Equity Group CEO Dr James Mwangi
Equity Group’s profit for the financial year ended December 31, 2016 has dropped by 4 per cent to Sh16.5 billion following a rise in bad loans.
The decline in earnings from Sh17.3 billion in 2015 was as a result of the bank more than doubling its loan loss provision (173 per cent) to Sh6.6 billion from the previous year’s Sh2.4 billion.
This was on the back of non-performing loans that more than doubled in 12 months from Sh9.1 billion to Sh18.8 billion. Presenting the results to shareholders at the bank’s head office in Nairobi yesterday, Group Chief Executive James Mwangi said the introduction of interest rate cap had complicated the business environment, making it hard to price some of the customers, such as small enterprises.
“The industry has seen deteriorating quality of financial assets. Currently, about 10 per cent of the industry’s loan book is likely to be lost, meaning a bank cannot recognise it as interest income, but put it in suspense,” he said. The group’s asset quality stood at 6.9 per cent even as Dr Mwangi said the bank had to shift from just lending in volumes to concentrating more on quality of borrowers.
Non-performing loans to micro enterprises stood at 9.5 per cent followed by SMEs at 7.5 per cent while those for large enterprises were at 5.9 per cent.
The trend saw gross non-performing loans increase during the period under review, forcing the bank to increase provisions, which had an impact on the net earnings. “Large enterprises were also affected by the macro environment. Their risk of default jumped from zero to 5.9 per cent because they are not being paid by the outlets they supply to,” said Mwangi.
The deterioration in banking industry’s asset quality from 7.1 per cent in December, Mwangi said, came at a time when the cap on cost of borrowing had denied players a chance to price risk when lending. The group realised net interest income of Sh41.8 billion, up from the previous year’s Sh34 billion.