KCB stays ahead of Equity in banks’ profitability race

Equity Bank CEO James Mwangi (left) and KCB Group CEO Joshua Oigara. FILE
Equity Bank CEO James Mwangi (left) and KCB Group CEO Joshua Oigara. FILE 

KCB Thursday asserted its position as Kenya’s most profitable bank for the third year in a row after it reported a 17 per cent earnings growth for the year ended December 2013.

KCB, which is also East Africa’s biggest bank by capitalisation, returned an after-tax profit of Sh14.3 billion, opening a Sh1.1 billion gap with its closest rival Equity Bank.

Equity also released its annual financial results Thursday showing that its after tax profit grew 10 per cent to Sh13.2 billion for the same period.

This means KCB also grew its profit at a faster rate than Equity – setting it up for continued market leadership if the trend continues. 

“We are excited with the performance reflecting growth in all our business segments,” KCB chief executive Joshua Oigara said.

KCB returned a bigger profit despite the fact that Equity ran a wider revenue margin in the year under review.

Equity’s interest margin – difference between its cost of funds and the lending rate- was 12 per cent compared to KCB’s 10.1 per cent – meaning it earned more for equal amount of loans disbursed.

KCB therefore relied on better cost management to outpace its rival.

The bank used 54 per cent of its revenues to pay for operational costs compared to 57.4 per cent a year earlier, riding on a three-year staff restructuring plan that ended last year with a one-off cost of Sh1.1 billion.

Kenya’s biggest bank by capitalisation had for long been saddled by a heavy cost burden that forced it to call in international consultants to help it shed some of the weight.

Equity’s efficiency, however, remains better than KCB’s at a cost to income ratio of 48.5 per cent.

This is what has enabled it to vigorously challenge KCB’s market leadership with a comparatively smaller asset base. Equity’s assets were Sh114 billion less than KCB’s in the year under review.

KCB also reduced interest paid to customers at a faster pace than Equity – a move that enabled it to cut interest expenses by Sh3.4 billion despite a six per cent increase in customer deposits.

Equity’s interest expenses fell by a smaller margin of Sh1.2 billion.

KCB, however, paid the price for the rapid reduction of interest paid on customer deposits. The bank’s customer savings grew by a smaller margin of Sh17 billion compared to Equity’s Sh29 billion growth during the same period.

“We deliberately retired Sh15 billion of expensive deposits,” said KCB’s chief finance officer Collins Otiwu.

More importantly, Equity grew the core business of lending at a faster rate than KCB, expanding its loan book by Sh36 billion compared to KCB’s Sh16 billion.

KCB’s income from lending dropped to Sh32.4 billion from Sh34 billion the previous year despite growing its lending portfolio to Sh227 billion. The drop in lending income is therefore partly attributed to the drop in lending rates during the year.

Equity grew its interest income by a marginal one per cent to Sh27.7 billion, supported by the faster growth in lending.

KCB’s subsidiaries contributed Sh2.1 billion to the bottom-line with South Sudan maintaining its position as the best-performing subsidiary despite being hit by chaos in the last quarter of the year.

Income from the subsidiaries is actually what set the two banks apart in terms of overall profitability.

Equity Kenya operation closed the year ahead of KCB in terms of profitability but the former’s earnings from subsidiaries fell to Sh1.2 billion from Sh1.6 billion the previous year.

“The performance was impacted by a reduction in lending rates and loan loss provisions of Sh700 million as impairment for the South Sudan business,” said Equity chief executive James Mwangi.

The two banks reported an increase in bad loans that has been attributed to delayed payments of contractors by the government.

KCB had 8.1 per cent of its loans go unpaid for more than three months compared to 6.7 per cent in 2012 while Equity’s bad book grew to five per cent of its total loan book.

KCB and Equity are Kenya’s largest lenders that account for 28.8 per cent of the total industry profits.

The industry returned a total of Sh124 billion in profits before tax last year, according to Central Bank of Kenya data.

KCB is the largest lender in terms of assets and market share while Equity is home to the highest number of bank customers.

Barclays Bank, which occupied the top profitability spot for nearly 10 years, reported a 12.7 per cent drop in profits in 2013. The bank’s profits dropped to Sh7.62 billion from Sh8.74 billion a year earlier. It is the only other top tier lender to have announced results.

Barclays’ outcome means competition at the top has now been left to the two local banks.

KCB boasts of a 118 years presence in the Kenyan market while Equity Bank was founded in 1984 as a building society and only converted to a bank in 2004.

Within 10 years of entering mainstream banking, Equity enjoyed fast and steady growth that has earned it global recognition.

KCB on the other hand rose from the ashes in the 1990s to reestablish itself as the market leader riding on its large footprint. The two banks renewed their rivalry last year when KCB poached some of Equity’s top executives.

KCB hired Samuel Makome to lead its Kenyan Unit and appointed Collins Otiwu as its group chief finance officer. Mr Oigara and Mr Mwangi were bullish in their outlook for 2014.

Both signalled that they plan to grow non-interest income by widening transaction channels to reach more customers.

“We have begun to reap the benefits of our investment in information technology, agency banking, merchant business and payment processing,” said Mr Mwangi.

KCB is proposing to pay a dividend of Sh2 per share up from Sh1.90 in 2012.

On Thursday, the bank’s stock traded at an average of Sh44.75 at the Nairobi bourse.

Equity has recommended a Sh1.50 dividend payout up from Sh1.25 a year earlier. Its share traded at Sh32 Thursday.