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NSE ASI: 47,093.27

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April 23, 2007 Intercontinental Bank PLC

Price: NGN25.95 Fair Value: NGN25.81 Financial Summary 2006 2007E 2008E Revenue: N38.79B, $303.05M Rating: Outperform 5-year EPS CAGR: 35% EPS 1.10 1.69 1.38 Recommendation: BUY ROE: 13.88% P/E 11.78 15.37 18.83

Market Data Current BVPS: N5.08

Credit Rating: AA, Agusto; A, Fitch Debt to Capital (%): 35% Bloomberg: INTB NL Fiscal Year-End: February FYE: February EBITDA: N10.55B, $83.73M Outstanding Shares: 10.72B Sustainable growth rate: 6.40% Free Float: 76% Dividend Yield: 1.73% Net Profit: N8.23B, 52 week high/low: NGN27.95/NGN9.85 INVESTMENT SUMMARY & HIGHLIGHTS Lifetime High: NGN27.95 Investment Grade: C+ Q3 06 result: Exceeds expectations

Daily avg. Volume/Value: INTERCONTINENTAL Bank Plc has released its third quarter (nine months) result which 13,506,125 shares/ showed a quantum leap in profits and gross earnings. The bank's profit before tax grew by 179 per cent to N12.8 billion by end of the third quarter ending November 30, 2006 NGN301,856,956; $2.395M compared to N7.18 billion recorded in the same period of 2005. Gross revenues almost (90-day moving average) doubled at 194 per cent to N59.11 billion from N30.48 billion, while profit after tax soared by 172 per cent to N10.13 billion from N5.88 billion during the period under review. The Mkt Cap:NGN278.7B; US$2.2B bank has in the past nine months experienced unprecedented growth in its deposits portfolio indicating robust customer confidence. N/share Intercontinental Bank price mov't 30.0 27.5 25.0 Full-year revenue projections expected to double preceding year 22.5 20.0 Revenue for February 2006 - February 2007 fiscal year is expected to double to 17.5 15.0 NGN77.5B when the 2006-2007 full-year results are announced. This estimate is based 12.5 10.0 on our extrapolation from previous quarters and our belief that the trend will continue 19-Apr-06 19-Jul-06 19-Oct-06 19-Jan-07 19-Apr-07 coupled with the increase in consumer confidence about the bank’s future financial Daily price mov't 30-day mov'g av. 60-day mov'g av. prospects and service delivery.

Jude Fejokwu [email protected] +234 1 271 3925

CSL RESEARCH Intercontinental Bank

Social risks highly diminished due to Corporate Social Responsibility acts

The bank has been at the forefront of corporate social responsibility acts especially within the educational and health sectors. Fifteen universities have so far benefited from the bank’s infrastructure development projects within the educational sector. The bank has also awarded scholarships to indigent and deserving college students across the country. The bank is definitely in tune with its host communities. Investor goodwill is at a high which in the African cultural context translates into increased business patronage and more positive interest in buying the stock.

Valuation promising and should improve further once new information arrives Our five-year DCF based valuation of Intercontinental Bank’s fair value today based on future projections is NGN24.90. Once certain systematic issues like inflation within the economy and cost of debt can be reviewed downwards, the WACC of 19.88% will adjust downward thereby creating more value for the firm even at current projections.

INVESTMENT THESIS

The stock has gained almost 50% within the first quarter of this year and definitely has value over the mid – long term. The stock price is currently holding steady within the N25.00 – N26.00 range. We suggest investors latch on to the stock now as the stock will soon embark on a steep upward movement. The stock definitely has good value going forward.

• Great Value & Growth Stock

• Exponential Growth in earnings between FY 2005/2006 and FY 2006/2007

• Foreign investors (Vectis Capital, EMP Africa Fund II, RICO, AIG Global Emerging Markets Fund II and Rand Merchant Bank of South Africa) stake $161 million (N20.25B) in form of convertible preferred equity into the bank

• Great Investor Goodwill & confidence in the stock.

• The first bank in Nigeria to raise its shareholder funds to $1 billion which highlights the strength of the bank’s brand equity.

• Steep increase in deposit base and steadily increasing further buoyed by the Happy Savers Promo currently ongoing nationwide. Happy Savers Promo has attracted 115,000 new accounts so far.

