Equity Bank downplays impact of law capping rates

Equity Bank has downplayed the impact of the law capping interest rates on its profitability, even as analysts see a notable slash on their interest income.

During the release of the bank’s results on Thursday, Equity Bank forecast that it would only lose 1.3 to 2 per cent of its net earnings from interests while Standard Investment Bank researchers see them shedding up to 2.9 per cent.

SIB analyst Faith Waitherero told The Standard on Saturday that if you look at the bank’s exposure to small and medium enterprises compared to other banks as well as their cost of funds, the bank is likely to take a bigger hit than its is projecting.

“Under the interest rate cap law, we expect Equity Group to record notable net interest margin (NIM) erosion owing to its loan book structure — mainly exposed to SME, micro and personal loan assets,” SIB said in a note to its clients.

According to the bank’s third quarter results, NIM was stable at 11.5 per cent versus 10.2 per cent during a similar period last year and 11.7 per cent in quarter two of 2016. Management forecasts the bank’s NIM in 2017 to range between 9.5 per cent and 10.2 per cent while SIB puts is at 8.6 per cent. Equity reported that this year’s interest income was mainly supported by the cash crisis that hit the government last year as the bank increased its loans to Treasury to take advantage of the lucrative rates.

“Interest income grew by 35 per cent to Sh26.1 billion up from Sh19.3 billion mainly driven by a 37 per cent increase in interest income on government securities as a result of the growth and enhancement on yields by 25 per cent,” the bank announced. The bank’s loans to individuals, corporates and the government grew by 19 per cent to Sh342 billion for the nine months to September, up from Sh287.4 billion for a similar period in 2015.

This was driven mainly by a 44 per cent growth in government securities which grew to Sh73 billion, up from Sh50.6 billion although it remains the smaller portion of their loan book.

The bank also reported shrewd management in sourcing for funding to contain costs with interest expenses growing at a lower rate of 29 per cent. Their funds mainly came from customer deposits at 72 per cent, with shareholders’ funds at 17 per cent and nine per cent long-term funds.

Equity says that most of its depositors, 76 per cent, hold current account and savings accounts which did not attract a huge deposit rate during the period under review.

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