* Strong economic growth, demand for credit buoys bank
* CEO says to expand to Rwanda, Tanzania by early 2011
* Plans to increase loan book from mortgages, small firms
(Adds CEO quotes, details)
By Helen Nyambura-Mwaura
NAIROBI, Oct 26 (Reuters) - Kenya's Equity Bank reported surging nine-monthly profit, driven by strong economic activity in the country, and said it planned to expand its services to Rwanda and Tanzania by next year.
Chief Executive James Mwangi said the bank, which is fifth largest by assets in the country, was buoyed by higher interest income, commissions, and lower costs.
"We are now operating in an environment that is stable and that reflects the performance. We are seeing very good economic growth, we are seeing growth in credit," he told investors.
East Africa's biggest economy is expected to grow by at least 4.5 percent this year from 2.6 percent in 2009.
The bank's profit before tax rose 53 percent to 6.53 billion shillings ($81 million) for the first nine months, while net interest income rose by the same margin to 11.98 billion.
Equity's shares -- one of the most frequently traded stock at the Nairobi Stock Exchange -- traded at 26.75 shillings each at 0747 GMT, higher than Monday's close of 26.50 shillings.
"The profit before tax is very lucrative. I would bet on it and with foreigners backing the stock, it (the share price) should go above 30 shillings," said Sheema Shah, an equities dealer with Dyer and Blair Investment Bank.
Mwangi said the group, a former building society which focuses on attracting lots of customers with small deposits previously ignored by big banks, would expand into Rwanda and Tanzania by the first quarter, after stabilising the performance of its struggling Uganda unit.
Some 3 percent of gross profit, or 300 million shillings, came from Equity's south Sudan subsidiary. The bank had invested 500 million shillings in that venture, Mwangi said.
The bank's strategy includes cutting of costs through further roll-outs of mobile banking and agency banking, automation and more lending to small and medium enterprises (SMEs) and mortgages.
HIGHER LENDING
The bank's loan book grew by 22 percent to nearly 70 billion shillings but Mwangi said the expansion was slower than the rise in deposits, which were up by more than a third to 91.3 billion shillings. Only half of that was being translated into loans.
The bank has a liquidity ratio of 51 percent, compared with a requirement of 20 percent and Mwangi said 24 percent of Equity's total funding had been invested in bonds.
"We don't want to see more money going into bonds but to SMEs. If SMEs can't take that, then we want to go into the mortgage space," Mwangi said. The bank has a stake in one of Kenya's biggest mortgage providers, Housing Finance.
Non performing loans fell by 20 percent to 3.57 billion shillings and the cost to income ratio dropped to 61 over the period from 63 in the previous period.
The bank now has 5.7 million customers, or 57 percent of all bank accounts in Kenya, largely driven by its mobile banking product with leading telecoms operator Safaricom known as M-kesho. The service now has 700,000 customers.
"M-kesho seems to have really activated that growth."
He said an earlier forecast of a million M-kesho customers by the year's end would be surpassed and the bank would use the product, together with agent banking, to cut banking costs by at least 80 percent. ($1=80.60 Kenyan Shilling) (Editing by Jon Loades-Carter)