Equity Bank defies rate cap to post Sh19b net profit

Equity Bank has defied the odds to post a 13.9 per cent growth in net profit to Sh18.9 billion for the year ended December 31, 2017.

In the results released yesterday, the listed lender broke the trend in the banking industry in a year where its peers - Kenya Commercial Bank, Barclays, Co-operative, Stanbic and NIC banks - all recorded a drop in profitability.

NIC, which also released results yesterday, reported a 4.2 per cent drop in net profit for the year ended December 31, 2017 to Sh4.1 billion due to what it called the effects of the rate cap and depressed yields from non-performing loans (NPLs).

Equity’s surprise results came a day after its share hit a 12-month high of Sh53 on the Nairobi bourse.

“The market seems to have agreed with our strategy and we can only accelerate it,” said Chief Executive James Mwangi at an investor briefing in Nairobi. The bank also cut loan loss provisions by 48 per cent or Sh3.2 billion.

Despite a seven per cent drop in interest income, the lender’s bottom line was supported by a 24 per cent growth in non-interest income and a near-halving of provisions for bad loans. Net interest income fell by 10 per cent from Sh41.8 billion posted in December 2016 to Sh37.6 billion in the financial year ended December 2017. This was a reflection of the effects of the cap on interest rates. Dr Mwangi said the bank was forced to lend to only those customers within the commoditised risk.

“Banks will not necessarily increase rates to all sectors, but interest rates will go back to where they are supposed to be,” he said.

Shifted focus

He said the bank shifted focus to Government securities and non-funded income to calm the headwinds of the rate cap. The growth in non-funded income by 24 per cent to Sh27.6 billion was achieved in a year that saw mobile banking commission grow the fastest (64 per cent) to Sh1.2 billion.

Total costs dropped by two per cent to Sh65.2 billion as the bank moved 97 per cent of its transactions to digital channels.

The drop was significantly due to trimming of loan loss provision to Sh3.4 billion. In 2016, it stood at Sh6.6 billion.

The cut in loan loss provision came even as gross NPLs eased marginally by 4.1 per cent to Sh17.98 billion. During the year under review, the lender’s loan book grew by five per cent while NPL ratio hit 6.3 per cent even as the bank shunned micro-enterprises.

“With their NPLs ratio at 15.4 per cent, you can’t lend there unless you want to be insolvent. The rate cap excluded them,” said Mwangi.

Meanwhile, NIC Bank’s interest income fell to Sh18.4 billion from Sh19 billion in 2016. This is despite a growing loan book from Sh114 billion to Sh119 billion.

“The reduction in yield on loans and advances was as a result of non-performing loans because when you default you do not pay,” said Managing Director John Gachora in a statement.