3 0 November 2020
BK Group Plc Stock Rating Target Price Closing Price Buy RWF394 RWF230
Buy Kenya line, overly discounted What's Changed From To
Target price 311 394 Company Update 2020e EPS 44.2 41.5 2021e EPS 52.2 55.9 Banks. Rwanda Rat ing: $RECO$ Target Price $ISO$$TP$
Maintain Buy, but significantly increase upside, especially on the Kenya line
Post the 3Q20 results and mgmt. guidance, we maintain our Buy rating for BKG and upgrade our forecasts (by reducing our 2020e earnings by 6% and upgrading our 2021e and 2022e earnings by 7% and 13%, respectively). At its current price on the RSE (RWF230), BKG RW is trading at a 0.9x 2020e P/B and 5.5x 2020e P/E; on the NSE (KES14), BKG KN is trading at a 0.5x 2020e P/B and 3x 2020e P/E. Our TP for BKG RW is RWF394 (KES44/share using a spot ex rate of KES/RWF 8.98). At this price, we value the bank at a 1.5x 2020e P/B and 9.5x 2020e P/E, implying 77% upside (237% upside on the Kenya line) at current price levels, incl. 2020e DPS of RWF29 – 13% yield (incl. 2020e DPS of KES3; 23% yield on the Kenya line). Notably, we project a 16.6% ROAE in 2020 and a normalised ROAE of 23.7% (vs. our 17% COE).
Addressing the high coverage ratio and our high conviction call on provision releases
As of 3Q20, the coverage ratio was particularly high (+10ppts Q-o-Q to 140%), which translates to an annualised cost of risk of 4.1%. In this note, we provide some context behind this provision build-up: i) 2018 (50% discount to commercial property collateral); ii) 2019 (switch from blanket provisioning approach to more targeted provisioning); iii) 2020 (COVID-19; increase in ECL calculations across all stages). We also highlight the scope for provision releases (we see the cost of risk normalising at 2%).
Capital finally showing signs of absorption, which bodes well for return profile
Two years post the right issue, 3Q20 total CAR is now at 23.4% (vs. req. min. cap of 15%), and BKG is now showing signs of significant capital absorption. We attribute this to: i) the acceleration in loan growth (+28% Y-o-Y as of 3Q20 vs. 20% in 2019); and ii) the stated CAR position is net of a 2020 dividend provision, which we estimate will be RWF29/share (includes the 2019 DPS of RWF14.4/share + 2020 DPS RWF14.5/share). We note that with the reduction in the excess capital, BKG should now generate a higher ROAE (20.3% in 2021), and the share price overhang should slowly dissipate. Given the lower provisioning outlook and mgmt.’s revised guidance on 2020e earnings (from -50% Y-o-Y earlier in the year to flat post 3Q20 results), the shape of BKG’s recovery looks very promising.
Key Financial Highlights (Dec Year End) Stock Data Closing Price RWF230 as of 27 Nov 2020 H2,BH1,BWH1,CBH9In RWFmn, unless otherwise stated 2019a 2020e 2021e 2022e Last Div. / Ex. Date RWF12.2 / TBA Total banking income 124,855 137,669 160,924 185,766 Mkt. Cap / Shares (mn) USD157.4 / 672.2 Av. Daily Liquidity (mn) USD0.00 Operating income 70,472 91,048 102,029 115,091 52-Week High / Low RWF265 / RWF230 Net income 37,308 37,538 50,568 61,124 Bloomberg / Reuters BOK RW / BOK.RW EPS (RWF) 41.2 41.5 55.9 67.6 Est. Free Float 43.3% EPS consensus (RWF) 41.2 N/A N/A N/A
Price to earnings 5.6x 5.5x 4.1x 3.4x Dividend yield 0.0% 12.6% 8.5% 10.3% Price to book value (tangible) 1.0x 0.9x 0.8x 0.7x Muammar Ismaily ROAE (tangible) 18.6% 17.0% 20.8% 21.8% +254 203743036 | [email protected] Capital adequacy ratio 30.6% 25.9% 25.6% 25.8% Kato Mukuru H2,BH1,BWH1,CBH9NPL coverage 116.0% 149.4% 148.0% 138.0% +971 4 364 1904 | [email protected]
Source: BK Group Plc, Bloomberg and EFG Hermes estimates
Disclosure Appendix at the back of this report contains important disclosures, analyst certifications Page 1 of 20 and the status of non-US analysts
BK Group Plc 30 November 2020 Banks. Rwanda
Data Miner
Investment Thesis Valuation and Risks The Bank of Kigali (BOK), which is 56.8% owned by the We have a Buy rating on BKG, with a target price of Rwandan government (through Agaciro Development Fund and RWF394/share (KES44/share), which we have derived through RSSB), is the most dominant bank in Rwanda across all balance applying our standard five-year dividend discount model. We sheet and profitability share metrics. As of 3Q20, BKG’s net assume a cost of equity of 17%, which we have derived using a loans, deposit and equity shares were 35.7%, 30.3% and risk-free rate of 12%, equity risk premium of 5% and beta of 1x. 35.4%, respectively. We also note that BKG continues to expand As our valuation is in local currency (Rwandan Francs), we have and innovate outside its traditional banking model with the applied a terminal growth rate of 8%. We believe the 8% establishment of BK Techouse. BK Capital and BK General terminal growth rate best reflects the low level of banking insurance (which in 2019 made up 14% of total NFI income). As system penetration in Rwanda. Downside risks to our rating the only systemically important bank, BKG is also captive of include: i) excess residual capital not being used, which subdues opportunities in the syndicated corporate loan segment being the return profile; ii) BKG’s loan growth trajectory; iii) limited the only local bank that usually participates. The bank also scalability of the bank’s operations as a result of Rwanda’s recently completed a successful rights issue (raising USD70mn) relatively small economy; iv) challenges in increasing non-funded and is well positioned for growth into large scale infrastructure income because of changes to the distribution model; and v) a projects, which form a key part of Rwanda’s current growth higher-than-projected risk charge. story. With capital from the rights issue now being absorbed, we project the bank’s return profile to improve. Finally, given the bank’s high coverage ratio and improving asset quality metrics, we project significant provision releases over our forecast period.
