Co-op Bank’s profit dips on loans cover

Co-operative Bank has reported reduced net profit of Sh10.9 billion in the year ended December 2020 after a huge increase in loan loss provisions.

The earnings dropped 24 per cent compared to the previous year when the lender made a profit after tax of Sh14.3 billion.

Despite the profit drop, Co-op Bank, which is listed at the Nairobi Securities Exchange, announced a dividend of Sh1 per share, which would see it pay a total of Sh5.9 billion to its shareholders.

The bank is majority-owned by co-operative societies.

“This will be a much-needed relief in a pandemic year to the over 15 million-member co-operative movement that predominantly owns the bank,” said Chief Executive Gideon Muriuki.

Besides the increase in loan loss provision, used as insurance against possible defaults, the bank’s bottomline also suffered from currency fluctuations in its South Sudan operation.

“The group has taken loan loss provisions of Sh8.1 billion, being a 220 per cent increase from Sh2.54 billion in 2019, in appreciation of the challenges that businesses and households are grappling with from the disruptions occasioned by the ongoing pandemic,” said Mr Muriuki.

He said the bank would continue to support its customers through the pandemic, noting that a total of Sh49 billion in loans were restructured to support customers.

Co-op Bank’s operating income last year grew by 11.1 per cent from Sh48.5 billion to Sh53.8 billion, with a big chunk of the earnings coming from interest on loans. The loan book expanded by 16.1 per cent from Sh31.3 billion to Sh36.3 billion while interest from government securities increased from Sh11.3 billion to Sh14.8 billion.

However, the loan loss provisions saw the bank’s total operating expenses grow by 41.8 per cent from Sh27.8 billion to Sh39.4 billion.

At the beginning of this year, Co-op Bank cautioned investors that its profit would drop significantly due to the coronavirus pandemic. However, it was bullish that the reduction would be lower than the rest of the industry. Compared to the other Tier-One banks, Co-op had the least increase in loan impairments and hence the lowest drop in profitability in the first nine months.

It attributed this to the composition of its loan book, with most of the borrowers continuing to service their loans.

However, towards the end of the year, the bank was forced to take a different approach, setting aside a lot of cash as insurance against possible defaults. This ate into its profitability.