Lower loan provision lifts Equity Bank earnings

Equity Group CEO Dr. James Mwangi (right) together with Celestin Muntuabu during the release of the Group's 2018 Q3 Financial Results in Nairobi yesterday. [Wilberforce Okwiri, Standard]

NAIROBI, KENYA: Equity Bank has posted an 8 per cent rise in net profits to September fromSh14.6 billion last year to sh15.8 billion partly supported by a slight reduction in loan loss cover.

Lower provisions by the bank went down to Sh1.3 billion from Sh2.8 billion, despite total bad loans for the Group surging from Sh20.6 billion in 2017 to Sh26.4 billion.

Analysts at Standard Investment Bank said the move helped the lender to post a growth in profits despite the actual figure being lower than a similar period last year.

Equity Bank posted an eight per cent rise in net profits to September from Sh14.6 billion to Sh15.8 billion.

“Concealed in the headline figure is the drop in profitability in 3Q18 (third quarter 2018) vis-à-vis 3Q17 – earnings per share contracted 9.1 per cent year on year to Sh1.27,” SIB said in a note to investors.

“The earnings would have been lower, had it not been for the 47.2 per cent drop in impairment charges as profit before provisions shrunk 11.6 per cent.” In fact, in the Kenyan business where the economy has really struggled, non-performing loans increased by Sh4.7 billion while provisioning in the country was cut from Sh1.9 billion to Sh432 million.

Equity Bank is the first lender to release results in a very tight market where focus has increased on how banks will navigate the continued cap on interest rates.

The economy has in the nine months witnessed default of a loan by Athi River Mining, while micro lender Real People has restructured its debt that will now be due next year.

Sanlam issued a profit warning after posting a Sh1.5 billion loss for the half-year ended June 30. Kenya Power also issued a similar alert.

The electricity distributor and Mumias Sugar said they needed more time to publish their results, an indication that the trend was likely to continue.

Meanwhile, Kenya Commercial Bank, which usually releases its result neck-to-neck with Equity Bank in what has become a two-horse rivalry, has decided to take its time.

Equity, however, gives a peek into what the lending sector numbers are expected to portray, especially beyond headline figures, as they start implementing forward-looking impairment under IFRS 9 guidelines.

SIB said the group’s NPL ratio deteriorated to 8.7 per cent - an all-time high- while coverage was the same as last year, despite ‘tougher’ IFRS 9 guidelines.

“The NPL ratio would have been higher, barring the more than Sh4 billion NPL write-off done in the course of the year,” SIB said.

The lender was hit by twin drivers of bad loans from delayed Government payments in Kenya and the continued acceleration in NPLs from regional subsidiaries, driven mostly by the Tanzania unit.