Kenya’s Biggest Bank Warns Rate Caps Risk Crippling Industry

NAIROBI (Capital Markets in Africa) – Equity Group Holdings Ltd., Kenya’s biggest bank by market value, posted a 6 percent decline in first-quarter profit as its chief executive officer warned government-imposed caps on commercial lending rates risk crippling the industry.

Net income slid to 4.83 billion shillings ($47 million) in the three months through March as the revenue generated from loans after expenses tumbled 15 percent to 8.89 billion shillings, the Nairobi-based lender said in an emailed statement. Equity increased the amount of money set aside to cover bad debts by 13 percent as net non-performing loans jumped 34 percent.

Equity is the fourth of Kenya’s top five banks to report lower first-quarter earnings. Lenders have resorted to buying government securities to shield earnings from the impact of the rate cap, which limits borrowing costs to four percentage points above the central bank’s benchmark rate, currently at 10 percent. The ceiling is also forcing banks to reduce costs by closing branches and cutting jobs to offset a decline in revenue.

Interest-rate capping “is not sustainable,” Mwangi said at a briefing. “It’s just a question of time for that, in one way or another, to be amended otherwise it will cripple the whole market.”

Almost half of Equity’s loan book was shielded from the cap that’s been in place since September, which helped to limit the impact on interest income, Mwangi said. A fifth of its loans are denominated in dollars and a quarter of the total are in the lender’s subsidiaries across East Africa.

“Our strategy of shifting to equally yielding, risk-free assets seems to have paid off,” he said. “Our regional focus seems to have paid off.”

Profit at the bank’s operations in the Democratic Republic of Congo and Uganda almost tripled, while its Rwandan business more than doubled, Mwangi said. While a civil war and an ensuing currency depreciation and hyperinflation have decimated South Sudan’s economy, it has had no impact on the group’s performance in the country, he said.

Equity’s stock was unchanged at 38 shillings by 11:34 a.m. in Nairobi after swinging between gains and losses.