Understanding HF Group’s 7.8% Profit Bump

HF Group Limited (HFCK) reported net profit for the nine months ended September 2016 rose 7.8% year-over-year (or YoY) to Ks837.7 million. Total revenue for the period was Ks3.5 billion.

But what backed HF Group’s gains in the latest nine months period? It turns out HF Group is another Kenya financial services company reaping the benefits of lending to the government. The mortgage financier significantly increased its buying of government bonds during the nine months period compared to a similar period last year. 

HF Group pumped Ks4.2 billion in government securities in the latest nine months period, indicating a sharp increase from Ks255 million invested in such securities in the comparable period in 2015. With that, the company’s income from lending to the government increased more than six-fold to Ks357.2 million. Interest revenue or the latest period increased 14% YoY to Ks3.1 billion. 

Growing appetite for government debt
Kenyan banks are in the race to lend to the government to boost their interest income following restrictions on interest rates they can charge on loans to customers. Besides the lucrative rates of lending the government, government securities also have limited default risk, making Treasury notes a safe investment for banks already battling soaring bad loans that have triggered the regulator to tighten loan loss provisioning requirements.
 

Kenya Commercial Banks (KCB) and Equity Group (EQTY) are two other lenders that have stepped up investment in government debt.

HF Group’s provisions for bad loans increased 17% YoY to Ks494.8 million in the latest period. The increase in loan provisions came at a time when the company reported a 36% uptick in non-performing loans.

Growing customer base
HF Group said it continues to gain customers as it expands to more Kenyan markets and leverage mobile technology to simplifying collecting of customer deposits and loan issuance. The company’s loan book expanded 8% to Ks53.9 billion in the latest nine months period.

HF Group stock eased 1.34% to close at Ks14.65 on Tuesday, November 22. The stock is down 34.16% year-to-date (or YTD) and down 38.32% over the last one year. HF Group has a market cap of Ks5.2 billion.