expense of the public.

They must not trade based on such information. Further, such information must not be relayed to anybody outside the key management team and directors who are privy to the operations of the companies.

A case in point that deals can be kept well under wraps without filtering into the market was the CFC- Stanbic merger, which was kept so discreet that the share only jumped massively the day the news of the planned merger became public.

This also happened during the East Africa Breweries and SABMiller deal in 2002 when both firms struck a deal for a swap of money losing factories and the purchase of lucrative stakes in each other.

This deal, dubbed the “Thunderbird” helped both companies save millions of dollars that was being wasted on marketing products that the Kenyan consumer was not even showing so much enthusiasm for.

“The market watchdog can also do a great service to investors by occasionally vetting some of abnormal trades and share price and movements,” says Mr Wachira adding that links can be drawn to see if movers of share trades have any affiliation whatsoever to the company they are trading in.

As for Equity Bank, stock pickers will be closely watching the moves of the major shareholders very carefully in a year that a two year mandatory share lock in ends in August this year.

Following its public offer by introduction at the Nairobi Stock Exchange in 2006, Equity Bank’s major shareholders were barred by Capital Markets Authority regulations from off loading their shares for two years.

In a move to allay any speculation about the issue, the bank’s chief executive James Mwangi told journalists that he had no intentions of offloading his shares in the bank even after the lock in period comes to an end. “I have no intentions of selling my shares or leaving Equity unless the shareholders ask me to or I retire,” he said.

But regardless of his intentions, all eyes are now firmly trained on Equity Bank.


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