High interest charges dampens Housing Finance earnings

Mortgage lender Housing Finance has reported Sh485 million profits after tax in the first-half of the year, a near flat growth that has seen it slash its dividends.

The firm, which is fighting one of its expensive property battles in court, is counting on at least five key housing projects it hopes to launch in the second half of the year to bolster its profitability. Interest expenses on customer deposits outpaced the rate that the lender collected on its outstanding home loans.

Managing Director Frank Ireri said the net profit for the period has risen by Sh11 million to Sh485 million. The earnings growth pales the financial performance of its peers in the banking sector where the conventional lenders have consistently delivered double digit expansion.

“In the next two quarters, we expect good contribution from Kenya Building Society ongoing projects,” said Mr Ireri, referring to Komarock phase 5B and Kmall projects. Both are expected to be completed and sold before the end year and will ‘contribute to profitability in the fourth quarter’.

Housing Finance will pay its shareholders an interim dividend of Sh0.65 down from Sh0.75 in a similar period last year. The company attributed the drop in dividend payout to the dilution linked to the introduction of 116 million additional shares through a Rights Issue. The payout ratio of 45 per cent (of the net profit) has however been maintained, Ireri added.

Interest income on loans to customers soared by 28 per cent, slower than the 32 per cent rise on the company interest expense on customer deposits. HF has until recently not been operating current accounts for customers, which is the cheapest source of funds that commercial banks use for onward lending. Commercial banks pay about 5 per cent interest on customer deposits on average, against lending rates of about 17 per cent.

But the very nature of HF’s business which is long term financing, customer deposits would often not be sufficient because they tend to be short term. The firm has had to borrow from the financial markets through the issuance of corporate bonds to bridge the mismatch.

Ireri, however, expects to open dozens of new branches in a push to increase accessibility and footprint as a full-fledged service bank, and that would hopefully slash it interest expenses going forward. “Our target is to open a maximum of 40 new branches by 2018 in major cities, emerging property hotspots and near KBS sites. It will lower our cost of deposits which will ultimately help reduce HF’s overall cost of funding,” he said.

HF will seek foreign currency funding to meet the growing need for forex financing for a number of its projects, including Buffalo Mall in Naivasha. HF is currently undergoing a reorganisation to strengthen its long-term value, and has currently contracted multinational management consulting firm McKinsey to help in the restructuring.

The firm has appealed a case in which the court wants it to pay about Sh726 million to a Runda house owner whose house it auctioned under controversial circumstances. Such a bill would wipe out most of its profits it makes in a year.