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ICT investment key to Co-op Bank efficiency

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Co-op Bank shareholders approve a motion during a past Annual General Meeting. FILE PHOTO | NMG

The digital upgrade at Cooperative Bank #ticker:COOP will enable it to reduce the cost-to-income (CTI) ratio through efficiency gains in ICT, investment bank Genghis Capital has said.

The investment bankers in an analysis said the lender’s quarter three results had shown a rise in expenses from the investment in a new ICT system and training, but this would likely cut the costs going forward.

They recommended a “buy” on the company’s shares at the Nairobi Securities Exchange, noting the expected progress on addressing the high CTI ratio.

“We highlight the bank’s focus on operational efficiency and re-organisation of its business model that we believe should see it continue to digitise operations in addition to efficiency driving down costs. This will lead to an improvement in CTI in line with the three-year average 48.4 percent and consequently profitability,” said Genghis.

In the nine months to the end of September, the CTI increased by 357 basis points (bps) or 3.57 percentage points to 51.2 percent.

“Management cited a restructuring of the business model (the implementation of an Enterprise Resource Planning (ERP) system together with increased costs to re-train staff under the new business model as reason for the worsening ratio,” the analysts said.

The worsening ratio came amid an increase in non-performing loans (NPLs) that rose to 11.3 percent, which was above the management’s 2018 outlook of nine percent compared to the 6.4 percent in the same quarter of last year.

Genghis Capital quoted the management of the bank as expressing confidence that NPLs will reverse the trend in the fourth quarter of this year, with indications that a Sh8 billion recovery had already been made during the quarter.

The analysts advised investors to expect a 21 percent potential increase in price to Sh17.05 compared to the current market.

They recommended the bank monitors the asset quality closely as it remains a concern.

“We believe the deterioration in asset quality remains a concern that will have to be monitored keenly moving forward as management had earlier indicated an improvement during the year was expected, an assertion that is yet to bear fruit,” said Genghis.