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Kenya’s Biggest Lender Sees 30% Earnings Boost From Oil, Gas

Kenya Commercial Bank Ltd. (KNCB), East Africa’s biggest lender by assets, said regional oil and gas discoveries may boost earnings as much as 30 percent as the finds spur project-finance opportunities and economic growth.

The bank, with operations in six East African countries, plans to target transport, housing and other infrastructure projects where the discoveries have been made, Chief Financial Officer Joshua Oigara said in an Aug. 7 interview in Nairobi, Kenya’s capital. The stock gained as much as 2.1 percent today.

“We see a lot of potential not just in the big projects but also in the value chain,” Oigara said. “When you put in the element of oil and gas in this region, it has potentially the ability to increase our own growth by 20 to 30 percent for a period of another seven to eight years.”

Uganda expects to start pumping oil later this year after Tullow Oil Plc (TLW), the U.K.-based explorer, discovered an estimated 2.5 billion barrels in the Lake Albert Basin. In neighboring Kenya, Tullow announced in March it found crude deposits at a site in the Turkana region that may exceed the Ugandan find. Tanzania, holder of East Africa’s second-largest natural gas resources, expects to begin exporting the fuel in seven years.

KCB, as the bank is known, has outlets in all three of those countries as well as Rwanda, Burundi and the newly independent nation of South Sudan. The units outside Kenya are expected to contribute 25 percent of profit “in the mid-term,” compared with 10 percent now, as trade within the East African Community increases, Oigara said.

Offshore Funding

KCB has started the process of obtaining an international credit rating, which it expects to complete by end of the current financial year, he said.

“This will give the bank an opportunity to access international debt capital markets as the banks moves to expand its sources of funds in the mid-term period,” Oigara said.

The East African Community has a combined gross domestic product of $79.2 billion and a population of 133.1 million people. The five-nation group includes Kenya, Uganda, Rwanda, Burundi and Tanzania. South Sudan has applied for membership, as has Somalia.

In the first half of this year, KCB’s earnings from outside Kenya doubled, while Kenya’s grew by 46 percent. Total net income climbed to 6.09 billion shillings ($72.4 million) in the six months through June from 4.06 billion shillings a year earlier, the lender said July 26.

‘Critical’

“Our regional businesses are a key part of our business, they are becoming much more critical in the group’s performance,” Oigara said. All of the units, which account for 15 percent of KCB’s assets, are profitable with the exception of Burundi, which is expected to break even in two years after starting operations in June, he said.

The bank intends to open offices in three more African countries over the next three to five years, he said. The 19- nation Common Market for Eastern and Southern African states is being targeted as an area of expansion, Oigara said, without providing more details. The members of Comesa, as the trading bloc is known, include the Democratic Republic of Congo, Ethiopia and Zimbabwe.

“Because KCB has a bigger network in the region and we are following our customers who are doing trade in those markets, the opportunity for the group will only be great in the future,” he said.

Profitability

KCB’s current return on equity, a measure of profitability, is 27 percent, ranking it sixth out of Kenya’s nine listed lenders, according to data compiled by Bloomberg. The ratio may climb to 30 percent by December, he said, which would lift the bank to fourth, based on current data.

Kenya Commercial’s cost to income ratio target is 52 percent by the end of 2012 from 60 percent a year earlier. At the end of June, the ratio was 56 percent, Oigara said.

The lender expects demand for loans to increase in the second half of the year, after the central bank cut official interest rates from a record 18 percent, he said. Commercial bank lending rates, currently at about 20 percent, may fall to as low as 16 percent by the end of this year, he said.

The Central Bank of Kenya on July 5 reduced its benchmark interest rate for the first time in 18 months to 16.5 percent as inflation slowed after peaking at 19.7 percent in November. The bank’s Monetary Policy Committee may cut the benchmark rate further at its next meeting on Sept. 5, Oigara said.

Shares in KCB rose to their highest level in more than two months, trading 1 percent higher at 24.50 shillings by the 3 p.m. close in Nairobi. That’s the highest finish since May 17, according to data compiled by Bloomberg

The stock has advanced 45 percent so far this year, outperforming a 27 percent gain in the Nairobi Securities Exchange’s All Share index over the same period.

To contact the reporter on this story: Eric Ombok in Nairobi at eombok@bloomberg.net

To contact the editor responsible for this story: Paul Richardson at pmrichardson@bloomberg.net

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