Equity Bank changes tack in growth plan as rate cap bites

Equity Centre that houses Equity Bank offices at Upper Hill. Photo:Wilberforce Okwiri

In the past decade, Equity Bank made its billions by largely focusing on the unbanked poor or the low-end market. They include watchmen, grocery sellers, small-scale farmers and the general informal sector.

This is the category Equity listed as typical customers - with cheap savings accounts and microloans backed by unusual guarantees.

The strategy proved remarkably successful and the bank moved from a quirky, fringe player to one of the most profitable banks in the country and a leading player on the Nairobi Securities Exchange (NSE). 

This market, however, is now not making business sense for lenders, especially in the era of interest rate caps, which has made interest income from micro-loans unattractive.

Equity Bank has already cut on salary or personal loans to focus more on large SMEs and Government securities.

According to the bank, the interest income on loans advanced to micro-enterprises is too marginal to cater for cost of administering the same loans.

The Government in September last year introduced a law to cap interest rates at four per cent above the Central Bank Rate (CBR).

The CBR is currently set at 10 per cent, putting the interest rate at 14 per cent. The minimum interest rate on interest-bearing deposits was set at 70 per cent of the benchmark rate - currently at seven per cent per annum.

PROFITS DROP

The effect has been far-reaching. Nearly all lenders have seen their profits drop as per the 2017 half-year financial results. All the 11 NSE-listed banks saw their combined profits drop by 14 per cent as they lost Sh18.2 billion, or 16 per cent, on loan interest on loans and advances to customers.

Unlike in the 2016 half-year when interest on loans and earnings was Sh117.5 billion, the rate cap that compelled banks to lower their pricing of loans knocked down their income to Sh99.3 billion.

Some commercial banks are now turning focus on trimming their workforce and deepening their digital products to boost efficiency. At least nine banks have announced job cuts in a bid to protect profits.

Equity Bank Chief Executive James Mwangi says the move by Central Bank of Kenya (CBK) to put three lenders under statutory management also sent the industry into panic, impairing the inter-bank mechanism.

This affected public confidence in the banking industry resulting in redistribution of liquidity and allocation of public deposits among the banks.

Equity, which recorded a 7.4 per cent drop in net profit to Sh9.3 billion in the half-year ended June 2017, says it has found its way out of the interest cap mess.

It has identified key areas of growth to diversify its revenue stream from interest income that for long made up the lion’s share of the lender’s income. Mr Mwangi says non-funded income, regional subsidiaries, Government securities, innovation and other initiatives will help mitigate the effect of the interest capping.

The lender plans to grow its non-funded earnings - which is derived from bank charges, transaction fees, monthly account charges, mobile banking, among others, to boost performance.

Alternative channels such as agency and mobile banking have seen branch and ATM activities slow down and now about 90 per cent of transactions happen outside branches.

The bank’s non-funded income in the first half of this year grew by 20 per cent from Sh10.9 billion to Sh13 billion, reducing the effects of reduced interest income on total income.

GROW FASTER

“We have seen non-funded income grow faster at 20 per cent,” said Mr Mwangi, “and the biggest driver is mobile banking commissions. This is a sustainable other income.”

The growth was mainly driven by mobile banking commissions, which grew by 337 per cent to Sh649.7 million from Sh148.8 million.

Trade finance grew by a quarter to hit Sh532.8 million from Sh426.3 million with merchant commissions rising by 13 per cent to Sh580 million from Sh514 million.

Agency revenue went up by 27per cent to Sh424.5 million from Sh333.8 million in the same period last year.

Mr Mwangi says mobile banking will be a key growth area. Equitel market share grew to 23 per cent as at March 2017 of the value of mobile banking transactions in Kenya.

“This is where the war will be won or lost. Taking nearly 25 per cent of the mobile money transfer from a dominant telecom industry for us is a big achievement,” he said, referring to the bank’s competition with Safaricom.

Apart from the South Sudan operations where the lender was hit due to insecurity and devaluation of the currency, other subsidiaries are now contributing to the group’s profits.