Cooperative Bank: Low Q1 earnings from unexpected loan loss provisions; reiterate Hold

  • Performance is largely in line with management targets, which painted a pessimistic outlook for 2021
  • Non-interest revenue is falling behind expectations, with fee and commission income yet to recover
  • We retain our Hold recommendation, in light of concerns about the bank's asset quality and cost structure

Co-op Bank has released its Q1 results, showing EPS declined 4% yoy to KES0.59. The results are disappointing in our view, and were mainly driven by higher loan loss provision charges (+154% yoy). The latter, though, was in line with management expectations, which had forecast a cost of risk of c2.5-3.0% in FY 21.

On the positive side, pre-provision profit was strong, growing 20% yoy, driven by an increase in net interest margins. However, the bank’s non-interest revenue declined 9% yoy as fee and commission income remained underwhelming. Overall, Co-op's Q1 earnings are lower than the industry level, with overall Q1 21 PBT for Kenyan banks rising by 20% yoy.

Management outlook on track so far

Higher net interest margin

On higher loan yields, the bank’s net interest margins increased to 8.3% in Q1 21 from 7.5% in Q1 20. This is still lower than the management target of 8.9% in FY 21. It remains unclear how loan yields will evolve in the remaining quarters as the Central Bank of Kenya (CBK) has yet to approve the loan pricing models. However, Co-op Bank is, thus far, within management's expected loan yields of above 11.5%, albeit slightly short of the 10% yoy estimated loan book growth. Loan book growth in Q1 21 was 8% yoy.

Overall, the 8.9% net interest margin management target remains rather aggressive in our view. To achieve it, the bank must either record strong loan book growth this year – which we believe will be difficult, given the subdued economic environment – or significantly cut its cost of funds, which in our view is already reasonably low, at 3.2%.

High cost of risk

Management had set a cost of risk target of 2.5-3.0% in FY 21, despite expecting non-performing loans to decline in FY 21. As at end-Q1, NPLs had declined 12% qoq. Loan loss provision charges, however, grew 154% yoy.

In our view, management may be trying to increase coverage levels in general from the current level of c60%. This would compensate for the weaker asset quality (compared with historical asset quality levels).

Turnaround of Kingdom Bank (formerly Jamii Bora Bank)

In our view, tier 3 Kingdom Bank was an unnecessary investment for Co-op. Kingdom Bank posted a profit of KES126mn in Q1, equivalent to c4% of total Co-op Bank Group profit. We believe management still has a long way to go to deal with Kingdom Bank's weak asset quality, and its inefficient cost structure.

ROA and ROE targets of 2% and 12%, respectively, in FY 21

Co-op Bank recorded Q1 ROA and ROE of 2.5% and 15%, respectively – well above the set management targets for FY 21. In our view, the threats to these levels being maintained remain the bank's unpredictably high cost structure and continued aggression on loan loss provision charges.

Non-interest revenue falling behind management target

Non-interest revenue fell 9% yoy on account of a 16% yoy fall in fee and commission income. Management targets 33% yoy growth in non-interest revenue banking on an uplift in transaction income from digital channels. For this to be achieved, the bank will need to focus on increasing the volume of chargeable transactions to deliver reasonable revenue growth.

We retain a Hold on Co-op Bank; target price KES16.00

Given the weak Q1 performance, we retain our Hold recommendation on the bank. We also remain concerned about Co-op's asset quality and erratic cost structure, which has been notorious for eroding revenue gains in the recent past.


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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

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