NAIROBI, March 15 (Reuters) - Kenyan lenders are facing severe turbulence, grappling with a government cap on commercial lending rates, and the impact of a drought, Equity Group Chief Executive James Mwangi said on Wednesday.
Equity, one of the country's biggest by customers, saw its pretax profit edge up 3.75 percent last year to 24.9 billion shillings ($242.22 million), as it boosted provisions for bad debts.
Mwangi said the cap on rates, at 4 percentage points above the central bank rate of 10 percent, had made it difficult for banks to lend to risky customers. The government imposed the cap last September saying banks had high returns and they were not passing those benefits onto customers.
"Bank management (teams) are sailors in deep waters," he told an investor briefing, adding a drought, which has left 2.7 million people in need of food aid, had depressed demand.
Kenyan bank shares have slumped since the cap was imposed. The average valuation for banks has dropped by half to 0.9 times book value.
Equity, whose return on equity had been surpassing the industry, is trading at 1.2 times book value, but analysts said the chief executive's bleak assessment could make investors question that premium.
"The tone of voice has moderated from 'we will grow and sustain this growth from digitization, SME and micro (lending) above the industry' to, the current environment is challenging and therefore we are adjusting our strategy," said Francis Mwangi, a research analyst at Standard Investment Bank.
A focus on micro-loans to individuals and small businesses, and a growing mobile phone financial services business, called Equitel, had propelled Equity's faster growth.
Equity, which also operates in Uganda, Tanzania, Rwanda, South Sudan and the Democratic Republic of the Congo, saw its net loans inch down 1 percent last year, as it reduced customer lending and boosted investments in government Treasuries.
Its net interest margin fell to 11.0 percent at the end of last year from 11.7 percent in September when the cap was imposed. It expects the margin to be 9-10 percent this year.
"This is now directly hitting profit and loss of the banks because you cannot pass it on to the consumer," said Mwangi, the chief executive of Equity. ($1 = 102.8000 Kenyan shillings) (Reporting by Duncan Miriri)