Kenya Listed Commercial Banks Analysis Cytonn H1’2015 Banking Sector Report
14th September, 2015 Table of Contents
I. Introduction to Cytonn Investments
II. Economic Review and Outlook
III. Kenya Banking Sector Overview
IV. Cytonn’s Banking Sector Report
A. ExecutiveSummary
B. Banking Sector Report
V. Appendix
A. Metrics Used
B. Tier I Banks
C. Tier II Banks
D. The Board of Directors – Cytonn Investments
E. Management Team – Cytonn Investments
2 I. Introduction to Cytonn Investments
3 Client Focus drives the Team
Cytonn Investments is a company with over 25 team members
44 Introduction to Cytonn Investments Cytonn Investments is an independent investments management company
• Our mission is that “we work to deliver innovative & differentiated financial solutions that speak to our clients needs”
• Cytonn Investments is differentiated in several respects:
1. Independence & Investor Focus: Cytonn is solely focused on serving the interest of clients, which is best done on an independent investment management platform to minimize conflicts of interest
2. Alternative Investments: Specialized focus on alternative assets - real estate, private equity, and structured products
3. Partnerships with Global Institutional Investors: Such as Taaleritehdas of Finland
4. Strong Alignment: Every staff member participates in ownership. When clients do well, the firm does well; and when the firm does well, staff do well
5. Capture Market Opportunity: Huge opportunity fo r private capital to drive economic growth, while creating above average returns for investors
5 Our Values Our 6 core values help us drive a high performing culture
• To achieve our vision that “we will be Africa’s leading investment manager by consistently exceeding client expectations,” we have key values which propel us forward:
vv People – We look for the best people who thrive in a team context
vv Excellence – delivering the best at all times
vv Client focus – putting the clients interest first at all times
vv Entrepreneurship – using innovation and creativity to deliver differentiated financial solutions
vv Accountability – every day we are committing our resources and reputation and we must be accountable
vv Integrity – do the right things
6 Cytonn’s Corporate Structure – Kshs 50 bn under mandate
Cytonn Investments
Kenya United States
Cytonn Cytonn Cytonn Real Private Cytonn Investments Investments Estate Equity Diaspora Ltd LLC
• Independent • Development affiliate • Financial Services • Diaspora platform • US advisory and investment providing investment • Education & HR connecting investors investment management grade real estate • Technology in the diaspora with management company, serving development opportunities in the company HNW & institutional solutions East African Region clients
7 Governance The board is comprised of 8 members from diverse backgrounds, each bringing unique skill-sets*
Professor Daniel Mugendi Njiru serves as the Chairman of the Board of Directors
Madhav Bhalla, Prof. Daniel Mugendi, Antti – Jussi Ahveninen, Non-executiveDirector Chairman Non-executiveDirector
James Maina, Nasser Olwero, Non-executiveDirector Non-executiveDirector
Edwin H. Dande, Elizabeth N. Nkukuu, Patricia N. Wanjama, Managing Partner & CEO Partner & CIO Partner & Head of Legal
*See Appendix 1 for Bios of the Board Members 8 Management – 80 years of cumulative industry experience
80 years of combined experience in investments, finance and real estate*
Edwin H. Dande, Elizabeth N. Nkukuu, Patricia N. Wanjama, Managing Partner & CEO Partner & CIO Partner & Head of Legal
Maurice Oduor, Andrew Ayuya, Johnson Denge, Investment Manager Project Manager Real Estate Services Manager
Julius Kibanya, Shiv Arora, BeverlynNaliaka, Distribution Manager InvestmentAssociate PR & CommunicationAssociate
*See Appendix 2 for Bios of the Team 9 Strong Track Record With Brands in Regional and Global Markets
10 Cytonn Investment Solutions
We offer differentiated investment solutions in four main areas
The Team’s expertise and market knowledge enable us to offer investors higher yields than the market average High Yield Solutions Regular credit analysis, quick dealing capability and the large banking spread in the market allow the team to capitalize on investment opportunities
Our unique strategic partnerships with Cytonn Real Estate, our development affiliate, enables us Real Estate to find, evaluate, structure and deliver world class real estate investment products for investors Investment Solutions Our platform connects global capital seeking attractive return with institutional grade development opportunities in the East African region
We understand that investors have varying financial goals. Our highly customized and simple to Private Regular understand investment products will enable you to achieve your investment objective Investment We offer solutions to both local investors, and those in the diaspora interested in the investment Solutions opportunities back in Kenya and the region
Cytonn seeks to unearth value by identifying potential companies and growing them through Private capital provision and partnering with their management to drive strategy Equity We primarily invest in the Financial Services, Education and Technology sectors
11 Cytonn focuses on the highest returning Asset Class Traditional investments returning 10% compared to 24% for real estate, & projected to continue
30%
25% 24%
20%
15% 12% 9% 9% 10% Average = 10% Per annum Return, 5 Year Average
5%
0% Real Estate 10--year Treasury Bond 91 dayT--bill Equities(NASI)
12 Global view of economic growth determines regions of focus There is demand from global capital (light colours) looking for attractive returns (dark colours)
13 Deal pipeline overview – 85% to low and mid-income housing
Kshs 49 Billion Deal Pipeline
Low to mid--income Housing Prime Residential and Mixed--use 85% 15%
• Masterplanned Development • High Density Integrated Mixed-use • Comprehensive Development • Gated Communities • Low to mid-income Modular Housing
14 Kshs 49 billion Deal pipeline details
• Set 1: Real estate projects where the design, concept, agreements and funding are all secured, and have ground broken or in the process of ground breaking • Set 2: Real estate projects where the Cytonn Real Estate team is in advanced stages of negotiations with the landowners, and where consultants have been appointed to begin market research and concept design
all values in Kshs Millions unlessstated Projects Concept ProjectSize SET 1 Amara Ridge Gated community 625.0 Situ Village Gated masterplanned community 3,050.0 ProjectRuaka Middle--class residential development 1,600.0 Sub -- Total 5,275.0
SET 2 ProjectMombasa High density mixed--use development 3,750.0 ProjectJuja Middle--class gated community 3,832.0 ProjectMount Kenya Masterplanned development 1,200.0 Project Mavoko Low to mid income masterplannedcity 12,500.0 ProjectLukenya Low to mid income masterplannedcity 22,500.0 Sub -- Total 43,782.0
TOTAL 49,057.0
15 Cytonn’s strategy brings three key pillars together
Financing Capability Development Capability
1. CreatingJobs
2. Growingthe Economy
3. Improving the standards of living
Landowners
16 II. Economic Review and Outlook
17 Economic review Kenya’s GDP growth to be supported by stable inflation and high infrastructure development
• Kenya’s GDP grew by 4.9% in Q1’2015 supported by high spending on infrastructure by the government and globally
low oil prices which boosts the manufacturing and the construction sectors since Kenya is a net oil importer. Kenya is
expected to grow by 6.5% in 2015 according to the IMF
• Inflation has remained stable during the year and within the CBK range of 2.5% to 7.5%. The inflation rate started the
year at 5.5%, moved on to hit a high of 7.1% in April on the back of rising fuel prices but declined to 5.8% in August
• On the currency, the Kenya Shilling has depreciated by 15.9% YTD on account of (i) a strengthening Dollar globally and
expectations that the Fed may increase rates, (ii) a widening current account driven by high government spending and
(iii) declining foreign exchange inflows on the back of poor revenues from tea, horticulture and tourism. As of
September, the import cover stands at 4.1 months which is marginally ab o ve the mandatory requirement of 4 months.
However the government has an unutilised credit facility from the IMF of Kshs. 63 bn
• Since June, CBK has increased Central Bank Rate (CBR) by 300 bps to 11.5% in order to stabilise the currency, and
eventually, the KBRR also increased by 133 basis points to 9.87%
18 Outlook Kenya’s economic outlook remains positive despite insecurity issues and a weakening currency
• The political scene in Kenya is stable but insecurity still remains a threat • Corruption is still rampant but the Governments war on graft is a step in the right Political direction Environment • The tourism sector having being hampered by insecurity issues and travel advisories is expected to recover after the advisories were lifted • Kenya’s economic growth is expected to be below target having grown only by 4.9% in Q1 2015 • The effects of devolution is expected to drive the economy as the various counties are Economic Growth given independence and transparent allocation of funds • The recent Obama visit GES summit raised investor confidence in the country and is set to attract private investment in the country • Pressures from a widening current account, high government expenditures and a The Currency strengthening dollar will affect the shilling moving forward. The MPC have taken several measures to tame the shilling downfall including raising CBR by 300 bps to 11.5%
• The drought experienced in the first quarter of 2015 affected the agricultural production as the industry is highly dependent on the March-May long rains. This in turn led to an Inflation uptick of inflation. Despite this inflation is within the CBK range of 2.5% to 7.5% and is expected to remain within this range • The is expected to step up the domestics borrowing for fiscal year 2015/16 since they Interest Rates have a net repayment of Kshs 21.9bn which will result into upward pressure on interest rates
19 III. Kenya Banking Sector Overview
20 Kenya’s Banking Sector Overview Kenya currently has 42 commercial banks, all regulated by the Central Bank of Kenya
• In Kenya there are a total of 42 commercial banks, 12 microfinance banks and 1 mortgage finance institution
• All banks are regulated by the Central Bank of Kenya. The Capital Markets Authority has additional oversight over the listed banks. All banks are required to adhere to certain prudential regulations such as minimum liquidity ratios and cash reserve ratios with the Central Bank