Dec Year End Dec Year End In RWFmn, unless otherwise In RWFmn, unless otherwise 2019a 2020e 2021e 2022e 2019a 2020e 2021e 2022e stated stated Income Statement Valuation Metrics Net interest income 94,773 110,033 128,785 148,274 Price to earnings 5.6x 5.5x 4.1x 3.4x Non interest income 30,081 27,636 32,139 37,492 Price to pre-provision earnings 2.2x 1.7x 1.5x 1.3x Total banking income 124,855 137,669 160,924 185,766 Price to book value 0.9x 0.9x 0.8x 0.7x Operating expenses (54,383) (46,621) (58,896) (70,675) Price to book value (tangible) 1.0x 0.9x 0.8x 0.7x Operating income 70,472 91,048 102,029 115,091 Dividend yield 0.0% 12.6% 8.5% 10.3% Total provisions (18,379) (36,645) (29,789) (27,771) ROAA 3.9% 3.3% 3.7% 3.8% Other income / (expense) 0 0 0 0 ROAE 18.0% 16.6% 20.3% 21.5% Income before taxes or zakat 52,093 54,403 72,240 87,320 ROAE (tangible) 18.6% 17.0% 20.8% 21.8% Taxes or zakat (14,784) (16,865) (21,672) (26,196) Leverage (Assets / Equity) 4.6x 5.1x 5.5x 5.6x Minorities & other items 0 0 0 0 KPIs Net income 37,308 37,538 50,568 61,124 Loan growth (Y-o-Y) 19.3% 21.0% 12.1% 12.5% Balance Sheet - Key Highlights Loans / Deposits 105.5% 98.2% 89.8% 83.8% Customer loans 678,000 820,354 919,478 1,034,200 Banking income growth (Y-o-Y) 20.0% 10.3% 16.9% 15.4% Total interest earning assets 962,800 1,180,372 1,370,915 1,577,281 Operating income growth (Y-o-Y) 30.5% 29.2% 12.1% 12.8% Risk-weighted assets 663,362 826,973 962,731 1,111,133 Earnings growth (Y-o-Y) 36.3% 0.6% 34.7% 20.9% Total assets 1,019,100 1,270,452 1,479,011 1,706,996 Net interest spread 9.85% 9.50% 9.54% 9.69% Customer deposits 642,700 835,307 1,023,667 1,234,276 Non-interest income / Banking inc. 24.1% 20.1% 20.0% 20.2% Total interest bearing liabilities 742,900 975,221 1,195,131 1,441,017 Cost-to-income 43.6% 33.9% 36.6% 38.0% Common shareholders' equity 220,800 232,142 265,011 304,741 NPL ratio 5.7% 5.5% 5.0% 5.0% Per Share Numbers NPL coverage 116.0% 149.4% 148.0% 138.0% EPS (RWF) 41.2 41.5 55.9 67.6 Cost of risk (bps) 253.2 410.0 300.0 250.0 DPS (RWF) 0 28.962 19.567 23.652 Tier 1 ratio 30.3% 25.7% 25.5% 25.6% BVPS (RWF) 244 257 293 337 Capital adequacy ratio 30.6% 25.9% 25.6% 25.8%
BVPS (tangible) (RWF) 237 250 287 332 Source: BK Group Plc, EFG Hermes estimates
Source: BK Group Plc, EFG Hermes estimates
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BK Group Plc 30 November 2020 Banks. Rwanda
Contents
Asset quality – Addressing the high coverage ratio and our high conviction call on provision releases 4
Share buy-back consideration - The rationale behind it 6
Capital – finally some signs of significant capital absorption 7
Balance sheet growth – BKG shifts focus to deposit growth after BNR prescriptions on max LDR 8
Market share – Still a dominant player, but KCB could narrow the market share gap 9
Rwanda (BKG RW) vs. Kenya (BKG KN) – Divergence in pricing creates massive opportunity on Kenya line 10
Profit Model – 2020 earnings guidance has decreased from -40% to flat, which is a massive uplift under current circumstances 11
Valuation – Massive upside on the Kenya line 14
Financial Statements 15
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BK Group Plc 30 November 2020 Banks. Rwanda
Asset quality – Addressing the high coverage ratio and our high conviction call on provision releases
Up to 43% of loans have been restructured, and mgmt. is guiding on 70% Stage 3 coverage. Based on mgmt. commentary, 43% of total gross loans were restructured as of 9M20. Additionally, mgmt. has taken a 1% general provision on these restructured facilities that translated to an additional RWF3bn impairment charge in 1H20 and are currently guiding on an increase specifically in Stage 3 loan provisions (from 62% for non-performing assets to c70%).
Notable developments in the regulatory space, specifically in relation to NBR guidelines:
Apply a macro overlay to a crisis condition; all PDs have increased, irrespective of the rating. Allowance to restructure credit facility up to 4 times. Collateral realisation increased from 2 to 3 years. Loans can be upgraded to performing after 12 months. Guidelines to be revisited in 2021.
Figure 1: NPL ratio has improved this year despite loan growth Figure 2: At first glance, coverage ratio looks unnecessarily high, but a cceleration reflecting scale of restructuring activities given BNR’s regularity reform on provisioning, we understand why BKG’s NPL ratio (%), 1Q17-3Q20 BKG’s NPL ratio (%), 1Q17-3Q20
7.0 149 140 137 136 130 6.5 6.4 129 116 110 113 6.0 5.8 109 104 103 5.7 5.7 5.7 5.6 5.6 5.5 92 5.5 86 5.3 89 80 75 73 4.9 4.9 5.0 4.8 69 4.7 61 4.6 4.5 4.4 49
4.0 29
2Q17 1Q18 3Q18 4Q18 2Q19 1Q20 1Q17 3Q17 4Q17 2Q18 1Q19 3Q19 4Q19 2Q20 3Q20
1Q17 2Q17 3Q17 1Q20 2Q20 3Q20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 4Q17
Source: Company data Source: Company data
The background to the high coverage ratio
Coverage remains relatively high (coverage ratio increased +10ppts Q-o-Q to 140% as of 3Q20), which mgmt., through different periods, has explained using the following reasons:
(i) (2018) New BNR guidelines that apply a 50% discount to commercial property collateral and a 30% discount to residential property collateral. (ii) (2019) BKG was initially using a portfolio approach or blanket probability of default for every client, whereas the regulator has recommended having a different approach (particularly for the corporate loan book). The impact here was an increase in the overall provisions. (iii) (1Q20) At the beginning of the COVID-19 pandemic (1Q20), BKG made a 1% general provision on all restructured facilities that translated to an additional RWF3bn impairment charge. Notably, some of these provisions were released 2Q20 (-6ppts in coverage ratio to 130%), but coverage still remained high. (iv) (3Q20) Based on the latest results, coverage has now increased 10ppts Q-o-Q to 140% attributable to increase in ECL calculations across all stages, but in Stage 3 in particular (Stage 2 coverage increased from 62% to 68%, according to mgmt.)
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BK Group Plc 30 November 2020 Banks. Rwanda
Figure 3: The 3 phases behind the high coverage ratio: i) 2018 (50% Figure 4: Given mgmt.’s conservative stance, we project a 4.2% discount to commercial property collateral); ii) 2019 (switch from CoR in 2020 but still remain confident a normalisation at 2.5% after bla nket provisioning approach to more targeted); iii) 2020 (COVID- significant provision releases over our forecast period 19) BKG’s quarterly impairment charge (%), 1Q17-3Q20 BKG’s cost of risk (%), 2015-24e
14,000 4.5 12,000 4.1 4.0 10,000
8,000 3.5 3.3 3.0 6,000 3.0 2.6 2.5 4,000 2.5 2.5 2.3 2.3 2,000 2.0 2.0 1.9 0 1.5
(2,000)
2016 2017 2018 2015
2019E 2020E 2021E 2022E 2023E 2024E
1Q17 2Q18 4Q18 3Q19 1Q20 3Q17 4Q17 1Q18 3Q18 1Q19 2Q19 4Q19 2Q20 3Q20 2Q17
Source: Company data Source: Company data, EFG Hermes estimates
How will the provision releases unfold?
Provision releases projected over the next 2 years. Considering: i) the NPL ratio declined in 3Q20 to 5.5% (signaling low asset quality deterioration during Rwanda’s lockdown period); ii) the lockdown restrictions in Kigali and other parts of Rwanda were lifted a while back (Rwandans were allowed to start their return to work on 4 May); iii) low stress levels on the SME and retail sides (according to mgmt.), there is a possibility of a significant provision release towards year-end and 1H21.
More stressed exposures, such as Rwanda Air and hospitality, to be restructured over a longer period. However, the more stressed corporate exposures – including Rwanda Air, hospitality and tourism-related entities – are likely to see their recoveries materialise over a longer period. Mgmt. added that if the economy can generate real GDP growth for two consecutive quarters in 2021, we should see substantial provision releases.
