Co-operative Bank announced plans to buy a 100% stake in Jamii Bora Bank, a Tier 3 bank in Kenya. The bank did not disclose the price of the transaction. We view this as negative for the following reasons:
- Jamii Bora is a loss-making entity and hence not ROE-accretive. As at December 2018, Jamii Bora recorded a loss of KES383.4mn versus Co-op Bank's KES17.6bn profit.
- Jamii Bora will not elevate Co-op Bank’s market position. According to the Central Bank of Kenya, Jamii Bora has a market size index of 0.21% compared to 9.44% for Co-op Bank. We believe Co-op Bank is capable of increasing its own market share without buying a new bank.
- Jamii Bora has poor asset quality. As at Q1 18, the last available financials, Jamii Bora's NPL ratio was 22.4% compared with Co-op's 10.5% (as at Q3 19). Given the asset quality trajectory for the industry in 2018-2019, and Jamii Bora’s SME and Micro SME market segment, we expect Jamii Bora’s asset quality to have worsened. We expect continued weakness in asset quality in Kenya and we believe that at this point, it would be unwise for Co-op to inherit a poor-quality loan asset.
- Jamii Bora is undercapitalised with the bank operating on negative liquidity.
We believe Co-op may be viewing the Jamii Bora acquisition to boost its Micro and SME presence – Jamii Bora’s key clientele segment. Although Co-op has a fairly small SME loan book at 9% of total loans, we believe this is a market segment that Co-op can grow in without having to acquire Jamii Bora. We would instead consider a bank that would give Co-op a more significant additional market share as a better option – this would most likely be a Tier 2 bank.
We reiterate our view that Tier 1 banks have little-to-no opportunity to buy banks in Kenya. Most Tier 1 banks are present in nearly all market segments. Unless Tier 1 banks are buying Tier 2 banks that have significant market share and profitability to be considered ROE-accretive, Tier 3 banks don’t have much to offer. Tier 3 banks are struggling with liquidity, profitability, market share acquisition and capital adequacy – banks would have to acquire Tier 3 entities at very steep discounts. We believe Tier 1 banks should be looking instead for prime regional banks to acquire because: (i) Tier 1 banks already control 70.26% of the market size index (according to the Central Bank of Kenya); (ii) the proportion of adults in Kenya who hold financial accounts is greater than 80% (according to World Bank), which further reduces opportunity in the market.
Before Co-op's interest in Jamii Bora, earlier in 2019, Commercial Bank of Africa (now merged with NIC to form NCBA) had shown interest in buying Jamii Bora for KES1.4bn. This represented a PB of 0.4x at the time of announcement. However, after the merger in 2019, the new CEO of NCBA announced that the Jamii Bora transaction had been shelved.
We have a Buy on Co-op Bank with a target price of KES16.00. The bank has a large market share in the corporate and retail space, which function to accelerate asset growth. The bank is also investing in and monetising it’s alternative channels, which are now generating revenue. At the same time, the retail client base will provide room to expand net interest margin with continued increase in loan yields on newly issued loans.