The cap on interest rate last September plunged the banking industry into “turbulence from challenges” of waning investor confidence following collapse of three lender, Equity Group managing director James Mwangi said yesterday.
He blamed interest controls on the bank's 4.56 per cent per cent drop in net profit for 12 months through December 2016 largely on the interest controls and default on loan by large enterprises.
Kenya's largest lender by market value said profit after taxation reduced to Sh16.54 billion from Sh17.33 billion in 2015.
“The challenges in the banking industry are beyond challenges. They are turbulence,” Mwangi told an investor briefing.
He said the bank's performance was dragged by poor performance in building and construction, trade and logistics sectors. The poor performance in the sectors was largely impacted by delayed payments by government amid slowed economic growth year on year in 2016.
Loans to customers reduced 1.42 per cent to Sh266.07 billion from Sh269.89 billion as the lender slowed down credit to risk borrowers, largely in micro enterprises. This followed the capping of interest rate at four percentage points above the prevailing 10 per cent Central Bank Rate.
Total non-performing loans more than doubled, jumping to Sh16.72 billion from Sh7.33 billion the previous year. Provisions against bad loans rose to Sh6.96 billion from Sh3.75 billion 12 months earlier.
The group's investment in securities, largely Treasury bonds and bills, more than doubled, rising 135.13 per cent year-on-year to Sh100.59 billion. Mwangi argued that risk-free infrastructure bonds were generating more than 14 per cent in return compared to risky loans.
“It is only in Kenya where that statement is true: 'the lower the risk, the higher the return',” Mwangi said. “So we have chosen to go risk-free… because we don't have money to provide for the risk that's not priced.” Net interest earnings, however, rose 22.09 per cent to Sh41.81 billion.
Customer deposits nonetheless increased 11.59 per cent to Sh337.20 billion.
Equity has retained dividend payout at Sh2 per share.
“We knew their loan book exposure was primarily to high-risk market segment in terms of micro and SMEs,” Francis Mwangi, head of research at Standard Investment Bank, said. “The expectation was that as soon as rates were capped banks will have less incentive to high-risk borrowers and that's exactly what we have started to see.”
Equity's fiercest competitor, KCB Group, last week reported a near flat growth in net profit. KCB's profit for the financial year ended December 2016 increased to Sh19.72 billion from Sh19.62 billion.
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