Rwanda Air remains a topical concern, but mgmt. unmoved. Total exposure to Rwanda Air is USD50mn. Notably, Rwanda Air has received budget support from the Rwandan government for the 2020-21 budget through bigger cash allocation. However, with; i) the upcoming common wealth conference (GHOGM 2021) next year (15k delegates and 52 heads of state); ii) the aforementioned budget support; and iii) investments from Qatar Airways (49% in Rwanda Air and 60% in the new Bugusera Airport), mgmt. is keen to note this should be the least of its concerns.
Cost of risk projected at 4.1% in 2020 and normalisation at 2%. Given the aforementioned points, we are projecting the risk charge to increase to 4.1% in 2020 and as the release of provisions that were frontloaded continues and the economy recovers (IMF projecting 2019 real GDP growth of 2.3% and strong 2020 recovery of 6.3%), we see the cost of risk normalising to 2%.
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BK Group Plc 30 November 2020 Banks. Rwanda
Share buy-back consideration - The rationale behind it
Mgmt. is considering introducing buy-back to provide some support to the stock on both the RSE and the NSE. This proposal is currently being shared with the board, and if approved could be presented to shareholders at the next AGM. Legal challenges on the Rwanda line imply the buy-back could be shelved for now
Unfortunately, on the Rwanda side (RSE), there is currently no regulation around share buy backs, so BKG is currently engaging the relevant regulatory authorities on how such a programme would be structured.
Additionally, the Company Act 2018 states that an entity is not allowed to buy back shares and hold them, which means that if mgmt. was to buy back shares, it would be cancelled. Given the need for capital, this is not an option it is willing to pursue. Kenyan regulation makes it easier on the Kenyan line
On the Kenyan side (NSE), although it would be the first share buy-back programme in Kenya, there is some nascent form of regulation, and getting approval from the necessary authorities (NSE/CMA), as well as structuring one, would be less complicated. The rationale behind it
Given that BKG raised USD70mn just two years ago through a rights issue, one may be surprised at BKG’s intention to introduce a buy back so shortly after. However, given the circumstances around RI changed before and after COVID-19, we try to at least explain mgmt.’s thoughts around the proposal through the table below. Under the circumstances, we see the rationale in the buy-back consideration, but note that given that the rights issue was made a RWF280/share, the buy-back share price will have to be significantly above the current market level (RWF230) to appeal to investors.
Figure 5: BKG operational circumstances before and after the share buy back No P urpose pf proceeds before 2018 rights After 2018 rights Issue (as of 2Q20) Actions being currently pursued by BKG issue 1 Purchase of a life insurer (namely Sonarwa), The proposed acquisition failed to go through last • Mgmt. now rolling out a greenfield (USD5-10mn consideration). year as Sonarwa’s valuation was too high operation (USD5-10mn consideration; but over LT). • Notably BKG is currently in talks with Mauritian Partner Swan to co-invest in life insurance. • Swan expected to invest 30% in the project. 2 To increase the single obligor limit from Loan growth as at 2019 and 3Q20 has been strong, • 2020-2021 budget has massive focus on USD30mn to USD40mn facilitating larger +19.3% Y-o-Y and +28% Y-o-Y, respectively. infrastructure investment. Mgmt. see this participation on syndicated facilities and sector as key part of the recovery and balance absorbing a higher number of large scale sheet capacity is key. corporate loans. • Power plant expected to come online by end-2020. 70MW capacity. Project size is USD400mn. BK participating on a syndicated basis. Notably it is the only local bank. • Cement plant is being fully financed by BK. Also expected to come online by end-2020.
3 Implementation of a 3% systemic charge • BNR has only applied a 0.25% additional capital • Mgmt. would still like to maintain a 5-7ppts on BKG for being a domestic systemically charge and remain muted on increasing this further. buffer over the min cap. requirement and important bank (new minimum capital maintaining a 35% div-pay out. requirement would be 18%; 15% of • However, the general view is that the 3ppts current minimum total CAR + 3% D-SIB increase in the D-SIB charge has either been charge) shelved or is being applied at a much slower pace than BNR had initially indicated. 4 To increase the stock’s liquidity by listing • Due to low investor penetration in Rwanda and low • Mgmt. has been actively engaging retail and additional shares on both the RSE and levels of local free float, trading activity on the RSE has institutional investors to generate more the NSE been subdued. trading on the stock. • The NSE traded volumes have been more active but mgmt. feel the share price has been unfairly discounted relative to its cross-listed Rwanda peer.
Source: Company data, EFG Hermes estimates
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BK Group Plc 30 November 2020 Banks. Rwanda
Share support most likely to be provided through recently approved DRIP programme
BKG recently got a dividend re-investment programme (DRIP) approved at RWF255/share and c7-8mn shares on both Kenya and Rwanda lines combined were subscribed. Due to the ongoing BNR suspension of dividend payments, this cannot happen until next year (when we expect the dividend payment suspension will be lifted); when it does, however, BKG intends expects the DRIP programme to provide some share price support in both markets at the RWF255/share (KES28/share on the Kenya line) level.
Capital – finally some signs of significant capital absorption
Accelerated RWA growth and dividend provision help to reduce CAR. Two years post the RI, 3Q20 Tier 1 CAR and total CAR at 23.2% (vs. req. min. cap of 10%) and 23.4% (vs. req. min. cap of 15%), respectively, are now showing signs of significant capital absorption. We attribute this to: i) the acceleration in loan growth (+28% Y-o-Y as at 3Q20 vs and 20% in 2019); and ii) the stated CAR position is net of a 2020 dividend provision, which we estimate will be RWF29/share (includes the 2019 DPS of RWF14.4/share + 2020 DPS RWF14.5/share).
Excess capital overhang should dissipate. The lower return profile (from the diluted post RI ROAE) has been an overhang on the share-price performance, but we are now encouraged to see that capital levels are now close to that of 2015 (CAR was 22.5%). Although this is relatively high (still a 7.3ppt buffer over the min cap requirement), we note that BKG’s total CAR has fallen by 9.3ppts, which implies that a large portion of the RI capital has now been deployed. More importantly, lower CAR should imply a resumption to a higher return profile once the economy recovers and banking operations normalise.
Only 0.25% additional capital charge applied by the BNR (vs. upper end of what was initially estimated of 3ppts). Subsequently, concerns over the high capital charge for being a domestic-systemically important bank (D-SIB) have dissipated after BNR only applied a 250bp charge (effectively brining BKG’s min cap requirement to 15.25%) and ever since have remained muted on the same.
Figure 6: Accelerated loan growth and 2019 & 2020 dividend Figure 7: We take a slightly more conservative outlook on RWA provision have reduced CAR to more acceptable levels growth than management BKG, capital adequacy ratios (%), 2013-2Q20 Loan and deposit growth (%), 2015-24e
Total CAR (%) Regulatory Min (%) Loan growth (net) Deposit growth 35 40 32.7 30.6 35 30 28.0 30 26.3 25 25 23.7 23.2 22.5 20 19.6 19.5 20 15
10 15 5
10 0
2015 2016 2017 2018 2019
2014 2017 2013 2015 2016 2018 2019
2Q20 3Q20
2022E 2023E 2024E 2021E 2020E
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
Projecting a 12.6% dividend yield based on a 35% payout. As per mgmt.’s guidance, we assume a 35% payout in 2020 (vs 35% in 2019) and we have added the 2019 pay-out as well. As mentioned above, this implies a RWF29/share and translates to a 12.6% dividend yield.
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BK Group Plc 30 November 2020 Banks. Rwanda
Balance sheet growth – BKG shifts focus to deposit growth after BNR prescriptions on max LDR
Loan growth has accelerated as mgmt. guided post the 2018 rights Issue...