• Kenya has a high relative ratio of banks to the total population, with the 42 commercial banks serving a country of 44 million people, compared with Nigeria's 22 for 180 million inhabitants and South Africa's 19 for 55 million
Commercial Banks / Population(Millions) 1.2x 1.0x 1.0x 0.8x 0.6x 0.3x 0.4x 0.1x 0.2x 0.0x Kenya South Africa Nigeria • Credit Information Sharing systems (CIS), agency banking, revised prudential guidelines and mobile banking are some of the new developments in banking that have spurred increased efficiency in the sector, as well as enhanced competition
21 Growth in the Banking Sector Growth in the banking sector has been underpinned by alternative banking offerings
• Over the last few years, the Banking sector in Kenya has continued to grow in assets, deposits, profitability and products
offering
• The banking sector’s aggregate balance sheet grew by 6.8% from Kshs 3.37 tn in March 2015 to Kshs 3.60 tn in June
2015, faster than the 3.4% increase in Q1’2015
• The growth has mainly been underpinned by: ØØ Banks responding to the needs of the Kenyan market for convenience and efficiency through alternative banking
channels such as mobile, internet and agency banking
ØØ Industry wide branch network expansion strategy both in Kenya and in the East African community region ØØ A resilience by banks to reduce their rates following the introduction of the KBRR. Kenyan banks have been fairly
good at protecting their margins regardless of the rate environment
22 Banking Sector Growth Drivers We expect banks to remain profitable in 2015 driven by cost containment and increased use of alternative channels There are a number of factors which will drive growth in Kenya’s banking sector:
1) Cost containment initiatives: In the event that NIMs decrease due to the increase in competition, banks will opt for more cost effective measures which ensure operational efficiency
2) Increased use of al ternati ve service delivery channels: With the growth of mo bile and agency banking, penetration in the market has increased and this will lead to a greater number of transactions as well as offer loan products to the mass market e.g. M-benki which was launched by KCB and Safaricom, and M-shwari which was a partnership between Safaricom and CBA
3) Growth of the retail segment: As the middle-class grows rapidly in Kenya, faster than majority of the countries in the region, there is an inherent increase in consumption expenditure and an increase in the percentage of the population which will require banking services
4) Expansion both regionally and domestically: With devolution in Kenya, we will see banks become more aggressive in trying to capture the opportunities that exist at county levels, which will increase their customer base. In addition, banks looking to expand in the less penetrated markets of Tanzania, Uganda, Rwanda and South Sudan are opening up new channels of revenue in countries with a relatively attractive spread compared to Kenya
23 Recent Developments in the Banking Sector
Banks register the slowest growth in 6 years
There were a number of developments in the banking industry:
1) Increase in Interest Rates: The Kenya Bankers Reference Rate increased by 133 bps to 9.87% largely as a result of
an increase in the CBR by 300 bps to 11.5%. This will raise interest on all loans pegged on the KBRR
2) Lower earnings release: Banks recorded the slowest year on year growth in 6 years of 8.3% during H1’2015, as
compared to 15.6% in H1’ 2014
3) Rejection of increase in Core Capital Requirements as proposed in the 2015/2016 Budget: Parliament
rejected the proposal to increase core capital in banks to 5 bn by 2018
4) Dubai Bank Liquidation: Dubai bank was placed under receivership with the Kenya Deposit Insurance Corporation
(KDIC) for failure to meet statutory requirements since July and for failure to honour a Kshs 48.2 mn financial
obligation due to Bank of Africa. The KDIC further recommended that the bank be liquidated
24 Banking Sector Metrics Robust growth in the banking sector as evidenced by constant increase in loans and deposits
Loans and Advances (Kshs Bn) Deposits (Kshs Bn) 2,500 3,000 2,170 2,570 1,941 2,500 2,292 2,000 CAGR- CAGR- 22.3% 17.6% 1,579 1,936 2,000 1,708 1,500 1,296 1,152 1,488 1,500 1,237 1,000 876 1,000 500 500
-- -- 2010 2011 2012 2013 2014 H1'2015 2010 2011 2012 2013 2014 H1'2015 Shareholders Equity (Kshs Bn) Bank Branches
1,600 600 CAGR - 7.9% 1,443 543 1,342 CAGR - 17.2% 502 1,400 1,272 500 1,161 432 1,200 1,063 400 362 1,000 291 800 300 266 600 200 400 100 200 -- -- 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 H1'2015
Source: Central Bank of Kenya 25 Banking Sector Metrics, continued…
Net interest margins are becoming compressed owing to stiff competition in the industry
Cost to income (%) Loans to deposits (%)
60.0% 90.0% 50.0% 47.4% 84.7% 50.0% 84.4% 43.7% 42.5% 85.0% 40.1% 40.9% 81.6% 40.0% 80.0% 77.4% 75.9% 30.0% 75.0% 70.9% 20.0% 70.0%
10.0% 65.0%
0.0% 60.0% 2010 2011 2012 2013 2014 H1'2015 2010 2011 2012 2013 2014 H1'2015
NPLs to total loans ratio(%) Net interest margin (%) 10.0% 7.0% 6.6% 9.5% 9.4% 9.5% 5.7% 6.0% 5.6% 5.2% 9.0% 8.6% 8.7% 8.6% 4.6% 4.8% 8.5% 5.0% 7.9% 8.0% 4.0% 7.5% 3.0% 7.0% 6.5% 2.0% 6.0% 1.0% 5.5% 0.0% 5.0% 2010 2011 2012 2013 2014 H1'2015 2010 2011 2012 2013 2014 H1'2015
Source: Central Bank of Kenya 26 Banking Sector Multiples Kenya’s banking sector is trading at an average PBV of 1.6x and a Trailing PE of 7.6x
No. of shares Mkt Cap (bn) TTM** Bank Sha re Price issued(bn) PBV P/E * Equity Group Holdings 43.00 3.7 154.59 2.45x 8.8x
I&M Holdings Ltd 107.00 0.39 41.98 2.05x 8.3x Barclays Bank of Kenya Ltd 13.00 5.43 70.61 1.93x 8.0x The Co--operative Bank of Kenya Ltd 18.00 4.89 88.01 1.89x 9.3x Standard Chartered Bank Kenya Ltd 234.00 0.31 72.34 1.87x 6.2x Kenya Commercial Bank Ltd 45.00 2.98 134.29 1.78x 7.7x Diamond Trust Bank Kenya Ltd 200.00 0.24 48.42 1.59x 8.2x CFC Stanbicbank 89.50 0.31 72.34 1.36x 8.8x NIC BankLtd 45.75 0.64 29.28 1.26x 7.0x Housing Finance Co. Kenya Ltd 21.25 0.35 7.49 0.77x 7.8x National Bank of Kenya 18.15 0.31 5.59 0.41x 3.2x Median 1.8x 8.0x Average 1.6x 7.6x * Share prices are as at 8th September2015 ** TTM – Trailing twelve months
Source: NSE, Cytonn Banking Sector Report 27 IV. Cytonn’s Banking Sector Report
28 Executive Summary Cytonn has undertaken this report to offer our investors a comprehensive view of the listed banks
• All listed banks in the Kenyan market were analysed by the Cytonn Investment Team
• The analysis was brought about by a need to be able to recommend to our investors which banks are the most stable
from a franchise value and from a future growth opportunity perspective
• The analysis covers the health and future expected performance of the financial institution, by highlighting their
performance using metrics to measure profitability, efficiency, growth, asset quality, liquidity, revenue diversification,
capitalization and intrinsic valuation
• The analysis was undertaken using H1’2015 results (franchise value) and analyst’s projections of future performance of
the banks (future growth opportunities)
• For banks which are part of a group structure, the financials of the group were utilised to take into consideration the
listed counter which an investor will purchase
• The overall ranking was based on a weighted average ranking of Franchise value (accounting for 40%) and Intrinsic
value(accounting for 60%)
• The top ranking was dominated by Tier 1 banks which performed well in terms of both Franchise and Intrinsic valuation
29 Cytonn’s Banking Sector Report – The Rankings We analyzed the listed banks on a franchise value perspective
Loan to Cost to Deposits/ Tangible Non Deposit Income PEG branch NPLs/ NPL Common Interest Camel Bank ratio ratio ROACE* NIM** ratio P/TBV (billions) Loans Coverage Ratio Income/ Rating Revenue StandardChartered 5 4 1 3 8 9 2 7 2 1 8 4 Equity 4 7 2 2 2 11 10 3 3 2 2 7 I&M 9 1 5 7 7 8 4 2 7 7 9 1 KCB 7 6 3 5 1 6 6 8 6 8 4 10 Co--operative bank 1 5 7 4 4 7 7 5 9 6 5 8 NIC 10 2 9 10 3 4 3 9 8 3 7 5 Barclays 2 8 4 1 11 10 9 6 4 4 6 2 CfC Stanbic 3 11 10 11 10 3 1 4 5 10 1 6 DTBK 8 3 8 8 9 5 8 1 1 9 10 3 NBK 6 10 6 6 5 1 11 11 11 11 3 11 Housing Finance 11 9 11 9 6 2 5 10 10 5 11 9
• The bank ranking assigns a value of 1 for the best performing bank, and a value of 11 for the worst
• The metrics highlighted a bank’s profitability, efficiency, growth, asset quality, liquidity, revenue diversification, capitalization and soundness
* ROACE - Return on Average Common Equity ** NIM - Net Interest Margin
Source: Cytonn Research 30 Cytonn’s Banking Sector Report – The Rankings
The banks were also ranked on Intrinsic value perspective Total Return DividendYield Upside Banks Current Price Valuation FY15e Total Return KCB 46.5 57.4 29.1% 5.7% 34.8% Equitybank 43.0 50.3 22.1% 5.1% 27.2% StandardChartered 243.0 263.0 15.0% 6.8% 21.8% Barclays Bank 12.9 13.5 12.8% 7.9% 20.7% NICBank 46.8 47.6 4.1% 2.4% 6.5% Housing Finance 21.8 20.3 (0.9%) 5.6% 4.7% DTB 204.0 206.5 2.5% 1.3% 3.8% Cooperative 18.2 16.5 (6.1%) 3.3% (2.8%) I&M Bank 121.0 99.5 (15.6%) 2.2% (13.4%) CfC Stanbic Bank 90.0 71.3 (20.8%) 0.0% (20.8%) National Bank 17.8 6.5 (63.5%) 0.0% (63.5%)
• KCB and Equity have the highest upsides at 34.8% and 27.2%, respectively
• NBK registered the highest downside of 63.5%
31 Cytonn’s Banking Sector Report – The Rankings
Overall, Equity bank was ranked 1st while NBK and HF were ranked last
Banks FranchiseValue Total Return WeightedH1 Total Score Score 2015 Score H1 2015rank Q1 2015 rank Equity 55 2 23.2 1 4 StandardChartered 54 3 23.4 2 3 KCB 70 1 28.6 3 5 Barclays 67 4 29.2 4 9 Co--operative bank 68 8 32 5 7 NIC 73 5 32.2 6 8 I&M 67 9 32.2 6 2 DTBK 73 7 32.8 8 6 CfC Stanbic 75 10 36 9 1 National Bank of Kenya 92 11 43.4 10 10 Housing Finance 98 6 43.4 10 11
• In H1 2015, franchise value was assigned a weighting of 40% while the intrinsic value was assigned 60% weight • The Q1 2015 rank was based only on franchisevalue • Equity Bank rose 3 positions to top the ranking based on a high upside and on the franchise value backed by high return on average equity of 30.5%, high net interest margin of 10.5% and a high non interest income contribution to revenue of 41.1% • CfC Stanbic declined from rank 1 in Q1 2015 to rank 8 in H1 2015 because of a high cost to income ratio of 60.0% vs an industry average of 48.1% and low net interest margin of 5.3% vs an industry average of 8.3%
