UPDATE 2-Kenyan banks eye solid earnings despite high rates

Thu Apr 26, 2012 2:38pm EDT

Related Topics

* KCB Q1 rises 35 pct, assures on full year profit growth

* Equity Q1 up 29 pct, says lending at lower rates helped

* NIC Q1 also up 29 pct on interest income growth (Adds analyst par 11,12)

By Duncan Miriri

NAIROBI, April 26 (Reuters) - Kenya Commercial Bank (KCB) and Equity Bank predicted strong profits this year after a resilient performance in the first quarter in the face of high interest rates and inflation.

The central bank raised its key lending rate by 11 percentage points to 18 percent in the final quarter of last year to prop up the shilling and fight high inflation, creating worries that the demand for loans would fall and defaults rise.

James Mwangi, the chief executive of Equity, whose shares are amongst the most traded on the Nairobi bourse, said his bank had kept the cost of funds low, allowing it to charge affordable lending rates that buoyed its profits.

"Equity maintained an average (lending rate) of 17.8 percent, which was very low compared to the 32 percent (other) banks are charging," Mwangi told reporters.

"If that is maintained, even in these difficult conditions we would expect Equity to perform better than last year."

In addition to being well capitalised with a liquidity ratio of 15 percentage points above the statutory minimum of 20 percent, Equity has cheaply priced loan agreements with multilateral lenders like the International Finance Corporation.

Focused on the lower-income part of the market, and operating in Uganda, South Sudan and Rwanda, Equity posted a 29 percent jump in first-quarter earnings to 3.73 billion shillings ($45 million).

KCB, the region's biggest bank by assets whose shares have surged 40 percent this year, making it the leading stock price performer on the Nairobi bourse, posted a 35 percent rise in its first-quarter profit to 3.4 billion shillings.

"We have put in place a robust business plan that will ensure that our Kenya and international businesses continue to maintain the growth momentum witnessed last year," Martin Oduor-Otieno, its chief executive said.

KCB increased its net bad debts provision by 21 percent, reflecting the impact of high interest rates on borrowers as well as growth in its lending book.

SUDAN CONFLICT

"We will probably have a better picture at the half year mark, but all signs indicate the banks are likely to post positive results," said Johnson Nderi, an analyst at Suntra Investment Bank.

"The only concerns are political risk locally and any fall-out from the economic problems in Europe, as well as inflation."

Meanwhile, NIC Bank, a mid-tier lender known for its strength in asset financing, reported a 29 percent jump in its first-quarter pretax profit to 1.03 billion shillings helped by a rise in total interest income. {ID:nL6E8FQ11Q]

Equity's Mwangi also welcomed parliament's rejection of a proposal to cap commercial banks' interest rates, which ended months of anxiety by bankers who feared the move would crimp their earnings and lead to credit rationing.

"That would have destroyed the economy," he said.

Mwangi also said he was concerned by the escalating conflict between South Sudan and Sudan but was confident the two countries would find a solution. Equity and KCB have units in South Sudan that contribute significantly to their bottom lines, which in the case of Equity is 6 percent of total profit.

"It is an issue of concern but when you analyse it more we feel that is not a situation that is sustainable because the two economies are hurting and cannot be able to sustain war so we believe that realism and rationalism will prevail," he said. ($1=83.3000 Kenyan shillings) (Editing by James Macharia, Bernard Orr)

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