Kenya’s biggest banks see stronger H2

Kenya’s biggest bank by assets, KCB, and its largest bank by depositors, Equity , expect to increase earnings in the second half of the year as lending picks up due to falling interest rates, the banks said on Thursday.Lenders in east Africa’s largest economy faced a tough first half due to high interest rates, which crimped growth in loan books and increased non-performing loans, after policymakers adopted a tightening monetary stance in the final quarter of last year.Despite the high lending rates, KCB posted a 48 percent leap in its first half 2012 pretax profit to 8.5 billion shillings ($100.77 million), while Equity recorded a growth of 29 percent to 7.62 billion shillings, thanks to growth in net interest income.The chief executives of both banks said they were optimistic that earnings for the second half of the year would be higher.Martin Oduor-Otieno, CEO of KCB cited growth in the bank’s five subsidiaries in neighbouring countries and a falling cost-to-income ratio while James Mwangi, the CEO of Equity, pointed to improving economic fundamentals in Kenya.Year-on-year inflation has fallen more than 900 basis points since last December, while the shilling has stabilised against the dollar this year, prompting policymakers to embark on an easing cycle earlier this month.DEFAULTS A RISKAnalysts said the banks had performed impressively in the first six months of this year, given the tough economic environment.“Loan growth was much slower than last year but what is encouraging is that non performing loans (NPLs) are still within control despite the higher interest rates,” said Judd Murigi, a research analyst at African Alliance.“The outlook is pretty good with more aggressive loan growth. NPLs remain a risk because of the loan factor but we will see good loan and deposit growth due to declining interest rates.”Equity said its ratio of non performing loans to its total loans had crept up to 3.2 percent during the period from 2.8 percent last year, causing it to raise its NPL coverage to 73 percent from 52 percent.“During hard times, you need to have the capacity, the resilience to deal with any challenges that may arise,” Mwangi said.On the other hand, KCB’s chief executive Oduor-Otieno said there was a possibility of increased defaults by borrowers who took loans when interest rates were high. Average base rates for commercial banks peaked at about 25 percent in the first six months of this year, although they have since fallen to around 23 percent.“To try and cushion ourselves against any deterioration in the performance of the loan book, we have taken up more provision in this half of the year,” said Oduor-Otieno.NET INTEREST INCOMEEquity increased its net interest income by 55 percent to 11.28 billion shillings in the first half, while KCB raised its net interest income by just over a third to 14.31 billion shillings.One analyst said he expected KCB’s share price to rise when the market reopens on Friday, thanks to the robust earnings growth.“We already saw demand on the share before the results, and I think demand, from across the board, will be pent up tomorrow,” said Vimal Parmar, head of research at Kestrel Capital.The shares closed at 24.25 shillings, unchanged from Wednesday’s close and up 44 percent in the year to date.Shares in Equity are some of the most frequently traded on the Nairobi bourse mainly due bets by investors that its focus on the low segment of the market, which is a large portion of the population, will continue to pay dividends.