Loan growth as of 2019 and 3Q20 has been strong, +19.3% Y-o-Y and +28% Y-o-Y, respectively. Although the current budget has a huge focus on COVID-19 relief measures, infrastructure investment is still a ST priority, and BKG sees construction-related projects as a key part to its recovery. We also reiterate particular projects in the pipeline:
RWF25mn for an energy project, which we assume will be one of the three new projects in the pipeline (Hakan Peat powered plant, three hydro plants and methane-based project) that are supposed to add 400MW of generating capacity by 2024 (vs. 221MW currently); A new cement plant. The cement plant is being fully financed by BK. Also expected to come online by end-2020. A project by “Mara phones” that will manufacture phones under the “Made in Rwanda” initiative. Trade opportunities in the DRC market. …but BNR preference for a 90% LDR has now shifted BKG’s focus to deposit growth
BNR recently expressed a preference for a 90% LDR. Given BKG’s 3Q20 LDR of 106%, mgmt. has shifted its focus to deposit growth and are now guiding on 10% loan growth 2021. Mgmt has also expressed a shift towards more deposit based funding (away LT DFI borrowing).
Figure 8: BKG exhibiting loan and deposit growth acceleration but Figure 9: And we project BKG to maintain the high deposit growth shift of focus to deposits reflecting through 2020 numbers mome ntum over our forecast period BKG’s loan and deposit growth, 1Q17-3Q20, (% Y-o-Y) BKG’s deposit growth, 2010-24e, (% Y-o-Y)
Net loan growth Deposit growth 40.0 40 35 35.0 33 35 30 30.0 30 24 25 25.0 23 21 21 21 19 19 20 20.0 17 15 16 15 15.0
10 9 10.0 9 5 5.0 0
(5) 0.0
2010 2015 2016 2011 2012 2013 2014 2017 2018
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 2020E 2021E 2022E 2023E 2024E 2019E
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
Government’s Economic Recovery Fund and BKG’s USD150mn allocation
In addition to the pipeline mentioned above, we also highlight the government’s Economic Recovery Fund announced in 1H20 that amounted to cUSD500mn to be provided to distressed sectors (cUSD100mn specifically to the hospitality sector). Notably, BNR was appointed as a fund manager, BKG got a USD150mn allocation (30% in line with 3Q20 loan market share) and the bulk of the funds have been distributed. According to mgmt., the cost of these funds is close to 0% and it is lending at between 5-8%. Overall, 14 banks were involved, and funds were distributed to 48 clients. The terms attached for the hospitality clients have been very supportive. Some facilities have been restructured up to 15 years, with a two-year grace period.
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BK Group Plc 30 November 2020 Banks. Rwanda
Figure 10: We are projecting a slower decline of the LDR to 90%; in Figure 11: …and, therefore, a slightly higher than guided loan 2022 rather than 2021… growth (projecting 12% vs. mgmt.’s 10% in 2021) BKG LDR, 2010-24e (%) BKG loan growth, 2010-2024e (%)
120 60 113 113 109 50 110 107 50
100 97 40 95 93 34 90 32 90 87 87 30 84 23 21 22 21 20 19 19 78 17 18 80 76 76 20 72 12 12 70 10 8
60 0
2015 2016 2017 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2015 2016 2017 2018
2023E 2024E 2019E 2020E 2021E 2022E 2019E 2020E 2021E 2022E 2023E 2024E 2018E
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
In light of the 3Q20 trends, we project deposit growth to continue accelerating (+30% Y-o-Y in 2020) and to normalise at 20% thereafter. On the asset side, we project +23% Y-o-Y in 2020 but a drop to 12% in 2021 as BKG complies with BNR’s LDR guidelines.
Market share – Still a dominant player, but KCB could narrow the market share gap
BKG continues to be the dominant bank and by a significant margin. As of 3Q20, BKG’s net loans, deposit and equity shares were 35.7%, 30.3% and 35.4%, respectively. The second biggest player (BPR) notably had net loans, deposit and equity share of 9.7%, 11.1% and 9.2%, respectively. Kenyan bank KCB, whose subsidiary is currently the 5th biggest bank in Rwanda (by assets), recently announced a proposed acquisition of BPR. If completed successfully, the market share gap would narrow (KCB would have a net loan and deposit share of 17.7% and 16.9%), but BKG would still remain the dominant player.
Figure 12: Post the RI, BKG has improved its market share across all Figure 13: BPR and I&M have also moved in double-digit market me trics, with really good performance particularly in loans and sha re stats. Notably, if KCB completes its proposed acquisition of de posits BP R, it will be the second largest bank in Rwanda across all metrics BKG, market share statistics, 2015-9M20 (%) Rwanda banks; market share statistics as of 1H20 (%) Ne t Customer Assets E quity 2015 2016 2017 2018 2019 9M20 loa ns de posits 50 BKG 3 6 .9 4 4 .3 3 6 .8 4 5 .6 45 BPR 11.9 9.7 11.1 9.2 40 3 5 .7 3 5 .4 I&M 11.3 11.6 11.1 8.9 35 2 9 .9 3 0 .3 30 Equity 9.7 9.3 9.7 9.3 25 Cogebanque 8.1 8.8 8.3 6.2 20 KCB 6.4 8 5.8 5.8 15 Ecobank 5.2 2 6.3 4.6 10 Access 3.7 1.4 4.4 4 5 GT 3.2 2.3 3.8 3.2 0 Total Assets Net loans Customer Equity BOA 2.2 1.4 1.8 1.6 deposits NCBA 1.5 1.2 1.7 1.6
Source: Company data Source: Company data
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BK Group Plc 30 November 2020 Banks. Rwanda
Rwanda (BKG RW) vs. Kenya (BKG KN) – Divergence in pricing creates massive opportunity on Kenya line
Post the 2018 rights issue, 34% of the newly issued shares started to trade in Kenya (on the NSE) at KES433/share. During the 2018 rights issue (BKG raised cUSD68mn), 222mn shares were offered, 146mn (or 66% of the new shares offered) were allocated to the Rwanda Stock Exchange (RSE) and 76mn (or 34% of new shares offered) were allocated to the Nairobi Securities Exchange (NSE). The listing of the new shares on the RSE and cross listing on the NSE happened on 30 Nov 2018 (first share price date on BKG KN is from 3 Dec 2018 as per BBG data). At the time (Dec 2018), the share price on the NSE of KES33/share (vs. RWF post RI share price of RWF279/share) implied the Kenya line was trading at an effective ex rate (KE/RWF of 8.45).
Since then, the Kenya line has de-rated by 61% vs. 16% on the Rwanda line. However, as trading activity on the NSE started to pick up (Feb 2019), a divergence between the share prices on the two markets started to develop (illustrated below). As of 27 Nov 2020 (same day BKG announced their 3Q20/9M20 results), that same divergence had widened significantly, with the Kenyan line trading at a 45% discount to the Rwanda line. To put the aforementioned into context, from the post RI listing date (30 Nov 2018) up to 27 Nov 2020, the Rwanda line has de-rated by 16% and the Kenya line has de-rated by 61%.
