Non Performing Loans Affect Equity Group 2019 Outlook

EQUITY

Equity Group posted a Ksh 17.4 Billion Profit After tax from Ksh 15.83 Billion, in the third quarter of its 2019 financial year, a 10% growth from a similar period.

Although the group increased its lending to enterprises in the real economy by 21%, with loans and advances to customers growing to Kshs. 348.9 Billion up from Kshs. 288.4 Billion, a majority of its loan portfolio held by enterprises spread in financing trade, housing, energy, water, transport and communication, tourism, restaurants, and hotels affected the Equity’s 2019 projections of Non Performing loans (NPL).

In its third quarter, the Group’s net interest income grew by 10% to Kshs 32.29 Billion from Kshs 29.47 Billion. Non funded income grew by 14% to Kshs. 22.54 Billion up from Kshs. 19.83 Billion to lift total income by 11% to Kshs 54.83 Billion up from Kshs. 49.3 Billion. Its focus on quality and diversification of its asset portfolio resulted in a loan portfolio distributed to MSMEs at 60%, consumers at 23%, large enterprises 14%, and agriculture at 3%.

Non-performing loans (NPL) were recorded at 8.3%, a percentile that did not fall in the 4% to 5.5% range that the group had forecasted for the year, compared to the sector’s NPL of 12.6%. Ideally as the size of NPL grows the financial health of a bank weakens because it reduces its ability to earn a profit, increase capital base and repay depositors. Equity group was forced to increase its cost of risk to 0.77% up from 0.62% resulting in an increase of loan loss provision by 42% to Kshs 1.88 Billion up from Kshs. 1.32 Billion.

Common factors that lead to loan default include, inadequate or non-monitoring of micro and small enterprises by banks, leading to defaults, delays by banks in processing and disbursement of loans, diversion of funds among others.