How Equity defied rate cap to beat rivals in profit race

Customers at a Equity Bank banking hall. file PHOTO | NMG 

By BRIAN NGUGI

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Summary

• Equity Bank managed to contain costs better than its rivals, grew its non-interest income faster and suffered fewer loans default, which lowered its expenses for bad debt.
• This helped to reduce the impact of reduced earnings from loans, which saw Equity’s net interest income dip 19.8 per cent to Sh29.2 billion.
• Most Kenyan banks have reported reduced profitability on effects of the lending rates cap that cut interest income as demand for loans plummeted.

Fewer loan defaulters, lower employees’ costs and increased earnings from processing loans helped Equity Bank

shrug off effects of the legal cap on lending rates to beat rivals in the profit growth race.

The Kenyan unit of Equity posted a 7.2 per cent growth in net profit to Sh16.3 billion in the year to December compared to Co-operative Bank

whose earnings dropped 10.7 per cent to Sh11.6 billion while those of KCB

were 2.5 per cent down to Sh19.2 billion.

Most Kenyan banks have reported reduced profitability on effects of the lending rates cap that cut interest income as demand for loans plummeted.

A review of the top lenders financial statements for their Kenya business show Equity Bank managed to contain costs better than its rivals, grew its non-interest income faster and suffered fewer loans default, which lowered its expenses for bad debt.

This helped to reduce the impact of reduced earnings from loans, which saw Equity’s net interest income dip 19.8 per cent to Sh29.2 billion.

In 2016, Kenya capped commercial lending rates at four percentage points above the central bank rate, and set a minimum deposit rate, crimping profit margins for banks.

The measure has had the effect of stifling the credit market as banks became more cautious in their lending practices.

Private sector credit grew just 2.1 per cent in the year to February, well below the central bank’s target rate of 12-15 per cent.

While Equity’s loan size last year remained unchanged at Sh213.8 billion Co-operative Bank and KCB increased their lending to 6.7 per cent to Sh252.3 billion and 13.1 per cent to Sh440 billion respectively.

KCB’s net interest income grew by Sh1.2 billion while that of Co-operative Bank dropped Sh1.5 billion. But both two banks suffered from loan defaults.

READ: Equity net earnings defy rate cap law, surge 14pc to Sh18.9 billion

KCB expenses on bad loans rose by Sh1.2 billion to Sh4.9 billion and Co-operative’s increased Sh1 billion to Sh3.5 billion.

Equity’s costs in bad debt reduced by Sh2.7 billion, making it the biggest profit driver besides higher commissions from foreign exchange trading, trade finance and loan processing charges—which rose 18.4 per cent to Sh16.7 billion.

KCB transaction income rose 15.8 per cent to Sh12.4 billion and Co-operative Bank was up 0.97 per cent to Sh10.4 billion.

Equity’s profit got a boost from lower staff costs as its wage bill dropped by Sh200 million while KCB’s and that of Co-operative rose by Sh900 million and Sh700 million respectively.

Investors at the Nairobi bourse value Equity Bank highly compared to KCB—which is Kenya’s largest bank by assets. Equity’s value at the bourse stood at Sh198 billion, KCB (Sh157 billion) and Co-operative Bank (Sh114 billion)