Figure 14: Kenyan line has de-rated significantly, faster than the Figure 15: Volumes on the Kenyan line have also been higher Rw a nda line a ttributable to higher liquidity and deeper market penetration BKG share price (rebased to 100), Dec 2018 to Nov 2020, RSE vs. NSE BKG KN turnover (KES’000s) Dec 2018 to Nov 2020
BOK RW BKG KN 120000
110 100000 100
90 80000
80 60000 70
60 40000
50 20000 40
30 0
Jun-19 Jun-20 Jun-19 Jun-20
Oct-19 Oct-20 Oct-19 Oct-20
Feb-19 Feb-20 Feb-19 Feb-20
Apr-20 Apr-19 Apr-20 Apr-19
Dec-19 Dec-19 Dec-18 Dec-18
Aug-19 Aug-20 Aug-20 Aug-19
Source: Bloomberg Source: Bloomberg
Deeper investor penetration and, therefore, higher liquidity in Kenya explain share-price divergence. We attribute part of the substantial share-price decline on the Kenya side to FX deprecation on the effective ex rate (-6% over the same period), but the rest of the share-price performance has been attributable to more liquidity on the NSE and, therefore, more price discovery. The NSE has a larger pool of both institutional and foreign investors, implying deeper investor penetration. We also note investor sentiment on the bank has been poor due to an overhang on the excess capital, which has led to a diluted ROAE (post the RI).
9M20 results show BKG has finally absorbed a substantial portion of its capital and is exhibiting signs of a promising recovery. Post the 3Q20 results, we see upside on the Kenya line (84%) and even more upside on the Rwanda line (237%). Given the price divergence, we also highlight the valuation on the Kenya line looks particularly attractive, as BKG KN is currently trading at 0.5x 2020 BVPS, whereas we value the stock at 1.5x its BVPS. Given this attractive valuation and the positive trajectory of BKG’s key profitability drivers, we project some convergence on the Rwanda and Kenya valuations over time.
Page 10 of 20
BK Group Plc 30 November 2020 Banks. Rwanda
Profit Model – 2020 earnings guidance has decreased from -40% to flat, which is a massive uplift under current circumstances
In the table below, we provide a summary of BKG’s profit model. Based on the figures, we forecast BKGs ROAE to decease by 260bps Y-o-Y, from 18% in 2019 to 16.6% in 2020e. Thereafter, we project a 2024e normalised ROAE of 23.7% (vs. a cost of equity of 17%).
Figure 16: Higher return profile over our forecast period to be achieved through lower risk charge, higher operating leverage and continued capital absorption BKG’s profit model, 2010-24e (%)
P rofit model 2010 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e 2024e
NII/ATA 7.0 8.9 9.3 9.4 9.4 10.0 9.6 9.4 9.3 9.4 9.5 NIR/ATA 5.1 3.3 3.5 4.2 3.5 3.2 2.4 2.3 2.4 2.3 2.3 To tal income/ATA 1 2 .1 1 2 .2 1 2 .8 1 3 .5 1 3 .0 1 3 .2 1 2 .0 1 1 .7 1 1 .7 1 1 .7 1 1 .8 Opex/ATA (5.7) (5.8) (6.1) (6.1) (6.2) (5.7) (4.1) (4.3) (4.4) (4.5) (4.6) C o st/income 4 7 .5 4 7 .8 4 7 .4 4 5 .2 4 8 .1 4 3 .6 3 3 .9 3 6 .6 3 8 .0 3 8 .7 3 8 .8 GOP/ATA 6.4 6.4 6.7 7.4 6.7 7.4 8.0 7.4 7.2 7.2 7.2 Risk charge (to ATA) (1.4) (1.4) (1.7) (2.4) (1.4) (1.9) (3.2) (2.2) (1.7) (1.6) (1.4) PB T/ATA 5 .0 4 .9 5 .0 5 .0 5 .3 5 .5 4 .8 5 .3 5 .5 5 .6 5 .8 Effective tax rate 2 8 .8 2 0 .4 3 0 .8 3 1 .7 3 5 .8 2 8 .4 3 1 .0 3 0 .0 3 0 .0 3 0 .0 3 0 .0 R o AA 3 .5 3 .9 3 .5 3 .4 3 .4 3 .9 3 .3 3 .7 3 .8 3 .9 4 .1 ATA/Avg/equity 6.9 5.5 5.8 5.9 5.1 4.6 5.1 5.5 5.6 5.7 5.8 R o AE 2 4 .5 2 1 .7 2 0 .0 2 0 .2 1 7 .2 1 8 .0 1 6 .6 2 0 .3 2 1 .5 2 2 .4 2 3 .7
Source: Company data, EFG Hermes estimates
Changes in estimates
In the table below, we provide a summary of the changes to our earnings estimates. Notably, we downgrade our 2020 earnings by 6% and upgrade our 2021 and 2022 earnings by 7% and 13%, respectively.
Figure 17: BKG new vs. old estimates, 2020e to 2022e, (In RWFmn) De c 2020e De c 2021e De c 2022e Old N ew % C hg Old N ew % C hg Old N ew % C hg Pro fit and loss account Total income 134,795 137,669 2% 150,302 160,924 7% 168,905 185,766 10% Gross earnings 161,336 171,015 6% 182,757 201,241 10% 208,542 231,912 11% Total operating costs (52,466) (46,621) -11% (58,543) (58,896) 1% (64,089) (70,675) 10% Net operating income 82,329 91,048 11% 91,759 102,029 11% 104,815 115,091 10% Total loss provisions (24,378) (36,645) 50% (23,314) (29,789) 28% (26,698) (27,771) 4% Pretax profit 57,951 54,403 -6% 68,445 72,240 6% 78,117 87,320 12% Tax (17,965) (16,865) -6% (21,218) (21,672) 2% (24,216) (26,196) 8% N et profit 3 9 ,986 3 7 ,538 -6% 4 7 ,227 5 0 ,568 7% 5 3 ,901 6 1 ,124 13% EPS 4 4 .21 4 1 .50 -6% 5 2 .21 5 5 .91 7% 5 9 .59 6 7 .58 13% DPS 1 3 .26 2 8 .96 1 1 8% 1 5 .66 1 9 .57 25% 1 7 .88 2 3 .65 32%
B alance sheet To tal assets 1 ,188,320 1 ,270,452 7% 1 ,364,321 1 ,479,011 8% 1 ,567,051 1 ,706,996 9% Gross loans 812,615 893,778 10% 932,551 992,957 6% 1,067,927 1,110,848 4% Net loans 770,766 820,354 6% 884,525 919,478 4% 1,012,929 1,034,200 2% Deposits 738,741 835,307 13% 855,551 1,023,667 20% 988,821 1,234,276 25% Sh areholders' equity 2 4 4,820 2 3 2,142 -5% 2 7 7,879 2 6 5,011 -5% 3 1 5,609 3 0 4,741 -3% BVPS 271 257 -5% 307 293 -5% 349 337 -3%
Source: Company data, EFG Hermes estimates
Page 11 of 20
BK Group Plc 30 November 2020 Banks. Rwanda
9M20 results commentary and summary guidance/projections
In the table below, we provide BKG’s 9M20 summary financials. Earnings grew 10% Y-o-Y to RWF27.6bn, shareholder funds grew 12% to RWF238bn and the annualised ROAE declined by 25bps to 15.4%.
