Co-operative Bank of Kenya Limited Q1 2020 results conference call transcript

Operator
Good day ladies and gentlemen and welcome to the Co-operative Bank of Kenya Q1 2020 financial results conference call. All participants are currently in listen-only mode and there will be an opportunity to ask questions later during the conference. If you should need assistance during the call please signal an operator by pressing * and then 0. Please also note that this call is being recorded. I would now like to hand the conference over to James Kaburu. Please go ahead.

James Kaburu
Good morning, good afternoon, good evening ladies and gentlemen. Once again welcome to the Cooperative Bank conference call to discuss our Q1 2020 financial results. We did share the results last week, a PowerPoint presentation and the results themselves, so I think you have had ample time to go through them. Here with me I have Mr Patrick Nyaga, who is group CFO, I have Mr Anthony Mburu, our Director Credit Management, I have Mr Anthony Muli, who is the bank Economist, and myself, James Kaburu, Head of Investor Relations and Strategy. We are going to start with a macroeconomic overview which is going to be presented by Anthony Muli. I hand over to Anthony.

Anthony Muli
Good day ladies and gentlemen. I will take you through the first few slides just by way of summary. I think what’s almost to the knowledge of almost all of us is that Kenya’s growth path in 2020 still remains quite uncertain. In the last couple of weeks we’ve seen various forecasts into 2020, the annual growth for the full year. However, we’ve also gotten a glimpse of the Q1 provisional statistics which indicate that Q1 GDP numbers were positive. We all recall that the adverse impact of the pandemic started in Q2, late March, and so in Q1 moverall growth is likely to range around 5.1%. Agriculture did a good run at about 4.5%, industry about 4.4%, and the services sector which now controls about 20% of the GDP growth at 6%. Moving into Q2 and Q3 I think that’s where we expect most of the adverse impact to be witnessed and felt throughout the economy. However, still looking at most of the projections they are based on an upward growth in Q4 of this year, and that assumes that the pandemic will be managed quite within Q2 and Q3. Looking at the currency it’s obviously gotten a bit of a beating from the fact that the USD has strengthened by more than 8% by early April. However, looking at the market today we seem to be stabilising around KSh 107 to KSh 107.5. What has come in to cushion this exchange rate is the fact that tea exports seem to be flowing well.

In the first two weeks of May 89% of the auction supply was actually successful, and that means that tea export flows are likely to remain resilient, at least upwards of 89% through the year. The other thing is that we’ve also seen most of the external financing offered give some comfort to the market in the sense of FX reserves. On the horticulture sector we haven’t seen much of an improvement in the sense that historically we export about 5,000 tonnes of fruits and vegetables, but currently only doing about 1,300 to 1,400 tonnes. This obviously speaks to the fact that we have a bit of a squeeze on the freight in the sense that cost is upward of about $4 a kilo, up from the usual $1 to $1.50 a kilo. So until that is rectified in terms of cargo flights then that might still remain low. On inflation the short period between May and July is when we have a bridge between the current reserves of maize and the early season harvest which is starting in July/August. So we might see a small spike in inflation in both May and June, but that should be resolved within July once the harvest comes in.

On short-term paper we have seen relative stability which we project to continue into June. That’s the close of the fiscal year. And the key thing to note is that the government has done most of the front loading in terms of domestic borrowing. It is currently at around KSh 387 billion out of a fiscal figure of KSh 389 billion. I think in the month of June most of the concentration will be around maturities to redeem maturing debt, which is quite high. So we have bonds worth KSh 31 billion maturing in June and we have short-term paper of about KSh 90 billion maturing in the same period. So we have a total of KSh 125 billion maturing in June, so I think that’s where the concentration would be.

Looking at how the government is likely to close the fiscal year in June, I think it’s still not very clear and I think we might have to wait until the May exchequer report is out to forecast how we are likely to close the fiscal year. In terms of private sector credit we have seen an uptick into the month of March – that’s close of Q1 – at about 8.9% expansion. However, given the COVID situation we think this will reverse in terms of trend into 2020 given that demand is projected to be low. And also on the supply side as banks we don’t have much appetite for credit given credit risk premium is still quite high by way of the 10% level NPLs. At this point I will invite Patrick Nyaga to quickly take us through the financial highlights and the conclusion. Thank you.

