Equity's Sh2.9b profit dip as big lenders feel heat

Equity Group Chairman Prof Isaac Macharia, Managing Director and CEO Dr James Mwangi and Geoffrey Maoga, a shareholder, during the FY 2023 Investor Briefing event. [Wilberforce Okwiri, Standard]

Two of Kenya's biggest banks have now collectively collected a yearly profit drop of more than Sh6 billion as concerns about an economic slowdown and higher defaults among businesses mount.

Equity Group, Kenya's biggest bank by asset base, said yesterday its net profit for the year ended December 2023 fell by Sh2.91 billion or 6.5 per cent to Sh41.98 billion after the lender doubled its provisioning for bad loans in the period.

It comes just days after KCB Group, the country's biggest lender by customer base, announced its profit for the year ended December dropped by 8.27 per cent or the equivalent of Sh3.3 billion to Sh37.4 billion on higher costs.

It was a dividend drought for shareholders however as KCB did not announce a dividend.

Yesterday, Equity said at an investor briefing in Nairobi it increased its loan loss provisions by 139 per cent to Sh32.8 billion, it said, after its gross nonperforming loans nearly doubled.

The lender's net interest income rose by slightly over a fifth.

Despite experiencing a decrease in profitability, the bank opted to keep its dividend unchanged at Sh4 per share for the year, leading to a total payout of Sh15.1 billion.

The payout is a boon for income-focused shareholders to whom dividends form a critical lifeline as the cost-of-living crisis rages. Norwegian Investment Fund-backed institutional investor Arise BV will be the biggest beneficiary of the dividend boom.

It will take home Sh1.92 billion of the dividend declared on account of its 12.76 per cent shareholding in the lender.

Group Chief Executive James Mwangi will also be a big winner, taking home Sh511.8 million through his 3.39 per cent stake in the bank.

Other shareholders, who hold 62.8 per cent, will divide the rest of the dividend payout among themselves. Non-performing loans (NPLs) reduce banks' earnings and cause losses, which weigh down on their financial soundness.

A loan becomes non-performing when the bank considers that the borrower is unlikely to repay, or when the borrower is 90 days late on a payment.

Banks with high levels of non-performing loans are also unable to lend to households and companies. This is harmful to the economy as a whole.

To mitigate the impact of the economic slowdown in Kenya, local banks like KCB and Equity have been actively expanding into foreign markets in recent years.

The two Kenyan giant lenders have posted lower earnings at a time when they have been hiking their rates in response to higher benchmark rates by the banking regulator.

However, there have been mounting concerns that the resulting higher interest rates on bank loans could lower consumer and business demand for fresh borrowings.