K-Rep Bank, majority owned by investment firm Centum, has recorded a 27.5 per cent net profit drop in the year ended December on the back of higher interest expenses.
The lender, which is set to rebrand to Sidian Bank beginning next month, said its net profit in the period stood at Sh372.3 million compared to Sh514 million the year before.
This came as interest expenses rose 42 per cent to Sh1 billion, underlining the impact of higher interest rates on an enlarged deposit base.
“The profit drop was mainly driven by an increase in … the cost of funds in the last quarter of the year after interest rates went up,” said the bank’s chief executive officer Titus Karanja.
K-Rep’s customer deposits rose by Sh1.3 billion to Sh13.3 billion, with interest rates having jumped to highs of 27 per cent in the second half of last year.
The interest rate jump raised funding costs for lenders relying heavily on deposits from cash-rich firms since these have the muscle to negotiate for better rates.
Small and medium-sized banks including K-Rep were also forced to pay higher rates on deposits in the wake of Imperial Bank’s collapse, which sparked a flight to top-tier banks that are viewed as relatively safer.
K-Rep’s interest expenses overtook its interest income which rose 12.9 per cent to Sh2.7 billion, with non-interest income, including fees, declining 2.2 per cent to Sh645.4 million.
Its loan book expanded by Sh2 billion to Sh12.5 billion. The bank’s operating expenses also jumped 15.1 per cent to Sh1.7 billion, driven by higher loan loss provisions and staff costs among others.
Its provisions for bad debts rose 30.1 per cent to Sh218.2 million, reflecting potential losses on its gross non-performing loans that more than doubled to Sh1.6 billion from Sh776.4 million.
The bank attributed the surge in the bad loans to delayed payments to its customers by the government and other large corporates.
K-Rep is undergoing a transformation spearheaded by Centum which bought a 66 per cent stake in the bank, raising its ownership to a controlling 67.5 per cent.
The investment firm last year injected Sh1.2 billion into the bank for boosting its technology infrastructure and to fund its growth ambitions.
K-Rep expects to receive a Sh400 million cash injection from the other shareholders who do not wish to be diluted by Centum from the rights issue.
Management expects to invest an additional Sh400 million in IT development this year as it plans to roll out a mobile and agency banking platform.
It hopes to ride on technology to widen its customer base without incurring costs associated with physical branches.
The lender currently has 37 branches and plans to open three more this year.
K-Rep disclosed its ambitions to be a mid-sized bank in three years’ time with an asset base of Sh125 billion, deposits of Sh100 billion and a Sh85 billion loan book.
The bank will need a capital base of at least Sh10 billion to support the ambitious plan, with the lender currently having a total capital of Sh3.7 billion.
Mr Karanja said the new capital will be raised through profit retention and new capital injection.