Loan defaults eat into Kenya’s banking giant Equity Group’s profits

Equity Group, a Kenyan bank with assets worth about $10 billion across East Africa, has reported a 6.5% decline in net profits from $341.9 million to $320.4 million for the year ended December 31, 2023, due to rising loan defaults.

Equity’s stock of bad loans jumped to $874.8 million last year from $481.9 million in 2022, revealing struggling local economies and hurting the bank’s growth while forcing the lender to increase provision for non-performing loans (NPL) to $269 million from $117.5 in the period.

The Central Bank requires Kenyan banks to set aside funds to cover loans where borrowers fail to pay principal or interest for 90 days.

“The NPL trend is consistent with management’s view as at the investors 3rd quarter briefing that NPLs had peaked. Prudent risk management culture led the board to approve a proactive derisking of future performance by providing for the lifetime expected loss on outstanding NPLs,” James Mwangi, Equity Group CEO, said on Wednesday during the release of the results in Nairobi.

Mwangi added that the manufacturing, real estate, and logistics sectors accounted for the bank’s largest share of NPLs, pointing to a tough business environment for most local firms. Bad loans comprised 32% of the lender’s loan book.

Since the COVID-19 pandemic, NPLs have been rising amid a tough business operating environment escalated by the devaluation of local currencies, rising interest rates, and record-high inflation.

Rising taxes in Kenya have also eaten into the disposable income for most households and businesses, leading to loan defaults.

Despite the profit drop, the Nairobi Securities Exchange-listed firm has retained a dividend payout of KES4 ($0.03) per share to shareholders, amounting to 36% of the profit after tax.

The bank said interest income rose to $795.4 million up from $656.5 million while non-funded income grew 30% to $579.4 million. Kenya’s top lender by earnings also saw customer deposits grow by 29% to $9.9 billion.

Equity, which also operates in neighbouring Tanzania, Uganda, South Sudan, Rwanda, and DRC, is still ahead of its main rival KCB Group in profitability. KCB reported an 8.3% drop in net profits to $285.9 million due to a jump in operating expenses.