Led by Kenyan tycoon James Mwangi, Equity Bank narrows profit gap with Safaricom through diversification and regional expansion

Oluwatosin Racheal Alabi -

Key Points:

  • Equity Group’s net profit surpassed Safaricom’s for the first time in over two decades, reaching Sh41.98 billion ($290 million) in 2023.
  • Safaricom’s entry into Ethiopia resulted in losses, impacting its overall profitability despite strong performance from M-Pesa.
  • Both companies have moved toward fintech, but Equity’s diversification into insurance and other sectors gives it a competitive edge.

Equity Group, East and Central Africa’s leading financial services group, headed by Kenyan banker James Mwangi, has reported a surge in income. In the 12 months to December 2023, Equity Group made a net profit of Sh41.98 billion ($290 million). This is in contrast to Safaricom’s net profit of Sh62.27 billion ($430 million) for the year ending March 2024.

Equity Group’s rising profitability

Safaricom’s net profit grew by 13.7 percent to Sh84.74 billion ($590 million). However, Safaricom Ethiopia recorded a loss of Sh42.09 billion ($290 million), with Safaricom Plc’s share amounting to Sh 21.76 billion ($150 million) due to its 51-percent stake in the Ethiopian business.

Notably, Equity Group has been narrowing the profit gap with Safaricom. The telco’s net earnings are now 1.42 times that of Equity Group, a decrease from more than 3.66 times in 2020 when Safaricom’s profits peaked.

Implications of regional expansion

“Equity business is closer to our hearts, money. That gives it a head start and has been there longer than Safaricom. It’s more in tune with the Kenyan market and now entering other regional markets,” said XN Iraki, a professor at the University of Nairobi Faculty of Business and Management Science. The don reckons that Safaricom benefited from novelty, where Kenyans leapfrogged from having no phones to mobile phones.

So far, Safaricom’s entry into Ethiopia has left it with a deep wound, inflating its expenses while eating into its profits. However, should the Horn of Africa market take off, some analysts insist the telco will comfortably reclaim its position.

In 2019, Equity Group’s net earnings were Sh22.38 billion ($160 million), compared to Safaricom’s Sh62.49 billion ($430 million). In 2020, Equity earned Sh19.79 billion ($140 million), while Safaricom earned Sh73.66 billion ($510 million). 

In 2021, Equity’s earnings increased to Sh39.17 billion ($280 million), while Safaricom’s were Sh68.68 billion ($470 million). In 2022, Equity earned Sh44.89 billion ($320 million), compared to Safaricom’s Sh69.65 billion ($480 million). In 2023, Equity’s earnings were Sh41.98 billion ($290 million), while Safaricom’s were Sh62.27 billion ($430 million). 

Analyst insights and future predictions

Safaricom beat Equity Bank by Sh20.29 billion ($140 million) in net profit last year. Safaricom booked a loss of Sh21.7 billion ($150 million) from its Ethiopia unit. This is akin to Equity Group losing all its revenue from one of its subsidiaries.

However, experts believe Ethiopia, which looks like Safaricom’s curse today, will soon be its blessing. 

“I believe once Safaricom Ethiopia breaks even in the financial year 2025 (projected), Safaricom will likely reclaim its pole position, should its Ethiopia play bear fruit,” said Melodie Gatuguta, Research Associate at Standard Investment Bank (SIB).

“I believe with the large customer base in Ethiopia, Safaricom will soon be in the lead again in terms of profits,” said Annchristine Wamuyu, the corporate finance associate at ABC Capital, another investment bank.

Wamuyu, like many other analysts, cautions against an apple-to-apple comparison of the two companies’ growth because their industries are too different.

“Safaricom’s market share borders on being a monopoly while the banking industry is becoming more competitive,” explained Wamuyu. 

Because Safaricom, unlike Equity, enjoys a market share in the Kenyan market with less competition pressure, it has more room for steeper pricing and better margins, said Wesley Manambo, another senior researcher at SIB.

Fintech and diversification strategies

Manambo explained that Safaricom’s entry into Ethiopia provides an opportunity for data on the GSM business as more than 80 percent of the country is offline. 

“Not to mention that mobile money will be a game changer given the high cash usage if they get their pricing, network, and agency rollout fast and right,” he added.

Despite belonging to different sectors, both companies have recently fashioned themselves as fintechs. Equity Group has made forays into telecoms with its thin SIM card, Equitel, enabling customers to call and text. Safaricom has pivoted more into financial services by revealing mobile payments products, and loan and savings products.

Although both companies are mature cash cows in their respective sectors in Kenya, with room for growth in their diversification strategies into the broader financial services sector in the country, it is Equity Group that so far has an edge in diversification with its entry into insurance, said Manambo. 

“I believe [Equity’s insurance] is set to profit from its brand, customer base, and balance sheet strength. For Safaricom, we are yet to see shareholders lobbying for entry into financial services offerings, be it by green field or acquisitions, as this is a key growth frontier.”

The head-to-head numbers for the various competing product lines offered by the two companies show that Equity Group has been gaining some ground. The lender grew total revenue by 25 percent, from Sh144.3 billion ($1 billion) to Sh180.1 billion ($1.2 billion), against Safaricom’s 15 percent, from Sh218.7 billion ($1.5 billion) to Sh252.4 billion ($1.8 billion). Equity Group has also been more efficient than Safaricom, averaging a net income of Sh24 ($0.17) for every Sh100 ($0.68) of revenue. Safaricom averages Sh17 ($0.12) for every Sh100 ($0.68) of revenue.

Equity Group grew their customers by 10 percent from 17.7 million to 19.5 million compared to Safaricom’s seven percent from 45.9 million to 49 million, including the Ethiopia market. The merchants under Equity Group’s Pay with Equity (PWE), the equivalent of Safaricom’s Lipa na Mpesa (LNM), recorded a 55-percent growth from 667,223 merchants to 1,033,386 merchants compared to the telco’s four percent growth from 606,662 merchants to 633,009 merchants.

Equity’s hold on the lead is not guaranteed, but so is the prediction that Safaricom will reclaim the top spot. Strategy and fate (including possible civil unrests in Ethiopia and DRC) will play a huge part in deciding whether Equity Group, which has diversified into various sectors and made forays into the region, will stretch its lead or blow it, allowing Safaricom to reclaim its pole position.

Manambo reckons both counters have a strong growth story with impressive valuation metrics. However, Manambo believes Safaricom is better positioned to record windfall profits in the long term if they get Ethiopia right and diversify by licence acquisition or buyouts into the larger financial services in Kenya. 

“Failure of which may see Equity profitability surpass them long term,” said Manambo.