Equity Bank was the second tier-one bank to record a profit decline in an industry that continues to defy the economic challenges to pay record dividends.
Equity Group's CEO James Mwangi spoke with the Business Daily on the bank’s financial performance, expansion plans, its insurance arm and performance of the shilling.
The bank’s net profit fell last year by six percent, with non-performing loans going up in Kenya. What was the underlying issue?
Kenya is highly interconnected globally, and this was not a domestic, but rather a global shock. It had more significant transmission into Kenya than the other countries in the region.
Unfortunately, Kenya was recovering from years of consecutive drought, and unlike the other countries, was importing food at a time when the Russia-Ukraine war had raised grain prices significantly, hence suffering from imported inflation.
As a result of the high inflation, the population was affected in terms of disposable income, forcing us to keep the base interest rate on existing consumer loans—for civil servants, the military, and teachers — at 13 percent despite the rise in the cost of funds. This affected the profitability of the bank.
We also had forex-denominated loans of about Sh150 billion equivalent. That debt was at around three to four percent, but it went up to about 12 percent once the US rates repriced upwards. Overall, interest expense went up by 53 percent, while interest income was up 26 percent.
Higher provisioning was also a factor in the profit fall. What is the outlook for the NPLs for the bank?
We are seeing the headwinds breaking. For the last three quarters, the US Federal Reserve has not increased its rate, and we have seen the first sign of easing with Switzerland making a rate cut. Locally, we have seen the shilling has strengthened.
We have seen the macroeconomic situation improving, and so it is just a question of adjustment. As they do so, we will see loan quality improve and that is why we expect improvement in our asset quality. We expect as this happens we shall see suspended interest being written back and outperform projections on return on equity.
You have announced plans to roll out your general insurance in June. How do you plan to deal with the issues of low penetration and fraud?
The insurance industry in Kenya looks like a failed business, with penetration at just 2.3 percent. That is how banking was when we entered the market, where only four percent of Kenyans had an account. Now this is at 86 percent.
Similar to what we did with banking, we are studying the barriers that are keeping insurance penetration low, like exclusions in policies which we are avoiding in ours.
We are also keeping an eye on fraud in the health insurance unit, which is leaning on the Equity Afya facilities.
The franchise and the system are owned by Equity Group Foundation, so you can’t introduce higher prices. In addition, a doctor can’t submit a claim to the insurance directly, but instead submits it to Equity Afya, where we have hired a team of 11 doctors to verify and if need be call the patient.
We have handed the Equity Afya franchises to graduates of our Wings to Fly programme, the Equity culture because they have practically been our employees for the last 15 years right from internship. If you make a mistake the lease is taken away and there will be another doctor in the afternoon. Out of the 23,000 students we have taken to university, 1,800 have studied medicine, and we only need 1,000. We will create discipline so that we change that industry once and for all.
Can we expect new acquisitions in the region?
Our regional approach is that we don’t want to do greenfield investments, but rather we prefer mergers and acquisitions given our size now.
There are countries that remain attractive like Ethiopia where we have a representative office. If Ethiopia opens, the best thing to do will be an acquisition or a merger.
The cluster of interconnected countries would not only include the seven countries we have a presence in, but would also bring in the likes of Zambia, Angola and Mozambique.
As a banker, has the shilling stabilised?
The shilling has found its value in the market place. I believe the price we are seeing is the market value. But remember the shilling is dependent on the supply and demand of dollars, and the demand for imported goods by Kenyans. Those two factors will determine the direction the shilling takes. It’s a question of whether we will suddenly develop an appetite for imported goods, which are now more affordable, and then exert pressure through demand of dollars.
There has also been increased interest in Kenyan banks by West and North African peers. What is it that they are seeing here?
The market is attractive because Kenyan banks have made it to become regional banks.
This means that if you invest in a Kenyan bank you are essentially investing in a regional bank. The best way of entering East and Central Africa is essentially through Nairobi, which is the regional gateway.
Nairobi is also elevated in social infrastructure and is therefore an ideal base because bankers are highly paid professionals, who require a cluster of services for their families, especially education and health.
It’s not Kenya alone that is attractive, it is the region, and Kenya is seen as the gateway.
On the macro economy, when is an ideal time for the Central Bank of Kenya to start easing monetary policy now that inflation and exchange rates have come down?
Remember Kenya missed a step when inflation hit, where policymakers held the interest rate too low.
The US moved its rate from near zero to 5.5 percent before Kenya responded. We held ours at between seven and nine percent, and consequently, we caused an impairment in the exchange rate.
This made Kenya unattractive to investors, and therefore we saw foreign capital migrate outwards, because they knew we could not undermine the market for long. Kenya has now done the right thing with the recent rate actions, and we can now see the stock exchange become the best performing globally in dollar terms for instance.
The CBK has given the signal that interest rates have peaked, which from where I stand is the case.
But it’s not yet time to lower the rate, because we might make the same mistake as before. The US, UK and the EU Central Bank have restrained themselves and Japan has increased its rate recently.
It would be prudent for Kenya to follow global trends, because we have learnt our lesson and we don’t want to reverse gains made in stabilising the exchange rate and reclaiming the value of the shilling.
Over the last couple of months, the CBK and Treasury have made very good decisions.