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• Attractive market and rapidly evolving industry: only about 10% of the Nigerian populace currently have bank accounts. Lots of room to gain market share which Intercontinental Bank is poised to capture a sizeable chunk of the non-banking populace.

BUSINESS STRATEGY

Management expects growth in revenue and market share to come from seven different activities:

• The bank is in the process of building about eighty new branches this year which will increase their number of branches to 280 evenly spread across the country and located in places where the bank is either unrepresented or underrepresented. This will enhance the bank’s reach to potential customers. The bank will take advantage of value-adding opportunities outside Nigeria to enable it become a global player.

• The bank aims to be aggressive in attracting new customers by approaching customers without being approached. The bank is rolling out new products and putting them at the door-step of consumers through cross-selling and adverts and promos. Nigerians like promos and this is a great way of increasing market share and revenue thereof. The ultimate goal of the ongoing Happy Savers promo is to raise the bank’s balance sheet size to N1.0 trillion before the end of the year.

• The bank is constantly upgrading its processes and services to meet customers’ needs thereby cementing strong customer loyalty and support. Management believes this will generate customer loyalty and affection which is an integral part of increasing market share in the mid – long term.

• The bank is aiming to be one of the strong players in global banking which culminated in its technical partnership with BNP Paribas last year to enable the bank qualify to manage the country’s foreign reserves valued at $41 billion. This will be an added brand new revenue stream for the firm though there are about eleven other banks also primed to benefit from this new revenue stream, management believes there is enough to go round.

• The bank is at the forefront of business development and product innovation; this is evidenced by its wide array of highly successful subsidiaries and highest number of exceptionally powerful product brands.

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• Management believes its innovative products coupled with effective marketing will generate patronage of its products, increase its market share and improve its bottom-line.

• Management sees ecommerce as a viable route to revenue generation and a platform to cross-sell products with minimal expenses incurred which benefits profits. Most of its current array of products is ecommerce focused. The average Nigerian consumer is still not very comfortable with the World Wide Web to engage in business transactions through the internet. Massive sensitization of its customer base will need to be embarked on by the firm to enable it benefit financially from the roll-out of these products.

• The bank will not pursue every project available; the bank will concentrate on niche projects to enable it lower its marginal costs thereby improving its bottom- line.

Other banks are also rolling out similar products but with a customized touch to them. Differentiation is the key driver in banks’ product marketing drives. We expect banks with strong customer loyalty and affinity to be most successful in selling their products. The competition is not necessarily trying to compete but to be different. Products are becoming so customized that patronage is low. We believe consumer financing schemes are the way to go to attract mass patronage. Intercontinental Bank needs to reach out further to the populace in this regard.

INDUSTRY OVERVIEW

The banking industry has undergone major reforms in recent times; the most heralded being the recapitalization exercise completed December 2005 which raised the minimum capital base of commercial banks in Nigeria to N25 billion. As a consequence of this reform, there are now twenty-five banks in Nigeria from eighty-one before the reform came into being.

The government recently enacted a money laundering law which requires banks to report funds transfers in excess of stipulated amounts to curb fraud and corrupt activities. The banks had to upgrade their systems to enable them comply with the directive. All banks are grappling with non-performing loans to varying degrees which has led to a committee being set up to form a credit bureau to enable banks better ascertain the risk of every loan applicant which should thereof reduce their bad debt and thereof the provision for it. The CBN has given all three tiers of government till March 31st to dilute their stakes in banks to a maximum of 5%. This will free up shares and give bigger banks a chance to prey on smaller ones. Stay tuned for the musical chairs.

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Most of the twenty-five banks in the country are currently aggressively rolling out customized retail products to meet the needs of their teeming customers. Most banks believe that there are a good number of unmet consumers’ needs which if correctly identified are the best way of greatly increasing revenue. A lot of banks in a bid to increase their demand deposits are doing promotions to attract new customers and bring in more deposits from new and existing customers. Another unmet need currently generating product creation in the banking industry is consumer financing schemes.

All banks are busy creating products to meet the insatiable appetite of the average Nigerian to consume. The banking industry is currently facing some key challenges:

1. Insufficient personnel with requisite skill sets needed to raise the bar.

2. Urgent need to better manage risks utilizing a global approach; this challenge is further strengthened by the growth in banks’ loan portfolio.