Patrick Nyaga
Thank you Anthony. Good day ladies and gentlemen. I will pick up from where Anthony has stopped. The information that is the next few slides is for your information and I will not necessarily go through that information because most of it is standard. I will therefore skip slides 11, 12, 13 and 14. I will do some quick highlights on slide number 15. This is mainly where we are talking about the acquisition of 100% share of Jamii Bora. As per the notice that had appeared in the newspapers some time ago we said that we would continue doing the due diligence. We are just about to conclude the due diligence so that we can move into the next processes.

I will skip slides 16, 17, 18, 19 and 20, and I will go to slide number 21 where we are looking at the channel performance. I note that a number of channels have improved in terms of performance and a number of them have declined their transactions. I think among the biggest gainers or the biggest increases are in MCo-op Cash where we’ve seen a number of 16.3 million transactions, a growth from 10.4 million transactions. This can be attributed to two things. One is the growth compared to the same period last year of e-loans or MCo-op Cash loans, and also some of the transaction increases towards the month of March out of the COVID-19 situation.

Agency banking declined a bit from 11.2 million to 10.3 million and ATMs from 10.8 million to 7.5 million, branch banking continued to decline from 4.6 million to 4.3 million transactions. On slide number 23 is just more explanations around the e-credit. We are noting that in terms of the number of customers if you look at Q1 2020 we had about 3.4 million customers who transacted on mobile MCo-op Cash and cumulatively we have lent about KSh 79.7 billion in MCo-op Cash. The other transactions on slide number 24 are just showing that mobile transitions in terms of millions increased from 10 million to 16 million. Mobile banking again in terms of commissions we saw significant growth, more than doubling from KSh 744 million to KSh 1.6 billion. If I go to slide number 25, again just a bit of detail around our alternative channels looking at the number of agents. We are now at about 16,783 agents compared to 11,682. In terms of number of transactions we’ve seen a bit of decline there compared to the same period last year from 11.3 million to 108 million.

If I move to slide number 26, again what are the types of transactions that are being carried out in agency banking? We are noting that cash deposits account for about 52%, cash withdrawals about 27%, balance enquiry about 15% and all the others about 6%. In terms of transaction value distribution most of the activities that happen at agency is cash deposits at 67% and cash withdrawals at 27% and others at 5%. Looking at the financial highlights, we note we have had a strong growth in terms of balance sheet compared to the same quarter last year where we grew our balance sheet from KSh 425 billion to KSh 470 billion. Our loan book grew from KSh 251 billion to KSh 276 billion. Total deposits also grew from KSh 319 billion to KSh 341 billion. And out of the profitability of the bank we grew our shareholders funds from KSh 72.8 billion to KSh 82 billion. Looking at the financial position of the balance sheet I think we’ve just gone through quite a bit of that. In terms of percentages total assets grew by 10.5%, loan book by 10%, government securities by about 11.5%, total deposits by 6.7% and borrowed funds about 15.5% because we drew the last tranche of IFC funds.

When you look at slide number 30, the diversification of our loan book, no significant change has happened in terms of how our book is placed, but you note that personal lending grew to 40% from 35.7% of the total loan book, corporates to 23.3% compared to 25.3%, mortgage – as you know we have been slowing down on this – from 14.3% to 12.4%, and SACCO had a growth from 8.1% of the book to 9%. In terms of diversified loan book from a graphical perspective just showing that the biggest portion of our book is personal consumer, now at 45%. Trade is at about 14% compared to 15% same period last year. Real estate is 10% compared to 12% the previous year.

Our liability portfolio on slide number 32. Retail business contributed the most at 24.2% compared to 23.3%, so we continued growing our deposits. The area that we were able to grow most was in retail, helping us reduce our cost of funding. Institutional banking is 20.2% compared to 21.2% and SME banking increased from 18.9% to 19.3%.

On slide number 33 is just a representation of our funding. Nothing much has changed. I will go to slide number 34 looking at the quality of our loan book. Obviously as at March 2020 COVID-19 had not impacted us much. Looking at the way the distribution of the loan book is there we are noting that out of the growth of the loan book from KSh 268 billion to KSh 294 billion the normal class increased from 78% to 81%, watch declined from 11% to 9%, substandard remained the same at 4%, doubtful at 6% compared to 7% in the previous period, and loss at 2%. Obviously the provisions as per IFRS increased from KSh 18.4 billion to KSh 19.4 billion and the gross non-performing loans from KSh 29.2 billion to KSh 31.3 billion.

