Bloomberg Ticker: FIBR <GO>
www.fib.co.ke
Co-operative Bank: Update Note
March 24, 2015
Analyst(s):
Bernard Kiarie
[email protected]
Head Office
Crawford Business Park, Ground Floor
State House Road
Tel: (254-20) 7606026
www.fib.co.ke
P.O Box 45236, 00100
Nairobi.
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DISCLAIMER: The information contained herein is obtained from sources, which to the best of our knowledge are deemed reliable. As
such, we are not responsible or liable for any factual errors arising thereof. Any opinions expressed herein are ours and are bound to
change anytime at no notice. This note is for information purposes only and does not constitute an offer for sale or purchase of any
security.
Co-Op: Update Note
Faida Investment Bank March 24, 2015
Summary
RECOMMENDATION: HOLD
Current Market Price
(24.03.15)
20.50
Trailing BVPS: FY2014
8.88
3-Year Average P/B
2.03
Forecasted BVPS: FY2015
10.90
Target Price
22.11
Upside Potential
7.9%
Source: NSE
Share Statistics
Issued Shares (Mn)
4,889
Market Cap (Kshs Mn)
100,231
Market Cap (USD Mn)
1,089.08
We revise our recommendation from BUY to HOLD based on our Target
Price of KES 22.11 (an upside potential of 7.9% from the prevailing
market price as at March 23, 2015). This is based on the abridged
FY2014 results, a 3-year historical average P/B and our FY2015
forecasts.
The bank’s next phase of growth is hinged on the ongoing
transformation strategy, dubbed the “soaring eagle transformation
project”. This strategy is expected to deliver operating efficiency and
unlock new growth opportunities (such as cross-selling). Management
targets a C/I ratio of 53.0% in FY2015.
The bank boasts of a branch network that covers the entire country (in
every county). With the wide branch network and the equally wide
distribution of agents, the bank expects to build a strong deposit
mobilization system. Management targets to grow the deposit base by
20%-25% FY2015.
Key FY2014 Results Highlights
Source: Company, NSE
Year to 31 Dec

Increased lending boosts interest income: Co-op recorded a
23.3% rise in interest income from loans and advances on the
back of a 30.9% growth in the loan book.

Restructuring costs, a one-off: During the period, the Bank laid
off 160 managers which resulted in a KES 1.3 billion one off
expense. Going forward, the bank expects an annual saving of
KES 500 million.

