Oral East Africa>Equity Bank cuts bad-loan insurance on promise of lower rates At the hut of the story

Written by Oral East Africa

Equity Bank Kenya profits rose 6 percent to Kes20.5 billion for the nine months to September, as the lender cut provisioning in anticipation of better loan quality with signals of lower interest rates.

The Kenyan unit profits rose from Kes19.3 billion supported by decline in loan loss provisions from 12.9 billion to Kes4.5 billion.

Equity Bank took the cue from a turnaround in loan defaults with non-performing loans declining from Kes92 billion to Kes91.8 billion.

“We are optimistic that the strong liquidity of the Group has positioned us to effectively support our customers as the economy starts showing signs of improvement in the key markets we operate in, signaled by reduction of the Central Bank Reference rates in some of the countries where we operate,” Equity Group Holdings Managing Director and Chief Executive Officer Dr. James Mwangi said.

Cautionary tale

Kenyan banks had been forced to increase provisions over the recent past as defaults rose sharply on tight local and global interest rates. Equity Bank saw gross defaults rise by Kes9.4 billion in just the quarter to June.

Central Banks have however began cutting interest rates signaling loose monetary policy that should decelerate the rate of defaults, giving banks some room to cut down on provisions.

Lenders however need to tread carefully with a big chunk of the bad loans being driven by the inability of the sovereign to keep up with supplier bills on fiscal strain rather than purely a function of high rates.

The International Monetary Fund has also warned Central banks in developed markets may have miscalculated on interest rate movements amid high uncertainty and data surprises.

The Fund said major central banks’ stances may turn out to be too loose, hindering disinflation, or too tight for longer than warranted, which stifles growth and triggers increased capital-flow and exchange rate volatility in emerging markets like Kenya.

Tough period

The impact of high interest rates continued to be felt in the banking sector with Equity Bank facing higher costs on deposits while loans advanced to customers shrunk on declined demand.

Equity Bank saw deposits climb from Kes563.8 billion to Kes607.9 billion showing its ability to attract sizeable savings which however came at a very high cost. Interest expense was up 64 percent from Kes17.8 billion to Kes28.8 billion.

Meanwhile loans to customers dipped from Kes454.4 billion to Kes423.1 billion indicative of the slump in credit to the private sector that tumbled to 3.7 percent in July from 13.9 at the end of last year.

A smaller loan book however earned higher returns showing the bank raised interest rates on customers to compensate for scale. Interest income was up 9 percent to Kes45.6 billion.

Equity Bank Group fortunes were also lifted by better fortunes from the country’s East African subsidiaries that raised the bottom line 13 percent to Kes40.9 billion for the third quarter from Kes36.2 billion in a similar period last year.

East African regional businesses now contributes 51 percent of profit before tax and 48 percent of total assets to reach Kes1.7 trillion as at 30th September 2024.

As business continues to grow in the Democratic Republic of the Congo (DRC) and with synergies realized from the Cogebanque acquisition in Rwanda, subsidiaries now account for 47percent of total loans, up from 46 percent in 2023, and contribute 47percent of profit after tax.