3. Poor corporate governance structures and Board pro-activeness. Low level of transparency in dealing with customers.

4. High levels of operational risk.

5. Cost efficiency under pressure which inhibits the ability of the industry to support economic activity through job, deposit and loan creation.

There is a palpable feeling in the air that the number of banks in Nigeria may very well reduce and not increase as banks in their quest to grow quickly take the inorganic route of acquisition. This has started with the acquisition of majority shares (55% once consummated) of IBTC Chartered Bank by Stanbic Bank, Nigeria Limited. With only 10% of the Nigeria’s population of 140 million (14 million) having bank accounts, there is so much room for customer growth and product cross-selling. The quest for size by the banks may be effective in the short-run and inefficient in the long-run. The economies of scale will have a limited multiplier effect. Time will tell as the rivalry within the industry gathers steam and only the innovative banks that meet the unmet needs of the masses in a timely fashion will be at the top of the performance charts we believe. Largest bank will not imply best bank.

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COMPANY SYNOPSIS

Intercontinental Bank Plc was established March 1 st , 1989 under the name, Nigerian Intercontinental Merchant Bank Limited with a paid up share capital of twelve million naira. The bank eventually became the largest and most profitable merchant bank in the nation before its conversion to a commercial bank in July 1999 and a commercial bank in 2000. In 2002, the bank became a publicly quoted firm listed on the Nigerian Stock Exchange with an initial public offer of 283,995,000 ordinary shares which was fully subscribed. The bank is rated as the 16 th largest bank in Africa by the Financial Times of London and among the top 1000 banks in the world. The bank in 2006 entered into an asset management/financial services partnership with BNP Paribas to enable the bank become a stronger player in the global banking arena.

The bank concluded a merger with three other banks; Equity, Global and Gateway in 2005 in fulfilment of the Central Bank of Nigeria’s objective of fostering the consolidation of banks as a way of addressing the endemic system of distress within the banking system in recent times. The seamless merger is deemed a consolidation model in Nigeria. The bank has over two hundred branches evenly distributed throughout the 36 states of the federation and expects to expand to 280 branches by the end of 2007. The bank was listed on the Nigerian Stock Exchange on 29 January 2003.

FINANCIAL RESULTS

Revenue increased 49.17% to N25.18 billion in Q306 from N16.88 billion in Q305 and profit after tax increased 46.7% to N3.785 billion in Q306 from N2.58 billion in Q305. Increase in profit after tax did not keep pace with revenue; this clearly shows that the bank’s expenses are increasing faster than revenues and will likely cause the bank not to meet profit after tax forecasts in the long run if not curtailed in the short run. In Q206 revenue increased by 28.21% while profit after tax increased by 89% compared to Q205; this clearly shows that costs have spiralled higher in recent times. This is likely due to capital expenditure due to aggressive roll-out of branches. Pressure will definitely be on these new branches to generate revenue quickly to make-up for their negative effect on the bank’s bottom-line. EPS came in at N0.35 in Q306, above Q305 EPS of N0.24 an increase of 45.83% but below Q206 EPS of N0.38. The bank appears to struggle in the second and fourth quarters of the fiscal year compared to the first and third quarters. The actual cause of this is yet to be determined.

The bank has projected revenue of N66.02 billion in fiscal year 2006/07 which we believe is quite conservative and will be surpassed. The bank projects pre-tax profit of N17.29 billion for 2007 as against N11.03 billion in 2006. Revenues are once again projected to grow faster than profit from 2006 to 2007(70% - 57%). Trailing twelve months return on equity is 13.88% which makes the bank fourth best in the industry out of thirteen banks reviewed and the return on capital employed is 11.14% which is less than its peers.

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VALUATION

Using a five-year scenario analysis discounted cash flow valuation approach; the intrinsic value of Intercontinental Bank at this time is N24.90. The WACC is 19.88% and given the prevailing business environment in Nigeria actually on the lower rung of the ladder. The risk-free rate utilized is the current yield-to-maturity on the longest tenor bond most recently issued which is 10.75%. The market risk premium is a four-year comparison of the returns on the market above the risk-free rate which is 13.81%. The Beta which measures the returns of the market over a set time period (default of 1) against the returns of Intercontinental Bank is 1.05. This produces a cost of equity of 25.30%. The cost of debt is 12.8% (the cost of debt for an AA rated firm in Nigeria). The tax rate is 22% and the capital structure is 35% debt and 65% equity. The growth rate of the firm into perpetuity utilized is 6.40%.

