Cytonn Q1'2020 Markets Review Equities

Market Performance:

During Q1’2020, the equities market was on a downward trajectory, with NASI, NSE 25 and NSE 20 losing by 20.7%, 24.2% and 25.9%, respectively, taking their YTD performance as at the end of March to losses of 20.7%, 24.2% and 25.9% for NASI, NSE 25 and NSE 20, respectively. The losses recorded by all the three indices breach the threshold of a bear market, which is a condition in which securities prices fall by 20.0% or more. The equities market performance during the quarter was driven by losses recorded by large caps such as Bamburi, Equity, KCB, BAT , EABL and ABSA of 40.0%, 36.5%, 35.2%, 28.0%, 24.7% and 24.3%, respectively.

During the week, the equities market was on an upward trajectory with NASI, NSE 25 and NSE 20 gaining by 8.9%, 7.1% and 5.0%, respectively, due to gains recorded by large-cap stocks such as EABL, Safaricom, Diamond Trust (DTBK) and NCBA of 14.8%, 13.4%, 7.3% and 7.2% respectively. For the last twelve months (LTM), NASI, NSE 25 and NSE 20 have declined by 12.0%, 18.5% and 29.3%, respectively.

Equities turnover declined by 49.4% during the quarter to USD 438.6 mn in Q1’2020 from USD 866.6 mn in Q4’2019. During the week, equities turnover declined by 31.8% to USD 25.5 mn from USD 37.3 mn in the previous week, taking the YTD turnover to USD 453.7 mn. Foreign investors remained net sellers for the week, with a net selling position of USD 3.9 mn, from a net selling position of USD 17.6 mn recorded the previous week. The trend reflects the global equity markets with foreign investors disposing of riskier assets in favor of safe havens.

The market is currently trading at a price to earnings ratio (P/E) of 8.9x, 32.3% below the historical average of 13.2x, and a dividend yield of 6.8%, 2.8% points above the historical average of 4.0%. With the market trading at valuations below the historical average, we believe there is value in the market. The current P/E valuation of 8.9x is 7.8% below the most recent trough valuation of 9.7x experienced in the first week of February 2017, and 7.7% above the previous trough valuation of 8.3x experienced in December 2011. The charts below indicate the historical P/E and dividend yields of the market. Kenyan Listed Results

HF Group released their FY’2019 results during the week:

HF Group released their FY’2019 financial results, recording a loss per share of Kshs 0.3 in FY’2019, an improvement from a loss per share of Kshs 1.6 recorded in FY’2018, not in-line with our expectations of Kshs 0.3 earnings per share. The performance of the group can be attributed to a faster 17.1% decline in total operating expenses, which out-paced the 6.0% decline in total operating income. For more information, see our HF Group FY’2019 Earnings Note.

During the quarter, listed banks in Kenya released their FY’2019 results, recording average core earnings per share growth of 9.9%, against a 13.8% growth in FY’2018. The table below highlights the performance of the banking sector, showing the performance using several metrics, and the key takeaways of the performance:

Key to note: Results released by NCBA were on a prospective basis (a continuation of CBA) representing the 9 months performance of CBA Bank and 3 months performance of NCBA Bank (Merged bank); prior year comparatives are of those of CBA Bank. In our analysis, we have used the pro forma combined statements of the two Banks as a 2018 comparative:

Net NFI to Return Core Interest Interest Net Non-Funded Growth in Total Growth in to Interest Total Deposit Loan on Bank EPS Income Expense Interest Income Fees & Government Deposit Income Operating Growth Growth Average Growth Growth Growth Margin Growth Commissions Securities Ratio Growth Income Equity

I&M 26.6% 4.5% 12.0% (0.5%) 6.3% 9.1% 34.8% 5.0% 7.6% 3.4% 76.3% 5.2% 19.5%

ABSA 21.2% 6.8% 11.0% 5.4% 7.7% 9.1% 31.4% 8.8% 14.6% 32.3% 82.0% 9.9% 16.7%

Equity 13.8% 12.2% 24.8% 8.6% 8.5% 19.0% 40.6% 16.1% 14.2% 6.2% 75.9% 23.3% 22.8% COOP 12.4% 1.4% 0.8% 1.7% 8.5% 33.1% 5.9% 34.7% 8.7% 46.8% 80.1% 8.7% 19.2%

KCB 4.9% 12.2% 4.4% 15.0% 8.2% 22.6% 33.4% 39.0% 27.7% 41.0% 78.0% 17.4% 20.4%

SCBK 1.7% (5.9%) (22.4%) 0.4% 7.4% 0.3% 32.2% (4.7%) 1.8% 0.9% 56.3% 8.5% 17.5%

Stanbic 1.6% 8.1% 7.1% 10.7% 5.2% 14.0% 46.1% 11.7% 2.4% (12.7%) 85.1% 9.3% 13.6%