32 Banking Sector Report Results Equity Bank ranks highest overall in the banking sector analysis
• Equity Bank ranked top, ranking high in return on capital, efficiency and revenue diversification. With the planned acquisition of ProCredit bank (Congo) and the roll out of Equitel which will the stock has an upside of 27.9% (including dividend yield)
• Standard Chartered ranked the second highest overall, ranking high in return on capital and deposit mobilisation despite being weighed down by low revenue diversification. The ranking was further boosted by the bank’s 21.8% upside
• Barclays Bank had the highest net interest margin attributable to the more expensive loans. The stock has a 20.7% upside mainly attributable to their aggressive entry into the SME market
• National Bank of Kenya, despite being associated with the Government, was the second most inefficient bank in terms of cost containment, operating at cost to income ratios of 54.3%. In addition, they have the lowest quality of assets in their loan portfolio, as can be seen by their NPLs which are 9.5% of their total loan book. The stock has a 63.5% downside
• Housing Finance ranked the lowest overall. It registered poor profitability, with the ROACE at 12.5% and their NIM at 7.1%, which was the third lowest in the market. In addition, they are hampered by liquidity issues, with a loan to deposit ratio of 133.5%. The stock has a 4.7% downside
Source: Cytonn Research 33 Future of the Banking Sector
The future is bright for the banking sector given the resilience to maintain margins
• There are concerns as to whether banks will be able to maintain their profitability margins with the increase of the CBR
to 11.5%. With the exception of minimal increases in non-performing loans, we do not think the banking businesses will
be impacted significantly by the increases as historically, Kenyan banks have been fairly good at protecting their margins
regardless of the rate environment
34 V. Appendix
35 A. Metrics Used
36 Banking Sector Report – Metrics Used Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Net Interest Margin - A bank’s net interest margin (NIM), is the difference between the interest paid on deposits and the interest earned on loans, relative to the amount of interest-earning assets with higher net interest margins translating into higherprofits Output: Majority of Bank’s funding is towards the issuing of loans rather than the purchase of government securities. Even with the introduction of the KBRR and the raising of the CBR to 10%, we expect banks to maintain their NIMs in 2015. Barclays had the highest NIM at 10.91%, with the lowest for CfC Stanbic at 5.32%
• Return on Average Common Equity - A bank’s return on average common equity (ROACE), is the amount of profit the bank earns as a percentage of average common shareholders’ eq ui ty. It’s a profitability measure that shows how much a company generates with the money shareholders have invested
Output: Banks with higher ROACEs are better at utilizing capital to generate profits. Equity bank has the highest ROACE at 30.53%, which was much above the industry average of the listed banks of 22.79%, while Ho using Finance had the lowest at 12.47%
37 Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Price/Earnings to Growth Ratio - The price/earnings to growth (PEG) ratio is the stock’s market price to earnings ratio divided by its growth in earnings for a specified period of time. The PEG ratio is used to determine the value of a stock while taking into ac co u nt its growth rate, with lower PEG ratios showing the stock is undervalued given the growth in its earnings
Output: To obtain this ratio, we estimated each bank’s 5-year growth rate based on analysis of (i) bank’s fundamentals, (ii) projections using each bank’s models and (iii) management’s input on a bank’s strategy going forward. KCB had the lowest PEG ratio at 0.34x, while Barclays was the most overvalued at 0.84x
• Deposits per Branch - A bank’s deposits per branch shows the amount of deposits a bank collects from each of its branches, hence a measure of efficiency. Banks with higher deposits per branch are preferred, as it shows for each unit cost of capital expenditure required to open new branches and their subsequent operating costs, a bank receives more in deposits
Output: CFC Stanbic and Standard Chartered have the highest deposits per branch at 4.79 bn and 4.41 bn, respectively, while Equity bank and National bank have the lowest deposits per branch at 1.31 bn and 1.30 bn, respectively. However, this is due to the high number of branches which Equity Bank has, as well as the large corporate book of CfC Stanbic and Standard Chartered
38 Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Loans to Deposits Ratio - A bank’s loans to deposit ratio (LDR) is a measure of liquidity as it shows how much of a bank’s loans are being funded by its deposits. Low LDR ratios indicate that the bank may not be earning a lot of interest. Very high LDR’s indicate that the bank might not have enough liquidity to cover any unforeseen funding requirements, and ratios above 1 show that the bank supplemented their loan issues with outside borrowings
Output: Our analysis showed us that in Kenya, the loan to deposit ratio has been steadily increasing, showing increased uptake of loans and more aggressive use of deposits by banks. Taking a preferred LDR of 86.5% which was the mean, we found that Co-operative was closest to the target at 82.5%, while Housing Finance was the farthest at 133.5%
• Cost to Income Ratio - The cost to income ratio is a measure of a bank’s efficiency, showing its costs in relation to its income. A lower ratio is preferred, as it indicates a bank is more profitable. An increase in the ratio often highlights potential problems as it shows a bank’s costs rose faster than its income; while a fall in the ratio could be brought by management’s cost cutting measures
Output: We see many Kenyan banks making an effort to be mo re efficient. Many Kenyan banks have opted to restructure in a bid to bring down costs and subsequently this ratio, most recently being Co -operative which was able to bring its cost to income ratio down to 47.6%, in line with the industry average. I&M maintained the lowest cost to income ratio of 33.8%, while CfC Stanbic had the highest ratio at 59.9%
39 Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Price to Tangible Book Value - This is a valuation ratio that expresses the bank’s market price to its tangible book value. It shows the price an investor would pay for a unit amount in the event of a liquidation. A ratio of less than one indicates that the bank’s assets are undervalued in the market while a ratio greater than one signifies overvaluation Output: We find Housing Finance maintained its position as the most undervalued bank as per this metric, while Equity bank is still the most overvalued
• Tangible Common Equity Ratio - This is the ratio of a bank’s common equity less intangible assets to its tangible assets. It is a common indicator of a bank’s risk and capitalization and measures how much losses a bank can take before shareholder’s equity is wiped out, hence solvency
Output: Standard Chartered is the most solvent with a tangible common ratio of 16.5%, while National Bank was the least solvent at 5.5%
• Non-Performing Loans to Total Loans Ratio - This is a measure of the percentage of a bank’s issued loans that are non-performing that is, in default, or close to being in default Output: Diamond Trust bank had the highest quality loan book with a non-performing loans to total loans ratio of 0.9%, while National Bank had the highest non-performing loans at 9.5% 40 Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Provisions to Non-Performing Loans (NPLs) - This is a credit quality metric that measures the credit risks for banks. It shows the extent to which the NPLs are covered by provisions hence the degree of stability of the bank’s lending base, with higher ratios preferred Output: Diamond Trust Bank has the highest provisions to non-performing loans at 87.2%, while National Bank has the lowest at 10.7%. This is ironic given that DTBK has the lowest NPLs/ Loans of 0.9% while NBK has the highest NPLs/Loans of 9.5%
• Non-Interest Income to Revenue - The non interest income is the income earned from sources other than loans and investments. The non-interest income to revenue therefore shows the extent of diversification of a bank’s operations. High levels are preferred, not exceeding the point where the bank loses focus of its primary business
Output: We see that Kenyan banks’ non-interest income is set to benefit from new initiatives such as banc-assurance and mobile banking. CfC Stanbic has the highest non-interest income as a percentage of revenue at 41.6%, while Housing Finance has the lowest at 15.2%
• Camel Rating - This is a ranking system that assesses the overall condition of a bank, that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Quality and Liquidity
41 B. Tier I Banks
42 I. Equity Bank
43 Company Description Equity bank is the largest bank in East Africa in terms of customer base
Company Description
• Equity Group Holdings Limited was formed as Equity No. Shareholders % Building Society (EBS) in 1984. EBS was a provider of 1. Norfininvest AS of Norway 12.23 mortgage financing for customers in the low income 2. British--American Investments Company 10.63 population 3. Equity Bank Employees’ Share Ownership Plan 4.07 • As at June, it had an asset base of Kshs 401.0 bn and 4. James Njuguna Mwangi 3.45 shareholders' equity of Kshs 65.0 bn 5. Fortress Highlands Limited 2.73 6. National Social Security Fund of Uganda 2.45 • It has 228 branches across the region: (i) Kenya 166, Nairobi 45 (ii) Uganda 31, Kampala 17 (iii) South Sudan 7. Andrew Mwangi 2.44 11, Juba 6 (iv) Tanzania 9, Dar-es Salaam 6 (v) Rwanda 8. NelsonMuguku 1.76 11, Kigali 5 9. Others 60.24 Total 100 Cons Pros • Equity Insurance Agency is currently the largest • Cost control: In the short term, implementation of Equity’s insurance intermediary with revenues growing with a 3.0 strategy will impact negatively on their cost to income CAGR of 63.7% for the past 5 years ratio • Equity Investment Bank is the 2nd largest Stockbroker • Exposure to different political, economic and regulatory in the country with a market share of 16%. They offer environments as the bank has regional subsidiaries in a one day settlement for transactions different countries hence is exposed to different changes in • Equitel is the fastest growing MVNO (Mobile Virtual its operating environment Network Operator) • The contribution of different subsidiaries does not reflect • Their agency banking platform is the fastest growing the asset base of these subsidiaries platform outpacing both ATMs and branch transactions • Key man risk – the bank’s strategy is heavily reliant on the with 46% of total transactions current group CEO
