KCB’s banking hall in Kigali, Rwanda. The bank has been on an aggressive regional expansion. File
Kenyan banks with regional operations saw their subsidiaries increase profitability in the second quarter as they reported double digit growth in earnings from their group operations.
Equity Bank and Kenya Commercial Bank (KCB)—which have been aggressive on regional expansion —reported net profits of Sh507 million and Sh264 million from the subsidiaries respectively in the six months to June, led by their Ugandan operations.
The half-year results showed the banks generated the bulk of their earnings in the second quarter compared to the first—a pointer that regional shops look set for higher profits in the second half.
Equity, for instance, generated 65 per cent of the half year regional profits in the second quarter while Fina Bank produced 80 per cent of its Sh50 million subsidiary profits in quarter two.
This is a departure from last year’s performance when Uganda’s operations ate into the earnings of the Kenyan operations, slowing down their profitability and dividend payment despite growing local earnings by more than half.
Equity Bank and KCB reported before tax losses of Sh400 million and Sh1.8 billion from the subsidiaries respectively last year.
“There is no subsidiary making a loss. The diversification has started to pay off,” said Equity Bank CEO James Mwangi, The comments were echoed by the chief executive of the KCB Group Martin Oduor-Otieno: “All our subsidiaries made profits for the first time in the first half.”
Last year, the Central Bank of Uganda reported that nearly half of the commercial banks reported losses, attributing the performance to rising operating expenses amid flat income from lending.
Equity, which saw its quarter one profits rise 56 per cent to Sh4.7 billion, appears to have made the biggest turnaround.
The bank has been struggling with the Ugandan unit since it bought Uganda Micro-Finance Limited for Sh1.7 billion in June 2008 and last year the subsidiary sank deeper into losses of Sh769 million compared to a loss of Sh266 million.
This reduced its group profits to Sh8.9 billion compared to Sh9.3 billion for the bank (Kenyan unit).
But the bank turned the corner first half of 2011 as its group performance stood at Sh4.7 billion compared to the Kenyan operation’s Sh4.2 billion — which means its subsidiaries turned a profit of half a billion shillings.
It returned a loss of Sh420 million in a same half last year because of the underperformance of the Ugandan unit since its South Sudan subsidiary was on the profit zone. This performance along with the fact that the bank has overtaken KCB in the profit front is set to excite shareholders at the Nairobi Stock Exchange where its share has lost 12 per cent in the past month to settle at Sh22.25.
KCB’s net profit for the half stood at Sh1.7 billion and analysts say Equity’s low cost to income ratio helped to outperform its peers that have been battling with rising overheads, led by employee costs.
Bright outlook
But like Equity, KCB managed a profit of Sh246 million from the regional units compared to a loss of Sh173 million in the same period last year. KCB says it posted a loss of Sh409 million in Uganda last year, Rwanda (Sh317 million) and Tanzania (Sh110 million). Its South Sudan subsidiary reported a profit of Sh580 million.
This outlook is set to whet Kenyan banks’ appetite for the regional market as opportunities emerge from the East African Community (EAC) common market.
Regional expansion is becoming important as the EAC common market takes shape, opening way for free movement of factors of production in a market of 126 million people.
Kenyan companies are racing to open subsidiaries in the regional countries with banks following suit in an effort to offer seamless banking services in EAC — which has caught the eye of Equity Bank, Fina Bank and Diamond Trust Bank.
