Co-op Bank HY 24 earnings, good enough to cover rating downgrade?

Co-operative Bank recently announced their half year earnings, posting a decent increase of 7% in net profit, showing a steady growth in both interest and non-interest income. Half year profits hit a high of KES 12.9B from KES 12.14B HY '23, no interim dividend for shareholders unfortunately. This growth was backed by great fundamentals, with the bank's net interest income increasing by 10.7% to KES 23.9B and non-interest income increasing by 11.2% to KES 15.4B. Group earnings per share stood at KES 2.21, a 6% increase from the same period last year. Here's what the MD, Gideon Muriuki, had to say about the bank's performance -

The strong performance by the bank is in line with the group’s strategic focus on sustainable growth, resilience, and agility delivering a return on equity of 22.1 percent

Increased operating costs

Operating expenses ate into the profits, increasing by 11% to KES 21.3B. This was primarily driven by more spending on salaries and increasing the loan loss provisions by 4.9%. With a 23.5% increase in NPLs¹, the bank deemed it prudent to hedge against this risk by allocating more funds to loan loss provisions. Hiring and pay raises also contributed to the 11% increase in operating costs. Interest expense incurred from customer deposits among others, saw a 52.7% increase from same period last year, highlighting a growth in deposits and more importantly the high interest rate environment they are working in.

Growth in the horizon

The bank is growing steadily and sustainably², we can clearly see this with the increase in head count by 317 people in HY '24. The employee count currently stands at 5,426. They announced a growth in number of physical branches by 8 for HY '24, with a FY '24 target of 15 new branches. Customer deposits surpassed KES 500B, hitting KES 507B, a 9.4% increase from the same period last year. This partially explains the increase in interest expense incurred from customer deposits. Total assets also grew to KES 716B, a 7.8% increase, from KES 664.9B. They recorded growth from most of their subsidiaries, Kingdom Bank was a subsidiary that recorded a 14.8% drop in profitability.
Morgan Stanley Capital International added Co-operative Bank to their frontier markets index, a huge win for the bank. This will give them exposure to foreign investors, and a fraction of the $13T funds that have been invested based on the company's indices might start flowing toward Co-op bank's stock.

Conclusion

Half year earnings were okay, not the kind to evoke fomo³ out of investors. This is a good thing though, they don't have the pressure experienced by other players in the industry to deliver record returns every earnings call. And as aforementioned, the growth is steady and sustainable. One thing to look into, is their exposure to government securities through bonds and bills, this level of exposure had Moody's downgrade their credit rating in late July, which was in line with their downgrade of Kenya's credit rating. With 28% of total assets invested in the Kenya government, they stand the risk of taking a so called 'hair cut' if things don't pan out as they expect. I should have a chat with Mr. Muriuki to find out why 28% of all assets are in Kenya government securities. Fingers crossed he doesn't tell me that it's a low risk investment 🤞🏾.

Resources

Co-operative Bank HY '24 earnings , Co-operative Bank investor relations , Fitch downgrade action commentary

NPLs - non performing loans ↩
Sustainably - growth that can be relied on in the future, usually seen through the modest numbers posted. ↩
Fomo - fear of missing out ↩

NOTE : These are personal opinions and aren't shared by the firm, our shareholders and/or associates

Increased operating costs

Growth in the horizon

Conclusion

Recommended reads

Resources

Footnotes