44 Source – Annual Reports and H1’ 2015 Investor Brief Financial Statements Extracts Equity bank has a high return on equity of 30% 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Income Statement Net Interest Income 26.5 29.2 35.7 44.3 52.3 62.8 75.5 21.0% Non FundedIncome 15.4 18.5 24.1 30.7 37.5 46.6 58.2 25.8% Loan Loss Provision 2.4 1.6 2.0 2.4 2.9 3.5 4.2 21.3% Total Operating Expenses 22.7 26.3 31.0 40.0 48.0 58.0 70.3 21.7% Profit Before Tax 19.0 22.4 28.9 35.0 41.8 51.4 63.5 23.2% Profit After tax 13.3 17.2 20.2 24.5 29.3 36.0 44.4 21.0% % PAT Change YoY 29.2% 18.0% 20.9% 19.7% 22.9% 23.4% EPS 3.6 4.6 5.5 6.6 7.9 9.7 12.0 DPS 1.5 1.8 2.2 2.6 3.2 3.9 4.8 CIR 48.8% 52.0% 48.4% 50.1% 50.2% 49.8% 49.4% ROaE 28.1% 29.7% 30.6% 32.2% 31.8% 32.3% 32.7% ROaA 5.1% 5.5% 5.1% 5.0% 5.0% 5.2% 5.4%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Balance Sheet Net Loans andAdvances 171.4 214.2 274.4 329.3 395.1 474.2 569.0 21.6% Government Securities 44.6 48.4 58.3 70.0 84.0 100.8 120.9 20.1% Total Assets 277.7 344.6 450.4 534.4 635.1 756.5 902.9 21.2% Customer Deposits 194.6 245.4 343.0 411.6 493.9 592.7 711.3 23.7% Borrowings 11.4 14.8 14.9 22.7 22.3 26.6 24.8 10.9% Total Liabilities 226.2 280.8 381.8 451.1 534.3 634.0 753.8 21.8% Shareholders Equity 51.6 63.8 68.6 83.3 100.8 122.4 149.1 18.5% Book value Per share 13.9 17.2 18.5 22.5 27.2 33.1 40.3 18.5%
45 Source – Company Financials Valuation Summary Equity bank has an upside of 22%
Cost of Equity Assumptions: 8th Sep--15 Terminal Assumptions: Growthrate 5% Riskfree rate* 12.0% Mature Company Beta 1.0 Beta 0.9 Terminal Cost of Equity 18.8% Country RiskPremium 6.0% Return on AverageEquity 32.7% Justified Price to Book Value 2.0x Extra RiskPremium 0.8% Shareholder Equity -- FY19e 149.1 Cost of Equity 18.1% Terminal Value--(Year 2019) 298.6
DDM 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Dividends 8.1 9.8 11.7 14.4 17.8 Terminal Value 298.6 Time 0.3 1.3 2.3 3.3 4.3 Discount Factor 0.9 0.8 0.7 0.6 0.5 Present value 7.7 7.9 8.0 8.3 154.4
Value of equity 186.3 Number of shares 3.7 Value per share 50.3 Current Price per share 43.0 Upside/(Downside) 17.0% DividendYield 5.1% Upside 22.1% Undervalued
* Five years average yields on a 10 year Treasury bond 46 II. Barclays Bank
47 Company Description Barclays bank has been in operational in Kenya for over 97 years
Company Description
• Barclays Bank has operated in Kenya for over 97 years No. Shareholding % • The bank listed its shares on the Nairobi Stock 1 Barclays Africa Limited 68.5% Exchange in 1986 • Before 2013, the bank was a subsidiary of Barclays 2 Others 31.5% bank plc, an international financial services Total 100.0% conglomerate • In 2013, all Barclays plcs in Africa (Except Egypt and Zimbabwe) were merged with the aim of operating as one bank in Africa, leading to the formation of Barclays Africa Group which now owns 68.5% of Barclays Bank Kenya • As of 2014, the bank had 119 braches
Pros Cons • Diversification into other markets: The bank is looking • Stiff competition in the retail and SME banking market to expand into the SME banking, mortgage banking, • The bank will continue lagging its peers in the capture of investment banking and bancassurance. Recently, the the retail market bank set aside a Kshs 30 bn loans forSME's • Challenges in deposit mobilisation compared to its peers • The bank has the highest net interest margin of 10.9% as at H1’2015 • Faster decision making and greater autonomy under Barclays Africa Group Limited Source – Annual Reports 48 Financial Statements Extracts Barclays bank has an estimated 5-year PAT CAGR of 9%
IncomeStatement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Net Interest Income 18.9 19.6 23.5 26.2 28.3 30.9 33.7 11.4% Non FundedIncome 9.1 8.7 9.2 10.4 11.3 12.3 13.5 9.2% Loan LossProvision (1.2) (1.4) (1.7) (2.0) (2.2) (2.4) (2.6) 13.2% Total OperatingExpenses (16.0) (15.9) (19.5) (22.1) (24.0) (26.1) (28.5) 12.3% Profit BeforeTax 11.1 12.3 13.2 14.5 15.7 17.1 18.7 8.6% Profit After tax 7.6 8.4 9.2 10.1 10.9 11.9 13.0 9.0% % PAT Change YoY (12.8%) 10.7% 9.1% 9.5% 8.3% 9.2% 9.2% CIR 52.9% 51.4% 54.3% 54.8% 54.9% 54.9% 54.9% EPS 1.4 1.6 1.7 1.9 2.0 2.2 2.4 DPS 0.7 1.0 1.0 1.1 1.2 1.3 1.4 ROaE 24.6% 23.9% 25.0% 25.3% 27.3% 27.4% 29.2% ROaA 3.9% 3.9% 3.8% 3.9% 4.0% 4.1% 4.2%
Balance Sheet 2012 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR GovernmentSecurities 47.5 47.6 57.2 70.6 77.0 83.9 91.5 99.7 11.8% Net Loans andAdvances 104.2 118.4 125.4 149.6 162.1 176.6 192.5 209.9 10.8% Total Assets 184.9 206.8 225.8 257.9 281.9 308.1 336.7 367.8 10.2% CustomerDeposits 137.9 151.1 164.8 180.2 196.4 214.1 233.4 254.4 9.1% Borrowings ------Total Liabilities 155.2 174.4 187.7 222.5 242.5 264.3 288.1 314.1 10.8% ShareholdersEquity 29.6 32.4 38.2 35.4 39.4 43.8 48.5 53.7 7.1% Book value Pershare 5.4 6.0 7.0 6.5 7.3 8.1 8.9 9.9 7.1%
49 Valuation Summary Barclays bank is undervalued by 12.8%
Cost of Equity Assumptions: 8th Sept 2015 Terminal Assumptions: Growth rate 5.0% Risk free rate * 12.0% Mature CompanyBeta 1.0 Beta 0.9 Terminal Cost of Equity 18.0% Country RiskPremium 6.0% Return on Average Equity 29.2% Justified Price to Book value 1.9x Extra Risk Premium 0.0% Shareholder Equity -- FY19e 53.7 Cost of Equity 17.2% Terminal Value 99.7
YearEnded 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Dividends 5.5 6.1 6.6 7.2 7.8 Terminal Cash flow 99.7 Time in Years 0.3 1.3 2.1 3.3 4.3 Discountingfactor 0.9 0.8 0.7 0.6 0.5 PV of Cash Flows 5.3 4.9 4.5 4.2 54.3 Value ofEquity 73.2 Number of Shares 5.4 Value PerShare 13.5 CurrentPrice 12.9 Upside / Downside 4.9% Dividendyield 7.9% Upside 12.8% UnderValued
* Five years average yields on a 10 year Treasury bond 59 III. Kenya Commercial Bank
51 Company Description Kenya Commercial Bank is the largest bank by asset base in Kenya
Company Description
• Kenya Commercial Bank opened office in Kenya under No. Shareholders % the name National Bank of India in 1904. It later 1. Permanent Secretary to the Treasury of Kenya 17.31 merged with Grindlays bank. After independence, the 2. National Social SecurityFund 7.52 government of Kenya acquired 100% ownership of the bank and renamed it Kenya Commercial Bank in 1970 3. Standard Chartered Kenya Nominees Ltd/CKE18965 2.16 4. Standard Chartered Nominees NR, A/C 9318 1.75 • Kenya Commercial Bank is the biggest bank in Kenya, 5. Standard Chartered Nominees NR, A/C 9069 1.65 with: (i) Total assets of Kshs 566.6 bn, (ii) Total 6. Kanaksinh Karsandas Babla and Sandip Babla 1.55 customer deposits at Kshs 443.0 bn, (iii) Total loans at Kshs 320.6 bn, (iv) To t al shareholders funds Kshs 78.1 7. Standard Chartered Nominees A/C9688 1.51 bn; 8. Standard Chartered Kenya Nominees Ltd, A/C KE20531 1.50 9. Others 65.05 • The bank has over 250 branches and more than 7 mn Total 100 customers Pros Cons • KCB Mpesa, a partnership with Safaricom, is expected • Exposure to different political, economic and regulatory to be a key growth driver for the bank in terms of environments as the bank has regional subsidiaries in deposits and loans different countries hence is exposed to different changes • Strong growth in alternative channels including mobile in its operating environment banking and agency banking to enhance digital • The bank seems to be struggling in utilising its asset base payments and more efficient delivery of services compared to its peers in generation of returns (e.g. ROaA • Launch of KCB Insurance to enhance integrated at 3.8% as compared to Equity bank at 5%) service offerings on bancassurance and investment banking
52 Source – Annual Reports and H1’ 2015 Investor Brief Financial Statements Extracts KCB has a high return on equity at 25%, and is one of the most profitable banks in Kenya
Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR Net Interest Income 33.0 36.0 45.0 56.6 67.7 81.4 97.9 22.2% Non FundedIncome 17.1 22.0 25.4 30.0 35.5 42.1 49.9 17.8% Loan Loss Provision 2.9 5.1 5.1 6.3 7.5 9.0 10.8 16.5% Total Operating Expenses 30.0 34.2 41.7 51.2 61.3 73.4 88.0 20.8% Profit Before Tax 20.1 23.8 28.7 35.4 42.0 50.1 59.8 20.2% Profit After tax 14.3 16.9 20.1 24.8 29.4 35.1 41.8 19.9% % PAT Change YoY 18% 17% 19% 23% 19% 19% 19% CIR 60% 59% 59% 59% 59% 59% 60% EPS 4.7 5.6 6.6 8.2 9.7 11.6 13.8 DPS 2.0 2.0 2.7 3.3 3.9 4.6 5.5 ROaE 24.4% 24.2% 25.7% 28.1% 28.1% 28.3% 28.5% ROaA 3.8% 3.8% 3.6% 3.7% 3.7% 3.7% 3.7% Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR Net Loans andAdvances 227.7 283.7 356.4 427.7 513.3 615.9 739.1 21.1% Government Securities 47.5 61.1 73.2 87.9 105.5 126.6 151.9 20.0% Total Assets 390.9 490.3 618.2 731.0 868.8 1,034.0 1,232.2 19.9% Customer Deposits 305.7 377.3 488.3 585.9 703.1 843.7 1,012.5 21.8% Borrowings 7.7 12.7 22.5 22.5 22.5 22.5 22.5 12.0% Total Liabilities 327.5 414.7 537.3 635.2 755.4 899.6 1,072.7 20.9% Shareholders Equity 63.4 75.6 80.9 95.8 113.4 134.4 159.5 19.9% Book value Per share 20.9 25.0 26.8 31.7 37.5 44.4 52.7 19.9%
53 Valuation Summary
Terminal Assumptions: Growthrate 5.0% Mature Company Beta 1.0 Terminal Cost of Equity 18.8% Return on AverageEquity 28.5% Risk free rate* 12.0% JustifiedPBV 1.7x Beta 0.9 Shareholder Equity -- FY19e 159.5 Country Risk Premium 6.0% Terminal Value--(Year 2019) 271.4 Dividend Discount model 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Extra RiskPremium 0.8% Dividends 8.0 9.9 11.7 14.0 16.7 TerminalCost of EquityValue 17.9% 271.4 Time 0.3 1.3 2.3 3.3 4.3 Discount Factor 1.0 0.8 0.7 0.6 0.5 Present value 7.6 8.0 8.0 8.1 142.0 Value of equity 173.8 Number of shares 3.0 Value per share 57.4 Current Price per share 46.5 Upside/(Downside) 23.5 % Dividend Yield 5.7% Upside Undervalue 29.2 d %
* Five years average yields on a 10 year Treasury bond 54 IV. Standard Chartered Bank
55 Company Description Standard Chartered Bank is one of the oldest bank in Kenya formed in 1910
Company Description
• Standard Chartered Bank was formed in 1910 and Shareholding became listed on the NSE in 1989 Standard Chartered Group 74% • The bank currently operates 37 branches LocalOwnership 26% • As at June 2015, the bank had assets in excess of Kshs Total 100% 228.2 bn and shareholders’ funds amounting to Kshs 40.1 bn
Pros Cons
