Equity Bank profit drops to Sh16.6bn on higher provision for bad debts

Equity Group reported a 4.1 per cent net profit decline in the year ended December, weighed down by higher provisioning for bad debt.

The lender made a net profit of sh16.6 billion in the period compared to Sh17.3 billion the year before.

Its loan loss provision rose 2.7 times to Sh6.6 billion, contributing to a 21.8 per cent increase in total operating expenses to Sh39.1 billion in what eroded its bottom-line.

The higher provision was driven by a doubling of gross non-performing loans to Sh18.7 billion.

The lender declared a dividend of Sh2 per share, same as the payout for the previous year.

Equity’s loan book shrank 1.4 per cent to Sh266 billion but the lender grew its total interest income 19.2 per cent to Sh51.8 billion.

Interest expenses rose 7.4 per cent despite customer deposits growing at a faster rate of 11.5 per cent to Sh337.1 billion, indicating a reduction in the rates paid to depositors as well as the portion of interest-bearing accounts.

Equity’s non-interest income grew 1.2 per cent to Sh22.2 billion.

Shift to larger SMEs
The bank CEO James Mwangi said the capping on bank lending rates had triggered a shift by borrowers to lending to larger SMEs with security and lesser risks, leading to a drop in total loans disbursed by 6 per cent.

"We are taking a cautious approach on lending to the micro enterprises as the risk is growing up and they are neither secured nor are they priced in the current controlled interest rates regime.

"We have a cost of risk that we cannot pass to the borrower and this is eating into banks’ profitability. The capping withdrew the only tool we use in the market, giving one price for all risks," said Mr Mwangi.

He said introduction of a cap on lending rates should also be backed by control of inflation and the returns on government securities.

Mr Mwangi said said small borrowers had hit the banks hard with default on loans while the capping prevents the lender from factoring in the default risk into their lending rates.

The micro businesses defaulted highest at 9.5 per cent.

Turbulent times

The banking sector, according to Mr Mwangi, had gone through turbulent times -- with high inflation, drought, currency fluctuation and loss of public confidence after three banks collapsed last year adding to the loss of interest rates control.

There has been a public outcry by borrowers who have found it more difficult to access credit after the rate capping law, amid claims that banks are bent on proving that the new legislation is not feasible.

Equity Bank said it plans to grow its alternative channels of transactions, translating to higher cost savings.