CO-OPERATIVE BANK OF KENYA LTD

2013 GROUP FINANCIAL PERFORMANCE

Contents

Macro Economic OverviewThe Co-operative Bank of Kenya StoryPillars of our Strategic GrowthFinancial Performance Update

Macro Economic Overview

Macro Economic Overview

  Kenya is now a frontier economy in similar ranks with Nigeria. This is mainly due to improved performance due to changes in political, economic and social landscape.

It offers great banking and business opportunities with now 67% of kenyan’s having formal financial access from any provider (Fin access 2013 Survey).

With heavy investment in roads network and standard gauge railways and telecommunications is expected to propel economic growth.

Macro Economic Overview

  Kenya’s minerals, oil and gas offers good deals in the medium and long term - Commercial production of titanium at the Coast region has already started - Commercial reserves have been confirmed for crude oil in Northern Kenya - coal in Mui Basin in Kitui has also been confirmed. Production expected in 2016/2017.

Geothermal power by GDC and Kengen expected to lower cost of power to the business community.

Macroeconomic Overview

Kenya’s FDI flow is projected above Sub-Saharan average in 2014

The country’s Foreign Direct Investment is forecast at 3.2% of GDP in 2014.

This compares favorably to Sub-Saharan average of 2.9% and Middle-income countries average of 2.2% of GDP (IMF , October 2013)

Macroeconomic Overview

The private sector remains vibrant and very attractive to FDI

The private sector provides better linkages between formal and informal segments of the economy.

This provides growing markets and good banking business opportunities.

Macroeconomic Overview

Kenya’s Debt level is still sustainable

The country’s Public Debt to GDP ratio stood at 51.8% in December 2013 and is projected to touch 53.3% in June 2014.

The IMF has been carrying out Kenya’s debt sustainability analysis since 2010 and indicates that our country’s debt is sustainable (IMF Debt Sustainability Analysis, April 2013 review).

Macroeconomic Overview

Kenya’s economy is now stronger to withstand external vulnerability

The country’s gross foreign exchange reserves averaged 4.3 months worth of import cover. This compares favorably with 3.1 months for COMESA and 3.9 months import cover for EAC.

The 2011-2013 IMF’s Extended Credit Facility has resulted in a stable money and forex market.

Macro Economic Overview

 Gross Domestic Product (GDP)

Kenya’s external position has strengthened substantially in the recent years.

The current account deficit, which averaged over 10% of GDP in 2011 and 2012, narrowed to 7.5% of GDP in September 2013. With the successful completion of the IMF’s Extended Credit Facility (ECF), Kenya now stands stronger to withstand external shocks.

Kenya’s economic growth rate has recovered steadily from 1.5% in 2008 to 4.4% in Q3 2013 and an estimated 5.0% for the whole of 2013.

This growth in 2013 is commendable given Kenya’s history of very low economic growth in an election year.

Macro Economic Overview

 

Source: Kenya National Bureau of Statistics

Macro Economic OverviewI

nflation

Kenya’s inflation rate is stable and within single digit level.

Inflation rate averaged 5.72% in 2013 and was within targeted upper band of 7.5% by the National Treasury.

For January and February 2014, inflation has averaged 7.04% which is within the National Treasury targets and is expected to remain relatively at that range.

Interest Rates

Interest rates have been stable in 2013 resulting from a stable inflation environment.

CBK have managed to keep the macroeconomic environment stable resulting in a stable money market.

Macro Economic Overview

Foreign Exchange

KES has been stable against major trading currencies in 2013

KES exchanged at an average of KES 86.125 to the USD in 2013 and KES 86.275 in January and February 2014 which indicates high currency stability.

No significant volatility is expected on the KES against other major currencies.

Macro Economic EnvironmentS

outh Sudan

• Banking business opportunities remain attractive;

Less than 3% of the population has access to formal financial services (Bank of South Sudan).

Forex business and trade finance is vibrant

Untapped agribusiness providing great potential

Number of formal SMEs has grown by over 1700% since 2006 according to the World Bank.

The Co-operative Bank of Kenya

A rich heritage, a confident future

A rich heritage, a confident future

Predominantly owned by the Co-operative Movement through Co-op Holdings Co-operative Society with a 65% stake.Kenya has the largest co-operative movement in Africa and the 7th in the world with over 12,000 co-operative societies, 7,000 of which are Sacco's.There are over 10 million members in the co-operative movement with a strong track record.Unique wholesale/ retail bread banking model.Growing network now with 134 branches in KenyaRegional expansion now with a presence in South Sudan.