Figure 18: BKG’s 9M20 summary financials % ch Q-o-Q % ch Y-o-Y 2 Q20 3 Q20 9 M19 9 M20 (3Q20 vs. 2Q20) (9M20 vs. 9M19) B alance Sheet Cash and balances with central bank 68,700 109,900 68,600 109,900 60% 60% Interbank 52,000 54,700 67,500 54,700 5% -19% Total securities 184,500 153,800 93,100 153,800 -17% 65% Gross loans 852,200 890,100 697,800 890,100 4% 28% Provisions (balance sheet) (62,000) (68,500) (46,700) (68,500) 10% 47% Net customer loans 790,200 821,600 651,100 821,600 4% 26% Lo ans/deposits 1 0 5.3% 1 0 6.2% 1 0 9.8% 1 0 6.2% Other assets 71,600 65,300 64,000 65,300 -9% 2% To tal assets 1 ,167,000 1 ,205,300 9 4 4,300 1 ,205,300 3% 28% Interbank 70,100 67,900 45,100 67,900 -3% 51% To tal deposits 7 5 0,400 7 7 3,300 5 9 3,100 7 7 3,300 3% 30% Total securities/ borrowings 68,900 69,400 39,900 69,400 1% 74% Sh areholders' funds 2 3 1,300 2 3 8,800 2 1 2,800 2 3 8,800 3% 12%
In come Statement Net interest income 24,200 30,800 70,700 82,600 27% 17% Net fees and commissions 2,200 2,700 9,400 8,200 23% -13% Foreign exchange earnings 2,200 3,100 6,700 7,300 41% 9% Other income 2,000 1,700 3,200 4,800 -15% 50% To tal income 3 0 ,600 3 8 ,300 9 0 ,000 1 0 2,900 25% 14% To tal operating costs (1 0,900) (1 2,000) (3 5,200) (3 5,000) 10% -1% Net operating income 19,700 26,300 54,800 67,900 34% 24% Total loss provisions (5,500) (9,200) (18,700) (27,500) 67% 47% Pretax profit 14,200 17,100 36,100 40,400 20% 12% Tax (4,300) (5,600) (11,100) (12,800) 30% 15% % tax rate 3 0 .3% 3 2 .7% 3 0 .7% 3 1 .7% N et profit 9 ,900 1 1 ,500 2 5 ,000 2 7 ,600 16% 10%
Per share figures BVPS 247.2 254.2 228 254 3% 12% EPS 10.9 12.7 27.6 30.5 16% 10%
R atios 2 Q20 3 Q20 9 M19 9 M20 b p s. ch Q-o-Q b p s. ch Y-o-Y Gross asset margin 13.5% 16.2% 14.5% 14.2% 270 (23) Cost of funds 4.3% 5.0% 3.4% 4.2% 69 87 N et margin 1 0 .0% 1 2 .2% 1 1 .8% 1 0 .9% 218 (8 9) ROAA 3.8% 4.3% 3.9% 3.4% 44 (48) ROAE 1 8 .2% 2 0 .4% 1 5 .7% 1 5 .4% 218 (2 5) C o st/ income ratio 3 5 .6% 3 1 .3% 3 9 .1% 3 4 .0% (4 29) (5 10) Coverage 129.9% 139.9% 136.6% 139.9% 1,001 334 N PL Ratio 5 .6% 5 .5% 4 .9% 5 .5% (1 0) 60 Provisioning Charge P&L 2.6% 4.1% 3.6% 4.1% 155 55 To tal CAR 2 8 .0% 2 3 .4% 2 9 .1% 2 3 .4% (4 60) (5 70)
Source: Company data, EFG Hermes estimates
Page 12 of 20
BK Group Plc 30 November 2020 Banks. Rwanda
With regard to the 3Q20 results above, we note the following;
COF pressures filtering, though on deposit acquisition focus. The net interest margin decreased by 89bps Y-o-Y to 10.9% (vs. 11.8% as of 9M19), attributable to: i) a 23bp Y-o-Y decline in the gross asset yield to 23% and a 89bp Y-o-Y increase in the cost of funding to 4.2%. The decline in gross asset yields decreased because of monetary easing by the BOG (-50bps in the policy rate in Apr 2020 to 4.5%) and funding costs have increased because of BKG’s renewed focus on deposit growth. We are projecting a 2020 NIM of 10.3% and a normalised NIM of 9%, on the relatively high funding costs.
Drop in NIR not as sharp as initially estimated as fee waiver repealed in Sep 2020. Net fees and commissions declined 13% Y-o-Y, attributable to waivers on fees to zero (part of BNR’s COVID-19 relief measures) and general challenges in NFI generation (after BKG migrated a large volume of transactions to alternatives, where the tariffs are much lower than at the branch level). However, these waivers were repealed in Sep 2020 and BKG is now charging RWF200 on all mobile transactions. Notably, mgmt. has improved its guidance (from FY20; -40% Y-o-Y) to flat based on its tariff review in Oct 2020 and volume uptake in 4Q20. However, we do foresee challenges in fee-income generation over our forecast period.
Resumption of normal operations to increase CIR, which has dropped to a multi-year low in 2020. The 9M20 CIR dropped 510bps Y-o-Y to 34%, attributable to a 1% Y-o-Y decline in operating costs against a 14% Y-o-Y rise in income. Mgmt. noted that the decrease is attributable to: i) lower travel costs because of travel restrictions related to the COVID-19 pandemic; ii) lower consultancy fees; and iii) lower marketing expenses. Mgmt. also noted that the expenses will pick up in 2021, as the aforementioned activities resume. Mgmt. also added that there will be an accelerated depreciation expense as it reconstructs a new ERP system (Oracle goes live in 4Q20). Staff expenses are projected to increase in line with inflation, and we, therefore, project a pick-up in the CIR to 36% in 2021 and normalised CIR of 38%.
Cost of risk has peaked at 4.1%, but we are projecting releases going to 2021. As mentioned in this note, we see the risk charge (risk charge/ATA) dropping significantly from 3.2% in 2020 to 1.4% in 2024.
Asset quality continues to improve but restructured facilities are high. The NPL ratio dropped by 10bps Q-o-Q to 5.5%, coverage improved 10ppts Q-o-Q to 140%. Mgmt. noted that 43% of loans have been restructured as a result of the distress related to the COVID-19 pandemic.
CAR was reduced substantially, which bodes well for return profile. The total CAR ratio deceased by 460bps Q-o-Q to 23.4% (vs. 28% as of 2Q20), attributable to loan growth (+28%) and the provision of next year’s dividend payment (which includes the suspended 2019 dividend and the 2020 dividend). The reduction in the excess capital should culminate in a higher ROAE.
Earnings guidance has dramatically improved. As of 3Q20, earnings have increased 10% Y-o-Y. Notably mgmt. has revised its 1Q20 earnings guidance for FY20, from -50% Y-o-Y to flat. This is in line with our forecasts (+0.6% Y-o-Y to RWF37.5bn for FY20).
Page 13 of 20
BK Group Plc 30 November 2020 Banks. Rwanda
Valuation – Massive upside on the Kenya line
The upside increases substantially on the Rwanda line and even more on the Kenyan Line.
Rwanda line (BKG RW); Buy; 84% upside. At its current price of RWF230, BKG RW is trading at a 0.9x 2020e P/B and 5.5x 2020e P/E. Our TP for BKG RW is RWF294; at this price, we value the bank at a 1.5x 2020e P/B and 9.5x 2020e P/E, implying a 77% upside at current price levels (incl. 2020e DPS of RWF29; 13% yield). Kenya line (BKG RW); Buy; 237% upside. At its current price of KES14, BKG KN is trading at a 0.5x 2020e P/B and 3x 2020e P/E. Our TP for BKG KN is RWF44 (using a KESRWF ex. rate of 8.98); at this price, we value the bank at a 1.5x 2020e P/B and 9.5x 2020e P/E, implying a 237% upside at current price levels (incl. 2020e DPS of KES3; 23% yield).
Valuation methodology:
To calculate our TP in RWF, we use our standard five-year dividend discount model (DDM). The cost of equity (CoE) assumed is 16.5%, and this was derived from a risk-free rate of 12%, equity risk premium of 5.0% and a beta of 1.0x. As our valuation is in the local currency (Rwandan Francs), we apply a terminal growth rate of 8%. We believe the 8% terminal growth rate best reflects the low level of banking system penetration in Rwanda. To calculate our TP in RWF, we convert our RWF TP into KES using an ex rate of 8.98.
