RenCap on Co-op Bank H1 2012 Results
Wednesday, 12 September 2012
Co-operative Bank of Kenya (Co-op) has released 1H12 interims. The bank reported net earnings of KES4.1bn, representing growth of 22% YoY. Its 34% RoE was the highest for 1H12 in the Kenyan banking sector.

Key Takeaways
Net loans were up 3% YtD, implying a 1% dip in 2Q12. This compares with 9% and 2% YtD growth at Equity Bank (BUY, TP KES27.9, current price KES22.3) and Kenya Commercial Bank (BUY, TP KES27.2, current price KES26.3), respectively. The Group’s NPL ratio rose to 5.1% from 4.6% in FY11, with the coverage ratio dropping slightly to 64% from 67% in FY11. Deposit growth was slow at 2% YtD, which management attributes to the impact of high interest rates.

On our numbers, the NIM continued to improve, and now stands at 10.1% from 8.5% in FY11, as asset margin expansion more than offset the spike in Co-op’s cost of funds. Total income rose 22% YoY and 4% QoQ to KES11.4bn. The cost of risk rose by 24% YoY to KES498mn, while the annualised cost-of-risk ratio was flat at 0.9% versus 1H11 and 1Q12. Operating costs rose 25% YoY to KES6.1bn and 3% QoQ, with the cost/income ratio improving to 53% from 54% in 1Q12 and 62% in FY11. Co-op reported anRoA of 4.7% and an RoE of 34.0%, versus 3.3% and 25.6%, respectively, in FY11.

What We Liked and Didn’t Like

  • Good NIM improvement coming through;
  • Continued expansion of the retail footprint via branches and agents (13 new branches have been opened this year, with the number of agents rising to 3,500 [2,000 this year]); and
  • Improving profitability, giving Co-op the highest RoE versus its key peers in 1H12.
  • Rising NPLs, driven by legacy issues and the impact of high interest rates on the personal loan book (40% of gross loans).
It has been a year of slow growth for Co-op, with management taking measured steps on both the asset and liability sides given the high-interest-rate environment that prevailed during 1H12. Nonetheless, growth is still very much on management’s radar, and there are plans to raise additional tier 1 capital within a 12-month window. Co-op trades on 2012E P/E and P/B of 5.4x and 1.5x, versus key peer averages of 6.4x and 1.7x. We have revised our forecasts and revised our rating to BUY from Hold, with a TP of KES15.8 (prev. KES15.1). The share price is down 11% since 24 January, and our TP now implies 36% potential upside.

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