DTBK 1.6% (6.9%) (7.3%) (6.5%) 5.6% 6.2% 23.6% 3.1% (0.9%) 12.9% 71.1% 3.1% 12.9%

NCBA (12.4%) (34.1%) (34.0%) (34.2%) 3.3% 25.9% 60.0% 14.4% 10.9% 11.8% 65.9% 4.1% 11.8%

HF N/A (15.4%) (16.7%) (13.2%) (0.2%) 6.4% 4.8% 91.2% 7.7% 43.3% 103.1% (11.3%) (1.1%)

FY'19 Mkt Weighted 9.9% 4.8% 5.1% 4.9% 7.5% 17.2% 32.4% 18.7% 12.8% 19.9% 75.5% 13.2% 18.9% Average*

FY'18 Mkt Weighted 13.8% 6.5% 10.6% 2.6% 7.9% 3.8% 33.2% (1.0%) 10.3% 9.1% 75.5% 4.3% 19.0% Average**

*Market cap weighted as at 31/03/2020

**Market cap weighted as at 31/12/2018

Key takeaways from the table above include:

i. All listed Kenyan banks have released results for FY’2018, and have recorded a 9.9% average increase in core Earnings Per Share (EPS), compared to a growth of 13.8% in FY’2018, and consequently, the Return on Average Equity (RoAE) declined marginally to 18.9%, from 19.0% in FY’2018. All listed banks apart from HF Group and NCBA have recorded growths in their core EPS, with I&M Holdings recording the highest growth of 26.6%, and the lowest being HF Group, which recorded a loss per share of Kshs 0.3, ii. The sector recorded strong deposit growth, which came in at 12.8%, faster than the 10.3% growth recorded in FY’2018. Despite the relatively fast deposit growth, interest expenses growth of 5.1% was slower than the 10.6% growth recorded in FY’2018, indicating that banks have been able to mobilize relatively cheaper deposits after the September 2018 implementation of the Finance Act 2018, which saw the removal of the minimum interest rate payable on deposits, which stood at 70.0% of the Rate (CBR). This helped mitigate high increments in interest expense, despite the relatively fast deposit growth, iii. Average loan growth came in at 13.2%, which was faster than the 4.3% recorded in FY’2018, indicating that there was an improvement in credit extension, with banks targeting select segments such as corporate entities and Small and Medium Enterprises (SMEs), the growth in was accelerated towards the tail end of FY’2019 following the repeal of interest rate cap in November 2019. Government securities, on the other hand, recorded a growth of 19.9% y/y, which was faster compared to the loans and the 9.1% growth recorded in FY’2018. This highlights banks’ continued preference for investing in government securities, which offer better risk- adjusted returns. Interest income increased by 4.8%, compared to a growth of 6.5% recorded in FY’2018. The slower 4.8% growth in interest income compared to the 6.5% recorded in FY’2018, may be attributable to the lower yields on interest-earning assets compared to FY’2018. Consequently, the Net Interest Margin (NIM) in the banking sector currently stands at 7.5%, a decrease from the 7.9% recorded in FY’2018, despite the Net Interest Income increasing by 4.9% y/y, and, iv. Non-funded income grew by 17.2% y/y, faster than 3.8% recorded in FY’2018. The growth in NFI was supported by the 18.7% average increase in total fee and commission income, which was faster than the (1.0%) growth recorded in FY’2018.

For a summary of the FY’2019 banking sector results and our key takeaways from the results, please see our Cytonn FY’2019 Banking Sector Performance Note. We shall be releasing our FY’2019 Banking Report on 3rd May 2020.

Quarterly Highlights:

During the quarter;

