Co-op Bank sees Sh1.8bn boost after McKinsey reforms

The Co-operative Bank estimates that it will get a Sh1.8 billion profit boost from cost savings and operating efficiencies resulting from last year’s restructuring that led to 160 staff layoffs.

The bank says the restructuring process which it completed in December at a one-off cost of Sh1.34 billion is set to give it the boost needed in the race to catch up with its peers.

Co-op Bank, the third-largest lender in the country by assets, laid off the employees on the advice of global consulting McKinsey & Company in a cost-cutting drive aimed at trimming its wage bill that currently stands at Sh9.7 billion.

“The redundancy will see the bank save up to Sh500 million annually, resulting in a Sh1.84 billion upswing in earnings in 2015,” says Co-op Bank’s managing director Gideon Muriuki in the lender’s 2014 annual report.

“Following the restructuring, some roles in the organisation were realigned while others became redundant.”

Co-op Bank had 3,918 employees as at the end of last year, down from the previous year’s 4,177.

Between 2013 and 2014, the bank had employed over 810 staff to operate in over 20 new branches, a hiring spree that raised their wage bill by over Sh1 billion to Sh8 billion.

READ: Co-op Bank retains McKinsey after 12pc profit dip

The lender, in an effort to reverse this trend, engaged McKinsey & Company to undertake a growth and efficiency review intended at implementing a flatter management structure, reduce reporting layers and eliminate duplicated roles.

This resulted in the retrenchment of mostly management staff who had worked at the bank for as long as 15 years, and a 12 per cent drop in net profits for the year to Sh8 billion. 

“This (transformation) entails the organisation of business units and front-line bankers by segments, instead of products to ensure that the bank increases staff productivity,” Mr Muriuki notes in the report released on Wednesday.

“Year 2014 has been monumental as the transformation project has seen us carry out an organisation re-design to create a customer-centric organisational structure.

The earnings bump Co-op Bank expects from the restructuring could raise competition in the Kenyan banking scene, with the lender seeking to claw at the profitability enjoyed by its peers.

Equity and KCB are currently the leading lenders in the country, with the two banks in recent years switching positions at the top.

Equity Group posted a 10.7 per cent net profit growth in the first quarter to Sh4.2 billion, while Co-operative Bank posted a 29 per cent growth in net earnings for the same period raking in Sh3.17 billion in net profit.

KCB Group has seen its net profit for the first three months of the year grow 12 per cent to Sh4.3 billion, regaining the top position which it had surrendered to Equity last year.

“The group had begun to reap the benefits of the transformation agenda in earnest, as reflected in the quarter one performance when the group reported an impressive 29 per cent jump in profitability,” Mr Muriuki told shareholders at the bank’s seventh annual general meeting in Nairobi on Wednesday.

“This was more than double the rate of growth in profitability of peer banks.”