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Kenya Listed Commercial Banks Review Cytonn Q1'2021 Banking

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Kenya Listed Commercial Banks Review Cytonn Q1'2021 Banking Kenya Listed Commercial Banks Review Cytonn Q1’2021 Banking Sector Report “Recovery of the Banking Sector Amid a Tough Operating Environment” 11th June, 2021 Table of Contents 1 Introduction to Cytonn 4 Listed Banking Sector Metrics 2 Kenya Economic Review and Outlook 5 Bank Valuation Reports 3 Banking Sector Overview 6 Appendix www.cytonn.com 2 I. Introduction to Cytonn 3 About Us Cytonn Investments is an alternative investment manager, with real estate development capability, and a primary focus on private equity and real estate investments in the high growth Kenyan Region. Cytonn has a unique strategy of coupling two compelling demand areas - the lack of high yielding investment products and the lack of institutional grade real estate. We provide high yielding investment instruments to attract funding from investors, and we deploy that funding to largely pre- sold investment grade real estate. With offices in Kenya and Washington, DC - USA, we are primarily focused on offering alternative investment solutions to global and local institutional investors, individual high net-worth investors, and diaspora investors interested in the East-African region. Real estate investments are made through our development affiliate, Cytonn Real Estate, where we currently have over Kshs. 82 billion (USD 820 mn) of projects under mandate across ten projects. In private equity, we invest in banking, education, and hospitality. Over Kshs. 82 Three offices across 2 Over 500 staff 10 investment billion worth of continents members, including readyprojects in 82 projects under 3 500 Cytonn Distribution 10 real estate mandate A unique franchise differentiated by: Independence & Investor Alternative Investments Focus StrongAlignment CommittedPartners Specialized focus on Focused on serving the Every staff member is an Strong global and local alternative assets - interest of clients, which is ownerin the firm. When partnerships in financing, Real Estate, Private best done on an clients do well, the firm does land and Cytonn Real Equity, and Structured independent platform to well; and when thefirm does Estate, our development Solutions minimize conflicts of interest well, staff do well affiliate www.cytonn.com 4 Why We Exist Africa presents an attractive investment opportunity for investors seeking attractive and long-term returns. Despite the alternative markets in Africa having high and stable returns, only a few institutional players serve the market. Cytonn is focused on delivering higher returns in the alternative markets, while providing the best client service and always protecting our clients’ interests. WE SERVE THREE MAIN CLIENT SEGMENTS: WE INVEST OUR CLIENT FUNDS IN: ● Real Estate, and Real Estate Related Businesses ● High Net-worth Individuals through Cytonn Private Wealth. This is done through our captive Distribution Network ● Private Equity ● East Africans in the Diaspora through Cytonn Diaspora ● Fixed Income Structured Solutions ● Global and Local Institutional Clients. These clients are served from our ● Equities Structured Solutions Investment & Fundraising Team We invest them in We deliver the We collect funds high growth best possible from ourclients opportunities returns www.cytonn.com 5 Our Business Structure Cytonn Investments Management Plc Cytonn Asset Managers Cytonn Capital Partners Cytonn (Regulated by (Private Markets) Real Estate Other Strategic Initiatives CMA & RBA) Private Offers and Real Estate Unit Trust Funds Research and Deal Origination Cytonn Distribution Investments East African Forum for Cytonn Hospitality Cytonn Africa Financial Fund Project Management Alternative Investments Superior Homes Kenya Cytonn Advisory Quality Assurance/ Control Pension Fund Management Cytonn Procurement - Cymatt Cytonn Real Estate Legal Cytonn Properties Cytonn Centre for Affordable Housing www.cytonn.com 6 II. Kenya Economic Review and Outlook 7 We expect gradual economic improvement in 2021 Q3'2020 GDP Sectorial Contribution Kenya GDP Growth rate 8.0% Education 4.1% 6.3% 5.7% 5.9% Information and Communication 4.2% 6.0% 5.4% 4.9% 5.4% 4.9% Construction 6.8% 4.0% Financial & Insurance 6.8% Transport and Storage 7.8% 2.0% -1.1% Wholesale and retail trade 8.6% 0.0% Real estate 9.0% 2014 2015 2016 2017 2018 2019 Q1' 20 Q2' 20 Q3' 20 Manufacturing 9.4% -2.0% Taxes on Products 11.4% -4.0% Agriculture and Forestry 19.5% -6.