• Diversification – The bank approved the setting up and • Recently high non performing loans have affected the operationalisation of the bancassurance business to be revenues for Standard Chartered Bank. Their NPL/Total carried out by Standard Chartered Insurance Agency loans was at 6.8% which is above the industry average of Limited, which will lead to diversification of their 5.5% revenues through a diversified product portfolio • The recent mass sale of mortgage products might have • Custody business will continue providing the bank with taken the bank out of their nichemarket a niche when it comes to wholesale banking • Activities are limited to the Kenyan market as the parent • Strong in SME banking business company prefers to operate independently in other markets
56 Source – Annual Reports and H1’ 2015 Investor Brief Financial Statement Extracts Standard Chartered has a high return on equity of 27%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Income Statement Net Interest Income 16.8 17.9 18.4 20.4 22.7 25.9 29.5 10.5% Non FundedIncome 7.1 8.2 9.7 10.8 12.1 13.5 15.2 13.2% Loan Loss Provision 1.0 1.3 1.3 1.4 1.4 1.6 1.9 7.2% Total Operating Expenses 10.5 11.7 11.9 13.1 14.7 16.7 18.9 10.1% Profit Before Tax 13.4 14.3 16.2 18.0 20.1 22.7 25.7 12.4% Profit After tax 9.3 10.4 11.4 12.6 14.1 15.9 18.0 11.5% % PAT Change YoY 14.9% 12.5% 8.8% 11.2% 11.5% 13.0% 13.0% EPS 30.0 33.8 36.7 40.9 45.6 51.5 58.2 DPS 15.0 12.8 16.5 18.4 20.5 23.2 26.2 CIR 44.0% 45.0% 42.3% 42.1% 42.1% 42.3% 42.4% ROaE 27.7% 27.2% 26.0% 27.5% 26.4% 25.8% 25.4% ROaA 4.5% 4.7% 4.9% 5.0% 5.0% 4.9% 4.9%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Balance Sheet Net Loans andAdvances 129.7 122.7 129.9 148.0 168.8 192.4 219.3 12.3% Government Securities 56.2 58.8 58.9 67.1 76.5 87.2 99.4 11.1% Total Assets 220.4 222.5 235.2 266.6 302.2 342.8 389.0 11.8% Customer Deposits 154.7 154.1 173.2 197.4 225.0 256.5 292.4 13.7% Total Liabilities 184.2 181.8 192.6 217.1 245.0 276.9 313.1 11.5% Shareholders Equity 36.2 40.7 42.5 49.5 57.2 66.0 75.8 13.3% Book value Per share 117.1 131.5 137.5 160.0 185.0 213.3 245.3 13.3%
57 Source – Company Financials Valuation Summary Standard Chartered Bank is undervalued by 15%
Cost of Equity Assumptions: 8th Sep--15 Terminal Assumptions: Risk free rate* 12.0% Growthrate 5.0% Raw Beta 0.9 Mature Company Beta 1.0 Country Risk Premium 6.0% Terminal Cost of Equity 18.0% Return on AverageEquity 25.4% Extra RiskPremium 0.0% Justified Price to Book Value 1.6x Cost of Equity 17.4% Shareholder Equity -- FY19e 75.8 Adjusted Beta 0.9 Terminal Value--(Year 2019) 118.4
Dividend DiscountModel 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Dividends 5.1 5.7 6.3 7.2 8.1 Terminal Value 118.4 Time 0.3 1.3 2.3 3.3 4.3 Discount Factor 1.0 0.8 0.7 0.6 0.5 Present value 4.9 4.6 4.4 4.2 63.3
Value of equity 81.3 Number of shares 0.3 Value per share 263.0 Current Price per share 243.0 Upside/(Downside) 8.2% DividendYield 6.8% Upside 15.0% Undervalued
* Five years average yields on a 10 year Treasury bond 58 V. Co-operative Bank
59 Company Description Co-op Bank embarks on its transformation agenda to sustain growth and improve customer experience
Company Description
• Co-operative Bank was founded by Kenyan co-operative No. Shareholders % societies and unions well versed in the difficulties of accessing credit from existing banks 1. Co-op Holdings Co-op Society Ltd 64.56 • As at June, it has a customer base of 5.4 mn and 143 2. Dr. Gideon Maina Muriuki 1.99 branches 3. NIC Custodial Services A/C 077 0.89 • In 2014, Co-operative bank embarked on an ambitious transformation jou rney called the Soaring Eagle 4. Kenya Commercial Bank Nominees Ltd A/C 0.56 Transformation Agenda, in order to sustain and put the 771A bank on a new trajectory for growth 5. Standard Chartered Nominees NR A/CKE17605 0.49 • Co-op bank has: (i) Total assets of Kshs 325.1 bn, 6. Standard Chartered Nominees A/C 9230 0.47 (ii)Total customer deposits at Kshs 248.4 bn (iii)Total loans at Kshs 204.8 bn, (iv) To t al shareholders funds 7. CfC Stanbic Nominees Ltd A/C NR1030682 0.39 Kshs 47.1 bn; 8. CfC Stanbic Nominees Ltd A/C R57601 0.31 • Co-operative Bank is the 3rd largest bank by asset size 9. Others 30.34 of Kshs. 325 billion and uses a unique model of wholesale banking to over 15,000 cooperativesocieties Total 100 Pros Cons • The bank is following through on its transformation agenda, and is reaping the benefits that come with it • The bank is slow in embracing technology compared to its • Co-operative bank has a large Sacco banking base, peers in deposit mobilisation • The bank might be losing out in first mover advantage in and the opportunity to grow upon the model in its regional expansion strategy their expansion strategy • The bank seems to be stretched in Tier I capital • Regional expansion that started with South Sudan with a unique joint venture with the Government of South requirements as compared to its peers Sudan • Co-operative bank is a financial one-stop shop owing to its full range of financial services 60 Source – Annual Reports and H1’ 2015 Investor Brief Financial Statement Extracts Co-operative Bank improves its cost to income ratio and set to deliver solid growth in earnings
Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR Net Interest Income 18.6 21.3 23.3 27.8 33.5 40.0 47.5 17.4% Non FundedIncome 9.3 10.8 11.4 13.4 15.8 18.5 21.7 14.9% Loan Loss Provision 0.8 1.2 2.1 2.5 3.0 3.6 4.2 29.1% Total Operating Expenses 17.4 20.1 19.9 23.4 28.3 33.7 39.8 14.7% Profit Before Tax 10.9 10.9 15.0 17.9 21.1 25.0 29.4 21.9% Profit After tax 9.1 8.0 10.5 12.5 14.7 17.5 20.6 20.7% % PAT Change YoY 18% (12%) 31% 19% 18% 19% 18% CIR 62% 63% 57% 57% 57% 57% 58% EPS 1.9 1.6 2.1 2.6 3.0 3.6 4.2 DPS 0.4 0.5 0.6 0.7 0.8 1.0 1.2 ROaE 27.4% 20.0% 22.8% 23.7% 23.5% 23.5% 23.4% ROaA 4.2% 3.1% 3.3% 3.3% 3.4% 3.4% 3.4% Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR Net Loans andAdvances 137.1 179.5 207.4 246.7 296.0 350.7 415.6 18.3% Government Securities 14.0 24.6 32.9 40.6 48.1 57.0 67.5 22.3% Total Assets 231.2 285.4 345.8 403.8 473.6 556.4 654.4 14.9% Customer Deposits 175.4 217.7 263.5 312.2 370.0 438.4 519.5 19.0% Borrowings 10.3 18.3 18.7 18.7 18.7 18.7 18.7 0.4% Total Liabilities 194.1 242.0 297.3 346.2 405.5 475.7 558.9 20.7% Shareholders Equity 36.8 43.3 48.4 57.4 68.0 80.6 95.4 20.7% Book value Per share 7.5 8.9 9.9 11.7 13.9 16.5 19.5 20.7%
61 Valuation Summary Co-operative Bank has a downside of 6.1%
Cost of Equity Assumptions: 8th Sep--15 Terminal Assumptions: Risk freerate* 12.0% Growthrate 5.0% Mature Company Beta 1.0 Beta 0.8 Terminal Cost of Equity 18.3% Country Risk Premium 6.0% Return on AverageEquity 23.4% Justified Price to Book Value 1.4x Extra RiskPremium 0.3% Shareholder Equity -- FY19e 95.4 Cost of Equity 17.4% Terminal Value--(Year 2019) 131.9
Dividend DiscountModel 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Dividends 2.9 3.5 4.1 4.9 5.8 Terminal Value 131.9 Time 0.3 1.3 2.3 3.3 4.3 Discount Factor 1.0 0.8 0.7 0.6 0.5 Present value 2.8 2.8 2.9 2.9 69.1 Value of equity 80.42 Number of shares 4.89 Value per share 16.45 Current Price per share 18.15 Upside/(Downside) (9.4%) Dividend Yield 3.3% Downside (6.1%) Overvalued
* Five years average yields on a 10 year Treasury bond
62 VI. Valuation Summary – Tier I Banks
63 Valuation Summary – Tier I Banks Tier I banks on average presents an upside of 14.6%
Company Name Price Issued Market P/E Dividend Yield PEG CoE Fair Upside Shares Cap TTM FY 2014 FY 2015e Value
EquityBank 43.0 3.7 159.1 8.8x 4.2% 5.1% 0.4x 18.1% 50.3 22.1% Barclays Bank 12.9 5.4 69.4 8.0x 7.8% 7.9% 0.8x 17.2% 13.5 12.8% KCB 46.5 3.0 140.9 7.7x 4.3% 5.7% 0.4x 17.9% 57.4 29.1% StandardChartered 243.0 0.3 75.3 6.2x 5.3% 6.8% 0.6x 17.4% 263.0 15.0% Co--operative Bank 18.2 4.9 88.8 9.3x 2.8% 3.3% 0.4x 17.4% 16.5 (6.1%)
Min 6.2x 2.8% 3.3% 0.4x 17.2% (6.1%) Median 8.0x 4.3% 5.7% 0.4x 17.4% 15.0% Average 8.0x 4.9% 5.8% 0.5x 17.6% 14.6% Max 9.3x 7.8% 7.9% 0.8x 18.1% 29.1%
Capital Adequacy Equity Barclays KCB Stanchart Co--op Bank Minimum Statutory Core Capital to Total Liabilities 18.4% 20.7% 17.2% 20.0% 16.0% 8.0% Core Capital to RWA 14.6% 15.9% 14.6% 17.3% 13.8% 10.5% Total Capital toRWA 16.6% 18.5% 15.9% 21.5% 21.0% 14.5%
64 C. Tier II Banks
65 I. I&M Bank
66 Company Description I&M bank was listed on NSE in 2013 through a reverse takeover transaction
Company Description
• I&M Bank was founded in 1974 as a financial services No. Shareholders % company and later converted to a commercial bank in 1 ZiyungiLimited 18.74 1996 2 Minard Holding 17.27 • I&M Bank is a the flagship company of the I&M Group 3 Tecoma Limited 16.66 of Companies that has a major presence in banking 4 Biashara Securities Ltd 13.92 (I&M) and insurance (GA), manufacturing and real 5 DEG 6.25 estate 6 Proparco 4.43 • In 2013 I&M Bank’s shareholders exchanged their Bhagwanji Raja Charitable Foundation The Registered shares for those of City Trust in a reverse takeover 7 Trustees 2.41 enabling I&M share to be publicly traded 8 Investments and Mortgages Nominees Ltd (A/c-0001229) 2.14 • I&M Bank’s international network includes Bank One 9 Investments and Mortgages Nominees Ltd (A/c-0004047) 2.13 Limited in Mauritius, I&M Bank Tanzania Limited and 10 Standard Chartered Nominees (A/c -9660B) 0.73 Banque Commerciale du Rwanda 11 Others 15.32 Total 100 Pros Cons
• Quality loan book: The bank has low NPLs of approx. • Traditional SME market now being targeted by tier 1 2% banks hence market share under threat • Regional expansion: The bank has plans to expand into Uganda and increase their bank branches in Kenya, • Low branch network in other counties in Kenya other than having opened 9 more branches in 2014 Nairobi • Revenue diversification: I&M introduced bank assurance in 2014 • Exposure to different political, economic and regulatory • Planned acquisition of Giro bank will boost its client environments, especially Tanzania with their upcoming reach hence growth elections might slow down business
67 Source – Annual Reports Financial Statements Extracts I&M bank has an estimated 5-year PAT CAGR of 17.8%
Income Statement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Net Interest Income 8.8 9.1 11.0 13.6 15.4 18.1 21.1 18.4% Non FundedIncome 3.6 3.1 3.4 4.0 4.7 5.4 6.2 15.3% Loan Loss Provision 0.4 0.8 1.1 1.3 1.2 1.3 1.5 13.3% Total Operating Expenses 5.1 4.8 6.1 7.3 8.0 9.1 10.4 16.8% Profit Before Tax 7.3 7.5 8.3 10.3 12.2 14.3 16.9 17.7% Profit After tax 5.0 5.2 5.8 7.2 8.5 10.0 11.9 17.8 % % PAT Change YoY 20.9% 5.1% 11.3% 24.1% 17.8% 17.9% 18.0% CIR 38.2% 33.1% 34.2% 34.1% 33.8% 33.3% 32.8% EPS 12.7 13.3 14.9 18.4 21.7 25.6 30.2 DPS 2.1 2.6 2.7 3.3 3.9 4.6 5.4 ROaE 25.1% 23.9% 21.6% 20.6% 20.4% 20.3% 20.3% ROaA 3.8% 3.5% 3.4% 3.4% 3.4% 3.4% 3.4%