In the table below, we provide our assumptions used to calculate BKG’s TP.
Figure 19: BKG – Standard dividend discount model (2020-2024e) In RWF per share
2020e 2021e 2022e 2023e 2024e
DPS 29 20 24 28 35 PV 25 14 15 15 16 To tal PV 85 Terminal value ROE 23.7% COE 17.0% Growth 8.0% BVPS 390 TV 678 PV of TV 309 To tal PV 394
Source: Company data, EFG Hermes estimates
As our unadjusted target price of BKG is highly sensitive to our CoE and RoAE assumptions, we provide a sensitivity analysis below.
Figure 20: BKG’s valuation sensitivity analysis RWF per share
T erminal ROAE
1 9 .2% 2 0 .7% 2 2 .2% 2 3 .7% 2 5 .2% 2 6 .7% 2 8 .2% 1 5 .0% 398 440 481 523 564 606 647
1 6 .0% 346 381 416 450 485 520 555
1 7 .0% 305 335 365 394 424 454 483
eq uity
C o of st 1 8 .0% 273 299 324 350 375 401 427 1 9 .0% 247 269 291 314 336 358 380
Source: Company data, EFG Hermes estimates
Page 14 of 20
BK Group Plc 30 November 2020 Banks. Rwanda
Financial Statements
Income Statement (Dec Year End) Key Performance Indicators (%) In RWFmn 2019a 2020e 2021e 2022e unless otherwise stated 2019a 2020e 2021e 2022e Net interest income 94,773 110,033 128,785 148,274 DuPont analysis (%) of average assets Fees & commissions 14,471 10,708 12,850 15,420 Net interest income 9.3% 8.7% 8.7% 8.7% Forex income 8,783 10,101 12,121 14,545 Non interest income 3.0% 2.2% 2.2% 2.2% Investment income 0 0 0 0 Operating expenses -5.3% -3.7% -4.0% -4.1% Other operating inc. (expense) 6,827 6,827 7,169 7,527 Other revenue (expense) 0.0% 0.0% 0.0% 0.0% Non interest income 30,081 27,636 32,139 37,492 Provisioning -1.8% -2.9% -2.0% -1.6% Total banking income 124,855 137,669 160,924 185,766 Taxes -1.5% -1.3% -1.5% -1.5% Operating expenses (54,383) (46,621) (58,896) (70,675) Other items 0.0% 0.0% 0.0% 0.0% Operating income 70,472 91,048 102,029 115,091 ROAA 3.7% 3.0% 3.4% 3.6% Loan loss provisions (18,379) (36,645) (29,789) (27,771) Leverage (assets / equity) 4.6x 5.1x 5.5x 5.6x Other provisions 0 0 0 0 ROAE (tangible) 18.6% 17.0% 20.8% 21.8% Other income / expense 0 0 0 0 Profitability Income before taxes or zakat 52,093 54,403 72,240 87,320 Yield on interest earning assets 13.0% 13.4% 13.3% 13.2% Taxes or zakat (14,784) (16,865) (21,672) (26,196) Cost of funds 3.1% 3.9% 3.7% 3.5% Net inc. before minority interest 37,308 37,538 50,568 61,124 Net interest spread 9.85% 9.50% 9.54% 9.69% Minority interest 0 0 0 0 Net interest margin 10.56% 10.27% 10.10% 10.06% Net income after minorities 37,308 37,538 50,568 61,124 Non-interest inc. / Banking inc. 24.1% 20.1% 20.0% 20.2% Cost of AT1 cap.,pref.div.&others 0 0 0 0 Cost-to-income 43.6% 33.9% 36.6% 38.0% Net income 37,308 37,538 50,568 61,124 Effective tax rate 28.4% 31.0% 30.0% 30.0% Source: BK Group Plc, EFG Hermes estimates Asset Quality Balance Sheet (Dec Year End) NPL ratio 5.7% 5.5% 5.0% 5.0% In RWFmn, 2019a 2020e 2021e 2022e NPL coverage 116.0% 149.4% 148.0% 138.0% Cash & central bank deposits 82,600 109,425 134,100 148,113 Cost of risk (bps) 253.2 410.0 300.0 250.0 Interbank assets 77,400 58,471 71,657 86,399 Capital Investments 124,800 192,121 245,680 308,569 CET1 ratio 0.0% 0.0% 0.0% 0.0% Customer loans 678,000 820,354 919,478 1,034,200 Tier 1 ratio 30.3% 25.7% 25.5% 25.6% Goodwill & intangibles 6,771 6,207 5,172 4,310 Capital adequacy ratio 30.6% 25.9% 25.6% 25.8% Fixed & other assets 49,529 83,873 102,924 125,405 Risk weight. assets / Total assets 65.1% 65.1% 65.1% 65.1% Total assets 1,019,100 1,270,452 1,479,011 1,706,996 Growth Rates (Y-o-Y) Interbank deposits 54,200 71,001 87,012 104,913 Loan growth 19.3% 21.0% 12.1% 12.5% Customer deposits 642,700 835,307 1,023,667 1,234,276 Deposits growth 20.8% 30.0% 22.5% 20.6% Borrowings 0 0 0 0 Assets growth 16.1% 24.7% 16.4% 15.4% Other liabilities 101,400 132,002 103,321 63,065 Risk-weighted assets growth 19.7% 24.7% 16.4% 15.4% Total liabilities 798,300 1,038,310 1,214,000 1,402,255 Net interest income growth 25.0% 16.1% 17.0% 15.1% Common shareholders' equity 220,800 232,142 265,011 304,741 Fees & commissions inc. growth -12.4% -26.0% 20.0% 20.0% Additional tier I capital 0 0 0 0 Non interest income growth 6.5% -8.1% 16.3% 16.7% Preferred share capital 0 0 0 0 Banking income growth 20.0% 10.3% 16.9% 15.4% Minority interest 0 0 0 0 Operating expenses growth 8.7% -14.3% 26.3% 20.0% Total equity and liabilities 1,019,100 1,270,452 1,479,011 1,706,996 Operating income growth 30.5% 29.2% 12.1% 12.8% Source: BK Group Plc, EFG Hermes estimates Earnings growth 36.3% 0.6% 34.7% 20.9% Other Ratios Loans / Deposits 105.5% 98.2% 89.8% 83.8% Loans / Assets 66.5% 64.6% 62.2% 60.6% Deposits / Interest bearing liab. 86.5% 85.7% 85.7% 85.7% Source: BK Group Plc, EFG Hermes estimates
Page 15 of 20
BK Group Plc 30 November 2020 Banks. Rwanda
Ra ting and Target Price chart
17 Feb Buy : RWF311 300
240
180
120
60
0 11/19 02/20 05/20 08/20 11/20
Rating Distribution
Rating Coverage Universe%
Buy 45% Neutral 37% Sell 18% Not Rated 0% Under Review 0%
Page 16 of 20
BK Group Plc 30 November 2020 Banks. Rwanda
Disclaimer
A n alyst Certification
The research analyst(s) listed on the front page of this report certifies that the views expressed in this document accurately reflect personal views about the securities and companies that are the subject of this report. The research analyst(s) listed on the front page of this report also certifies that any spouse(s) or dependents (if relevant) do not hold a beneficial interest in the securities that are subject of this report. The research analyst(s) listed on the front page of this report also certifies no part of their respective compensation was, is & or will be directly or indirectly related to the specific ratings or views expressed in this research report. EFG Hermes has taken measures to ensure that the review process and signing off on this report is conducted by person(s) who do not have a beneficial interest in the securities mentioned in this report and are neither re munerated directly nor indirectly for the specific ratings mentioned in this report nor for the review process of this report. The research analyst(s) listed on the front page of this report also certifies that they are acting independently and impartially from EFG Hermes shareholders, directors and is not affected by any current or potential conflict of interest that may arise from any of EFG Hermes’ activities.
