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Kenya's Equity Bank says bullish about 2011

By Duncan Miriri

NAIROBI (Reuters) - Kenya's Equity Bank is upbeat about earnings prospects this year thanks to an expected fall in its cost-income ratio and higher non-interest income from economic growth, its chief executive said.

James Mwangi said the bank's subsidiaries in neighbouring Uganda and South Sudan were likely to do well as Uganda turns profitable and South Sudan benefits from a peaceful referendum on separation from the north.

Equity Bank is the largest Kenyan bank by market capitalisation, and its shares are frequently among the most heavily traded at the Nairobi bourse.

"The continued peace in South Sudan, even after the referendum, tells us that it is not likely to be a major challenge, so we are very bullish," Mwangi told Reuters in an interview on Tuesday.

In Uganda, where Equity completed an acquisition in 2009, Mwangi said he expected the bank would stop bleeding cash and turn profitable in 2011.

In Kenya, he said the bank's transactional model could benefit from projected economic growth in east Africa's biggest economy of 5.7 percent.

"That again increases the volume and explains the rapid growth last year. We have not seen anything that has changed," he said.

Equity's pretax profit surged 71 percent to 9.04 billion shillings in 2010, and Mwangi said it was hard to assess the likely impact on the 2011 outlook from rising inflation at home and the crises in Japan.

Equity plans to deploy its surplus capital -- more than double the statutory minimum -- to open operations in Rwanda and Tanzania during the second quarter of this year, Mwangi said.

"We want to further test the model we used in South Sudan of green fields, because it seems to have delivered better results than the acquisition in Uganda," he said.

He said the South Sudan operation turned profitable faster than the acquisition in Uganda, adding that five outlets would be opened in Rwanda and three in Tanzania.

COSTS FALL

Equity expects its costs as a percentage of income to fall to 54 percent this year from 58 in 2010, as it benefits from past investments.

"We are seeing 2011 being a fairly good year. We have started reaping the benefits of our past investments. The cost income ratio is dropping as we fully utilise our new data centre," Mwangi said.

"The branches that we have opened in the last three years are now maturing and starting to make significant profit."

Founded in central Kenya as a building society in the 1980s, Equity has grown into the largest bank by number of accounts in Kenya, with just over 6 million.

It has teamed up with telecom operators such as Safaricom to offer mobile phone based accounts. Mwangi said users of the services had grown to 1 million since the first was launched last year.

"The roll-out of the agency (banking) model makes (mobile phone banking) even more usable. It is very critical, because going forward business will be through partnerships," he said.

In 2010, Equity's share of income from commissions and transactions rose from 40 percent to 47 percent of total income, and Mwangi said that could grow to 50 percent this year.

"Transactions can really grow, and there is a possibility that in two to three years' time, commission and transaction income will be higher than interest income," he said.