Balance Sheet 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Government Securities 21.1 32.8 22.3 33.5 39.2 45.9 53.7 10.4% Net Loans andAdvances 91.9 101.6 123.8 152.3 178.2 208.5 243.9 19.1% Total Assets 141.4 154.2 191.7 233.2 272.7 318.8 372.9 19.3% Customer Deposits 97.1 99.2 123.8 152.3 178.2 208.5 243.9 19.7% Borrowings 11.6 14.3 17.5 21.4 24.9 29.1 34.0 18.8% Total Liabilities 117.5 131.7 158.7 194.3 226.7 264.5 308.8 18.6% Shareholders Equity 22.1 21.7 32.2 38.2 45.2 53.5 63.3 23.9% Book value Per share 0.1 0.1 0.1 0.1 0.1 0.1 0.2 23.9%
68 Valuation Summary I&M bank is overvalued with a downside of 15.6%
Terminal Assumptions: Cost of Equity Assumptions: 8th Sept2015 Growthrate 5.0%
Risk freerate* 12.0% Mature Company Beta 1.0 Terminal Cost of Equity 19.0% Beta 0.9 Return on AverageEquity 20.3% Country Risk Premium 6.8% Justified Price to Book value 1.1x
Extra RiskPremium 0.2% Shareholder Equity -- FY19e 63.3 Cost of Equity 18.0% Terminal Value 69.2
Year Ended 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Dividends 1.0 1.3 1.5 1.8 2.1 Terminal Cashflow 69.2 Time inYears 0.3 1.3 2.3 3.3 4.3 Discounting factor 1.0 0.8 0.7 0.6 0.5 PV of Cash Flows 1.0 1.0 1.0 1.0 34.9 Value of Equity 39.0 Number of Shares 0.4 Value Per Share 99.5 Current Price 121.0 Upside / Downside (17.8%) Dividend yield 2.2% Downside (15.6%) Overvalued
* Five years average yield on a 10 year Treasury bond 69 II. NIC Bank
70 Company Description NIC bank is fairly liquid owing to the counter’s 48% free float
Company Description
• NIC Bank (formerly National Industrial Credit Bank No. Shareholders % Limited) was incorporated in Kenya on 29th September 1959 as a joint venture between Mercantile Credit 1. First Chartered Securities 15.84 Limited and Standard Bank. NIC Bank was among the 2. ICEA Asset Management Ltd A/C 2000 9.16 first non-bank financial institutions to provide hire 3. Livingstone Registrars Ltd 8.73 purchase and instalment credit finance facilities in Kenya 4. Rivel Kenya Ltd 8.29 • In early 2015, NIC Leasing LLP, a partnership between 5. SaimarLtd 4.21 NIC Bank Limited and Mercantile Finance Limited, was 6. Amwa Holdings Ltd 2.12 incorporated to undertake direct operating lease business. The leasing product is available for Small and 7. Makimwa Consultants Ltd 1.35 Medium size enterprises (SME’s), Corporates and both 8. Murwoki Holdings Limited 1.10 County and Central Government 9. Standard Chartered Nominees A/C9230 1.00 • As at June 2015, NIC has: (i) total assets of Kshs 153.2 10. Others 48.2 bn, (ii) To t al customer deposits of Kshs 105.2 bn (iii) Total loans at Kshs 108.3 bn (iv) To t al shareholders Total 100 funds at Kshs 23.7 bn Pros Cons • Well developed IT network T24, that enables the bank • Traditional SME market now being targeted by Tier 1 to centralize operations across its subsidiaries banks, hence it’s market share is under threat • NIC bank partnered with Post Bank Limited to offer • NIC has a high cost of funding at 5.4%, due to heavy Agency Banking services, allowing NIC customers to reliance on corporate deposits, resulting in a compression deposit or withdraw cash from any of the 102 Post of the bank’s net interest margins Bank branchescountrywide • Exposure to different political, economic and regulatory • NIC bank has maintained its pole positioning in asset environments, especially Tanzania with their upcoming financing and curved a niche in the market elections might slow down business
71 Source – Annual Reports and H1’ 2015 Investor Brief Financial Statements Extracts NIC bank has an average return on equity of 20%
Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR Net Interest Income 7.3 8.0 8.6 10.1 12.0 14.1 16.5 15.5% Non FundedIncome 3.2 3.6 4.2 4.9 5.7 6.5 7.4 15.6% Loan Loss Provision 1.1 0.3 0.5 0.6 0.7 0.8 1.0 24.3% Total Operating Expenses 5.5 5.3 6.1 7.0 8.2 9.6 11.1 15.8% Profit Before Tax 5.0 6.2 6.8 8.0 9.4 10.9 12.7 15.3% Profit After tax 3.2 4.1 4.8 5.6 6.6 7.7 8.9 16.7% % PAT Change YoY 7% 27% 15% 17% 18% 16% 16% CIR 52% 46% 47% 47% 47% 47% 47% EPS 5.1 6.4 7.4 8.7 10.3 12.0 13.9 DPS 0.6 1.0 1.1 1.3 1.5 1.8 2.1 ROaE 20.1% 20.6% 19.7% 20.0% 19.9% 19.6% 19.3% ROaA 2.8% 3.1% 3.1% 3.2% 3.3% 3.3% 3.4%
Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR Net Loans andAdvances 81.4 102.0 114.9 134.6 156.1 181.1 210.0 15.5% Government Securities 18.1 19.2 11.4 13.2 15.3 17.8 20.6 1.4% Total Assets 121.1 145.8 162.6 185.6 212.8 244.5 281.2 16.7% Customer Deposits 91.6 100.4 113.7 131.9 153.0 177.5 205.9 15.4% Borrowings 3.6 14.4 15.7 15.7 15.7 15.7 15.7 1.8% Total Liabilities 103.5 122.4 136.6 154.9 176.6 201.7 230.9 13.5% Shareholders Equity 17.2 22.9 25.5 30.2 35.8 42.3 49.9 16.7% Book value Per share 26.9 35.7 39.8 47.2 55.9 66.1 77.9 16.7%
72 Valuation Summary
Terminal Assumptions: Growthrate 5.0% Mature Company Beta 1.0 Terminal Cost of Equity 18.3% Return on AverageEquity 19.3% Risk free rate* 12.0% Justified Price to Book value 1.1x Beta 0.8 Shareholder Equity -- FY19e 49.85 Mature Market Risk Premium 6.0% Terminal Value--(Year 2019) 53.7
Dividend DiscountExtra RiskPremiumModel 310.3%--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 DividendsCost of Equity 17.2% 0.7 0.8 1.0 1.2 1.3 Terminal Value 53.7 Time 0.3 1.3 2.3 3.3 4.3 Discount Factor 1.0 0.8 0.7 0.6 0.5 Present value 0.7 0.7 0.7 0.7 27.7 Value of equity 30.4 Number of shares 0.6 Value per share 47.6 Current Price per share 46.8 Upside/(Downside) 1.8 % Dividend Yield 2.4 % Target Price 47.6 * Five years average yields on a 10 year Treasury bond Upside Fairly Valued 4.2 73 % III. National Bank of Kenya
74 Company Description National Bank’s largest shareholder is NSSF with a 48.1% stake
Company Description
• National Bank was incorporated in 19th June 1968 but % ShareHolding % 1 National Social Security Fund(Kenya) 48.05 officially opened on November 14th 1968. At the time it 2 Kenya Ministry ofFinance 22.5 was fully owned by the government 3 NIC Custodial Services 0.41 4 Equity NomineeLimited:00084 0.37 5 Equity NomineeLimited:00111 0.34 • As at June the bank had assets totaling 124.4 bn and 6 Standard CharteredNominees 0.34 7 Ephraim Mwangi Maina 0.33 Shareholder funds in excess of Kshs 13.3 bn 8 Craysell Investments Limited 0.32 9 Jubilee Insurance Company of KenyaLimited 0.29 10 David MwangiNdegwa 0.26 • It currently has 75 branches across Kenya 11 Over 49,200 Other Investors 26.79 Total 100
Pros Cons • Introduction of Islamic Banking that capitalized on the • High cost of funds. Despite NBK serving retail customers, unbanked Islam community contributing to deposit it has maintained high cost of funds averaging 4.5% thus growth leading to lower NIMs of 8.5% • The introduction of bancassurance and custodial • NBK has the worst loan book among the listed banks with services has seen the bank diversify its revenue an NPL/Total loan ratio of 9.5% • Branch expansion – in 2014 NBK opened 15 branches • Low NPL coverage of 10.7%, despite having the highest that saw the bank grow its deposits NPLs • Despite being associated with the Government, the bank is slow in county expansion
75 Source – Annual Reports and H1’ 2015 Investor Brief Financial Statements Extracts National Bank has a low return on equity of 7%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Income Statement Net Interest Income 5.6 6.8 6.2 6.2 6.7 7.3 7.8 2.9% Non FundedIncome 2.9 3.1 4.2 3.7 4.0 4.3 4.6 8.2% Loan Loss Provision 0.3 0.5 0.8 0.9 0.9 1.0 1.1 15.9% Total Operating Expenses 6.7 7.5 8.4 8.5 9.1 9.8 10.6 7.1% Profit Before Tax 1.8 1.3 2.0 1.4 1.6 1.8 1.9 7.7% Profit After tax 1.1 0.9 1.4 1.0 1.1 1.2 1.3 8.7% % PAT Change YoY 52.5% (21.8%) 56.8% (26.7%) 14.7% 7.3% 7.3% 8.7% EPS 4.0 3.1 4.9 3.6 4.1 4.4 4.7 DPS ------CIR 75.3% 70.2% 73.7% 76.9% 75.9% 76.0% 76.1% ROaE 10.0% 7.2% 10.9% 7.5% 7.9% 7.9% 7.8% ROaA 1.4% 0.8% 1.1% 0.7% 0.8% 0.8% 0.8%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Balance Sheet Net Loans andAdvances 39.6 65.6 64.6 69.7 75.3 81.3 87.8 6.0% Government Securities 27.5 30.3 32.3 34.9 37.7 40.7 43.9 7.7% Total Assets 92.6 123.1 130.4 140.5 151.4 163.2 176.0 7.4% Customer Deposits 78.0 104.7 107.6 116.2 125.5 135.6 146.4 6.9% Total Liabilities 80.7 110.9 117.6 126.6 136.4 147.0 158.4 7.4% Shareholders Equity 11.9 12.2 12.9 13.9 15.0 16.3 17.6 7.5% Book value Per share 42.5 43.7 46.0 49.6 53.7 58.1 62.8 7.5%
76 Source – Company Financials Valuation Summary National Bank is overvalued by 64%
Cost of Equity Assumptions: 8th Sep--15 Terminal Assumptions: Justified Terminal Price Risk free rate* 12.0% Growthrate 5.0% (2019) 3.8 Beta 0.9 Mature Company Beta 1.0 Terminal Cost of Equity 18.0% Country Risk Premium 6.0% BV(2019) 11.9 Return on AverageEquity 7.8% Extra RiskPremium 0.0% Justified Price to Book Value 0.2x Cost of 17.2% Preference 5.7 Terminal Residual CF (8.1) Equity Shares Residual Income 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Beginning book value of equity 6.5 7.2 8.2 9.4 10.6 Cost of equity 17.2% 17.2% 17.2% 17.2% 17.2% Equitycost 1.1 1.2 1.4 1.6 1.8
Net Income 1.4 1.0 1.1 1.2 1.3 Equitycost 1.1 1.2 1.4 1.6 1.8 Residual Income 0.2 (0.2) (0.3) (0.4) (0.5) Terminal Value (8.1) Time 0.3 1.3 2.3 3.3 4.3 Discount Factor 1.0 0.8 0.7 0.6 0.5 Present value 0.2 (0.2) (0.2) (0.2) (4.4)
Book Value of equity 6.5 PV of equity excess return (4.7) Value of equity 1.8 Number of shares 0.3 Value per share 6.5 Current Price per share 17.8 Upside/(Downside) (63.5%) Overvalue d *Five years average yield on a 10 year Treasury bond 77 IV. Diamond Trust Bank
78 Company Description DTBK’s stock is fairly liquid with a free float of 48%
Company Description
