Equity Group’s financial performance in the first nine months of this year has shown substantial growth, driven largely by an increase in interest income. The lender’s net profit soared to Ksh 40.9 billion, bolstered by an 11% increase in interest income and robust customer deposits. Despite these gains, Equity also faced some challenges, including a rise in operating expenses and a marginal increase in gross non-performing loans.
Profit Growth Supported by Strong Interest and Deposit Growth
Equity Group’s net profit of Ksh 40.9 billion in the first three quarters of the year marks a significant milestone for the lender, signaling resilient profitability in the face of economic challenges. One of the primary contributors to this performance was an increase in interest income, which rose by 13% to reach Ksh 138.9 billion. Net interest income, a crucial element of the bank’s revenue, hit Ksh 80.6 billion as customer deposits grew by 9% to a record Ksh 1.3 trillion.
The growth in deposits allowed Equity Group to reduce its dependency on borrowed funds from international lenders. The lender managed to decrease its borrowed funds by an impressive 64%, from Ksh 214 billion down to Ksh 76.4 billion, highlighting a strategic shift towards leveraging internal funding sources. This reduction in foreign borrowing could enhance the bank’s long-term stability, especially considering global uncertainties in capital markets.
Challenges with Non-Performing Loans and Operating Expenses
Despite the positive profit trajectory, Equity Group saw a slight uptick in its gross non-performing loans (NPLs), which rose by 0.7% to Ksh 125.3 billion. Net non-performing loans, however, showed a slight improvement, decreasing to Ksh 54 billion from Ksh 58 billion. The bank’s non-performing loan coverage ratio, a measure of its capacity to cover potential loan losses, stood at a reassuring 67.1%. This suggests that the lender has set aside sufficient reserves to cushion against potential defaults.
The increase in NPLs reflects the challenging economic conditions in Kenya, where rising costs of living and inflationary pressures have impacted borrowers’ repayment capabilities. The bank has maintained an aggressive loan recovery strategy to manage these risks, which has helped in slightly reducing the net NPLs despite the adverse conditions.
In addition to managing NPLs, Equity Group faced increased operating expenses, which rose by 27% to Ksh 54 billion. A significant portion of this expense surge was driven by a rise in staff costs, which reached Ksh 23.9 billion. The increase in operating expenses highlights the bank’s continued investment in its workforce and operational capacity, potentially positioning it for further growth and efficiency gains in the coming years.
Non-Funded Income and Interest Expenses
Equity’s non-funded income, which includes fees, commissions, and other non-interest revenue streams, experienced a marginal increase, reaching Ksh 58.3 billion. While the growth was modest, this component remains an essential part of Equity’s revenue mix, helping to diversify its income sources beyond traditional lending. However, interest expenses, or the costs associated with paying interest on deposits and borrowed funds, also increased by 18% to Ksh 43.5 billion. This rise in interest expenses reflects the heightened competition for deposits within Kenya’s banking sector as well as the impact of rising interest rates in the global market.
Dividend Outlook and Shareholder Value
Despite the impressive profit growth, Equity Group opted not to declare an interim dividend for shareholders. This decision could be part of a broader strategy to retain earnings for future expansion, investment, or potential risk management as the bank navigates a dynamic economic environment. By retaining earnings, Equity Group can reinforce its capital base, enabling it to continue expanding its lending capacity and enhancing service delivery.
Looking Ahead
Equity Group’s third-quarter results underscore its resilience and adaptability in a challenging economic landscape. With strong deposit growth, increased interest income, and strategic debt reduction, the bank has demonstrated sound financial management. Yet, as it faces elevated non-performing loans and rising operating costs, Equity Group must continue to adapt its strategy to maintain profitability and stability.
As the year draws to a close, the bank’s performance will depend on how effectively it manages its loan portfolio, controls operational expenses, and navigates external economic pressures. For investors, Equity’s strong results and prudent debt reduction signal a promising future, albeit tempered by cautious optimism given the challenges that remain in the banking sector.
