Co-op Bank signals positive outlook amid profits drop

The resilient Kenya’s banking sector which grew deposits by 15 per cent despite Covid-19 economic pressures is likely to report significant drop in end year results on high non-performing loans.

Co-operative Bank Group, ranked by Moody’s as the second strongest lender in terms of book quality over weekend become the latest to alert investors of pending drop in returns, taking cue from NCBA and Diamond Trust Bank.

In a statement on Friday, the listed bank said it had made positive strides in a dark period that was characterised by a drop in incomes for households and businesses owing to the adverse effects of the pandemic.

The bank restructured loans valued at Sh46 billion by the end of the third quarter to help customers negatively impacted by the pandemic.

Last year, Co-op Bank  posted a 12.6 per cent growth on its 'Soaring Eagle' strategy that has given it a competitive edge.

The  lender which recently acquired Jamii Bora Bank  and renamed it Kingdom Bank recorded an after-tax profit of Sh14.3 billion up from Sh12.7 billion in 2018.

In November last year, it reported a 10 per cent drop in net profit for the nine months to Sh9.8 billion compared to the previous year after its loan loss provision grew 89 per cent to Sh4 billion from Sh2.1 billion due to Covid-19 related pressure.

This, despite the lender recording sustained growth in assets which grew 16 per cent in the third quarter to Sh5101 billion, loans, deposits and accounts which have since grown to 8.8 million.

The bank’s customer deposits for nine months ended September 30 last year improved by 16.4 per cent  to Sh375.5 billion and its loans and advances to customers increased by 5.7 per cent to Sh284.2 billion.

Co-op Bank Group MD Gideon Muriuki said they employed every possible strategy to manage high loan default rate arising from muted income among households.

To managed high non-performing loans which grew 37.8 per cent  in the third quarter to Sh34.2 billion from Sh24.8 billion, the lender has hired management consulting firm McKinsey & Company to review its lending processes with an aim of reducing the risk of defaults.

The drop in profit in the country's  does not come as a surprise considering high loan restructuring and high levels of non performing loans. 

According the a report released late last year by the Central Bank of Kenya, lenders restructured Sh1.38 trillion, which is 46.5 per cent of the industry’s total loan book of Sh2.9 trillion.

This is as the industry strives to shield its customers and balance sheet from ravages of the Covid-19 pandemic.

In November, Fitch Rating projected Kenyan banks' credit profiles to face significant risk from the economic impact of the coronavirus pandemic, forecasting non-performing loans to hit 15 per cent. 

''We forecast that the sector's non-performing loans (NPL) ratio will rise to about 15 per cent by end-2020, and even higher in 2021 when debt relief measures are phased out,’’ said the global credit rating firm.

The firm gave a negative outlook on Kenyan bank Issuer Default Ratings, all of which is 'B+', saying profitability will remain under pressure from rising loan impairment charges (LICs) and moderate credit growth.