Co-op Bank projects rise in 2015 profit as it eyes regional expansion

Co-operative Bank of Kenya expects increased profitability this financial year as its transformation agenda enters the home stretch. Group Chief Executive Gideon Muriuki projects that the bank’s full-year profitability will grow by a third, from the Sh8 billion announced for the period ending December 31, 2014. The growth will be supported by emerging lending opportunities and income from fees and commissions.

He is upbeat about 2015’s performance, and retained loan and deposit growth target for this financial year at 30-35 per cent and 25-30 per cent, respectively. “Overall, management is optimistic about 2015 performance and we expect the momentum to be maintained going forward,” Standard Investment Bank Research said in a note to investors.

Apart from a projected increase in profit before tax this year and a 30 per cent increase in the first quarter, Co-op bank seeks to reduce its cost-to-income ratio to 53 per cent by 2015 and below 50 per cent by 2017.

The lender saw its net profit increase by 28 per cent to Sh3.17 billion in the first quarter of 2015, compared with Sh2.47 billion a year earlier. Muriuki attributed the growth to its transformation agenda that enabled the bank to cut on operational costs. “We are realising gains out of the restructuring we have been going through since last year focusing on cost reduction and efficiency,” he told an investor briefing recently.

The bank engaged McKinsey & Company – a global consultancy company - in August last year to perform a “growth and efficiency review”. “The transformation project dubbed ‘The Soaring Eagle’ is intended to re-tool and re-energise the business for superior competitiveness in Kenya’s banking sector,” said Muriuki.

growth forecast

In the ongoing strategic review of the bank, McKinsey has also given it a high rating and a revised growth forecast from a cross section of investment banks and analysts. Recently, Renaissance Capital 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. Renaissance expects a 24 per cent return on equity in 2015, rising to 27 per cent over the next two years.

This project entails organisation of business units and front-line bankers by segments instead of products to ensure that the bank increases staff productivity.

The bank has also adopted a collaborative product ownership empowering sales teams to be more customers as opposed to product focused. “We are also encouraging relationship mangers to focus on a basket of products per customer thus enhancing cross selling,” said Dr Muriuki.

Co-operative Bank’s transformation journey also intends to digitise and automate all processes including loan origination processes, various customer delivery systems and voucher processing among others. “We want to improve the system’s uptime and processing capacity and have a robust credit management framework, enhance collection of loans and advances and a proactive management of non-performing loans,” said Muriuki. The Co-operative Bank Group boss said they are looking for opportunities in Uganda, Rwanda, Tanzania and Ethiopia by riding on the unique co-operative model.”The bank plans to open three new outlets in South Sudan this year, adding to the existing two,” he said during the release of the first quarter of 2014 results.

Kenya’s third largest lender by assets and customer base, cut 160 jobs last year as part of the reforms recommended by McKinsey.

This is expected to save it Sh600 million this year.