Co-op sends 160 workers home to arrest wage bill

Kenya’s third-largest lender by assets, Co-operative Bank, has laid off 160 employees in a cost-cutting drive aimed at reducing its Sh8 billion wage bill.

The retrenchment, which is being done according to the recommendations of consulting firm McKinsey, kicked off Thursday with the announcement that the employees are being sent home under a one-off retrenchment plan.

The bank’s chief executive officer, Gideon Muriuki, said it had become necessary to streamline the bank’s processes to remain competitive and to maximise on the company’s well-established Universal Banking Model.

“The board decided to lay-off 160 staff to leverage on our investment in ICT and other new business channels,” he said in a memo sent to staff Thursday.

Sources within the bank said the sacked employees have been offered a soft landing with a package that includes one-and-a-half month salary for every year worked and the offsetting of 40 per cent of loans held with the bank.

Beneficiaries must, however, pay the remaining 60 per cent immediately.

Co-op Bank had 4,177 employees at the end of last year, having employed an additional 810 during the year when it opened 20 new branches.

The hiring spree resulted in a Sh2 billion jump in the bank’s wage bill to Sh8 billion compared to a Sh500 million increase the previous year.

Mr Muriuki said the bank is yet to calculate how much the retrenchment exercise will cost, but expects it to bring down the bank’s cost-to-income ratio to below 55 per cent from current 58 per cent.

The industry average is 51 per cent. The cost-to-income ratio indicates that for every Sh100 that Co-op Bank makes, Sh58 went to meeting expenses leaving it with a low return of Sh42 compared to the industry average of Sh49.

Apart from salaries, other costs associated with bank staff include medical cover, retirement benefits, training expenses and tax implications of lower priced loans.

Co-op’s annual cost per staff is approximately Sh1.9 million compared to KCB’s Sh1.4 million and Equity’s Sh1 million.

The list of laid off workers mainly comprises mid-level managers. Co-op hopes to jump-start its profit growth from increased efficiency following a nine per cent drop in its after-tax profits for the nine months to September.

The bank posted a net profit of Sh6.3 billion in the third quarter compared to Sh6.9 billion last year.

READ: Co-op Bank sees 9pc drop in nine-month net profit

This is the first time the lender is reporting a drop in profits since it embarked on a turnaround plan in 2001 when it made a loss of Sh2.3 billion.

The bank attributed the drop in profits to its movement to a higher tax regime upon expiry of a five-year lower tax incentive given to firms that list at the Nairobi Securities Exchange (NSE) and investments in its South Sudan subsidiary, which is yet to break even.

“The impact will be felt next year because they have to factor restructuring costs,” said Evelyne Wanjiku, a research analyst with Genghis Capital.

Co-op Bank has also upgraded its core banking system, gaining increased efficiency through mobile and Internet banking platforms.

The bank has subcontracted over 7,000 agents to offer cash withdrawals and deposits for its customers, among other defined services under the agency banking model.

Mr Muriuki said the bank was not going to conduct any other round of layoffs. In the past, Co-op Bank had relied on a hiring freeze even as it increased its branch network to keep a lid on its wage bill but three months ago it hired McKinsey Consultants to review its operations.

McKinsey, which opened a Kenya office earlier this year, has in the past recommended job cuts at KCB, Barclays and National Bank. National Bank laid off 200 employees through a voluntary early retirement scheme last year.