Q1 19 EPS rose by 4% yoy to KES0.61 (2% below our estimates). Non-funded income increased by 19% yoy, supported by strong fee income growth. Although Co-op trails peers on technology, the bank has been focusing on continued digitalisation and has phased out free services on alternative channels. Loan book growth was flat while deposit growth came in at 7% yoy. ROE stood at 20.2% versus our estimates of 20.6%. Overall, PBT growth of 4% yoy is currently trailing management’s FY 19 target of 12% yoy.
We upgrade Co-op Bank to Buy on recent price weakness. Our target price remains unchanged at KES16.00 (ETR 36%). The bank is trading at 2019f PB of 0.9x and PE of 5.4x. We think the valuation is discounted especially given the 20.2% ROE in Q1 19. Even with the discount, investors may punish the stock due to weakened asset quality. Among Kenya banks, KCB remains our top pick. Still, Co-op Bank has a strong retail network, strong corporate market share and is continually upgrading its technology platforms to catch up with peers.
Weak earnings miss management’s forecasts. Co-op’s PBT, loan book and deposits were 4%, 0% and 7% yoy, respectively versus management targets of 12%, 11% and 10% yoy, respectively for FY 19. Our forecasts are lower than management’s for FY 19 and we expect PBT, loans and deposits to grow 7%, 8% and 9% yoy, respectively. We still believe that the weakening macro-economic environment and asset quality do not support strong loan book growth. Management, however, sees some lending opportunity in manufacturing and the corporate segment in general.
NPL ratio fell 20bps qoq to 11.0%. This is still much higher than the 9.0% target that management has for FY 19 and our 8.1% target. Management has been looking to make a recovery from a major client in the manufacturing sector (46.0% NPL ratio), but we believe this will likely only be seen in Q4 19 (or later) as there is still little credit flow in the market to support the manufacturing business. The government is also yet to start key spending in manufacturing as part of its strategy for the year.