i. The gave a go-ahead to Nigerian lender, Access Bank PLC to acquire a 100% stake in Transnational Bank PLC for an undisclosed amount, with Access Bank PLC targeting to enhance its corporate and retail banking business in Kenya through the acquisition. Access Bank is Nigeria’s largest lender by assets with an asset base of USD 16.1 bn (equivalent to Kshs 1.6 tn). The acquisition was in line with our expectation of consolidation in the Kenyan banking sector. For more information see our Cytonn Weekly #03/2020, ii. SBM Bank (Kenya) Limited filed a petition under the Insolvency Act 2015 to liquidate East African Cables (EAC), which is unable to pay its obligations owed to the lender amounting to Kshs 285.0 mn. The listed firm has had banking facilities with other lenders such as Standard Bank Plc (Kenya & Tanzania), Stanchart, and Equity Bank, and in a statement to stakeholders, EAC revealed that it has successfully completed the restructuring of 82.0% of its total debt obligations and has made significant progress to complete the remaining phase, including debt owed to SBM Bank. For more information see our Cytonn Monthly January 2020, iii. Bank of Kenya officially commenced trading on the Securities Exchange (NSE) as , after the bourse temporarily suspended the trading of the lender’s shares to allow the settlement of outstanding obligations as well as change of its trading ticker code, as the lender finalized its brand transition. The rebranding ended a process that began in 2018, following Barclays Plc’s reduction of its stake in Barclays Africa Group from 62.0% to 15.0%. For more information see our Cytonn Weekly #07/2020, iv. Safaricom opened talks with a consortium of undisclosed investors who would be involved in the bid for one of the two Ethiopian telecom licenses due to the high entry costs expected to scale above Kshs 100.0 bn. In November 2019, the company entered into a joint bid with Vodacom (which owns a 35.0% stake in Safaricom); however, more telecommunication firms such as Vodafone (which also owns a 5.0% stake) are expected to join the partnership. For more information see our Cytonn Weekly #08/2020, v. Co-operative Bank of Kenya announced it has opened talks to acquire 100.0% stake in Jamii Bora Bank Limited. The announcement came months after of Africa (CBA), dropped its cash buy-out offer and instead, merged with NIC Bank to form NCBA Group. The Central Bank of Kenya (CBK) welcomed the transaction, citing it will enhance the stability of the Kenyan Banking Sector and diversify the business models of the two institutions. For more information see our Cytonn Weekly #11/2020, vi. KCB group announced that it has set aside a Kshs 30.0 bn credit facility, in an effort to cushion individuals and businesses grappling with the effects of the Coronavirus pandemic. The credit facility will be accessed through the lender's mobile lending platform, KCB M-Pesa, and will issue loans from Kshs 50.0 to Kshs 1.0 mn, depending on the customer’s credit rating. The loan facility offers repayment periods of 30-days, 60-days, and 90-days with interest rates of between 2.0% and 6.0%, per month. For more information see our Cytonn Weekly #13/2020, vii. Equity group was given the green light by the Committee Responsible for Initial Determination (CID), a Commission mandated to monitor and investigate possible breaches of the COMESA Competition Regulations, to acquire a 66.5% controlling stake worth Kshs 10.9 bn in Banque Commerciale du Congo (BCDC), effectively valuing BCDC at Kshs 16.4 bn. For more information see our Cytonn Weekly #13/2020.

Equities Universe of Coverage:

Below is our Equities Universe of Coverage:

Price at Price at w/w q/q YTD Year Target Dividend Upside/ P/TBv Banks Recommendation 27/03/2020 03/04/2020 change change Change Open Price* Yield Downside** Multiple

Diamond 81.8 87.8 7.3% (19.3%) (19.5%) 109.0 189.0 3.1% 118.5% 0.4x Buy Trust Bank

KCB 35.0 34.6 (1.1%) (35.2%) (35.9%) 54.0 64.2 10.1% 95.7% 0.9x Buy Group***

Kenya 2.2 2.8 24.7% (22.1%) (8.3%) 3.0 4.8 4.0% 76.6% 0.2x Buy Reinsurance

Equity 33.2 34.0 2.4% (36.5%) (36.4%) 53.5 56.7 7.4% 74.1% 1.2x Buy Group***

Jubilee 250.0 275.0 10.0% (24.0%) (21.7%) 351.0 453.4 3.3% 68.1% 0.9x Buy Holdings

I&M 49.8 50.0 0.4% (6.0%) (7.4%) 54.0 75.2 5.1% 55.5% 0.7x Buy Holdings***

Co-op 12.1 12.9 6.6% (21.4%) (21.1%) 16.4 18.1 7.8% 48.1% 1.0x Buy Bank***

Sanlam 13.9 15.0 8.3% (12.8%) (12.8%) 17.2 21.7 0.0% 44.7% 1.3x Buy

ABSA 9.8 9.9 0.8% (24.3%) (25.8%) 13.4 13.0 11.1% 42.4% 1.2x Buy Bank***

NCBA 26.4 28.3 7.2% (22.9%) (23.2%) 36.9 37.0 6.2% 36.9% 0.7x Buy

Standard 178.3 185.0 3.8% (12.1%) (8.6%) 202.5 211.6 10.8% 25.2% 1.4x Buy Chartered

Liberty 8.4 8.5 0.5% (18.5%) (18.1%) 10.4 10.1 0.0% 18.7% 0.7x Buy Holdings CIC Group 2.3 2.3 0.0% (17.9%) (14.6%) 2.7 2.6 0.0% 15.2% 0.8x Accumulate

Stanbic 92.0 96.0 4.3% (15.8%) (12.1%) 109.3 103.1 7.3% 14.7% 1.0x Accumulate Holdings

Britam 6.5 7.0 7.4% (27.8%) (22.7%) 9.0 6.8 3.6% 0.6% 0.7x Lighten

HF Group 4.2 4.2 1.0% (35.3%) (35.0%) 6.5 4.2 0.0% 0.0% 0.2x Lighten

*Target Price as per Cytonn Analyst estimates **Upside/ (Downside) is adjusted for Dividend Yield ***Banks in which Cytonn and/or its affiliates are invested in

We are “Positive” on equities for investors as the sustained price declines have seen the market P/E decline to below its historical average. We expect increased market activity, and possibly increased inflows from foreign investors, as they take advantage of the attractive valuations, to support the positive performance.

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