Our book is staged. We have the three stages there and the amount of provision we are holding in each stage. So stage 1 is at KSh 236 billion and we have KSh 4.8 billion provision, mainly general provision. Stage 2 is at KSh 26 billion. We have a provision of KSh 1.68 billion. And stage 3, which is KSh 31.3 billion, we have a provision of KSh 13.22 billion. In terms of portfolio trends specific to the sector we’ve discussed this in the past. We will have a small issue with our manufacturing book. Out of that book 77% of it is non-performing from 46%. In terms of building and construction 47% compared to 19% in the same period last year. Agriculture and trade remained relatively the same, and actually manufacturing and building & construction increased provision within that class. The others remained relatively the same. If you look at the provision now out of the overall book trade continues to hold the biggest percentage of our provision at 32% followed by personal consumer at 18% and manufacturing at 16%.

In terms of coverage our cost of risk is now at 1.4% compared with 0.8% last year. CBK coverage we are at 61.2% and IFRS coverage we are at 54.8%. We have strong capital ratios. We are in compliance with all the ratios as can be seen from the graph. Also in terms of total capital we still have a buffer, although we are working on a tier 2 loan to make sure that we boost that capital. Optimal asset and funding mix, no significant change as you can see from slide number 40. I will go to slide number 41. In terms of liquidity the bank has been quite liquid at 49%. Our loan to deposit ratio is at 81%. When you include the borrowed funds it comes down to 75%.

How did the various subsidiaries contribute in terms of profitability? Cooperative Bank at KSh 4.9 billion obviously being the most significant contributor of profitably for the group. Co-op Consultancy grew their profitability by 16% to KSh 250 million. Co-op Trust Investment grew by 2% to KSh 20.5 million. Kingdom Securities registered a loss of about KSh 6.6 million. Co-op Bank of South Sudan, a profit of KSh 29.7 million.

Profit from associates, mainly CIC, a loss of KSh 21.6 million. That gives us a profit before tax of KSh 5.117 billion, almost a flat growth compared to the same period last year. In terms of the profit and loss we note that out of the growth of our loan book and also the growth of the loan book and treasury bills and bonds our interest income grew by 4.5%. We were able to reduce our interest expense despite the growth in deposits from KSh 3.16 billion to KSh 3.02 billion, and therefore that gave us a growth in terms of net interest income of 8.5%. We grew our fees and commissions significantly mainly because of the e-loans and also some of the commissions arising from loans and advances. Our total operating income therefore grew by 12.5% from KSh 11.12 billion to KSh 12.5 billion. When you factor in the loan loss provision you note that we were a bit aggressive there to make sure that we clean our loan book from KSh 500 million to KSh 900 million. That’s about 79.5% growth. When you look at total operating expenses our profit before tax and exceptional items therefore at KSh 5.24 billion compared to KSh 5.09 billion. If you factor in the share of profit from associates our profit before tax is KSh 5.12 billion compared to KSh 5.11 billion last year, so a 0.1% growth.

In terms of key ratios return on average assets declined a bit from 3.5% to 3.2%. Return on average equity from 20.5% to 18.5%. Earnings per share remained relatively the same at KSh 2.45. Our net interest margin declined slightly from 7.4% to 7.3% out of some of the CBR considerations. CBR continued to decline. Cost to income ratio deteriorated quite a bit there from 49.7% to 54.2%, and provisions from 50.9% to 58.1%. In terms of NIMs on loans a significant improvement from 7.6% to 8.1%. In terms of slide number 45, non-funded to total income, because of the e-loans we were able to increase our non-funded to total income to 40% compared to 38%. Non- performing loans declined from 10% to 9.5% as at Q1. And cost of average funds including borrowed funds improved significantly from 3.8% to 3.4%. Debt to equity ratio increased from 32.6% to 33.4% out of the drawdown of the IFC loan.

So in a nutshell that is the performance of the group for the first quarter, a bit of mixed reactions in some areas and also some minor impact by COVID-19 towards the end of March. Probably just to emphasise that our profit before tax was almost level with the same period last year out of some expanded operating expenses. Thank you very much. I think we can do questions and answers. Thank you.

Operator
Thank you very much, sir. Ladies and gentlemen, if you wish to ask a question please press * and then 1. If you wish to withdraw your question please press * and then 2. Again if you wish to ask a question please press * and then 1.You will hear a confirmation tone that you have joined the queue. Our first question is from Adesoji Solanke of Renaissance Capital. Please go ahead.

