Earnings Report /

Cooperative Bank: Weak Q1 earnings on higher loan loss provision, poor regional unit performance

  • Cost of risk rises to 1.4% on weak manufacturing book; coverage now at 54.8% but we believe 70% would be more adequate

  • South Sudan PBT declines 29% yoy; the country is Co-op's Achilles heel with unpredictable performance

  • Still a Buy – Co-op trades at a current PB of 0.9x vs Q1 20 ROE of 17.8%, which we consider an attractive discount

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
21 May 2020
Published byTellimer Research

Co-op Bank (Buy, TP KES16.00) released weak Q1 20 results with EPS flat at KES0.61. The bank's weak earnings were due to higher operating expenses, which we believe came from hiring skilled technology staff. Cost of risk rose to 1.4% with the bank’s manufacturing book showing continued asset quality weakness (NPL ratio was 77% compared with 46% in Q1 19). The bank’s associates also recorded a loss of KES121bn compared to PBT of KES20bn in Q1 19, with South Sudan PBT falling by 29% yoy. Balance sheet growth was strong with loans and deposits rising 10% yoy and 7% yoy, respectively. This tempered the impact of lower net interest margin (7.5% in Q1 20 vs. 7.7% in Q1 19) following cuts in the central bank rate on which loan yields of loans issued prior to November 2019 are based (loans issued under the rate cap had their yields tagged to the central bank rate). The bank is still doing its due diligence on the Jamii Bora acquisition, which in our view is not a value-accretive acquisition.

Co-op Bank is trading at a current PB of 0.9x against a Q1 20 ROE of 17.8%. Though we consider this an attractive entry point for investors, KCB is still our top pick. We remain concerned about management's ability to reign in costs and we foresee the need to write off part of the NPLs in the manufacturing book as these have remained uncollectable despite management's reassurance. 


  • We expect continued weakening of the asset quality and anaemic balance sheet growth due to Covid-19 related impact.
  • We expect the cost of risk to remain elevated. Management has been expecting to recover loans from the bank's manufacturing book, which has been a consistent client. However, with the recent Covid-19 outbreak, we believe the chances of recovering these loans have significantly declined and hence we expect either higher provision or a write-off on the manufacturing book. 
  • Although we expect slower growth in fees and commission due to the recent removal of fees  on bank to M-Pesa transactions, we expect Co-op Bank’s growing mobile lending product to support fees growth. The bank is still trailing behind local peers on adapting mobile lending, but we believe there is room for growth within its client base.

Key positives:

  • Non-interest revenue grew 19% yoy mainly from increased fees and commission income from mobile banking channels where revenue jumped by 120% yoy. Mobile banking clients have close to doubled in the last year with transactions rising 60% yoy. The strong growth in mobile banking cannibalised agency banking, which recorded a 5% yoy drop in revenue. We are not concerned about this as we believe the bank still has a long way to go on product offering, client adaptation and technology improvement to enhance its mobile banking arm. We believe this will more than make up for the loss in revenue from agency banking. 
  • High balance sheet growth with loans and deposits up 10% yoy and 7% yoy, respectively. Notably, the loan book growth was driven by the personal household segment, which accounts for 41% of the loan book compared to 36% in Q1 19. We expect much more muted growth going forward on account of Covid-19 impact, which has so far resulted in 5% of job losses in the formal sector and negatively impacted 58% of jobs in the informal sector.

Key negatives:

  • Rise in cost of risk to 1.4% from 0.8%. The bank's NPL ratio recorded a slight improvement to 9.5% in Q1 20 from 10.0% in Q1 19. The manufacturing segment recorded significant weakening, which we believe warranted the additional loan loss provisionIFRS coverage level, however, improved to 54.8% from 52.2% in Q1 19. We believe with the continued asset quality weakness, the bank should be targeting a minimum of 70% coverage levels. 
  • Operating expenses grew by 15% yoy with cost/income ratio rising to 50.9% from 49.7%. Staff costs grew 25% yoy, which we believe was related to technology hires. Going forward, the bank is still likely spend more on technology as it lags peers onsystems upgrade. As such, we don’t expect much of a decline in cost/income ratio in the future. 
  • Regional units and associates record poor performance. South Sudan PBT fell by 29% yoy on weaker balance sheet growth and currency losses. South Sudan remains a weakness for the bank with performance expected to remain unpredictable. Associates (of which the key one is CIC Insurance with 35.71% shareholding) recorded a loss of KES121bn from a profit of KES20bn in Q1 19. This is unlikely to improve with the insurance market continuing to face fraud and high claims rates.


  • Continued decline in the central bank rate would impact margins negatively.
  • Protracted Covid-19 impact on business operations.
  • Locusts infestation will increase risk of food shortages.
  • Continued floods from heavy rainfall will impact harvests.