How Equity weathered interest capping storm

Zachary Ochuodho @zachuodho

Equity Bank Group seems to have navigated the choppy waters of interest rates capping that has left the banking industry reporting declining profits and the market starved of credit.

The bank becomes the first institution to post a whopping 14 per cent growth in profitability since the caps were introduced in September 2016 following public outcry over exorbitant cost of loans vis-a-vis interest paid for deposits.

Yesterday, Equity’s chief executive James Mwangi announced after-tax profit of Sh18.9 billion for the period which ended December 31, 2017, compared to Sh16.6 billion it reported in a similar period in 2016.

Operating environment

“The operating environment over this two-year period (2016-2018) was characterised by bank failures, severe drought adversely impacting the agricultural sector and resulting in elevated inflation, prolonged presidential elections, interest rate capping causing a credit crunch and ultimately lower economic growth estimated to be 4.7 per cent in 2017 from 5.8 per cent in 2016,” Mwangi said while briefing investors.

Mwangi attributed the bank’s 3.0 strategy and differentiated business model for the performance while it’s peers report shrinking profits as the industry tightened lending to guard against lending to borrowers perceived to be risky due to the thin margin between interest earned from loans and interest paid on saving deposits.

Mwangi is confident if the loan caps are reviewed, the group is poised to grow much faster and that the lender has Sh200 billion which it intends to lend out as soon as the capping law is modified.

Last year, the firm deepened its 3.0 Strategy of digitisation through its digital suite of self-service app known as Eazzy Banking, which grew by 2,005 per cent to 92.8 million transactions from 4.4 million, with a value of Sh77.8 billion from Sh3.3 billion year on year.

“Our prediction that the branch will cease to be a banking transactional channel has come to pass. Branches reported a decrease in transaction volumes by nine to 18.6 million down from 20.4 million.”

Mwangi said branches would be re-invented as relationship and wealth management centres for SMEs and high net worth individuals because most transactions had moved to the Eazzy Banking platform.

Last year profitability was powered non-funded income which grew by 24 per cent to Sh27.6 billion up from Sh22.2 billion driven by Forex income, remittances, commissions, trade finance, agency commission, credit cards and diaspora remittances.

“Equity Group business model has proved that the group is not dependent on the loan book only to drive shareholder value, Mwangi said.

The group’s loan interest income growth declined from Sh43.4 billion to Sh34.1 billion. Income from treasury operations increased from Sh12 billion to Sh19.2 billion.

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