Co-operative Bank Records 33.6 Percent y/y PAT Growth

Co-operative Bank (Co-op Bank) announced 9M15 results, recording 33.6% y/y PAT growth to KES 8.6bn. Below please find key highlights:

Key Pointers

Net Interest Income recorded 15.6% y/y growth as interest expense grew at a faster rate relative to interest income: Co-op Bank’s interest income grew 24.4% y/y, primarily driven by 25.5% y/y growth in interest from loans and advances, which accounted for 82.3% of total interest income.

Interest earned from government securities also recorded 16.0% y/y propped by the hike in government yields in 2H15. Interest expenses were up 47.4% y/y with interest accruing from customer deposits increasing 53.9% y/y, as Co-op Bank revised deposit rates upwards to attract deposits. This saw annualized Net Interest Margins shed 55 bps y/y to 9.4%, as cost of funds increased at a faster rate (+68bps y/y) than the yield on interest earning assets (+13bps y/y).

Non-interest income recorded was up +9.5% y/y, as fees and commission income recorded modest growth (+4.3% y/y). Forex income however grew 59.6% y/y impelled by the volatility of the KES against major currencies, evidenced by 12% year to date depreciation of the KES against the USD.

Cost containment measures implemented following the McKinsey strategy recommendations begin to yield results, with the bank recording 4.5% y/y decline in operating expenses. This translated to a 920bps y/y improvement in the Cost-to-Income ratio to 49.0% in 9M15, hence a 38.4% y/y growth in operating profit.

The bank’s loan loss provision increased 103.1% y/y to see NPL coverage ratio improve 918 bps y/y to 40.4%. While the coverage ratio remains low in relative terms (tier I avg. of , we believe cost savings from operations will continue to be redirected to loan loss provisions, progressively improving coverage going forward.

Balance Sheet continues to record sturdy growth (+23.0% y/y), with (net) customer loans and advances recording 20.7% y/y growth. Customer deposits similarly recorded an impressive 26.5% y/y growth to see the loans/ deposits ratio shed 403bps y/y to 83.8%. Loan book quality improved y/y, evidenced by 33bps y/y decline in NPL ratio to 4.0% in the 9 months to September 2015, (relative to a tier I bank avg. NPL ratio of 5.4%) despite the interest rate hike, as gross NPLs rose at a slower rate (+11.0% y/y) relative to gross loans (+20.2% y/y).

Capital adequacy remains sufficient, with core capital/total risk weighted asset ratio shedding 30bps y/y to 14.2%. This remains well above the statutory 10.5% ratio. Total capital/total risk weighted assets improved by 120bps y/y to 22.4%, as Co-op Bank’s borrowed funds recorded 6.5% y/y increase.

Going forward, we expect sturdy bottom line growth from Co-op Bank, driven by strong loan book growth and further cost management benefit from increased operational efficiencies. We note that Co-op Bank’s annualized Return on Equity and Return on Assets have noted 309bps and 34bps y/y increase to 23.1% and 3.5% respectively. Additionally, Co-op Bank is set to receive USD 105.0m from the IFC to boost lending
to the SME space.

Recommendation: Based on trailing P/E and P/B ratios of 6.9x and 1.4x relative to a tier I bank average of 7.5x and 1.7x, Co-op Bank appears attractive from both a valuation and growth point of view. We therefore issue an Accumulate (Buy on price dips) on Co-op Bank