Co-operative Bank (COOP): Asset Quality Erosion Tests Valuation Case

Business Snapshot

Co-operative Bank (COOP) remains Kenya’s third-largest lender by assets, with a deposit-led franchise anchored in retail and MSME lending. The bank’s 811.1Bn asset base at HY’25 reflects steady growth in customer deposits, which now exceed 547Bn, underpinning its liability-sensitive model. Net interest income, the primary revenue driver, contributed 29.38Bn in HY’25, while non-interest income—including FX and transaction fees—added 14.11Bn. Digital lending and MSME working capital facilities have become strategic growth vectors, offsetting pressure in traditional segments. The bank’s competitive moat stems from its cooperative shareholder base, low-cost deposit franchise, and extensive branch network, though rising credit costs and funding pressures are testing this advantage.

COOP’s scale matters for NSE portfolios as a bellwether for Kenyan banking sector health. With a market share of ~12% in total loans and ~11% in deposits, its performance influences sector sentiment and liquidity conditions. The bank’s ability to sustain dividend payouts—averaging KES 1.50 per share annually—also anchors income-focused strategies, though asset quality trends now dictate sustainability.

Financial Performance

HY’25 earnings grew 8.4% y/y to 14.1Bn, driven by a 23.1% surge in net interest income to 29.38Bn. Total assets expanded 13.2% to 811.1Bn, with customer deposits rising 7.95% to 547.72Bn. However, the quality of earnings is deteriorating. Gross NPLs increased 9.7% y/y to 76.29Bn, pushing the NPL ratio to 16.7%, while loan loss provisions surged 50.5% y/y to 4.52Bn. Net interest margins contracted 50bps to 7.3%, reflecting a 160bps rise in cost of funds to 5.4% amid a higher-for-longer rate environment. The cost-to-income ratio improved marginally to 44.9%, but efficiency gains were offset by higher credit costs.

The trend is consistent with prior periods. FY’24 net earnings rose 5.2% to 23.19Bn, but NIMs fell 90bps to 7.6% as funding costs climbed 130bps. Gross NPLs grew 27.9% y/y to 66.94Bn, with coverage declining to 69.2%. Q3’25 saw net earnings rise 12.3% y/y to 21.56Bn, but gross NPLs increased 12.7% to 78.93Bn, with NPL coverage at 63.7%. The bank’s ability to convert revenue growth into sustainable profitability is increasingly constrained by asset quality deterioration.

Valuation Lens

COOP trades at a trailing P/E of 12.8x, below its five-year average of 14.1x, reflecting investor skepticism. The P/B ratio of 1.2x is also below the sector median of 1.4x, suggesting the market is pricing in higher risk. Dividend yield stands at 4.8%, near the top of the sector range, but sustainability hinges on credit cycle stabilization. EV/EBITDA of 6.2x is attractive relative to peers, yet this multiple assumes no further deterioration in asset quality or margin compression.

The current price of KES 14.65 embeds expectations of a rebound in NIMs and NPL stabilization. Analysts’ target prices range from KES 14.80 to KES 21.10, with a median of KES 16.81, implying 15% upside. However, these targets assume a peak in funding costs and a slowdown in NPL formation. If asset quality continues to weaken or margins compress further, the downside risk to earnings and valuation multiples increases materially.

Risks

Asset Quality Deterioration — Gross NPLs have risen 19.0% y/y to 69.55Bn, with the NPL ratio at 16.9%. Sectors such as real estate, trade, and energy are primary drivers, and coverage ratios are declining, increasing the risk of higher-than-expected credit losses.

Margin Compression Under Higher-for-Longer Rates — Net interest margins have contracted 50bps to 7.3% as deposit repricing outpaces asset yield adjustments. Cost of funds has risen 160bps to 5.4%, pressuring net interest income despite growth in earning assets.

Operational Efficiency Strain — The cost-to-income ratio has risen to 46.6%, eroding the benefits of digital transformation. Rising credit impairment charges and compliance costs are offsetting gains from operational initiatives.

Rates & Liquidity Context

The Central Bank Rate (CBR) has remained at 13.0% since July 2023, with T-bill yields in the 15.0%–16.0% range for 91-day and 182-day tenors. Interbank rates have stabilized around 14.5%, reflecting tight liquidity conditions. For COOP, this environment is net restrictive: higher deposit costs compress NIMs, while elevated risk-free rates reduce the attractiveness of liquid asset holdings. The bank’s deposit beta has risen, and its ability to reprice loans is constrained by competitive pressures and borrower stress. Money-market conditions are unlikely to ease materially until the CBK signals a pivot toward monetary easing, which is not expected before late 2026.

What To Watch

Next Catalyst — Q1’26 earnings release, expected in mid-April 2026. Focus on NPL formation, provisioning trends, and NIM trajectory.

Management Signal — Watch for commentary on asset quality normalization, digital lending growth, and deposit repricing strategies. Management’s guidance on NPL coverage ratios and provisioning policies will be critical.

Peer Check — COOP’s NPL ratio of 16.9% is among the highest in the sector, trailing Equity Group (13.2%) and KCB Group (12.8%). Its NIM compression is steeper than peers, reflecting a less favorable deposit mix. The dividend yield is competitive, but the payout sustainability is questionable relative to peers.

Valuation Trigger — A sustained improvement in the NPL ratio below 15.0% and stabilization of NIMs above 7.5% would justify a re-rating toward the higher end of analyst targets. Conversely, a further rise in NPLs or a decline in NIMs below 7.0% would pressure the stock toward book value.

Informational only, not investment advice.