The dividend discount model generated an intrinsic value of N 25.84 while our relative valuation technique generated an intrinsic value of N22.70. A fourth price forecasting approach using forward EPS/forward P/E using growth generated an intrinsic value of N22.70, while our forward EPS/forward PE using extrapolation generated an intrinsic value of N32.93 Using an equal-weighted average of these five prices yielded a final fair value of N25.81 which is our final fair value estimate for Intercontinental Bank at the present time. The use of multiple approaches to generate our price forecast helps us to avoid model bias and maintenance research which becomes more likely when one approach is used to determine fair value of a firm.

# COMPARATIVE VALUATION

Price Mkt. Cap EPS Company 2007E P/E 2007E P/BV ROCE (%) ROE (%) 19/4/07 (mill) (Naira)

Oceanic 19.53 227,368 1.73 11.28 4.83 28.64 25.40

Intercontinental 25.99 278,690 1.69* 15.37 5.04 11.14 13.88

UBA 37.99 321,851 1.69 23.67 5.53 17.27 24.08

Diamond 10.7 81,359 0.78 16.67 2.32 11.81 12.13

Average 23.55 227,300 1.47 16.42 4.43 17.21 20.21 # Comparative analysis is based on banks with the same credit ratings. * Does not include shares from recently concluded offer

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INVESTMENT RISKS

Economic Factors: We view the banking sector as being very prone to an economic slowdown which will affect consumers’ marginal propensity to save and their willingness to take on loans through various consumer finance schemes currently being launched. Inflationary trends due to overspending in an election year will also reduce the deposit base of banks thereby affecting thereby ability to generate profits.

Return on Capital Employed low: The bank’s return on capital employed is quite low compared to banks with similar credit ratings. A bank that is not generating returns above its weighted average cost of capital cannot sustain profitability in the mid – long term. With the likely success of its recently concluded public offer, it is imperative that the bank find viable outlets for the huge amount of funds that will be at its disposal.

Growing focus on ecommerce products: The average Nigerian citizen is not yet comfortable with the internet as a means of facilitating business transactions. Most of the banking products of Intercontinental bank are ecommerce based. We believe that these products will not yield the desired results in the near-term.

Competition (Internal & External): The bank has other subsidiaries which we believe will compete with the bank for funds and attention. This will impair the bank’s ability to generate adequate returns. The copycat syndrome is currently growing at an alarming rate within the industry; every bank is chasing the customer, sourcing for funds from within and abroad. Without clear differentiation and diversification into unrelated markets, we believe the firm will encounter profit stagnancy.

Industry Risk: The banking industry is heavily regulated by the Central Bank of Nigeria (CBN) and this raises uncertainty as to the impact on the banks’ bottom-line of the next regulatory measure taken by the apex body. The CBN recently asked all forms of government to reduce their holdings in banks to 5% maximum. This has forced banks to sell off massive amounts of shares to the general public which will depress their stock price at least momentarily. The banks can diminish the impact of industry risks by moving towards variable cost activities and less of fixed cost activities.

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Political Risk: The expected change of government early this summer will bring its own share of uncertainty to the industry. A lot of politicians are withdrawing funds from the banks to meet their election expenses. There is also a high risk of laundered funds being deposited in banks by outgoing government officials. This may artificially boost the bottom-line of banks in 2007. This will likely have an effect on the profitability of the banks in the current year.

IMPORTANT DISCLOSURES

Financial models and/or methodology used in this report

Recommendations and opinions in this research report are formed based on a combination of discounted cash flow analysis, industry knowledge, relative valuation techniques, logical extrapolations, peer group analysis, and company specific and market technical elements (events affecting both the financial and operational profile of the company). Forecasting of company sales and earnings is based on segmented bottom up models using subjective views of relevant future market developments. The output is aggregated into models for group profit and loss, balance sheets and cash flow estimates where available – all taking into account the recent development in historical reports. In addition, company guidance and financial guidance is taken into account.

Kindly bear in mind that this research report is based on the figures of the Bank where available and not the Group; this is to ensure that all banks are judged on a level platform.

The assigned Investment Grade is made up of twenty variables analyzing a firm’s profitability, efficiency, liquidity, growth, relative valuation ratios, market value and management performance. Each variable is assigned a maximum score of five totalling one hundred points.