Pillars of our strategic growth

Pillars Of Our Strategic Growth

1. Successful financial deepening and business diversification

2. Strong transaction income base

3. Strong risk management framework

4. Robust technology and service delivery channels

5. Strong investment in human capital

6. A powerful brand

7. Strong capital base

8. Strong & sustainable partnerships with Development Partners

9. Social investment that inspires self reliance

10. Heavy investments for future growth

Successful financial deepening and business diversification

Successful Financial Deepening and Business Diversification

We deliver a diversified product offering

To cover SME, Retail, Co-operatives, Corporate, Agribusiness, Mortgage, Asset Finance & Micro Credit

Has linkages with all sectors of the economy - Financial, Agriculture, Energy, Transport, Housing , Manufacturing

A diversified product offering increases the bank’s coverage and fulfillment of customer needs, boosting wallet size growth.

Successfully build an account base of over 4.1 Million accounts

Excellent cross selling opportunities with a customer base of over 4.1 million accounts ; 76% with only 1 account

Linkages with Saccos expands this mass retail base, boosting sales retail offerings; Sacco link.

26% stake in CIC Insurance Group

Remarkable growth in account numbers

Account numbers, thousands

Growing borrowing customer base

Strong growth in borrowing customer numbers continues to boost asset growth and the bottom line

2. Strong Transaction Income Base

1. Built a vast capability to drive non-funded commissions

2. Strong growth in commissions as customers enjoy convenient

access via the service outlets of their choice.

3. ATMs, over 535

4. Agency Banking, 7,099 live sites, 15,000 by close of 2014

5. Branch network, 134 and growing

6. M-banking, 1.32 Million customers

7. Sacco Link Customers – 631,487

8. Forex income of Kes. 1.47B in 2013

9. Subsidiaries businesses

10.Associates

3. STRONG RISK MANAGEMENT FRAMEWORK

Proactively managed our NPL

High level of Governance; Risk & Finance Committee of the Board.

A robust credit management frameworko Enforcement of prudent credit risk management policyo Well diversified portfolioo Adequate provisioning policy

A sound risk & compliance framework

A well-diversified asset portfolio

Sacco ; 29 B 21%

Agribiz ; 4.2 B ; 3%

Corporate; 17.1 B; 13%

Mortgage; 12.8 B; 9%Micro-credit;

3.8 B ; 3%

Asset Fin.; 6.1 B; 4%

Personal, Card and other retail;

52B; 38%

SME; 11.8 B; 9%

Asset portfolio diversification Sacco Agribiz

Corporate Mortgage Micro-credit

Asset Fin. Personal, Card and other retail SME

4. Robust Technology & Service Delivery Channels

• Sustained investment in world-class technologies and service

channels to optimize operational efficiency while providing

unrivalled service

• Banking on the latest Bank Fusion Universal Banking (BFUB) core

banking platform from Misys with a world-class support structure

with the following:

o Latest 6 IBM P7 series servers

o Tier 3 Data centre

o Fiber connection

o MPLS technology on data movement between head office and

branches.• Investment in specialized systems: Opics (Treasury System) and

Trade Innovation for Trade Finance

Robust technology and service delivery channels

Strong focus on county banking strategy

Continued focus on customer delivery channels

5. Strong Investment In Human Capital

The Bank is undoubtedly an employer of choice in the industry

We have a clear and functional organization and leadership

structure

We have enshrined a performance-based culture and the

Balanced Score Card system

We have a vibrant workforce with a good mix of age and skill

sets.

Runs own Leadership & Management Centre; center of

excellence in banking training.

Includes training for Sacco's management.

6. A Powerful BrandCo-op Bank is the face of Kenya. We embody the legacy of

a successful enterprise by indigenous Kenyans, represented

by the Co-operative movement.

Our brand speaks to the character of the Kenyan people, as

engrained in our tagline ‘we are you’ and BoD Declaration of

the ‘Kingdom Bank’

We are a successful African story, being the number one Co-

operative Bank in Africa

A reputable Board of Directors; A track record of a most

successful business and operational restructuring from a

huge loss of Kes 2.3Bn in Year 2001

Co-op Bank wins the ‘Most Green Bank’ Award

2013 Energy Management AwardsCITATION

Willingness to take risk in new area of financing (clean energy banking)

Actively promotes ‘green energy’ among our clients

Fastest turnaround time for Renewable Energy (RE) & Energy Efficiency (EE) financing for SME and large enterprises.

Currently have the highest achievement in AFD Clean Energy credit line.

Bank with the largest pipeline of projects seeking clean energy financing.