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Re gistration of non-US analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of EFG Hermes, which is a non-US affiliate and parent company of EFG Hermes USA, a SEC registered and FINRA member broker-dealer. Research analysts employed by EFG Hermes are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of EFG Hermes USA, Inc. (“EFG Hermes USA”), and may not be subject to FINRA Rule 2241 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
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Fo r Entities and Clients in the United States Hermes Securities Brokerage and EFG Hermes UK Limited are not registered as broker-dealers with the US Securities and Exchange Commission, and it and its analysts are not subject to SEC rules on securities analysts’ certification as to the currency of their views reflected in the research report. Hermes Securities Brokerage and EFG Hermes UK Limited are not members of the Financial Industry Regulatory Authority (FINRA), and its securities analysts are not subject to FINRA’s rules on Communications with the Public and Research Analysts and Research Reports and the attendant requirements for fairness, balance, and disclosure of potential conflicts of interest.
This research report is only being offered to U.S. Institutional and Major US Institutional Investors (subject to conditions outlined in Rule 15a-6) and is not available to, and should not be used by, any US person or entity that does not fall within one (1) of these categories/classifications. Hermes Securities Brokerage and EFG Hermes UK Limited cannot and will not accept orders for the securities covered in this research report placed by any person or entity in the United States. Hermes Securities Brokerage and EFG Hermes UK Limited are affiliates companies of Financial Brokerage Group (FBG), located at B129, Phase 3, Smart Village – KM28 Cairo, Alexandria road 6th of October 12577 – Egypt. FBG has a 15a-6 chaperoning agreement with EFG-Hermes USA, Inc., a FINRA member firm, located at 3 Columbus Circle, 15th Floor, Suite 1617, New York, NY 10019 | USA. Orders should be placed with our correspondent, EFG-Hermes USA Inc. 212-315-1372.
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BK Group Plc 30 November 2020 Banks. Rwanda
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This research report was prepared by EFG Hermes, a company authorized to engage in securities activities in various jurisdictions. EFG Hermes is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” and “U.S. Institutional Investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through EFG Hermes USA, a SEC registered and FINRA member broker-dealer authorized in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through EFG Hermes. To contact EFG Hermes USA directly via phone at (212)315- 1372 or via mail at EFG Hermes USA, Inc. - 3 Columbus Circle, 15th Floor, Suite 1604, New York, NY 10019.
EFG Hermes USA accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor.
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This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither EFG Hermes nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report. EFG Hermes may rely on information barriers, such as “Chinese Walls” to control the flow of information within the areas, units, divisions, groups, or affiliates of EFG Hermes.
Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks . The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States. The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments. Past performance is not ne cessarily a guide to future performance and no representation or warranty, express or implied, is made by EFG Hermes with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior consent of EFG Hermes and EFG Hermes accepts no liability whatsoever for the actions of third parties in this respect.
In vestment Banking Business EFG Hermes, or any of its subsidiaries, does and seeks to do business with companies mentioned in its research reports or any of their affiliates. As a result, investors should be aware that the firm, or any of its subsidiaries, maintains material conflict of interest that could affect the objectivity of this report.
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Gu ide to Analysis
EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment.
In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding target price. For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:
R ating Po tential Upside (Downside) % Buy Above 15% Neutral (10%) and 15% Sell Below (10%)
EFG Hermes policy is to update research reports when appropriate based on material changes in a company’s financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analyst’s outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating.
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All reports are prepared by Hermes Securities Brokerage (main office), Building No. B129, Phase 3, Smart Village, KM 28, Cairo-Alexandria Desert Road, Egypt 12577, Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued capital of EGP3,843,091,115 while some reports are produced by analysts registered at EFG Hermes UK Limited, authorized and regulated by the UK Financial Conduct Authority.
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BK Group Plc 30 November 2020 Banks. Rwanda
S a les Contact In stitutional Sales Ca iro Office: London Office Ne w York Office Mohamed Aly Yasser Waly Sruti Patel Karim Baghdady +20 2 35 35 6052 +20 2 35 35 6339 +44 207 518 2903 +1 212 315 1292 [email protected] [email protected] [email protected] [email protected]
Wael El Tahawy Dubai Office: Claire te Riele Miljana Asanovic +20 2 35 35 6359 Ramy EL Essawy +44 207 518 2907 +1 212 315 1373
[email protected] +971 4 363 4093 [email protected] [email protected]
[email protected] Ahmed Hashem La gos Office Srikanth Ramanathan +20 2 35356286 Ayah Abou Steit Olamide Shonekan +1 2015546005 [email protected] +971 4 363 4091 +234 7086457441 [email protected] [email protected] [email protected] Carol Aziz K a rachi Office: +20 2 35 35 6312 Saad Iqbal [email protected] +92 2135141140 [email protected]
GC C High Net Worth Sales In dividual Sales Na irobi Office: Hatem Adnan Hany Ghandour Bassam Nour Muathi Kilonzo +20 2 35 35 6083 +20 2 35 35 6007 +20 2 35 35 6069 +254 2037433032 [email protected] [email protected] [email protected] [email protected]
Rami Samy Joram Ongura +971 4 363 4099 +2540791691010 [email protected] [email protected]
Primary Analyst Coverage (Muammar Ismaily)
Company (Reuters/Bloomberg) Last Rating Price (27 Nov 2020)
BK Group Plc (BOK.RW/BOK RW) Buy RWF230.00 CAL Bank (CAL.GH/CAL GN) Buy GHS0.69 CRDB Bank (CRDB.TZ/CRDB TZ) Buy TZS185.00 Development Finance Company (DFCU Group) (DFCU.UG/DFCU UG) Buy UGX629.00 Ecobank Ghana (EGH.GH/EGH GN) Neutral GHS5.00 Ghana Commercial Bank (GCB.GH/GCB GN) Buy GHS3.86 National Microfinance Bank (NMB.TZ/NMB TZ) Neutral TZS2340.00 Stanbic Bank Uganda (SBU.UG/SBU UG) Buy UGX23.00 Standard Chartered Bank Ghana (SCB.GH/SCB GN) Sell GHS15.11
Analyst Coverage (Kato Mukuru)
Company (Reuters/Bloomberg) Last Rating Price (27 Nov 2020)
ASA International Group Plc (ASAI.L/ASAI LN) Buy GBP2.21 Asia Commercial Bank (ACB.HN/ACB VN) Buy VND27200.00 Bank For Foreign Trade (VCB.HM/VCB VN) Neutral VND94500.00 Bank For Investment And Development (BID.HM/BID VN) Sell VND42450.00 HDBank (HDB.HM/HDB VN) Buy VND21450.00 MB Bank (MBB.HM/MBB VN) Buy VND20000.00 Saigon – Hanoi Commercial (SHB.HN/SHB VN) Buy VND17000.00 Saigon Thuong Tin Commercial (STB.HM/STB VN) Sell VND14500.00 Vietnam Export Import Commercial Joint Stock Bank (EIB.HM/EIB VN) Neutral VND17100.00 Vietnam Js Commercial Bank (CTG.HM/CTG VN) Sell VND34050.00 Vietnam Prosperity Jsc Bank (VPB.HM/VPB VN) Buy VND27000.00 Vietnam Technological & Commercial Bank (TCB.HM/TCB VN) Buy VND23700.00
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