Kenyan banks with regional operations saw their Ugandan subsidiaries return to the profit zone in the first quarter of this year as they reported double digit growth in earnings from their group operations.

Equity Bank and Kenya Commercial Bank (KCB) — which have been aggressive on the regional expansion drive — reported net profits of Sh200 million and Sh100 million from the subsidiaries respectively, led by their Ugandan operations.

Last year, the Ugandan operations ate into the earnings of Kenyan operations slowing down their profitability and dividend payment despite growing local earnings by more than half.

Equity Bank and KCB reported before tax losses of Sh400 million and Sh1.8 billion from the subsidiaries respectively last year.

“We note that group profits were higher than the bank’s profits mainly on account of the Uganda subsidiaries turning profitable at the end of 2010,” said Kestrel Capital in a note to investors in reference to the quarter one performance.

Last year, the Central Bank of Uganda reported that nearly half of the commercial banks reported losses in the nine months to September, attributing the performance to rising operating expenses amid flat income from lending.

Equity, which saw its quarter one profits rise 86 per cent to Sh2.3 billion, appears to have made the biggest turnaround.

The bank has been struggling with the Ugandan unit since it bought Uganda Micro-Finance Limited for Sh1.7 billion in June 2008 and last year the subsidiary sank deeper into losses of Sh769 million compared to a loss of Sh266 million.

This reduced its group profits to Sh8.9 billion compared to Sh9.3 billion for the bank (Kenyan unit).

But the bank turned the corner in the first three months of 2011 as its group performance stood at Sh2.3 billion compared to the banks Sh2.1 billion — which means its subsidiaries turned a profit of Sh100 million.

Its returned a loss of Sh400 million in a similar quarter last year because of the underperformance of the Ugandan unit since its South Sudan subsidiary was on the profit zone.

This performance along with the fact that the bank has overtaken KCB in the profit front is set to excite shareholders at the Nairobi Stock Exchange where its share has gained 69 per cent to settle at Sh27.50.

KCB’s net profit for the quarter stood at Sh1.7 billion and analysts say Equity low cost to income ratio helped to outperform its peers that have been battling with rising overheads, led by employee costs.

It also grew its income from commissions and lending since its loan book grew from Sh66.1 billion in March last year to Sh86.1 growing net interest income 35 per cent to Sh3.5 billion.

“Equity Bank cost efficiencies improved significantly with a cost to income of 45.3 per cent compared to 54.7 per cent in quarter four of 2010  and 53.4 per cent in quarter one 2010,” said Kestrel Capital, attributing it to its minimal growth expansion.