• Diamond Trust Bank was incorporated in 1945 as No. Shareholder % Diamond Jubilee Investment Trust and later changed its 1 Aga Khan Fund For Economic Development 17.3 name to DTB Kenya in 1972 when it was listed on the 2 Habib BankLimited 12.0 NSE • Diamond Trust Bank (DTB) has operated in East Africa 3 The Jubilee Insurance Company of Kenya Limited 10.4 for over 70 years, with a focus on the SME sector 4 Standard Chartered Nominees A/C KE18965 4.1 • The bank currently has the following subsidiaries: 5 Standard Chartered Nominees A/C KE18972 2.8 • DTB Tanzania Ltd 6 Standard Chartered Nominees a/c A/C KE11752 1.9 • DTB Uganda Ltd 7 The Diamond Jubilee Investment Trust (U)Limited 1.4 • DTB Burundi 8 Standard Chartered Nominees A/C KE18986 1.1 • Diamond Trust Insurance Agency Ltd 9 Craysell Investments Limited 1.0 • Premier savings and finance Ltd 10 Others 48.1 • Network Insurance Agency Ltd • As of 2014, the bank had a total of 110 branches Total 100 Pros Cons • Strong backing from financing partners, i.e. Aga Khan • Traditional SME market now being targeted by tier I banks Fund for Economic Development and Habib bank hence market share under threat • Strong performance of subsidiaries: The regional • Exposure to different political, economic and regulatory subsidiaries in Tanzan ia, Uganda and Burundi environments, especially Tanzania with their upcoming contribute approx. 25% of the group’sPAT elections might slow down business and high country risk in • Partnerships to drive NFI growth: DTBK has partnered targeted expansion regions such as DRC with Nakumatt and Master Card to create the • High cost of funding at 4.6%, resulting in lower NIMs at Nakumatt Global MasterCard which allows users to pay 9.3% bills, facilitate cash withdrawals and deposits, engage in forex trading and money transfers
79 Financial Statements Extracts DTB has an estimated 5-year PAT CAGR of 15.6%
Income Statement 2013 2014 2015e 2016e 2017e 2018e 2019e CAG R Net Interest Income 11.0 12.8 15.8 20.0 23.2 27.4 32.3 20.4 % Non FundedIncome 3.4 3.8 4.2 5.4 6.4 7.6 8.9 18.6 % Loan Loss Provision (0.9) (0.9) (1.3) (1.9) (2.2) (2.6) (3.0) 28.5 % Total Operating Expenses (7.2) (8.1) (11.0) (15.0) (17.6) (20.8) (24.6) 24.9 % Cost to Income 43.3% 43.4% 48.6% 51.9% 52.2% 52.2% 52.2% 3.8 % Profit Before Tax 7.2 8.5 8.9 10.3 12.0 14.1 16.7 14.4 % Profit After tax 5.2 5.7 6.3 7.4 8.5 10.0 11.8 15.6 Balance Sheet 2013 2014 2015e 2016e 2017e 2018e 2019e %CAGR Government% PAT ChangeSecuritiesYoY 11.0%25.4 9.1%35.1 11.3%37.8 15.9%44.7 15.5%52.7 17.7%62.2 17.7%73.4 15.9% CIR 43.3% 43.4% 48.6% 51.9% 52.2% 52.2% 52.2% Net Loans andEPS Advances 110.921.6 137.723.6 170.326.2 200.930.4 237.135.1 279.841.3 48.6330.2 19.1% TotalDPS Assets 166.52.1 211.52.4 251.22.6 296.43.0 349.63.5 412.34.1 486.24.9 18.1% CustomerROaE Deposits 27.9%128.8 22.8%161.0 20.3%189.2 21.0%223.3 263.521.6% 22.4%310.9 23.4%366.8 17.9% BorrowingsROaA 3.5%5.8 3.0%12.3 2.7%19.3 2.9%22.8 26.92.9% 3.0%31.7 3.2%37.4 24.9% Total Liabilities 142.8 179.3 214.3 252.9 298.4 352.1 415.5 18.3% Shareholders Equity 21.0 29.0 33.5 40.1 47.7 56.7 67.3 Book value Per share 86.7 119.6 138.2 165.6 197.1 234.3 278.1
80 Valuation Summary DTB’s stock is fairly valued with an upside of 2.5%
Cost of Equity Assumptions: 8th Sept 2015 Terminal Assumptions: Risk free rate* 12.0% Growthrate 5.0% Mature Company Beta 1.00 Beta 0.8 Terminal Cost of Equity 18.2% Country Risk Premium 6.0% Return on AverageEquity 23.4% Justified Price to Book value 1.4x Extra RiskPremium 0.2% Shareholder Equity -- FY19e 67.3 Cost of Equity 17.2% Terminal Value 93.4
Year Ended 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Dividends 0.6 0.7 0.8 1.0 1.2 Terminal Cashflow 93.4 Time inYears 0.3 1.3 2.3 3.3 4.3 Discounting factor 1.0 0.8 0.7 0.6 0.5 PV of Cash Flows 0.6 0.6 0.6 0.6 47.6 Value of Equity 50.0 Number of Shares 0.2 Value Per Share 206.5 Current Price 204.0 Upside / Downside 1.2% Dividend yield 1.3% Upside 2.5% Fairly valued
* Five years average yield on a 10 year Treasury bond 81 V. CfC Stanbic Bank
82 Company Description CfC Stanbic Holdings’ majority shareholder is the Stanbic Africa Holdings (UK)
Company Description
• CfC Stanbic Holdings was listed in the NSE on April No. % ShareHolding % 1 Stanbic Africa Holdings Ltd.(UK) 41.41 2011 2 CfC Stanbic Nominees (K) Ltd non--resid ent A/C NR00901 18.59 • This comes after CfC Stanbic Limited and CfC holdings 3 Standard Chartered Nominees non--resid ent A/C 9866 5.85 4 Standard Chartered nominees non--resident A/C 9867 4.05 limited merged and demerged from the CfC insurance 5 Sovereign TrustLtd 2.72 holdings limited (later became Liberty Holdings) 6 Standard Chartered nominees non--resident A/C KE9053 2.03 7 Archer & Wilcock NomineesLimited 1.55 • As at June 2015, CfC had assets in excess of Kshs. 8 The Permanent Secretary to the Treasury ofKenya 1.1 203.6 bn and shareholder’s funds of Kshs. 26.2 bn 9 Standard Chartered Nominees account9230 1.05 • As at June 2015, the bank operates 24 branches and is 10 SCB A/C Pan African Unit LinkedFD 0.86 11 Others 20.79 planning to open 1 more branch in the year Total 100
Pros Cons
• The Corporate and Investment banking is a key driver • Political Instability in the countries they operate. The recent instability in S.Sudan proved to be a challenge as it for CfC Stanbic revenue as it contribute to 64% of the affected their overall income banks total income • Their expansion strategy is limited by the presence of Standard Bank in the region • CfC is a one stop financial services shop offering • Lack of operational efficiency owing to a high cost to investment banking, custodial and brokerage services income ratio of 60%, which is the highest among listed banks as at June • The recent launch of their mobile banking platform is set to reduce costs associated with branch transactions
83 Source – Annual Reports and H1’ 2015 Investor Brief Financial Statements Extracts CfC Stanbic has a return on equity of 23%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR IncomeStatement Net Interest Income 7.5 8.4 9.2 11.1 13.0 15.0 17.3 15.6% Non FundedIncome 8.5 8.2 9.5 10.6 11.8 13.3 14.9 12.6% Loan LossProvision 0.9 0.8 0.9 1.1 1.3 1.4 1.7 15.6% Total OperatingExpenses 8.8 8.9 11.3 13.0 15.0 17.1 19.6 17.0% Profit BeforeTax 7.2 7.6 7.3 8.6 9.8 11.1 12.6 10.5% Profit After tax 5.1 5.7 5.1 6.0 6.9 7.8 8.8 9.0% % PAT Change YoY 51% 11% (10%) 17% 14% 13% 13% EPS 13.0 14.5 13.0 15.2 17.4 19.7 22.2 DPS ------CIR 49.6% 49.1% 55.5% 55.2% 55.3% 55.6% 55.8% 2.6% ROaE 25.4% 23.3% 18.3% 18.6% 17.7% 16.9% 16.1% (7.1%) ROaA 3.4% 3.3% 2.6% 2.6% 2.6% 2.6% 2.6% (4.6%)
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Balance Sheet Net Loans andAdvances 69.1 88.3 101.6 116.8 134.4 154.5 177.7 15.0% Governmentsecurities 48.4 28.1 35.9 41.2 47.4 54.5 62.7 17.4% Total Assets 170.7 171.3 218.2 245.3 276.4 312.1 353.0 15.6% CustomerDeposits 95.7 96.8 119.5 137.5 158.1 181.8 209.1 16.6% Borrowings 5.8 6.5 6.5 6.5 6.5 6.5 6.5 (0.1%) Total Liabilities 148.4 144.7 188.8 209.9 234.2 262.1 294.2 15.2% ShareholdersEquity 22.4 26.6 29.4 35.4 42.3 50.0 58.8 17.2% Book value Pershare 56.5 67.4 74.2 89.5 106.9 126.6 148.8 17.2%
84 Valuation Summary CfC Stanbic is overvalued by 21%
Cost of Equity Assumptions: 8th Sep--15 Terminal Assumptions: Risk free rate* 12.0% Growthrate 5.0% Raw Beta 0.6 Mature Company Beta 1.0 Country Risk Premium 6.0% Terminal Cost of Equity 18.0% Extra RiskPremium 0.0% Return on AverageEquity 16.1% Cost of Equity 17.4% Persistency Factor 0.5 Adjusted Beta 0.9 Justified Price to Book Value 0.9x Residual Income 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Beginning book value of equity 26.6 29.4 35.4 42.3 50.0 Cost of equity 17.4% 17.4% 17.4% 17.4% 17.4 Equitycost 4.6 5.1 6.2 7.4 % 8.7
Net Income 5.1 6.0 6.9 7.8 8.8 Equitycost 4.6 5.1 6.2 7.4 8.7 Residual Income 0.5 0.9 0.7 0.4 0.1 Terminal Value 0.1 Time 0.3 1.3 2.3 3.3 4.3 Discount Factor 1.0 0.8 0.7 0.6 0.5 Present value 0.5 0.7 0.5 0.2 0.1 Book Value of equity 26.2 PV of equity excess return 2.0 Value of equity 28.2 Number of shares 0.4 Value per share 71.3 Current Price per share 90.0 Upside/(Downside) (20.8%) Overvalue * Five years average yields on a 10 year Treasury bond d 85 VI. Housing Finance
86 Company Description HF Group’s mandate is to provide integrated solutions for the property industry
Company Description
• HF Group (Formerly Housing Finance Company of No. Shareholders % Kenya) was incorporated on 18th of November 1965 1 British American Insurance Company Ltd 33.6% and is the premier mortgage Finance Institution in Kenya licensed under the Banking Act 2 Equity Nominees Ltd 12.4% • The HF Group started operations in 1966 with the main 3 NSSF 6.8% objective of implementing the government’s policy of 4 SCB A/C Pan African Unit 3.9% promoting thrift and home ownership by providing 5 Permanent secretary treasury 3.6% savings and mortgage facilities to the Kenyan public 6 Jubilee Insurance 1.1% • In August 2015 the Company establish a non-operating 7 Bai Co. (MTIUS) Ltd 0.9% holding company and rebranded to HF Group limited 8 CFC Stanbic nominees Ltd A/C NR1030833 0.9% with subsidiaries (i) HFC Limited; (ii) HFDI (Property 9 CFC Stanbic nominees Ltd A/C NR1030852 0.8% Development and Investment Solutions); (iii) HF Insurance Agency; and (iv) HF Foundation 10 Others 36.1% Total 100.00% Pros Cons • Revival of Kenya building society. This is an advantage • Lack of a vibrant mortgage market in Kenya for HF since in addition to providing mo rtgage financing, • The Kshs 726 mn lawsuit poses a significant risk to the it can also develop the houses, hence additional revenue bank’searnings streams • Low diversification as evidenced by the low percentage of • Vibrant real estate market in Kenya with an annual non interest income to total revenue at 15.2% which is housing supply which does not satisfy demand, the lowest among the listed banks especially in the middle and lower income segment • Asset liability mismatch which forces the bank to resort to • The bank is the market leader in provision of mortgage expensive financing financing
87 Source – Annual Reports Financial Statements Extracts HF bank has an estimated 5-year PAT CAGR of 14.5%
IncomeStatement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR Net Interest Income 2.6 3.0 3.6 4.3 5.2 6.0 7.1 18.7% Non FundedIncome 1.4 0.8 0.9 1.2 1.4 1.6 1.9 18.0% Loan LossProvision 0.3 0.6 0.7 0.8 1.0 1.1 1.3 19.5% Total OperatingExpenses 2.4 2.5 3.0 3.7 4.5 5.3 6.4 21.0% Profit BeforeTax 1.5 1.4 1.5 1.8 2.1 2.4 2.7 14.4% Profit After tax 1.0 1.0 1.1 1.3 1.5 1.7 1.9 14.5 % % PAT Change YoY 33.9% (2.0%) 9.4% 18.1% 16.5% 15.1% 13.6% CIR 55.1% 49.2% 52.2% 53.6% 53.7% 54.3% 55.4% EPS 2.9 2.8 3.1 3.6 4.2 4.9 5.5 DPS 1.2 1.0 1.2 1.4 1.7 1.9 2.2 ROaE 18.1% 15.7% 12.8% 12.0% 13.0% 13.8% 14.4% ROaA 2.3% 1.8% 1.6% 1.6% 1.5% 1.5% 1.4%
Balance Sheet 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR GovernmentSecurities 0.3 0.3 0.7 0.9 1.1 1.3 1.5 42.1% Net Loans andAdvances 35.2 45.2 55.4 65.9 79.1 94.2 112.1 19.9% Total Assets 47.4 61.0 74.2 87.4 103.1 121.9 144.4 18.8% CustomerDeposits 26.5 36.1 43.3 51.9 62.3 74.7 89.7 20.0% Borrowings 14.4 17.1 19.2 23.0 27.4 32.7 39.1 18.0% Total Liabilities 41.5 54.4 64.1 76.5 91.3 109.1 130.5 19.1% ShareholdersEquity 5.9 6.6 10.1 10.9 11.7 12.8 13.9 16.2% Book value Pershare 16.9 18.9 29.1 31.2 33.8 36.7 40.0 16.2%
88 Valuation Summary HF bank is fairly valued with a downside of 0.9%
