Co-op Bank has released its 9M 21 results, with EPS increasing 19% yoy to KES1.98. Revenue performance was positive on the back of stability in margins and positive non-interest revenue growth. Profit before provisions increased 26% yoy.
Earnings, though, were weighed down by increased operating costs, which pushed up the cost/income ratio above that of peers and increased loan loss provision charges. This is unlike the trend seen in Equity Group and KCB Group results, whose earnings were bolstered by falling cost of risk.
Net interest margin stability. The net interest margin in 9M 21 was 7.8% compared with 7.7% in H1 21, with minimal change in loan yields and cost of funds. For Q4 21, we expect little change in the net interest margin, as we do not expect the Central Bank of Kenya to increase the base rate. Loan and deposit growth were at 8%yoy and 12%yoy respectively.
Non-interest revenue growth of 16% yoy. Most of this growth was driven by trading income from securities held by the bank. Fee and commission income grew 9% yoy. We had anticipated stronger fee income performance following the lifting of the ban on digital transaction charges and the strong growth witnessed in transactions.
13% yoy increase in operating costs. This drove the cost/income ratio up to 49.4% in 9M 21, which is above peers, with KCB Group at 43.5% and Equity Group at 48.1%. The ratio has, however, improved from 9M 20’s 52.2%. Even then, Co-op Bank’s cost structure has not delivered the envisioned gains of the transformation project, which targeted a cost reduction. We, therefore, believe the bank is likely to struggle to break the 45% cost/income ratio target, unlike its peers.
50% increase in loan loss provision charges. This was matched by the 23% yoy increase in gross NPLs. Notably, however, relative to FY 20, gross NPLs have decreased (by 16%), leading us to believe the accelerated loan loss provision was to bump up coverage or cover for write-offs.
We retain our Hold recommendation
The bank is trading at a PB of 0.8x. We have a Hold recommendation on the stock for the following reasons:
Relative to its peers, Co-op Bank is falling behind on efficiency with a higher-than-peer-average cost/income ratio. While management has been promising significant improvements in cost/income ratio, the bank has continued to face cost pressure from increasing staff costs and other operating costs, especially technology.
In terms of monetisation of digital channels, the bank lags its peers in agility, efficiency and deployment of digital banking solutions. As such, although the contribution of non-interest revenue from alternative channels is increasing, the pace of growth is slower than we believe is reasonable for a bank with its retail market share.
The bank has traditionally performed better on asset quality than its peers but, in the past three years, its asset quality has declined to the point where it is similar to other Kenyan Tier 1 banks. We do not see a quick resolution to this and expect asset quality to remain within the peer range.