Adesoji Solanke
Hi everyone. Can you hear me clearly?

Patrick Nyaga
Yes we can.

Adesoji Solanke
Okay. Hi. This is Soji Solanke from Renaissance Capital. Thanks for the call. I have a few questions. The first is on agency banking. Can you just talk us through why your agent count was up about 50% year on year but your transaction volumes are down? That I’m not getting. If you can just talk about that a little bit. The second question is around staff cost. On my numbers it was up about 25% year on year in the first quarter. Could you let us understand if there’s any reason not to use this as a run rate for the year in terms of staff costs? And then still on opex, on overall costs what sort of growth should we be working with for this year? I’m asking also because I would like to know if there is any cost savings you expect to achieve on the back of COVID-19. My third question is around restructurings. In your slide you mentioned that you have restructured about 5% of the loan book. What I’m wondering is do you think you’ve done all that you need to restructure, partly also because when I look at the numbers from your key peers they’ve done 20% to 25%. I’m just wondering why your numbers are relatively lower by such a wide margin. Then my fourth question is when you restructure how do you intend to treat this from an impairment charges angle? What cost of risk number are you thinking about for this year? Those would be my main questions for now. Thanks.

James Kaburu
Thank you Solanke. We can have a few more questions.

Adesoji Solanke

Okay. Let me ask one last one then. My last one is on e-credit. Is it a key driver of your non-interest revenues? In this environment how risk averse are you getting and what impacts do you expect this to have on non-interest revenues for 2020? That’s my last question. Thanks.

Patrick Nyaga
Okay. Thank you. Maybe we can take those first because they are quite a number, so that we don’t forget them. I will request Anthony to answer the questions on the loans and I will give you the others.

Anthony Mburu
Good afternoon. My name is Anthony Mburu. Thank you for the questions, Solanke. Restructures, the directive that we have received from Central Bank of Kenya is based on a case by case an analysis of what customers require. So far as at the date of our results, as per 31st March, as we have indicated only about 5% of our customers required to have their loans restructured. Obviously as we proceed new ones are coming up or new customers are coming up requesting for consideration. But what we can say is that because it is demand driven, not bank pushed, it is up to the customers who feel they cannot pay their loans to come forward, and then we sit down and we agree a restructure. So there are those who are paying in the normal course of business.

Others have come and said we are going to have a problem and have asked for restructure, and we have accommodated based on what they said. Others required just a partial support for a short period of time. So we have gone with what our customers require. As I said it is demand driven and not bank pushed. We are also watching the situation because if the others have had 25% we will watch to see what the differences are between us and them. I guess we will adjust accordingly. But as we speak, whatever we’ve done we’ve done on the basis of the customer coming to us.

Regarding the issue of impairment we plan to use both the CBK guidelines, and because they are based also on IFRS 9 rules, and IFRS 9 did come out with a clarification regarding what to do with the impairment or ECL under the COVID-19 scenarios, we will be applying those. We will be applying the guidelines we’ve been given by our regulator and also the guidelines that have been proposed by the accounting body. On the issue of e-credit I think what I would say is that we continue to provide e-credit, both to the individual and the business plan to the business customers. We have obviously adjusted our algorithms to take into consideration the environment we are in. Remember our e-credit is based on customers who are already in our book who already have a relationship with us either as a borrowing customer or as a depositing customer. And the algorithms are based on the turnovers that they do through us. And they are short-term loans, one month, two months, three months, so as they pay off the previous one and they are taking the next one we are factoring the reduced turnovers for those who have reduced turnovers into the whole discussion. So we expect that we will still be able to offer the product with those changes in structure or changes in policy, and we wait to see how things go. All of this is happening obviously now in April/May. So far the statistics as at April/May show there may be 10% or 15% reduction in demand. But on the other hand it’s understandable especially in the month of April. Business had come to a bit of a halt or a slowdown. But what we’ve seen is that people have gone back to business, to work, and so we are seeing in the month of May a lot more activity, a lot more banking in accounts. So the initial panic that had caused people to shut down, go home and stay away, what we are finding now is that they have found other ways to do business and even with limited hours people are still able to do financial transactions. So I think those are the three bits I needed to comment on. With that I hand over back to Patrick.

