Uganda rebound raises KCB net profit to record Sh17bn

A rebound of KCB’s Uganda subsidiary helped Kenya’s biggest lender to post a 17.4 per cent net profit growth and set a new earnings record for the banking sector.

The Uganda unit had reported a gross loss of Sh88.45 million in the nine months through September, meaning that strong performance in the fourth quarter supported the full year recovery.

“Uganda, which for the most of last year was in a loss position, is now profitable,” said Joshua Oigara, KCB’s chief executive.

The bank did not give a breakdown of its subsidiaries’ performance but Mr Oigara said the units, including its operations in the war-torn South Sudan, were all profitable.

The regional units made a combined net profit of Sh969.8 million in the year ended December, representing 5.7 per cent of the group’s net full year earnings of Sh16.8 billion.

The Sh969.8 million profit from the subsidiaries was however less than half the Sh1.9 billion they made in 2013 when it accounted for 13.3 per cent of the total Sh14.3 billion net profit.

The halving of the subsidiaries’ earnings is partly due to Uganda’s losses in the first nine months of last year.

KCB said it was still keen on deepening its regional expansion with the planned entry into eastern Democratic Republic of Congo, Ethiopia, and Somalia.

The bank first announced the plans in 2013 but is yet to set up operations in the identified markets.

Regional banking – which was pioneered by KCB — has become popular among local lenders who see it as presenting opportunities growth and geographical diversification opportunities.

Uptake of formal financial services in the region is lower than Kenya’s but is expected to rise significantly in the coming years as economic growth picks up pace.

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KCB operates in six markets, including Tanzania, Rwanda, and Burundi, giving it the largest operation in eastern Africa ahead of its rivals.

Kenya, however, remains the most important market for the local lender and accounts for the bulk of KCB’s cash-generating assets.

The bank’s overall profit growth, which saw it maintain its dividend payout at Sh2 per share, was the result of double-digit increase in interest and other income.

Total interest income rose 14 per cent to Sh47.4 billion as the stock of outstanding loans expanded to Sh283.7 billion from Sh227.7 billion.

Average lending rates in the banking sector dropped from 17.3 per cent in 2013 to 16.5 per cent last year, putting emphasis on increased lending as a major driver of profits.

Other income, including fees charged on transactions, increased 28.4 per cent to Sh22 billion and supplemented the mainstay lending business.

The bank’s interest expenses rose by a third to Sh11.5 billion, reflecting a 23.4 per cent growth in customers’ deposits to Sh377.2 billion.

KCB said its customer base increased from 2.5 million to 4.1 million, expanding its presence in the retail banking market where most of the transaction-based income is drawn from.

Equity is the largest retail bank with 9.2 million customers as of September last year. Despite the sharp increase in deposits, KCB said it will raise more long-term funds to fund its mortgage business.

Local banks have complained of a mismatch between long-term loans and deposits that are mostly short-term in nature, exposing a gap that restricts their lending to sectors like real estate where they face an exposure of ten years or more per customer.

This has seen the institutions raise more funds through rights issues, corporate bonds and by taking long-term debt from sovereign wealth funds and multilateral financiers including IFC.

KCB said it will deepen its presence in the mortgage lending market where it is one of the biggest players alongside Housing Finance that is also raising Sh3.5 billion through a rights issue to grow its business.

The bank’s share price closed trading at Sh59.50 on Thursday, dropping 8.4 per cent from Wednesday’s price. It has however gained 36 per cent over the past one year.

Analysts at Standard Investment Bank (SIB) said KCB’s performance had exceeded their forecasts in key metrics including earnings per share and loan book growth.

“Overall, the bank’s performance was better than expected,” SIB said in a statement.

Profitability of the wider banking industry will become clear in the coming weeks as more lenders publish their 2014 figures.