The Group’s NPL coverage stands at 94%. NPL coverage inclusive of credit risk guarantees stands at 119.8% and the cost of risk has normalized to pre-Covid rates of below 1.5%.
The Group continues to prudently hedge against default through a loan book diversification strategy across market segments, with large enterprises holding 26%, SMEs 43%, consumers 20%, agriculture 8%, and micro enterprises 3% of the loan book.
Equity Group’s half-year results continue to reflect a sustained digital transformation with 99 percent of all customer transactions now happening outside the branch network.
“Covid-19 acted as a tailwind to our efforts of digitizing our business,” said Dr. James Mwangi, Group Managing Director, and CEO while releasing the results.
“The business transformation has supported recovery and built resilience in the business. Going online and virtual through digitization has brought ease and convenience to our customers resulting in increased uptake of our products and growth of the business”, added Dr. Mwangi.
The Group’s recovery and resilience strategy saw the Group’s profit after tax grew by 36 percent to Kshs 24.4 billion up from Kshs 17.9 billion for the comparative half-year results of the previous year.
The profit growth was principally driven by a 29% growth in interest income to Kshs 55 billion up from Kshs 42.8 billion as a result of the growth of loans to customers by 29% to Kshs 650.6 billion up from Kshs 504.8 billion. “The loan growth was targeted to supporting our clients to recover and rebuild after the Covid-19 business disruptions while allowing re-purposing and retooling for resilience and agility to take advantage of emerging opportunities and green shoots in the real economy, “said Dr. Mwangi.
The differentiated strategy adopted by management to support borrowers to cope with the difficulties of Covid-19 business disruptions has seen most of the businesses survive and recover. Out of Kshs 171.4 billion Covid-19 restructured loan book, Kshs 46.6 billion has been fully repaid, and a further Kshs 114.0 has resumed repayment, with only Kshs 8.1 billion non-performing. Out of the remaining Kshs 11 billion which is anticipated to resume repayment within the next six months, only Kshs 2.7 billion is showing the strain of recovery.
The Group’s culture of customer centricity and focus informed the management’s Covid-19- environment strategy of focusing on customers’ recovery and resilience. Targeted lending reflected by the 29% growth of the loan book is part of the strategy to sustain recovery, and growth and allow the real economy to thrive and brighten the lights of the economy by generating growth opportunities.
In pursuit of resilience and prudence, management has fully provided for the entire Kshs 8.1 billion Covid-19 books that have resumed repayment and are non-performing while proactively downgrading Kshs 2.7 billion of the remaining restructured book.
The success of the recovery and resilience strategy is reflected by the decline in NPL ratios to 8.5% compared to 10.7% the previous year. The Group’s 8.5% NPL positively and favorably compares to Kenya’s banking industry NPL ratio of 14.7% as of 30th June 2022.
The Group’s NPL coverage stands at 94%. NPL coverage inclusive of credit risk guarantees stands at 119.8% and cost of risk has normalized to pre-Covid rates of below 1.5%.
The Group continues to prudently hedge against default through a loan book diversification strategy across market segments, with large enterprises holding 26%, SMEs 43%, consumers 20%, agriculture 8%, and micro enterprises 3% of the loan book. Group loan book diversification currently reflects 45.9% in US dollars and 54.1% in local currencies. Geographical sovereign risk diversification has Kenya holding 65%, DRC 19.6%, Uganda 7.3%, Rwanda 4.4%, Tanzania 3.6%, and South Sudan 0.1%.
Over the last three years during the Covid-19 pandemic, Equity Group has gone through its greatest business transformation in line with the environmental challenges. “Equity Group had adopted a strategy of business transformation through digitization to offer customers a more online business experience offering ease and convenience.
Digitization compresses time and geography, transforming the Equity banking experience from where you go, to what you do on your own devices, whatever time, wherever you are, a truly 24 hours banking experience.” While our agility and flexibility allowed us to increase our software engineers by 600 new staff and our Chief Information Officers to 17 from one, Covid-19 coping, mitigation and adaptation protocols acted as a catalyst and tailwind for customers’ adoption of digital tools, online practices and change of technology adoption culture to deliver a speedy business transformation of the look, feel and experience of the Equity Group business,” said Dr. Mwangi.
