Earnings Report /

Cooperative Bank: Management targets held back by loan book; reiterate Buy on price weakness

    Faith Mwangi
    Faith Mwangi

    Equity Research Analyst, Financials (East Africa)

    Tellimer Research
    30 August 2019
    Published by

    Co-op Bank recorded a 5% yoy increase in H1 19 EPS to KES1.27. On a quarterly basis, Q2 19 EPS rose by 5% to KES0.66, just 1% below our expectations. Key highlights include a 31% yoy jump in non-interest revenue, mainly on increased fees and commission income. Performance was negatively impacted by a 106% yoy jump in loan loss provision charge, with NPL ratio rising 10bps qoq. Unlike Tier 1 peers, Co-op recorded a low balance sheet growth with 3% yoy growth in loans and 9% yoy in deposits. The bank saw a slight 20bps lift in margins, following a decline in cost of funds. Q2 19 ROE was 21.5%, lower than our projected 21.8%.

    Reiterate Buy on continued price weakness. Our target price remains unchanged at KES16.00 (ETR 47%). The bank is trading at a 2019f PB of 0.8x and a PE of 5.0x. KCB is still our top pick in Kenya. Co-op has a strong retail and corporate network. However, the bank’s current market price remains under pressure relative to its local peers given that the bank is still playing catch up on management agility and technology adoption. Additionally, the bank’s asset quality has weakened significantly eroding its historical advantage of better-than-peer asset quality.

    2019 management targets held back by loan book growth. Co-op management targets a 2019 PBT growth of 11%. So far, the bank is on track to meet its cost/income ratio (50%), non-funded income contribution (38%) and NPL ratio (9%) targets. However, with lower-than-expected balance sheet growth, Co-op will need to lend a lot more aggressively in H2 19 to meet its 11% yoy loan growth target for 2019. In our view, the bank has a wide corporate and retail network client base to extend credit and we see this as achievable given the pent-up credit demand in the market. However, if management opts for this, then asset quality is unlikely to record significant improvements.

    Asset quality improves, but manufacturing credit quality still weak. Management had intended to resolve some manufacturing-related NPLs in H1 19. However, with the continued decline in the economic environment for manufacturers, we don’t expect a resolution this year.