A grade of A – B- means the firm has a positive performance outlook A grade of C+ to C- means the firm has a fair performance outlook A grade of D – F means the firm has a negative performance outlook

Risk warning Major risks connected with recommendations or opinions in this report, including a sensitivity analysis of relevant assumptions have been taken into consideration in developing this report. Any particular risk to the company that we are aware of has been discussed in the body of this report.

Expected updates This research product will be updated on a quarterly basis following the full year result statements from the company. Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price of Intercontinental Bank on April 23rd, 2007.

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Hedge Clause This report has been prepared by the Investment Research Department of CSL Stockbrokers. The author of this report is Jude Fejokwu, Head, Investment Research & Strategy and a team of analysts.

CSL Stockbrokers has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the CSL Stockbrokers Standards of Professional Conduct. CSL Stockbrokers Investment Research department is organized independently from and does not report to other business areas of the First City Group.

CSL Stockbrokers has made no agreement with Intercontinental Bank to write this report.

CSL Stockbrokers research reports are prepared in accordance with the CFA Institute’s Ethical rules on Research Reports writing.

This research report has been developed utilizing multiple sources: CSL data and estimates, Intercontinental Bank website and annual reports and press releases. We believe the above sources are reliable though we take no responsibility or liability for errors based on stated facts or opinion expressed herein. This document is produced for informational purposes only. An investor should be aware that the financial markets are risky and past positive performance and accurate forecasts are not guarantees of future positive performance and accurate forecasts. We do not accept any liability whatsoever for any loss based on the use of information in this report. CSLS Limited may effect transactions in securities of companies mentioned herein and may also perform or seek to perform investment-banking services for those companies mentioned herein. This report may not be reproduced, distributed or published by any recipient without the written prior consent of CSL Research. Copyright © 2007 Equities Research Unit, CSL Stockbrokers Limited, Lagos Nigeria.

For further enquiries, please contact the Research Dept. ( [email protected] ) 234-1-271- 3925.

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Abridged Financials (2-year projections and 3-year actual results)

3 Year Profit & Loss (Nm) 2008E 2007E 2006A 2005A * 2003A Gross Earnings 135,768 77,581 38,790 32,796 21,409 Interest Paid 8,064 7,132 7,925 8,357 6,557 Gross Profit 60,923 38,945 30,865 24,439 14,852 Overhead Expenses 28,765 25,949 19,649 14,244 9,011 Risk Assets Provisions 984 892 662 2,043 1,442 Profit Before Tax 48,694 23,274 11,029 8,150 4,345 Taxation 10,712 5,120 2,433 2,029 1007 Profit After Tax 37,982 18,154 8,595 6,120 3,337 Dividend Paid 6,434 5,147 4,293 2,330 1,435

Balance Sheet (Nm) Fixed Assets 25,832 22,058 11,072 5,536 4,464 Loans & Advances 300,185 262,467 158,938 68,396 32,147 Total Assets 650,432 602,847 360,903 203,647 96,785 Deposits 609,816 484,691 252,280 134,383 66,387 Other Liabilities 94,632 88,746 54,754 31,725 18,013 Total Liabilities 741,692 586,491 307,034 167,458 85,479 Share Capital 7,342 6,981 5,361 1,794 1,794 Shareholders Fund 110,100 101,467 53,868 34,678 10,110

Key Ratios and Variables Gross earnings growth (%) 105.55 81.23 18.28 53.19 45.92 Gross Margin (%) 120.12 90.56 79.57 74.52 69.37 Asset Turnover (times) 10.23 7.01 0.11 6.21 4.52 Liquidity Ratio (times) 3.59 2.11 1.14 1.19 1.09 Return on Asset (%) 5.76 3.22 2.38 3.01 3.45 Return on Equity (%) 16.24 14.55 15.96 17.65 33.01 Earnings per Share (N) 2.85 1.69 0.93 1.4 0.71 Price Earnings (times) 23.05 21.92 11.75 5.58 5.99 Dividend per Share (N) 1.05 0.50 0.45 0.42 0.4 Dividend Yield 2.33 1.33 4.12 5.38 9.41 Financial Year End Price (N) 45.00 38.00 10.93 7.81 4.25 * 14 months to February 2005.

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