Co-op Bank net profits up 45pc to Sh7.7b

Co-operative Bank’s net profit grew 45.2 per cent last year, helped by a higher interest margin and transaction-based income.

The bank’s net profit stood at Sh7.7 billion compared to Sh5.3 billion in 2011 as interest from lending increased 60.6 per cent to Sh21.2 billion from Sh13.2 billion.

The fast growth in interest income came as the bank’s loan book rose at a slower rate of 8.7 per cent to Sh119 billion. This means that the rise in interest income was driven by a higher interest margin –-the difference between deposit and lending rates.

Mr Francis Mwangi, an analyst at Standard Investment Bank, said Co-op enjoyed an interest margin of 10.6 per cent last year, up from 9.3 per cent in 2011.

“Co-op and other banks have benefitted from higher interest margins last year,” Mr Mwangi said.

Commercial banks raised their lending rates to above 20 per cent last year compared to an average of 14 per cent in 2011, helping them to earn higher returns on new and old loans which were re-priced upwards.

Banks raised their interest rates as cost of deposits rose in reaction to the Central Bank’s move to tighten liquidity from late 2011, with the lenders benefitting from the higher rates with minimal growth in default rates.

Co-op Bank also benefitted from an increase in its transaction-based income as its customer base rose from 2.3 million to 3.2 million. This raised its earnings from forex trading, ledger and ATM fees to Sh7.8 billion from Sh6.4 billion, representing a 21.8 per cent growth.

Chief executive Gideon Muriuki said the bank has installed a new core banking system at a cost of Sh2.5 billion to help it offer more services to its customers and further boost fees and commissions.

“Most of our customers are currently taking one banking service. The new core banking system gives us an opportunity to cross-sell multiple services to our customers,” Mr Muriuki said.

Among the services Co-op wants to expand include credit cards and online banking. The lender is set to double its agent network to 10,000 by year-end as it seeks to reach more customers in remote areas.

Its current network of 5,000 agents collected deposits worth Sh6.1 billion last year, signalling the gains banks like Co-op, Equity, and KCB are recording from their agency business. Co-op announced a dividend of Sh0.5 per share compared to Sh0.4 in 2011 and 2010. The bank’s share has gained 18.1 per cent in the past one year to trade at Sh13.2.

Mr Muriuki said the conservative dividend payout despite strong profit growth is informed by the need to raise more funds for expansion by retaining profits.

“We don’t see the need to pay a high dividend and come back to shareholders to raise money through a rights issue,” he said. The funding strategy will see the bank retain Sh5.2 billion of its profit last year, adding on to another Sh14.2 billion it is raising from international financiers.

Mr Muriuki said Co-op will open a total of 30 branches in Kenya this year to expand its footprint in the counties where it sees increased opportunities from devolution of resources and establishment of new governance structures.

The 47 counties are set to share 15 per cent of all national revenues annually besides charging local taxes, a move that is expected to stimulate economic activity at the grassroots and raise demand for banking services.

Co-op will open its first branch in South Sudan in April, marking its first regional expansion in the footsteps of its rivals such as KCB and Equity. It plans to open a total of four branches in that market by June.

The bank's aggressive expansion plans are expected to drive up its costs in the short term as its rivals KCB and Barclays implement cost-cutting measures including staff retrenchments. Mr Muriuki said the lender was keeping a lid on costs by freezing new hiring and relying on existing staff to run the new branches.