Between June 2019 and June 2022, digital banking transactions through mobile and internet channels, Agency and Merchant infrastructure doubled from 330 million to 663.9 million while transactions on the Group’s own infrastructure of branches and ATMs declined from 25.3 million to 19.2 million transactions delivering an online self-service business model with 99% of banking transactions being outside the branch and a corresponding 74% of the value of transactions, leaving branches to do high-value transactions. During the same period, the value of digital transactions has grown over 400% to Kshs 4.4 trillion up from Kshs 1.2trillion while the value of branch and ATMs based transactions have grown to Kshs 1.7trillion up from Kshs 1.1 trillion.
Gross trade finance revenue grew by 64% to Kshs 2.6 billion up from Kshs 1.6 billion while trade finance-related lending grew by 106% to Kshs 34.4 billion up from Kshs 16.7 billion as trade finance guarantees and off-balance sheet items grew by 62% to Kshs 158.4 billion up from Kshs 97.7 billion. Focus on payments and trade finance saw non-funded income grow by 23% to Kshs 25 billion up from Kshs 20.4 billion compared with the 28% growth of Net Interest Income of Kshs 39.8 billion up from Kshs 31.2 billion. The non-funded income, a higher quality class of income, constitutes 38.6% of the total income in spite of the 29% growth in both the loan book and interest income.
Geographical expansion and business diversification have started to bear fruit and impact the Group’s value creation and growth. The Group registered a 19% growth in total assets to Kshs 1333.9 billion from Kshs 1,119.7 billion primarily driven by 59% growth in long-term debt funding to Kshs 162.6 billion and 18% growth in customer deposits to Kshs 970.9 billion up from Kshs 820.3 billion as customer numbers grew 18% to 16.9 million up from 14.3 million.
The geographical expansion and business diversification strategy have successfully reduced the concentration of sovereign risk in Kenya by having subsidiaries contribute 40% of the Groups Total Assets, 42% of the Group’s total revenue, and 28% of the profit after tax. Expansion and diversification initiatives have affirmed the strategy as subsidiaries other than Kenya posted a return on average equity of 22.3% above the cost of capital of 21% and enabled the Kenyan mother business to register a 35.5% return on average equity and 4.2% return of average assets. The Kenya business also registered a 39.2% cost-to-income ratio as a result of declining unit costs on shared services on account of economies of scale.
An efficiently funded and leveraged balance sheet structure with 73% of funding from short-term customer deposits, 12% medium-term debt funding, and 11% long-term shareholder funding has allowed the creation of an agile asset mix of 49% net loan book, 27% government securities and 16% cash and cash equivalent. The initial prudent and conservative risk backstopping through capital buffers conservation saw dividends not being paid for two consecutive years and a conservative policy that saw Group register 62.4% liquidity in June 2021.
Provisions for NPLs saw NPL coverage reach 94% and 120% with credit risk guarantees and the mass distribution of Covid-19 vaccines, making the pandemic business, as usual, has left the Group strategically positioned for balance sheet efficiency and optimization.
Asset allocation from low-earning assets saw cash and cash equivalent decline by 2% while growth in loans accelerated to 29% from 23% in Q4 2021 while investments in Government securities decelerated to 16% down from 81% driving Net Interest Margins to increase to 6.9% up from 6.6% at H1 2021 as yields on earning assets grew to 9.7% up from 9.2%. On the strength of efficiencies of business transformation through digitization and realization of economies of scale on growth and diversification, the Group has registered strong performance.
The Group cost-income ratio has improved to 46.7% down from 48.5% and the cost-to-asset ratio has improved to 4.7% down from 5.4% on a 19% expanded balance sheet of Kshs 1,333.9 billion up from Kshs 1,119.7 billion. Group return on average equity has increased to 28.9% up from 25% while Group return on average assets has risen to 3.8% up from 3.3%. “Growth of the scale of business and economies of scale, the pursuit of efficiencies and optimization of the balance sheet, and efficiencies of business transformation through digitization have served us well and positioned us strategically for the future,” said Dr. Mwangi.