Lapse of the 5 year tax rebate by CMA: The 5 year period that
the bank had enjoyed following its listing at the Nairobi
Securities Exchange came to an end in FY2013.
2011A
2012A
2014A
2015F
5,332,779
7,723,857
1.53
1.84
2.17
8,014,998
11,849,913
1.64
2.42
6.0
7.0
8.7
8.9
10.9
P/E x
8.02
6.84
8.17
12.20
8.46*
P/B x
2.0
1.8
2.0
2.3
1.88*
ROaE
26.1%
30.7%
27.6%
20.0%
24.5%
ROA
3.3%
4.2%
4.2%
3.1%
3.7%
62.4%
55.4%
59.5%
59.0%
59.4%
Net Income (Kshs '000)
EPS (Kshs)
BVPS (Kshs)
C/I Ratio
2013A
9,108,186
*Forward multiple
Source: Company reports, FIB estimates
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Co-Op: Update Note
Faida Investment Bank March 24, 2015
Context: Industry Operating Environment
According to the Central Bank of Kenya (CBK) in the Credit Officer
Survey report 2014, the banking industry performed as follows:Key Item [KES Bn]
Interest income on loans
Interest expense on deposits
PBT (Unaudited)
Loan book (gross)
Customer deposits
Overall Balance Sheet
FY2013
211
72
124
1,600
1,980
2,730
FY2014
246
90
141
1,970
2,330
3,260
% Growth
16.3%
24.0%
13.5%
22.9%
17.7%
19.4%
The growth in the loan book was attributed to the transparency in the
pricing of loans (via introduction and use of the Kenya Bankers
Reference rate-KBRR) which to an extent contributed to the declining
cost of borrowing and increased investment opportunities driven by
relatively stable macro-economic environment.
The commercial bank lending rate was on a decline throughout the
year. The commercial banks’ weighted average lending rate declined
from 17.03% (January 2014) to 15.99% (December 2014).
The growth in customer deposits was boosted by rising interest rates on
deposits (by 26bps to 6.81%) as well as increasing financial inclusion to
the unbanked bankable population.
We also noted a focus by the industry on transactional income as
increased competition in the industry resulted in thinning net interest
margins. Additionally, banks dedicated resources towards the growth
of other non-traditional banking services such as bancassurance and
investment banking.
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Co-Op: Update Note
Faida Investment Bank March 24, 2015
Co-op’s FY2014 Results Highlights
FY2013
FY2014
%
Growth
24,541,725
29,352,011
19.6%
20,045,346
24,713,355
23.3%
4,126,061
4,331,262
5.0%
370,318
307,394
-17.0%
-
-
0.0%
5,915,815
8,076,153
36.5%
5,103,060
5,957,719
16.7%
Deposits & placements from banking inst.
146,220
215,306
47.2%
Other interest expenses
666,535
1,903,128
185.5%
18,625,910
21,275,858
14.2%
9,263,892
10,809,905
16.7%
Total Operating Income
27,889,802
32,085,763
15.0%
Operating Expenses
16,604,571
18,922,421
14.0%
Loan loss provision
PBT Before Exceptional Items
Exceptional item-restructuring costs
778,157
10,507,074
0
1,175,598
11,987,744
1,342,509
51.1%
14.1%
PAT
9,108,183
8,014,998
-12.0%
DPS
0.50
0.50
Net Funded income/total operating income
66.8%
66.3%
Non-Funded income/total operating income
33.2%
33.7%
C/I Ratio
59.5%
59.0%
Loans & advances to customers
137,087,227
179,486,355
30.9%
Customer deposits
175,425,121
217,698,323
24.1%
10,252,392
18,269,487
78.2%
79.0%
85.0%
ROaA
4.2%
3.1%
ROaE
27.2%
19.9%
Selected Items
Interest Income
Loans & advances
Government & trading securities
Deposits & placements with banking inst.
Other interest income
Interest Expenses
Customer deposits
Net Interest Income
Non-Interest Income
Borrowed funds
Loan/deposit
Co-operative Bank of Kenya recorded a 14.1% increase in profit
before taxes (PBT) from KES 10.5 billion (FY2013) to KES 12.0 billion
(FY2014).
 Increased lending boost interest income: Co-op recorded a 23.3%
rise in interest income from loans and advances on the back of a
30.9% growth in the loan book. The yield on loans declined from 14.6%
(FY2013) to 13.8% (FY2014). As a result, a higher risk appetite towards
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Co-Op: Update Note
Faida Investment Bank March 24, 2015
high
yielding
assets
(loans/deposits ratio up 4.3%)
resulted in the growth in interest
income on loans despite a
decline in yields.
 Higher growth in interest expense slightly negates the growth in
interest income: Interest expenses grew by 36.5% from KES 5.9 billion
(FY2013) to 8.1 billion (FY2014). This was mainly due to increases in
interest on borrowings (by KES 1.2 billion), customer deposits (by KES
855 million). The customer deposits increased by 42.3 billion while
borrowings increased by KES 8.0 billion during the period. In addition,
the cost of customer funds declined by 20bps to 2.7% while the cost of
borrowed funds increased by 390 bps.
 As a result, net interest up 14.2%: The combination of a 19.6%
growth in interest income and a 36.5% increase in interest expense
resulted in a 14.2% growth in net interest income. Consequently, net
interest margin dropped marginally from 10.8% to 10.07%.
 Status quo remained despite technologically enhanced
infrastructure: To determine the impact of the adoption of various
channels for delivery of banking services, we considered contribution
of non-funded income to total operating income. This depicted no
change as non-funded income was fairly flat at 33.7%. However,
management expects to grow this contribution from transactional
activities on the various channels.
 Restructuring costs, a one-off: During the period, the Bank laid off
160 managers which resulted in a KES 1.3 billion one off expense.
Adjusting the profit after tax for this one off would have resulted in a
2.7% growth in earnings. Going forward the bank expects to save at
least KES 500 million annually. The bank also intimated that it will be
taking some staff on training. This could slightly cancel out some of the
staff cost savings.
 Lapse of the 5 year tax rebate by CMA: The 5 year period that the
bank had enjoyed following its listing at the Nairobi Securities
Exchange came to an end in FY2013. As a result, FY2014 profits
experienced an additional 10.0% in tax expense.
 Increased lending: Co-op increased its lending appetite during the
period. The loan book grew by 30.9% to KES 137.1 billion. The
loan/deposit ratio increased from 79.0% to 85.0. The sectors that
showed a high appetite for loan uptake during the year included
lending to corporates and mortgage lending.
 Fairly healthy capital adequacy ratios, for now: The core
capital/TRWA dropped marginally from 15.7% (FY2013) to 14.6%
(FY2014), but still slightly higher than the statutory minimum
requirement of 10.5%. The bank recorded aggressive lending in FY2014
(loan/deposit ration from 79.0% to 85.0%, 30.9% growth in loan book
and 25.0% increase in TRWA). If the bank continues with this kind of
growth in risk weighted assets with minimal growth in earnings, we
expect dividend payout to remain at the same level or be slashed
going forward, or an injection of external capital.
5|Page
Co-Op: Update Note
Faida Investment Bank March 24, 2015
A New Strategy: “The Soaring Eagle Transformation Project”
In the last quarter of 2014, Co-operative Bank engaged Mckinsey and
Company to undertake a growth and efficiency review of the bank.
According to the Bank’s management, the review will focus on the
following:

Pursuing a customer centric model improving branch and
head office sales & productivity. Aggregation of banking
products and services per sales agent. Looking at cross-selling
opportunities.

Optimization of the investments made in the delivery channels
to generate more transaction income as well as improving
customer experience: Non-funded income was flat in FY2014.

Digitization of various processes for improved turnaround times
and efficiency. The bank targets to bring down cost/income
ratio to 53.0% in FY2015

Improved staff productivity and overall bank’s performance by
leveraging on the bank’s young and energetic and dynamic
human capital: 80% of staff under 35 years and 92% under 40
years.
Outlook
The bank bases the next phase of growth on the ongoing
transformation strategy, dubbed the “soaring eagle transformation
project”. This strategy is expected to deliver operating efficiency and
unlock new growth opportunities (such as cross-selling). Management
targets a C/I ratio of 53.0% in FY2015.
The bank boasts of a branch network that covers the entire country (in
every county). With the wide branch network and the equally wide
distribution of agents, the bank expects to build a strong deposit
mobilization system. Management targets to grow the deposit base by
20%-25% FY2015.
We revise our recommendation from BUY to HOLD based on our Target
Price of KES 22.11 (an upside potential of 7.9% from the prevailing
market price as at March 23, 2015). This is based on the abridged
FY2014 results, a 3-year historical average P/B and our FY2015
forecasts.
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