World Recognition

7. Strong capital base

7. Strong capital base

• Steady and consistent growth in shareholders equity

• Ability to double our deposit base within statutory requirements

• Ability to lend up to Kshs 9.2 B to a single customer

• Capital retention strategy to grow business.–Progressive dividend payout as our earnings grow–Long term plan of deepening shareholder value–Affordable means of funding growth

Strong return on investment

• Progressive dividend payout as our earnings grow

• Critical focus of deepening shareholders value

Ksh

8. Strong and Sustainable Partnerships With

Development Partners

Leveraged on our strong balance sheet to secure

long-term debt from developmental partners for

over 18 billion as hereunder:

– IFC US$ 60 million (Kshs.5.1 billion)

– EIB Euro 70 million (Kshs.8 billion)

– AFD Euro 10 million (Kshs.1.2 billion)

– DEG US$ 52.5 million (Kshs.4.51 billion)

Strong and Sustainable Partnerships WithDevelopment Partners

Senior debt has enhanced asset-liability match

Mitigated our shilling exposure

Diversified our asset portfolio

Expanded our client base to export-led sectors

Boosted our competitive position on account of

affordable lending rates

9. Social Investment that Inspires Self Reliance

Social investment philosophy: empower institutions

and individuals so that in future they don’t need to be

helped again.

Board of Directors went out of its way to incorporate a full

consultancy company - Coop Consultancy Services - with

20 consultants to support Sacco’s and related community

benefit institutions.

Capacity building for Sacco’s making them more

competitive. Carried out over 500 mandates in 3 years.

Supports Sacco’s to establish FOSA’s

Social Initiatives

Co-op Bank Foundation:-

one of the main pillars of the Co-op Bank Social Responsibility program

The bank will have sponsored in 4 years, over 2,800 needy but bright students to pursue Secondary, University & College education.

9. Social Investment That Inspires Self Reliance

• Supported the establishment of Kenya Co-

operative Coffee Exporters Ltd to help coffee

farmers maximize return on their business and

take greater control of the coffee value chain.

• Our social investment has greatly boosted our

corporate image and brand visibility.

10. Heavy Investments for future revenue growth

In line with the County Governance Structure, we have opened over 60 branches in the last 3 years;– Leveraging on these branches to be key banker to

most of the county governments.– Around 20 of these branches will contribute positively

to our profits from this year (Kshs226 million loss in year 2013)

South Sudan operations: we opened our doors for customers from September. 2013. This strategic joint venture (Co-op bank 51% / GOSS 49%), is expected to contribute positively to our profits from this year. (Us$3.2 million loss in 2013).The unique joint venture guarantees quick turnaround of our business.

Financial Performance Update

A Growing Bank

KES Billions 2013 2012

% Change (Year on

Year)

 

Total Assets 231.2 200.8 15%  Loan book (NET) 137.1 119.1 15%  Government securities

39.3 33.4 18%  

Total Deposits 181.2 163.3 11%  

Borrowed Funds 10.3 4.6 124%

Number of Accounts ( Millions)

4.1 3.2 28%  

Branch Network 134 114 18%  

Optimal Investment in earning assets

Strong Balance Sheet ratios

2013 2012

Core Capital / Total Deposits 18.2% 18%

NPL / Total Loans 4.3% 5%

Total Capital / Total Risk Weighted Asset

21.1% 23.8%

Liquidity 32.6% 35.5%

Loans to Deposits 75% 73%

Strong Balance Sheet Growth

Strong Profitability Growth

KES Billions (except for Earnings per share) 2013 2012

% Change (Year on

Year)   Interest Income 24.54 24.36 1%   Interest Expense 5.92 8.68 -32%   Net Interest Income 18.63 15.68 19%   Fees & Commissions 7.14 6.05 18%   Forex Income 1.5 1.3 15%   Total Income 27.89 23.85 17%   Loan Loss Provision 0.78 1 -22% Operating Expenses 17.4 14.2 22%   PROFIT BEFORE TAX 10.87 9.98 9%   PROFIT AFTER TAX 9.11 7.72 18%   Earnings per Share 2.19 1.84 19%  

Sustainable Profitability

Key Profit & Loss Ratios

2013 2012

Cost to Income 59% 55%

Non - Funded to Total Income 33.3%

34%

FX to Non Funded income 16% 15.9%

Average Return on assets 4.2% 4.2%

Average Return on Equity 27.4%

31%

Conclusion

We are pleased with the strong balance sheet and P&L growth with the Profit before tax of Ksh. 10.87B for the year ended 31st December 2013 representing a 9 % growth over the 2012 PBT of Kes. 9.98B

With the major investment in the branch network, ICT infrastructure and new operations in South Sudan, we expect the growth momentum to be sustained and better profitability in 2014

Conclusion

The Board of Directors has recommended subject to AGM and Capital Market Authority approval the following;

A dividend payment of Ksh.0.50 per every ordinary share held in order to retain more funds for expansion.A bonus share issue of one (1) new ordinary share for each six (6) ordinary shares held.

Thank you for your continued support.

God bless you.

Dr. Gideon Muriuki, MBSGroup Managing Director & CEO