Equity CEO James Mwangi: Why our DRC unit will soon overtake Kenya

Equity Group on Monday released its financial results for the nine months ended September, showing that its net profit had grown by 3.7 percent to Sh34.6 billion despite the earnings in Kenya dipping by a fifth.

The 3.7 percent growth is a softer pace compared with a similar period in 2022 when the net earnings grew by 26.62 percent. James Mwangi, the CEO, put the earnings into perspective in his address to investors, analysts and the press.

On the macro-economic turbulence and if the economy has seen the worst of inflation and interest rates yet

Our feeling is that global inflation has peaked and we don’t expect it to be back to where it has been. We have seen it reach 5.6 percent in the US and is down to 2.9 percent, which is still far above the targeted rate.

We expect interest rates to start slowing but it will take time because there are no indications yet that the Federal Reserve will start cutting rates. It could happen mid next year or beyond.

On what Equity is noticing about its customers in light of the tough economic conditions

At the household level, we are still struggling with inflation and price of commodities, particularly food and energy, and this has caused a significant strain on consumers.

The macroeconomic environment has challenged a couple of borrowers and we have seen our non-performing loans (NPLs) ratio go up by 200 basis points, but this is the secured loan book.

The group has borrowed a lot from how it managed the global health pandemic to navigate through the very strong macroeconomic headwinds that have come with high inflation, high interest rates and the devaluation of currencies in emerging markets.

We used our balance sheet to handle Covid-19 shocks but this time, we never know how long inflation, depreciation of the shilling and the new tax regime, especially those introduced in the Finance Acct 2023, will be with us.

About interventions to avert mass loan defaults in the wake of elevated interest rates

While profit is good, it should never be at the expense of livelihoods or preserving small businesses. We have chosen to use the profit and loss (P&L) statement to support the customer by ensuring that we don’t pass the full impact of price of high interest rates, inflation and depreciation of the Kenya currency to the customers.

So, interest expense is growing much faster than the interest income. The operating expenses are also growing much faster than the net interest income, showing the use of P&L to cushion customers.

We are maintaining customers at an average of 16.5 percent when the sovereign risk on bonds over a similar period is at 18 percent. It is a deliberate decision. We did not want to deal with mass defaults.

On the growing influence of subsidiaries in determining Equity Group performance

We see the impact of geographical expansion and we see how significant BCDC (DRC Congo subsidiary) has become. If you look at it relative to other subsidiaries and Kenya, DRC is 60 percent of Kenya (in terms of asset base).

When you look at the performance in terms of assets, again DRC stands tall compared to Kenya. When we look at performance in terms of profit, we see DRC now filling the gap. We also see Tanzania, Rwanda and Uganda following that trend significantly.

On profit after tax, again, we see significant growth. We see the rivalry between Kenya at Sh22.7 billion and Sh15.67 billion in DRC.

For those who remember, we have in the past gone through the question of why diversify capital from Kenya to markets with uncertainty.

We took a long-term view and we have been validated. It is the best decision we ever took for this group.

On the potential of DRC unit overtaking Equity Bank Kenya and what that will mean for the group

As DRC becomes more efficient, it will hopefully this year beat Kenya in terms of return on equity and return on assets. So, essentially, what we had as the beautiful story in Kenya has been amplified by DRC.

All these subsidiaries were funded by Kenya and now the subsidiaries the Kenya business was funding are outperforming it.

If we thought the group is getting to maturity because Kenya is now close to maturity, the entire group has become a start-up all over again because of the momentum of DRC, Uganda, Rwanda and the newfound energy that Tanzania is bringing on the table.

About the increasing loan defaults at Equity Group and the mitigating strategies

We have seen our NPLs jump to 12.2 percent (from nine percent). We believe we have peaked. We are seeing all the signals of it now starting to climb down.

We see 86.4 percent of our NPLs has been provided for and 62 percent has been covered through provisions and we also have a credit guarantee component of 19 percent or Sh21.4 billion to mitigate the small loans that might not perform.

Absorbing the difference between the interest expense and interest income and taking up the cost of inflation through other operating expenses and staff costs has seen a significant growth in our cost-to-income ratio from 47 percent to 50 percent.

The cost of funds have moved from 2.5 percent to four percent but the yields have remained broadly constant because we didn’t pass all these to the customer.  Equity is a bank with a human face and soul. It is not all about profits. You can choose customers over profitability.

On taking another big bet on insurance sector

The insurance business seems to be taking ground and we want to prompt investors to this evolving story.

Our first 12 months have proved to be very important and we have benefited a lot from the trust that the Equity brand has enjoyed over the years.

Outlook for the remainder of the year

The balance sheet is very solid and we have not changed our outlook in regards to how the future looks like in terms of growth. It is not the entire region that is being affected.

What we may be losing in Kenya, that is being compensated by other subsidiaries.

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