Equity Bank has set its sights on expanding into Rwanda and Tanzania to maintain its profit growth momentum, after increased economic activity in the first nine months of the year boosted its after-tax profits by 51 per cent.
Increased interest income, commissions and technology-aided cost-cutting measures saw Equity's third quarter after-tax profits surge to Sh5.13 billion from Sh3.38 billion recorded in the period to September last year.
Ranked Kenya's fifth largest bank by assets, with operations in Uganda and Southern Sudan, Equity's net interest income went up by 53 per cent to Sh11.98 billion.
Group chief executive James Mwangi said the bank will capitalise on the new agency banking model to slow its physical expansion in Kenya, while still increasing its reach in rural, unbanked parts of the country. "Part of our strategic focus is to be a technologically driven bank," said Mr Mwangi when he announced the results on Tuesday.
Some of the technology driven cost-cutting measures the bank has employed include mobile banking and smart ATMs that allow customers to make deposits, which have enabled the bank to slow down on building of new branches and cut staff numbers.
Equity has so far this year opened 13 new branches, against an annual average of 45 new branches while the number of staff has grown to 5,200 from 5,000, against the traditional 45 per cent annual increase in employee numbers. The strategy has helped the bank increase its efficiency as measured by the cost to income ratio, which dropped to 61 per cent from 63 per cent posted in a similar period in 2009.
Mr Mwangi announced that the Central Bank of Kenya had approved 6,000 agents for Kenya's largest bank by customer numbers. Equity now has 5.7 million customers, or 57 per cent of all bank accounts in Kenya, Agency banking, which will see use of outlets as bank branches, is expected to reduce the cost of delivering financial services to customers.
Mr Johnson Nderi, an analyst at Suntra Investment Bank, said expanding through an agency banking model and using branches as hubs is a sustainable model for expansion as it will allow Equity Bank to manage its staff and other general operating costs.
Market analysts said the bank's strategic move away from the traditional brick and mortar approach stems from past experiences by Kenyan banks, which were unable to sustain their many branches after they were hit by the economic slowdown of the 1990s.
"Equity is taking a cautious approach as it has seen what is happening in the Sudan and Uganda," said Mr George Bodo, a research analyst from Genghis Capital.
Ugandan banking sector regulator, Bank of Uganda, said in a recent report that rising costs in Uganda's banking industry has seen half of the commercial banks report losses, among them Equity Bank.
Mr Mwangi said the group will focus on stabilising the Ugandan subsidiary before venturing into Rwanda and Tanzania in the first quarter of next year. The agency banking model will open a new revenue stream for Equity as it will give the lender room to offer wholesale banking to the agencies which will translate into increased commissions and transactions income, said Mr Bodo.
Equity's non-interest income grew by 32 per cent to Sh6.02 billion, driven mainly by commissions and transaction fees.
Agency banking, Mr Bodo added, will allow decentralisation of services, a move that will free up branches to focus on core banking services with higher returns. Mr Bodo said Equity's high liquidity ratio, which is shy just of 50 per cent, could earn more income if it was lent out as loans.
Equity has in its books government securities worth Sh12.1 billion, a sign that there are scarce lending opportunities or the bank is not willing to take up high risks by lending to low quality borrowers.
But with interest rates on government securities falling, the bank is switching its focus to the small and medium-sized enterprises (SME) to soak up the excess money. "There is no need to buy more bonds when the average lending rate to an SME or a mortgage is 14 per cent," said Dr Mwangi.
The bank's share price rose 0.25 per cent up to Sh26.50 in Tuesday's trading at the stock market.