Is COOP Bank’s Profitability Sustainable?

Co-operative Bank of Kenya (COOP) announced that its net profit for the nine months ending September 2016 rose 22.3% YoY to Ks10.5 billion. When the news entered the market, investors pushed up COOP Bank stock to Ks14.50 a share on November 17, making the stock the top gainer on the Nairobi Securities Exchange (NSE). 

For your information, COOP Bank stock is up 15.5% over the last one month, down 19.7% so far this year and down 19.67% over the last one year.

Talk about COOP Bank profits
The 22.3% profit growth for the nine months comes on the heels of a 19% profit growth to Ks7.41 billion for the six months ending June 2016. Profit for the period ending March 2016 also rose over a similar period last year. But is COOP Bank’s profitability sustainable?

COOP Bank has embarked on an efficiency drive under a program internally dubbed “Soaring Eagle” where the company is modernizing its operations and automating processes. In an investor update, COOP Bank CEO Gideon Muriuki recently said “Soaring Eagle” plan has produced impressive results, especially helping in cost curtailment.

If COOP Bank can trim its operating costs further through modernization and automation of its systems, profit sustainability should be a long-term reality at the company. COOP Bank reported operating expenses of Ks17.2 billion for the latest nine months compared with Ks14.6 billion for the prior nine months.
 

Operating costs are a major issue at COOP Bank. But with the company only two years into its “Soaring Eagle” program, there seems to be more room to continue cutting weight until operating expenses can drop lower.  The company said it has so far managed to lower its cost-to-income ratio to 47% from 62% since it started working on its efficiency plan in September 2014.
 

Automation should also reduce the need for more physical bank branches, which should in turn lead to more rental expense savings. COOP Bank’s rental charges came to Ks1.07 billion in the nine months ending September 2016, indicating an uptick from Ks1.01 in the nine months ending September 2015.
 

Besides whittling down costs, automation at COOP Bank is also freeing more time for staff to pursue sales leads and that should boost revenue. As COOP Bank lowers operating expenses and grow revenue in the process, profit margins should improve and in turn lift earnings.

Total revenue for the nine months ending September 2016 jumped to Ks32.3 billion from Ks26.6 billion in the comparable period last year.


 

The environment of low interest rates should also boost credit uptake, leading to higher net interest revenue.

Expansion plans
As part of revenue growth and diversification drive, COOP Bank has set its sight on more regional expansion in the next five years. The bank is particularly eying expansion in Uganda, Tanzania, Ethiopia and Rwanda.

For the latest nine months period, COOP Bank showed remarkable resilience in its regional operations as it booked a profit in its South Sudan unit at a time when most of its Kenyan rivals operating in the war-torn nation scooped losses. Co-Operative Bank of South Sudan, which is owned 51% by the Kenyan lender and 49% by the government in Juba, contributed more than Ks45 million to the bank’s bottom line in the just reported period.

COOP Bank is also growing its customer base. The company finished 3Q16 with more than 6.1 million customers.