Equity Bank profits up 18per cent but registers drop in new loans

Dr. James Mwangi CEO Equity Bank during release of Equity Bank 2016 Half Year Results where the bank announced an 18% profit before tax on 22nd August 2016. PHOTO:WILBERFORCE OKWIRI

Equity Bank has reported a shrinking loan book for the first time ever in its six-month operating results released yesterday.

The March to June period was specifically difficult, with the total outstanding loans dipping by more than Sh6 billion to point to sluggish demand for credit from the private sector.

But despite the tough environment, the bank still registered an 18 per cent growth in net profits, which rose to Sh10.1 billion helped by a spike in lending rates on customer loans witnessed from the second half of 2015.

Group chief executive James Mwangi attributed the growth in profits to increased investment in Government securities.

“We have derived our income from the growth in loan book and Government securities,” Mr Mwangi said at the investor briefing early yesterday. He also used the platform to stage a strong fight against the proposed capping of interest rates, citing that the amendments that are awaiting the Presidential Assent do not recognise risks and term of the loans.

“Those below four per cent might be denied loans,” said the Equity boss, in reference to the proposals that seek to cap lending rates at four per cent above the prevailing Central Bank Rate – currently at 10.5 per cent.

Present loans are priced anywhere between 20 and 25 per cent, up from about 16 per cent in July last year. It is the first time in Equity’s history that the loan portfolio has contracted, after peaking at Sh275 billion at the end of March.

After fashioning itself as the poor man’s bank, Equity has experienced near astronomical growth that was uninterrupted for nearly two decades.

 By March, it was the most profitable lender in the region. It continued to be the most-valued bank, with its market valuation at the close of trading on the Nairobi Securities Exchange yesterday standing at nearly Sh143 billion.

But as borrowers continue servicing the outstanding loans while there is marginal fresh lending, the end result is a smaller loan book. A shrinking loan book also being felt across other banks could indicate apathy from prospective borrowers, in a problem that might already be manifesting wider in the banking sector.

Interest earned on deposits is an important revenue stream for banks, indicating that their overall revenues may take a hit moving forward as the outstanding loans are settled.

As the biggest bank by customer base, the dent in Equity’s loan book numbers could be a clear reflection of the market conditions. Faith Waitherero, an investments analyst at the Standard Investment Bank said most banks that have reported their first half operating results actually struggled to lend.

“It is not a problem that is unique to Equity Bank,” Ms Waitherero said, adding that KCB – the second-biggest lender by customer base did not fare any better either. KCB Group’s loan book remained nearly flat since December last year, only rising marginally from Sh345.9 billion to Sh347.3 billion.

Ms Waitherero however added that while the slowdown in lending was a factor of sluggish demand, it may also be a product of more stringent lending as banks race to avoid risky borrowers.

“We have seen banks are more inclined to quality lending which means they are choosier on whom to give loans,” said the analyst from SIB.