Equity Group this week reported a 13.6 per cent rise in net profit to Sh39.3 billion in the first nine months to September 2024 as earnings at the Kenyan unit recovered and costs increased at a subdued pace.
James Mwangi, CEO of Equity Group, spoke to Business Daily about the rebounding performance at the Kenyan unit, the outlook for the rest of the year, emerging lending opportunities in the economy and how the lender has successfully tapped talent from global institutions.
Equity Kenya’s performance has recovered from the decline in profitability seen last year that extends into half of 2024. What worked in Q3?
What really worked was the restructuring of our balance sheet. The Sh130 billion foreign loans we disbursed were expensive.
These loans were previously priced at an average of 3.2%, then reached 11%. So, it was costing almost four times more, and that was impacting our top line, where interest expense was growing twice as fast as interest income.
The second thing is to focus on productivity. We told ourselves that if we couldn’t control anything else because of macroeconomics, there was one thing that was within our control as employees. Employees have significantly increased their productivity resulting in increased efficiency.
Our non-performing loans have also peaked, so we no longer need to make further provisions this quarter. So the lower provisions and lower cost of risk from 3.5 percent to 2.2 percent made a big difference.
From now on, what will contribute more is loan recovery. I see Q4 of this year and Q1 of 2025 will help us get to single digit NPLs. Hopefully this reduction, from over 13% to 8-9% by March, will be significant and will free up much of the pending interest into income.
If we recover two or three of the larger loans, the fourth quarter will be the group’s best performance in a long time. Our earnings growth could jump from 15% to 25% within one quarter, which is what I expect.
The shilling has stabilized against the dollar, inflation is now subdued, the economy has moved beyond street protests and floods and interest rates are starting to fall. What are the expectations for the rest of the year?
I think Kenya saw that it had limited options and then chose to focus on stimulating the economy. Reducing interest rates would stimulate the private sector to revive projects and consider expansion.
At the same time, when we have more disposable income, we will see more consumption and that is the vitality we need. But this vitality will not happen unless interest rates fall.
I am happy that inflation is at the right level and therefore there is scope for us to be able to cut interest rates, under the guidance of the Central Bank of Kenya. This will give companies the desire to borrow and the wheels of the economy will start turning.
You mentioned that Equity Group has deals in the pipeline worth Sh180 billion. Which sectors are showing greater interest in terms of willingness to borrow, given that credit growth has been largely constrained?
We are seeing a transformation in the economy, although it is still early days. We are seeing a focus on manufacturing and this for exports in the region.
We see for the first time that exports to America are for manufactured goods and not raw materials and this is a big change, helped by the Athi River Special Economic Zones and AGOA (African Growth and Opportunity Act) opportunities.
The country’s ability to shift from raw materials to manufactured goods represents a huge opportunity. We also see the country manufacturing goods such as plastic tanks for the region. It is no wonder that our (Kenya) trade with the DRC has increased dramatically.
Foreign trade with Uganda, Tanzania and now the Democratic Republic of the Congo is increasingly concentrated in finished products. This is where most of our financing (equity) goes to move the economy from an exporter of raw materials to an exporter of finished goods.
So manufacturing accounts for the most trades in progress, followed by agriculture. Agriculture is heavily involved in agro-processing where we are seeing significant value addition.
We are also seeing early signs of agriculture shifting from rain-fed agriculture to irrigation and greenhouses, providing lending opportunities.
Your borrowed money has decreased since December last year. Why would you do that considering you’ve already developed this especially since the time of the coronavirus?
It has been difficult to participate in global borrowing due to high interest rates and volatile exchange rates.
We have built a working relationship with 24 development banks, and as the situation changes and market demand for dollar-denominated loans increases, we will come back and borrow. We will wait for interest rates to fall to 3-4% so that we can borrow and continue lending to our clients at 6-8%.
Ideally, we want to participate in this area because we want to be the catalyst for cross-border trade and AfCFTA opportunities, and the best way to do that is to finance those exports in dollars, because the profits are also in dollars.
The inflation rate has stabilized at about 2% globally, which paves the way for continued reductions in interest rates. Libor was at 5.5 percent, and has now dropped to five percent, so there is still a long way to go, given that it started at 0.1 percent.
It may take two to three years for interest rates to reach a level that allows us to borrow effectively and provide dollar-denominated loan interest to our clients.
Almost every quarter she introduces VIPs she gets from global organizations. What’s the secret to winning the seemingly ever-increasing talent war?
Stocks are no longer the bank you can compare to regional or national champions. You can only compare them to global banks because they have transformed themselves and will most likely be the strongest African champion in the financial sector by 2030.
The secret to winning the talent war is simple: create a safe environment. The greatest talent we are attracting now is women. Talking about a safe environment.
The second thing is the competitive salary. This way, you become an employer of choice. But for seniors, the salary is great but they wonder if the organization will take care of their family.
When we take care of the family in terms of high-quality health insurance, a 20 percent pension contribution and we assure them that in the event of death, we give their family a lump sum salary for eight years and then add an employee ownership system so they can also work for themselves, I don’t think there’s a company that can To easily outperform us in the talent war.
We have thought about the short, medium and long term interest of employees because this organization was never built by strong shareholders. I was only 28 and had no money, but I enjoyed the trust of talented people.
So it’s about attracting talented people and that’s why the Equity Leadership program has seen us take thousands of talented kids to school. This talent is now available for stock. Nearly 2,000 of our employees are from this program.
Many insurance companies incur underwriting losses and rely on investment income for sustainability. What is the stock strategy to start making money from underwriting business alone?
We have chosen that if we get into the insurance business, we do so not as an investment arm but to really make it happen in terms of the insurance business. And if you look at the profit we’ve made, it’s clearly from the insurance business.
We feel that the reason insurance has not been very successful is because of the trust issue and this is due to claims not being paid promptly. This delay is what creates an opportunity for investment income.
We have chosen to accept the challenge of delivering on our promise to be there when the insured event occurs. We pay within seven days of claim and this will give us tremendous growth in terms of business.
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