Earnings Report /

Cooperative Bank: Higher non-interest revenue driven by mobile banking

  • Mobile lending platform delivers strong revenue on higher customer numbers and loan disbursement

  • 12% yoy rise in EPS to KES2.45 in FY 19, higher than our expectation of KES2.30

  • Reiterate Buy with a target price of KES16.00

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
19 March 2020
Published byTellimer Research

Co-op Bank (Buy, TP: KES16.00) released its FY 19 results, marking a 12% yoy rise in EPS to KES2.45. This was higher than our expectation of KES2.30. The outperformance came on the back of higher-than-expected non-interest revenue, driven by a jump in fees and commission income (+45% yoy). This is positive and we expect the bank’s mobile credit products, which are gaining traction, to continue delivering strong growth. 

Even though the Kenyan government has sought to cut fees charged on mobile banking channels, we think this will only have a slightly negative impact on the bank as its lending products have been (i) recording stronger growth over the past two years and continuously accruing higher income and, (ii) gaining traction over the bank-to-M-Pesa transactions. The loan loss provision (+18% yoy) was lower than we expected with the bank recording a lower-than-expected NPL ratio of 9.9%. The improvement was on account of a larger gross loans book; actual gross NPLs rose 15% yoy. We expect continued weakness into 2020f from the impact of the coronavirus.

Co-op bank is trading at a 2020f PB of 0.8x and PE of 5.1x. We consider this a discount given the 19.3% ROE in FY 19. We believe the bank will be able to deliver higher margins from its large retail book and will continue to deliver high fee income growth from its mobile loans platform. 

We remain concerned about the bank’s planned acquisition of Jamii Bora Bank, which we see as negative. Jamii Bora is undercapitalised, not profitable and has minimal market share, and hence would not add much value to Co-op Bank overall. The price of this transaction is yet to be disclosed. 


  • Increase in net interest margin from the current 8.4% will be supported by continued lending to higher-yielding SMEs and retail book, which accounts for 44% of Co-op Bank’s total loan book.
  • Lending products will continue to drive non-interest revenue. The bank has been playing catch up with local Tier 1 banks and now has 89% of transactions taking place on alternative channels. We expect the continued monetisation of these transactions to be the key focus for the bank going forward.
  • We expect the bank’s asset quality to remain under pressure. The bank has indicated it was targeting a recovery from a large client in the manufacturing sector in Q4 19, but the numbers suggest it did not take place. We may see the recovery in Q1 20. Meanwhile, the manufacturing sector NPL ratio for Co-op Bank is 74% and the contribution to total NPL book is 16%. 
  • On a general economic level, we expect NPL pressure to continue being driven by the real estate, building and construction sector, which accounts for 17% of the bank’s total NPLs. The government recently opted to allow banks to extend repayment periods for personal loans, which we believe will soften the impact of the economic slowdown. Co-op Bank's retail loans accounts for 35% of its total loan book.
  • South Sudan remains a negative pressure point for the bank with the country still struggling with stability. A positive turn in the country’s economy, however, would result in robust FX income for Co-op Bank. 


  • Non-funded income grew by 40% yoy. The bulk of this was driven by fees and commission income (+45% yoy). 
  • The bank’s mobile banking channel recorded a 36% yoy increase in transactions. 
  • Similar to KCB, Co-op Bank had a strong year on its mobile lending platform with customers rising to 4,127 from 1,389 in FY 18, which boosted the loans advanced to KES63bn from KES20bn. 
  • We believe there is room for growth for mobile lending as banks continue to use data to expand the lending limits available. Currently, these loans serve the micro lending market and are popular for its accessibility. 


  • Gross NPLs increased 15% yoy and we do not see any reprieve in sight. Cost of risk was 1.0%, but given the prevailing weak asset quality conditions, we expect this to trend higher in coming years. 
  • Operating expenses grew 6% yoy though cost/income ratio fell to 52.1% on higher income. This is higher than its local Tier 1 peer average, which is below 50%. Though the improvement is notable, the bank is lagging behind peers on technology adaptation and management agility, and we believe this will hinder the bank’s ability to catch up with its peers on cost/income ratio. 


Management is concerned about the impact of Covid-19 on the economy.