Analysts upgrade Cooperative Bank’s stock rating

The ongoing strategic review of Co-operative Bank of Kenya by consulting firm McKinsey has given the bank a high rating and a revised growth forecast from a cross section of investment banks and analysts.

Renaissance Capital says it has revised forecasts and upgraded the lender’s rating. “We are urging investors to buy rather than hold Co-op shares whose prices are expected to rise by 19 per cent to Sh25 per share from the current levels of Sh21 per share,” said Adesoji Solanke, an analyst at Renaissance Capital.

The McKinsey transformation agenda is currently front-and-centre of management’s focus, and also involves crafting a strategic plan for 2015-2019. There is optimism that this transformation strategy will work based on a similar project involving Kenya Commercial Bank (KCB), which has been rated successful.

Co-op Bank’s 2014 financial results were weakest due to a restructuring cost estimated to be Sh1.3 billion, associated with staff layoffs.

Following the strategic business review, the bank laid off 160 managers in late 2014. Costs also increased in the second half of last year, partly driven by ongoing branch expansions.

According to management, 23 or 16 per cent of its 142 branches were loss-making as at end of the 2014 financial year. Furthermore, operational losses from South Sudan of Sh541 million weighed on the group’s performance during the year.

Co-op Bank is relying on a strong base for ramping up non-funded income streams that is likely to follow the successful execution of the transformation strategy.

“The bank’s returns have been decent, in our view, and averaged 26 per cent over the past five years. For us to make sense of the McKinsey partnership, we think Coop’s returns need to gravitate towards the 30 per cent level sustainably over time,” said Solanke.

Renaissance expects a 24 per cent return on equity in 2015, rising to 27 per cent over the next two years.

“We believe KCB has achieved notable success in its transformation drive over the past four years, and it will be important to see how Coop’s numbers evolve on this journey. If history is anything to go by, we think there should be wins on the cost front, but improving revenue levers will likely be a function of how finely management executes on strategy,” said Solanke.