Co-operative Bank of Kenya announced 1Q17 numbers marking a 6.0 percent y/y decline in EPS to KES 0.66. The numbers were weaker than their peer bank, KCB.
Disappointingly, there was notable weakness on both Net Interest Income (NII) and Non-Interest Revenue (NIR) as they declined 1.6 percent y/y and 2.2 percent y/y respectively.
Some of the positives that emerged from the results were as follows:
- Modest cost growth, total OPEX up 4.7 percent y/y.The main cost element was staff costs which ticked up 6.8 percent y/y with other operating costs rising 4.1 percent y/y. Overall, the bank remains keen on improving efficiency with 88 percent of transactions now taking place on alternative channels. As there are no immediate cost pressures, we do not expect a significant uptick in CTI going forward (1Q17 it stood at 47.9 percent from 45 percent in 1Q16). Management’s FY17 target CTI is at 50 percent, whose attainment we believe will be tied to shielding the bank from further income decline.
- Non-Performing Loans (NPL) levels remained stable q/q. NPL ratio stood at 4.6 percent from 4.8 percent in 4Q16 and 4.0 percent in 1Q16. Overall this remains below the overall sector average of 9.3 percent as at October 2016. We are happy with Co-op Bank’s management in keeping a stable NPL ratio when the sector is facing significant loan book quality decline. We expect management to remain within its FY17 target of 4.5 percent. Loan loss provision was up 20 percent y/y. Management is keeping in line with historical coverage levels of about 50 percent and we are yet to see indication of additional aggressive provisioning.
However, there were some negatives:
- Net Interest Margin (NIM) erosion to 8.5 percent.This is down from 9.3 percent in 4Q16. The bank’s management remains the most aggressive and optimistic of the management bodies we have met. Backing this, advances and deposits grew 15.0 percent y/y (+3.8 percent q/q) and 6.9 percent y/y (+7.6 percent q/q) respectively. Though there was notable decline in Cost of Funds to 3.7 percent from 3.9 percent in 4Q16 and 5.4 percent in 1Q16, our key worry is erosion of loan WAIR to 12.7 percent from 13.9 percent in 4Q16 and 15.7 percent in 1Q16. In our view, the aggressive strategy will continue to weaken NIM making attainment of the management FY17 target of 9.5 percent a tall order. Notably, the bank was lending more to the corporate sector and shedding from more risky segments. With only a small pool of clients fitting the 14 percent risk pricing, competitive pressure is expected to be a key player in cutting NIM further.
- NIR declined 2.2 percent y/y.This was after other income shed 52.3 percent y/y on account of reduced write-backs in 1Q17. FOREX income grew 12.5 percent y/y despite South Sudan’s contribution falling to just 5 percent after historically being a key contributor. Management expects South Sudan business to remain slow in 2017 given hyperinflation and tough operating business environment. NIR to total income stood at 33.6 percent – in line with management’s FY17 target of 34 percent.