Patrick Nyaga
Thank you Anthony. Solanke, on agency banking your question is about the count is going up yet both the transactions and the commissions have declined. Obviously we continue expanding our footprint in terms of agency banking, and we will continue doing that. However, there has been some decline in terms of economic activity around some of these transactions. That’s probably why we have seen a bit of decline in both the transaction numbers and in the commission income. There is something we changed a bit also within the month of February and March.

We used to have a lot of agencies that we had put inside our branch premises, but because of these issues ofCOVID-19 and this social distancing and all that we had to move them out back into their premises. So we saw a decline there in number of transactions because of that activity. But also because of the lockdowns starting around mid-March we saw quite a bit of impact immediately. But as Anthony said, we are starting to see a bit of that move back, some of the transactions into the agency. So that’s the reason why you are seeing the count is up, because we continue increasing the agency footprint, but in terms of transactions there was a bit of lull there. But we expect that probably going forward to go back to the normal.

In terms of staff costs there was quite a bit of increase compared to the same period last year. This is mainly because of several things. One, last year around mid to end of last year we engaged quite a number of people in some of the technical areas. The majority of that cost has been felt fully in Q1 2020 compared to the same period last year when we didn’t have that cost. However, as the year progresses and you are comparing like for like, and also out of some of the activities that we are now doing because of COVID-19, for instance we are not hiring any more, a number of staff are working from home, on a comparison basis we will not see the run rate increasing any further. In fact on staff costs we are projecting about 8% full year. So that will actually be taken care of.

When you look at the opex actually March 2019 compared to March 2020 other operating expenses only grew by 1%. Therefore we intend to maintain that or even come down slightly. We are now especially because of the COVID-19 situation looking at all the lines of cost that we don’t need and we are working on them quite significantly. There are a lot of travel costs for example that have been shelved, and a number of other areas. Therefore again from a run rate I expect to see no growth at all actually, maybe some decline. I may not be able to project exactly the kind of decline that will be there because obviously this situation is fluid, but we are working on very specific parameters and specific lines of expense that need to go down, also noting that some lines are also going up. For instance masks and sanitisers are costs we didn’t have. Now we have them in the P&L. But from an annual run rate perspective I expect zero or negative growth on that line. So those are the key three things that Solanke has asked. I hope I have satisfied you.

Adesoji Solanke
So for staff costs 8% growth, other opex flat to decline. Okay. That’s understood. Just a few follow-ups. So restructured loans what percentage of the loans would you say have been restructured as at today? Then secondly in terms of impairment charges you have a number of KSh 900 million in Q1. That’s KSh 3.5 billion for the year. Do you think this number is too low given all the risks that you are seeing today? Finally just in terms of that e-credit number, can we work with Q1 as a sustainable run rate? Or if not, to what extent do you expect the run rate to decline relative to Q1? That’s it.

Thank you.

Patrick Nyaga
Maybe I can help Anthony a bit there. You are asking what kind of number we see. Anthony talked about 5% at the time. Probably as at now we’re probably about 6%. Probably he can talk more about where he thinks the projection will go.

Anthony Mburu
Solanke, I think we had done KSh 15 billion by 31st March. As a percentage of our book that is close to 5%. We foresee it maybe rising to about 10%, but we don’t see much beyond that because as I said it is demand driven. This is what we are seeing from the customers themselves. So far those are the sorts of numbers we’ve seen 5%, but we are projecting maybe up to about 10%. On the issue of the run rate on the e-credit there was obviously a dip in April. We are starting to see a slight increase in May. I wouldn’t say that that rate can be applicable to the end of the year. Possibly a dip of maybe about 10% on whatever we were doing in that first quarter in the second quarter, and if things improve in Q3 and Q4 then that could change. So annually the run rate for the year could be at the maximum a 5% dip overall for the year. I think those are the two questions you had. Did I miss something, Solanke?

Operator
Thank you. The next question is from Ronak Gadhia of EFG Hermes. Please go ahead.

Ronak Gadhia Good afternoon Patrick, Anthony and the team. I hope you guys are keeping well. A couple of questions. Maybe some of them are just a follow-up to Soji’s. Firstly on your cost of risk. I understand it is difficult to give a definitive guidance on cost of risk given the various moving parts and you don’t even know what percentage of loans would be restructured. But could you share some thoughts on the possible scenarios the bank is modelling based on what you’ve seen so far and what the expectations are for the economy through the rest of the year?……

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