Earnings Report /
Kenya

Cooperative Bank: Q2 20 – Better-than-expected results but profits decline; still a Buy

  • Waiver on mobile transaction fees impacts Co-op Bank whose most common transaction is mobile to e-wallet

  • Operating costs impacted by Covid-19 and recent hires, but management expects FY 20 to trend with inflation

  • Reiterate Buy; Co-op trades at a current PB of 0.8x vs Q2 20 ROE of 17.8%, which we consider an attractive discount

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

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Tellimer Research
14 August 2020
Published byTellimer Research

Co-op Bank released Q2 20 results with EPS decreasing by 7% yoy to KES0.62. On a cumulative H1 20 basis, EPS decreased by 4% yoy to KES1.23. Although the bank's performance was better than expected, the results were still poor as we see the decline in profit as negative. The poor results were on the back of higher operating expenses following elevated staff costs and higher loan loss provision charge (+42% yoy) with gross NPLs increasing by 12% yoy. Unlike KCB, Co-op Bank’s Q2 20 tax charge decreased to 19% from 27% in Q2 19, which boosted earnings somewhat, albeit still negative. Meanwhile, net interest income increased by 15% yoy underpinned by good balance sheet growth and an uptick in net interest margin following a decline in cost of funds.

Co-op Bank is trading on a current PB of 0.8x against a Q2 20 ROE of 17.8% and H1 20 ROE of 18.1%. We view this as still an attractive entry point for the bank. Even then, we prefer KCB as our top pick. Co-op Bank is still catching up to peers on cost management and generating fees and commission income from its alternative channels.

Key positives:

  1. Net interest margin increased to 8.1% in Q2 20 from 7.9% in Q2 19. Notably, despite the falling loan yields, the bank’s cost of funds declined to 2.6% in Q2 20 from 3.2% in Q2 19. The bank recorded a 19% yoy growth in deposits, which we believe was fuelled by its large retail network. Additionally, we believe the bank may have also wound down some expensive term deposits as it usually does in low growth periods.

  2. Income from associates increased to KES68mn up from KES7mn. We believe this was largely on account of the South Sudan business where the bank mainly earns FX income. Its other associate, CIC Insurance, made a loss in H1 20. Co-op Bank also launched an associate leasing business in 2019, but we do not believe this was a large contributor to the associate income.

Key negatives:

  1. Non-interest revenue increased by 27% yoy. Fees and commission income decreased by 35% yoy. The bank’s mobile banking channel is less advanced than those of KCB and Equity Group both in scale and profitability. The most common transactions remain bank to e-wallet transactions whose charges were waived for 2020 by the Central Bank of Kenya. We expect fees and commission income to recover in 2021 when the waiver is potentially lifted. Also, the recent uptick in transaction volumes is likely to support fees and commission income even as the bank focuses on pushing out more products on its mobile banking platform.

  2. Operating expenses increased by 8% yoy. The bank hired new technical staff, which resulted in staff costs increasing by 7% yoy. Management expects staff cost growth to be 8% yoy in FY 20 with the bank no longer hiring new staff. Other operating expenses increased by 10% yoy reflecting the Covid-19 related expenses that management had expected for Q2 20. Going forward, management expects other operating costs to be flat for FY 20.

  3. Loan loss provisions increased by 42% yoy. This was on the back of a 12% yoy increase in gross NPLs. We consider this to be a modest increase in provisions and had expected a steeper increase in cost of risk. As at Q1 20, the bank had not factored in any Covid-19 impact. Relative to the rest of the sector, Co-op Bank had the lowest restructured loans in Q1 20 at 6% of its loan book.

Risks:

  • Continued decline in the central bank rate would impact margins negatively.

  • Protracted Covid-19 impact on business operations.