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* Non-performing loans rise for KCB, Equity
* Equity takes a 0.7 bln shilling hit on South Sudan
* KCB aims to lend in new areas such as oil and gas (Adds Equity Bank's numbers)
By Duncan Miriri
NAIROBI, Feb 27 (Reuters) - Kenya's biggest bank by assets, KCB, and its largest lender by depositors, Equity , reported double-digit earnings growth last year, helped by increased lending across several African countries.
The growth in pretax profit was however curbed by rising bad debts and conflict in South Sudan where they both have operations.
The chief executive of Equity, which has operations in five regional countries, said the bank booked a 0.7 billion Kenyan shillings ($8.1 million) impairment charge on its South Sudan business, after conflict erupted in December.
James Mwangi said business volumes had fallen by 40 percent since the rebellion started. Equity has a 40 percent market share in South Sudan while KCB, which operates in six east African states, has about 52 percent.
Both banks said non-performing loans rose, an industry-wide trend that analysts in part blame on delays in payments by government to contractors which have sought bank financing for state road and other infrastructure projects. Those delays are blamed on Kenya's election last year.
KCB's non-performing loans rose to 8.1 percent from 6.7 percent the previous year, reflecting difficult conditions at home and conflict in South Sudan.
Collins Otiwu, KCB's chief financial officer, said the bank was confident about longer-term prospects for South Sudan, which contributes about 10 percent of profit, despite shutting down four of its 21 branches due to the fighting.
"We have put in all the provisions that we needed to put in so you won't see anything significant in 2014," he said.
Equity said its non-performing loans rose to 5.19 percent during the year from 3.1 percent, citing similar reasons.
KCB said it aimed to increase its return on assets to 4.1 percent this year from 3.8 percent last year. It is also aiming for a 30 percent return on equity from 24.4 percent.
Chief Executive Joshua Oigara said the bank would do this by cutting the cost-to-income ratio to just under 50 percent from 54 percent last year. He said one step would be to centralise routine processes such as opening accounts.
KBC shares, some of the most frequently traded, rose 2.3 percent to 44.75 shillings.
Standard Investment Bank said in a note to clients that KCB's outlook was promising, but it must cut costs and deal with bad debts. It put a fair value of 53.37 shillings on the bank's shares.
KCB aims to lend more to small and medium firms and consumers to cut reliance on lower-yielding corporate lending.
CEO Oigara said the bank was already lending to firms exploring for oil and gas in Kenya's far north where London-listed Tullow Oil struck oil in 2012.
Analysts said KCB, which retained more than half its earnings and raised the dividend by just 5 percent to 2 shillings a share, was preparing for opportunities from regional integration in east Africa.
"This speaks to a bank looking to conserve its cash in order to bet bigger on East African Community (EAC) common market growth," said Aly Khan Satchu, an analyst and trader.
Profit at KCB rose 17 percent to 20.1 billion shillings ($232 million) last year. Equity's profit climbed 11 percent to 19.15 billion shillings. ($1 = 86.5000 Kenyan shillings) (Editing by Erica Billingham)