Co-op Bank defies South Sudan turmoil to rake in profits

When other Kenyan lenders with branches in South Sudan are counting losses thanks to the unfavourable business conditions in that country, Cooperative Bank is smiling all the way to its cash vaults.

And it’s not by fluke that the lender defied the turmoil in the conflict-scarred country to rake in remarkable profits. Its ingenious strategy from the onset stands it in good stead. The bank localised its brand by giving South Sudanese Government a stake. This gives it an immense advantage.

Besides, government ownership apparently appeals to the patriotism of the citizens to do business with the bank.
Analysts also point to the lender’s measured and prudent expansion as another secret to its success.

Cooperative Bank’s fortunes look even more striking when assessed against the dismal performance of other lenders. Regional companies with subsidiaries in South Sudan from last December experienced a substantial drop in profits and a huge loss on investment after Juba devalued its currency by 84 per cent as the government abandoned efforts to fix the exchange rate.

Kenya Commercial Bank, Equity Bank and CFC Stanbic have said their earnings growth for the full year ended December 2015 were slowed significantly by South Sudan unrest.

This is in sharp contrast to Co-op Bank chief executive Gideon Muriuki who announced a 46.2 per cent rise in profit after tax of Sh11.7 billion for the year 2015 compared to Sh8.01 billion recorded in 2014. He said the bank’s vigorous cutting of costs had finally paid off significantly for the lender.

Mr Muriuki attributed the overall performance, which saw it outpace its tier one peers in the Kenyan banking industry to the bank’s improving operational efficiencies, reduced operating costs and improved customer delivery platforms.

Coop Bank’s profit after tax rose by 46 per cent, the highest in the banking industry, during the year when up to 19 listed companies, the largest in Kenya’s corporate history, have issued profit warning,.

The lender’s South Sudan subsidiary Coop Bank South Sudan contributed Sh849 million profit before tax in 2015. This is despite taking a Sh1.8 billion hit.

Mr Muriuki believes that the lender’s entry strategy was right from the beginning. The decision by Coop Bank to venture in South Sudan via joint venture with local partners, the Government of South Sudan, he noted had now been proven to have been a smart move. Why? This guarantees the bank access to the commanding heights of the economy – currently driven by the government, particularly in difficult times, Mr Muriuki told investors last week.

The Government of South Sudan virtually controls the economy on account of the nascent institutions which are not yet strong enough to be accorded independent space to run various sectors. This is seen to grant Coop Bank’s subsidiary an upper hand from competition as the government of South Sudan is well placed to tap opportunities to the advantage of the lender.

Domestication of Coop Bank is also said to have boosted the lender’s fortunes in an age when economic nationalism even in East Africa is rising.
“These were clearly strong results and in the banking continuum of results seen so far, Coop Bank is a bull outlier. Coop Bank evidently navigated South Sudan, where most banks took a big hit, and that was also an interesting development. The big hike in the full year dividend will be well received as well,” said Nairobi-based analyst Aly Khan Satchu.

NON-FUNDED INCOME

The private sector in South Sudan is also still in its infancy stages, driven by Kenyans and Ugandans and a few South Sudan diaspora.
The decision by Coop Bank to focus on non-funded income business as opposed to lending worked also in its favour, particularly at these turbulent times of severe currency devaluation that has deeply eaten into asset books.

Besides the model which gave it a competitive edge in South Sudan, analysts also pointed to the cost-cutting exercise pursued by the lender in recent years after it sourced the services of leading global American advisory firm Mckinsey and Company to undertake a “growth and efficiency review” which the bank has said is finally paying off.

“The Mckinsey process has also seemingly delivered some meaningful returns. These were the strongest results seen so far from the banking sector and probably speaks to the Model,” said Mr Satchu.

Sterling Capital Investment Director John Kirimi said Coop’s performance in South Sudan is exemplary.

“I think the results are very good relative to the results of Coop Bank peers in the banking industry. I think the lender rationalised their operations including costs and they focused on their strategic vision and mission.”

This was also echoed by analyst Robert Shaw who said, “Cooperative Bank has for some time now pursued a vigorous cost cutting and retrenchment policy. If one goes into any of their branches it is clear there have been cutbacks in staff. In the bigger picture this was necessary and hence the improvement in their profit.”

Going forward, Mr Muriuki said the lender would pursue a regional expansion plan based on the joint venture partnership model for its South Sudan subsidiary.

The lender has in the past said it is eyeing presence in Rwanda, Uganda, Tanzania and Ethiopia in the next five years.

Cooperative Bank has a three-branch footprint in South Sudan which analysts say limited its exposure compared by other banks who have invested in extensive branch networks, with KCB having 20 branches and Equity more than ten branches.