Equity Group this week announced a 13.6 percent increase in net profit to Sh39.3 billion in the first nine months ending September 2024 as earnings at the Kenyan unit recovered and costs grew at a muted pace.
James Mwangi, CEO of Equity Group spoke to Business Daily about the recovery in performance at the Kenyan unit, the outlook for the rest of the year, the emerging credit 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 and is even up to half in 2024. What worked in the third quarter?
What really worked was the restructuring of our balance sheet. The Sh130 billion in foreign denominated loans that we have paid is very expensive.
The loan previously cost an average of 3.2 percent, and reached 11 percent. So it’s about four times more expensive, and that’s affecting our topline, where interest expense is growing twice as fast as interest income.
The second thing is to focus on productivity. We told ourselves that if we can’t control anything because of macroeconomics, there is one thing we can control as staff. Employees significantly increase their productivity and gain efficiency.
Our non-performing loans (NPLs) have also peaked and we do not need to make any more provisions this quarter. So lower provisioning and lower risk fees from 3.5 percent to 2.2 percent make a big difference.
Going forward, what will contribute more is debt recovery. I see the fourth quarter of this year and the first quarter of 2025 will help us have single digit NPLs. The reduction, from above 13 percent to 8-9 percent, will hopefully be significant in March and will release a lot of suspended interest into income.
If we recover two or three of the big loans, the fourth quarter will be the best performance for the group in a long time. Profit growth can jump from 15 percent to 25 percent in a quarter and that’s what I want.
The shilling has stabilized against the dollar, inflation is now muted, the economy has gone through color protests and floods and interest rates are starting to fall. What is the outlook for the rest of the year?
I think Kenyans have seen that their options are limited and have chosen to focus on starting their economy. A reduction in interest rates will stimulate the private sector to revive jobs and look at expansion.
At the same time, as we get more income, we will see more consumption and this is the impetus we need. But this vibrancy will not happen unless interest rates fall.
I am glad that inflation is at the right level and therefore there is headroom for us to reduce rates, with the guidance of the Central Bank of Kenya. This will give businesses an appetite to borrow and the wheels of the economy will start turning.
You mentioned that Equity Group has a Sh180 billion offer in the pipeline. Which sector is showing more interest in terms of appetite to borrow, as credit growth is increasingly constrained?
We are seeing an economic transition, although it is still early. We see a focus on manufacturing and this is for export in the region.
For the first time we see that exports to America are for manufactured goods and not raw materials and this is a big change, helped by the special economic zone in Athi River and the Agoa opportunity (African Growth and Opportunity Act).
The ability for countries to move from raw materials to processed goods is a huge opportunity. We also see countries making things like plastic tanks for the region. No wonder our (Kenya) trade with Congo DRC is increasing.
Outward trade with Uganda, Tanzania and now the DRC, is growing in finished products. There, most of the financing (Equity) will be done in order to move the economy from an exporter of primary materials to an exporter of finished goods.
Thus, manufacturing accounted for most of the transactions in the pipeline, followed by agriculture. Agriculture is significantly in agro processing where we see significant value addition.
We also see early signs of the transformation of agriculture from rainfed to irrigation and green housing and this provides opportunities for lending.
Borrowed funds have been declining since December last year. What is behind this as you have grown especially since Covid-19?
It is difficult to participate in global debt due to high interest rates and volatility in exchange rates.
We have established working relationships with 24 development banks and as conditions change and market demand for dollar-denominated loans increases, we will return and lend. We will wait for interest rates to drop to 3-4 percent so we can borrow and continue to lend to customers at between 6-8 percent.
Ideally, we want to participate in this area because we want to be a catalyst for cross-border trade and AfCTA (African Continental Free Trade Area) opportunities and the best way to do that is to finance these exports in dollars, because of the earnings. also in dollars.
Inflation has stabilized at around two percent globally and this leaves room for continued interest rate cuts. LIBOR was at 5.5 percent and now it’s down to five percent and it’s still a long way off, because it started at 0.1 percent.
It may take 2-3 years for the interest rate to be at a level that allows us to borrow effectively and provide the benefits of dollar-denominated loans to our customers.
Almost every quarter you introduce a senior person that you get from a global organization. What is the secret of winning the battle apparently to add to the talent?
Equity is no longer a bank that can be compared to regional or national champions. You can only compare it with global banks because they have transformed themselves and are likely to be the strongest champions in the financial sector in Africa by 2030.
The secret to winning the talent war is simple: create a safe environment. The biggest talent currently attracting attention is women. This is talking about a safe environment.
The second is the competitive salary. That way, you are the employer of choice. But for older people, the salary is great but they question whether the organization will take care of their family.
When we take care of our families in terms of high-quality health insurance, pension contributions of 20 percent and guarantees that in the event of death we give the family eight years of gross salary and then increase the employee ownership scheme so that they can also work for themselves, I don’t think any company can easily outdo us in the battle of talent.
We have thought about the short-term, medium-term and long-term interests of our employees because this organization was never built by strong shareholders. I’m only 28 and without money but I like to meet gifted people.
So it’s about attracting talented people and that’s why the Equity leadership program has seen us bring thousands of gifted children into school. That talent is now available to Equity. Nearly 2,000 of our staff are from this program.
Many insurance companies make underwriting losses and depend on investment income for sustainability. What is the strategy for Equity to start making money from the underwriting business alone?
We chose that when we entered insurance, we did not do it as an investment arm, but to make it happen in terms of the insurance business. If you look at the profit we have made, it is strictly from the insurance business.
We feel the reason insurance has not been successful is a trust issue and this is due to not paying claims promptly. And that delay creates an opportunity for investment income.
We chose to take the challenge to deliver a promise to be there when the event is insured. We pay within seven days of claim and this will give us exponential growth in terms of business.
