Equity reduces borrowings by Sh25bn on high interest rates

Equity Bank Muindi Mbingu Street branch in Nairobi.

Photo credit: File | Dennis Onsongo | Nation Media Group

Equity Group borrowings fell to Sh25.4 billion in three months to the end of March 2024 as the lender opted for the early repayment of part of its borrowed funds to manage interest costs.

New disclosures by the bank show that total borrowings in March were down to Sh125.1 billion from Sh150.5 billion in December. The bank’s short-term borrowings fell from Sh23.6 billion to Sh15.5 billion over the three months while long-term borrowings dropped to Sh109.6 billion from Sh126.9 billion previously.

The early repayment of the borrowed funds helped contain growth in non-deposit-related interest costs.

“Because of elevated interest rates, we have made difficult decisions like paying out the long-term loans because they were on floating interest rates and the effective interest rates on borrowed funds moved from 3.5 percent all the way to 12 percent,” said Equity Group CEO James Mwangi.

The bulk of the bank’s borrowed funds consist of loans taken from development finance institutions (DFIs) and are largely denominated in US dollars. The DFIs that have issued the lender credit facilities include the European Investment Bank, the International Finance Corporation, the African Development Bank, Proparco and the CDC Group. The borrowings which are all unsecured have floating interest rates tied to the London Interbank Offered Rate (Libor) and or the secured overnight financing rate.

The floating rates have soared in the past year with central banks in advanced economies having raised borrowing costs to curb runaway inflation. Following the early repayment, the bank’s non-deposit-related interest costs edged up only slightly to Sh2.37 billion at the end of March from Sh2.36 billion at the same time last year.

However, the bank found some of the savings from the significant appreciation of the Kenya shilling in the opening quarter of 2024 which helped trim payments in local currency terms.

Banks borrow funds externally to raise capital to support their lending businesses with the money sourced from other lenders, bonds or DFIs.

The borrowings can be obtained on an unsecured basis or against the lenders’ fixed assets. Equity Group has primarily used funding from development finance institutions to support lending to small and medium enterprises with the funds being partly used in de-risking the MSME borrowers.

The low-interest payments helped Equity manage its costs in the first quarter as it posted a 25 percent growth in net profit in the period to Sh15.3 billion from Sh12.3 billion previously. Total operating income in the three months closed at Sh50 billion from Sh40 billion in March 2023 as the bank grew both its interest and non-interest revenue lines as income from lending expanded.

Equity’s growth momentum was however contained in part by elevated loan-loss provisioning costs as the bank raised its cover for dud loans in response to higher non-performing loans.

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