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% -5.7% -8.0% • According to Kenya National Bureau of Statistics (KNBS), the Kenyan economy recorded a 1.1% contraction in Q3’2020, down from a growth of 5.8% recorded in Q3’2019. This was the second consecutive contraction, following the 5.7% contraction recorded in Q2’2020 • We expect the economy to gradually improve in 2021 supported by the recovery of sectors such as tourism, hospitality and trade etc. which were worst hit by the pandemic 8 Inflation Inflation averaged has 5.3% in the first 5 months of 2021 5-Year Inflation Rates 14.0% 11.5% 12.0% 10.0% 6.6% 8.0% 6.3% 6.7% 6.3% 6.4% 6.0% 6.3% 4.0% 5.6% 6.4% 3.8% 5.9% 2.0% 3.7% 4.1% 0.0% *Source: KNBS • Inflation averaged 5.8% in the first five months of 2021, a 2.0% points decline from the 6.0% recorded over the similar period in 2020. Key to note, May 2021 inflation increased to 5.9% from the 5.8% recorded in April 2021 attributable to rising food prices. The rise in inflation rate earlier in the year was attributed to the rising fuel prices • We expect inflation to be higher than 5.2%, which was the average in 2020, but remain within the government target range of 2.5% - 7.5%, mainly due to the rising global fuel prices and the new taxes introduced at the start of the year that will be transmitted to the final consumers 9 Stanbic PMI Index Kenya PMI Index 65 60 59.1 55 52.5 50 Average - 51.6 45 40 41.5 35 34.4 34.8 30 *Source: Markit Economics PMI Average • In 2021, the economic prospects of the country improved, with the Stanbic PMI index averaging 49.7 in the first 5 months of 2021, an increase from the 41.5 recorded during the same period last year. In Q1’2021, the PMI Index declined, coming in at an average of 51.6, compared to 53.9 in Q4’2020 • Key to note, a PMI reading of above 50 indicates improvements in the business environment, while a reading below 50 indicates a worsening outlook 10 Currency Year-to-date, the Kenyan shilling has appreciated by 1.5% against the US Dollar 115.0 Kshs. vs USD 115.0 108.5 110.0 110.0 105.0 10-yr moving average 108.2 105.0 100.0 100.0 95.0 95.0 90.0 90.0 Jul-18 Jul-16 Jul-17 Jul-19 Jul-20 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Nov-16 Nov-17 Nov-18 Nov-19 Nov-20 Mar-21 Mar-17 Mar-18 Mar-19 Mar-20 May-19 May-20 May-16 May-17 May-18 May-21 *Source: Central Bank of Kenya Exchange Rate 10 Yr Moving Average • The Kenya Shilling has appreciated by 1.5% year to date, in comparison to the 7.7% depreciation in 2020. The gain is mainly supported by the improving diaspora remittances evidenced by a 43.8% y/y increase to USD 299.3 mn in April 2021, from USD 208.2 mn recorded over the same period in 2020 • In our view, the shilling will come under pressure due to continued uncertainty globally making people prefer holding dollars and other hard currencies 11 Interest Rates and Monetary Policy Central Bank Rate (%) Weighted Average Interest Rates (%) 20.0 14.0 12.1 18.0 12.0 16.0 7.0 14.0 10.0 12.0 7.1 10.0 8.0 8.0 6.0 6.0 4.0 4.0 2.0 2.0 5.0 0.0 0.0 Jul-19 Jul-20 Jan-19 Jan-20 Jan-21 Jun-19 Jun-20 Oct-19 Oct-20 31-Jul-15 31-Jul-16 31-Jul-17 31-Jul-18 31-Jul-19 31-Jul-20 Feb-19 Apr-19 Feb-20 Apr-20 Feb-21 Sep-19 Sep-20 Dec-20 Dec-19 Aug-19 Aug-20 Nov-19 Nov-20 31-Jan-16 31-Jan-17 31-Jan-18 31-Jan-19 31-Jan-20 31-Jan-21 Mar-19 Mar-20 Mar-21 31-Oct-15 31-Oct-16 31-Oct-17 31-Oct-18 31-Oct-19 31-Oct-20 30-Apr-15 30-Apr-16 30-Apr-18 30-Apr-17 30-Apr-19 30-Apr-20 30-Apr-21 May-19 May-20 Central Bank Rate Average Rate Deposit Interest Spread Lending • Since the start of the year, the Monetary Policy Committee has met thrice and held the Central Bank Rate stable at 7.0% in all instances and the Cash Reserve ratio also remained unchanged at 4.25% • The MPC concluded that the current accommodative monetary policies together with the package of policy measures implemented over the last year have protected the economy from substantial decline and supported vulnerable citizens. As a result of the adoption of the accommodative policy in 2020, commercial banks’ lending rates declined to 11.9% in December 2020 from 12.0% seen in September 2020 12 Private Sector Credit growth Private Sector Credit Growth 30.0% 25.8% 25.0% 20.0% 15.0% 8.9% 10.0% Average: 8.0% 2.8% 5.0% 8.4% 1.9% 4.9% 0.0% *Source: KNBS • In the 12 months to December 2020, growth in private sector credit stood at 8.4%, supported by recovery in demand with the improved economic activity following the easing of COVID-19 containment measures, and the accommodative monetary policy • We expect to see increased caution on lending especially to businesses that rely on imports hence inhibiting private credit sector growth due to the high risk of credit default, with the possibility of heightened Non Performing Loans due to the continuing pandemic and the new restriction measures put in place 13 III.
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