Cost of Equity Assumptions: 8th Sept 2015 Terminal Assumptions: Growthrate 5.0% Risk free rate* 12.0% Mature Company Beta 1.00 Beta 0.9 Terminal Cost ofEquity 18.0% Country RiskPremium 6.0% Return on AverageEquity 14.4% Justified Price to Bookvalue 0.7x Extra RiskPremium 0.0% Shareholder Equity -- FY19e 13.9 Cost ofEquity 17.2% Terminal Value 10.0
Year Ended 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19 Dividends 0.4 0.5 0.6 0.7 0.8 Terminal Cashflow 10.0 Time inYears 0.3 1.3 2.3 3.3 4.3 Discounting factor 1.0 0.8 0.7 0.6 0.5 PV of Cash Flows 0.4 0.4 0.4 0.4 5.4 Value of Equity 7.1 Number of Shares 0.3 Value Per Share 20.3 Current Price 21.8 Upside / Downside (6.6%) Dividend yield 5.6% Downside (0.9%) Fairly valued
* Five years average yields on a 10 year Treasury bond 89 VII. Valuation Summary – Tier II Banks
90 Valuation Summary – Tier II Banks Tier II banks on average presents a downside of 15.7%
Company Name Price Issued Market P/E Dividend Yield PEG CoE Fair Upside Shares Cap TTM FY 2014 FY 2015e Value
I&M Bank 121.0 0.4 48.4 8.3x 2.1% 2.2% 0.6x 18.0% 99.5 (15.6%) NICBank 46.8 0.6 29.9 7.0x 2.1% 2.4% 0.4x 17.2% 47.6 4.2% National Bank 17.8 0.3 5.0 3.2x 0.0% 0.0% 0.4x 17.2% 6.5 (63.5%) DTB 204.0 0.2 40.8 8.2x 1.2% 1.3% 0.5x 15.9% 206.5 2.5% CfC 90.0 0.4 36.0 8.8x 0.0% 0.0% 0.8x 17.4% 71.3 (20.8%) HF 21.8 0.3 6.5 7.8x 4.6% 5.6% 0.5x 17.2% 20.3 (1.0%)
Min 3.2x 0.0% 0.0% 0.4x 15.9% (63.5%) Median 8.0x 1.6% 1.7% 0.5x 17.2% (8.3%) Average 7.2x 1.7% 1.9% 0.5x 17.2% (15.7%) Max 8.8x 4.6% 5.6% 0.8x 18.0% 4.2%
Capital Adequacy I&M NIC NBK DTB CfC HF Minimum Statutory Core Capital to Total Liabilities 20.4% 20.0% 11.5% 21.3% 20.6% 18.3% 8.0% Core Capital to RWA 15.4% 14.0% 14.5% 14.9% 15.6% 14.3% 10.5% Total Capital toRWA 17.9% 20.0% 15.5% 18.0% 18.7% 17.6% 14.5%
91 D: The Board of Directors
92 The Board of Directors – Non-executive Directors Professor Daniel Mugendi is the Chairman of the Board
Professor Daniel Mugendi Njiru,PhD Chairman Prof. Mugendi is a renowned scholar, researcher, consultant and higher education leader. He has made significant contributions in the area of agro--ecosystems research and management as well as the development of University education in Kenya. He is currently the Principal of Embu University College --a constituent collegeof the University of Nairobi. HeistheChairman of Board of Trustees of Kenya Forestry ResearchInstitute("KEFRI"). He has previously served as the Deputy Vice--Chancellor of Finance, Planning and Development at Kenyatta University and also as the Dean of the School of Environmental Studies and Human Sciences. Prof. Mugendi holds a BSc. from Moi University, MSc. From University of Nairobi and a PhD from University ofFlorida.
Ani – Jussi Ahveninen Non--executiv e Director Antti --Jussi Ahveninen is a real estate funds sp ecialist with 12 international institutional real estate funds managed, all with excellent track record. He currently heads the international real estate funds operation of Finland based Taaleritehdas Private Equity Funds, a financial services house with over USD 4 billion under management. Antti has previously set--up and headed the real estate funds operation for theinvestment banking arm of one of thelargest banks in Saudi Arabia based in Riyadh. He has an MSc in Real Estate Finance from Swedish School of Economics and Bachelor's degree from Helsinki School of Economics. Antti is also a lecturer with Aalto University School of Engineering (formerly Helsinki University of Technology), with studies undertaken in Japan and USA.
JamesMaina Non--executiv e Director James is the Assistant Director at the Ministry of Lands Housing and Urban Development (MoLH&UD) (Directorate of Nairobi Metropolitan Development) a position hehas held since 2010. Hebrings with him over 15 years of experience in urban planning and management; spatial planning, preparation of master plans and local plans, zoning and development control, traffic management and decongestion, all gained with theNairobi City Council and his current position. Heholds a Masters Degree in Urban and Regional Planning from the University of Nairobi, as well as a BA from the same institution.
93 The Board of Directors – Non-executive Directors, continued… The board is comprised of 8 members from diverse backgrounds, each bringing unique skill-sets
MadhavBhalla Non--executiv e Director Madhav is a Founding Partner at the law firm of Taibjee and Bhalla, a well established Litigation and Commercial law firm based in Nairobi, Kenya. Madhav possesses over 16 years of experience across transactional and commercial work, corporateadvisory, banking, employment law, commercial & civil litigation, intellectual property, trustsand specialises in real estate conveyancing and property law. Madhav is the Hon. Legal Counsel to the Retailers Trad e Association of Kenya (RETRAK) and serveson theboard of many local trusts, charitiesand foundations. Heholds a LL.B. (Hons) from the University of Birmingham and a Dip Law from theKenya School ofLaw.
Nasser Olwero Non--executiv e Director Nasser is the Director of Information Science and acting Director of the Science and Innovation group at the World Wildlife Fund (WWF) in the United States, with over 16 years of experience. He advises on technology application creating an interfacebetween conservation science and Information Technology and Systems and has built various tools to support conservation. His interest is on the intersection of conservation science and technology examining and applying various information systems to aid conservation efforts around the world. He has been involved in various natural capital projects and training in Uganda, Tanzania, Mozambique, Indonesia, Thailand, Bhutan, Mexico, Myanmar and Cambodia. He holds an MPhil. Degree in Environmental Information Systems from the School of Environmental Science, Moi University,Kenya.
94 Executive Directors Cytonn’s Executive Directors bring with them over 35 years of experience in Investment Management
Edwin H. Dande,MBA Managing Partner, ChiefExecutiveOfficer Edwin istheManagingPartner & Chief Executive Officer ofCytonn Investments Managem ent Limited. Edwin has over 15 years of diversified financial services experience spanning investment banking, private equity, investment management, and real estate in global and regional financial services brands such as KPMG, former Lehman Brothers, Bank of America Securities / Merrill Lynch, and Britam Asset Managers. He holds a MBA, Finance Major from the Wharton School University of Pennsylvania and Bachelor of Science Degree in Accounting from the Monmouth University. He is also a Certified PublicAccountant.
Elizabeth N. Nkukuu, CFA Partner, ChiefInvestmentOfficer Elizabeth serves as the Chief Investment Officer of Cytonn Investments Management Limited. She has over 10 years of experience in Investment Management. Before JoiningCytonn, Elizabeth was a Senior Porsolio Manager at Britam Asset Managers having come from Genesis Investments as an Investment Manager. Elizabeth started her career as an Investment analyst in PineBridge Investments. Elizabeth has a Mast er’s of Business Administration (MBA) Degree (Finance) from theUniversity of Nairobi. In addition to being a Chartered Financial Analyst (CFA), she isalso a CPA (K).
PatriciaN. Wanjama, CPS Partner, Head ofLegal & CompanySecretary Patricia serves as the Head of Legal and Company Secretary for Cytonn Investments Management. Prior to joining Cytonn, Patricia served as the Head of Legal and Assistant Company Secretary for Britam Asset Managers. Patricia has over 10 years of experience in the Legal field, with a strong focus on Financial and Investment Law. She holds a MBA from Strathmore Business School, a LL.B and isa Registered CPSK.
95 E: The Management Team
96 The Management Team
Cytonn’s management team bring with them vast experience in investments, real estate, finance and PR
MauriceOduor InvestmentManager Maurice serves as an Investment Manager at Cytonn Investments Management Limited. He has over six years experience in investment industry having worked with two strong brands in Kenya. Before joining Cytonn Investments, Maurice served as Assistant Porsolio Manager at Britam Asset Managers Ltd focusing on porsolio management and clients relationship management. Maurice started his career at Genesis Kenya Investment Management Ltd as an investment Assistant with specialization in Fixed income analysis, investment dealing and porsolio management duties. He holds a Bachelor of Business Administration (Finance option) from Maseno University and is currently a Chartered Financial Analyst (CFA) level IIIcandidate.
Johnson Denge,MISK Real Estate ServicesManager Johnson is the Real Estate Services Manager of Cytonn Real Estate. Johnson has close to 10 years of diversified Real Estate development experience spanning from deal origination, Concept development, Real estate research, Valuation and advisory, and real estate market in Regional Real Estate market brands such as Ryden International, and Acorn Group and now at Cytonn Real Estate. He is a full member of Institution of Surveyors of Kenya, a Registered Valuation Surveyor and an Estate Agent. He holds a Bachelors Degree in Land Economics from theUniversity ofNairobi.
Andrew Ayuya,MAAK ProjectManager Andrew serves as the Project Manager at Cytonn Real Estate. Andrew has close to 10 years experience in Construction Project Management of diverse building projects right from inception, planning, implementation, monitoring and evaluation, handover and closure. He is a member of the Architectural Association of Kenya, ConstructionProject Managers Chapter. Prior to joining Cytonn, Andrew was the Senior Project Manager at Pinnacle Projects International Limited. He holds a Masters in Project Planning and Management from University of Nairobi and a Bachelors of Construction Management from Jomo KenyattaUniversity.
97 The Management Team, continued…
Cytonn’s management team bring with them vast experience in investments, real estate, finance and PR
JuliusKibanya DistributionManager Kibanya serves as the Distribution Manager at Cytonn Investments Managem ent Limited. He has over fifteen years experience in Sales & Marketing and Management Information Systems. Before joining Cytonn Investments, Kibanya held the position of Branch Manager at Madison Insurance Company ltd, Unit Manager in BRITAM and Jubilee Insurance. hepreviously worked with Directorateof Personnel Management as a lecturer in Information Technology.He isa graduate of IMIS-- London and a member of theInstitutefor theManagement of Information Systems.
Shiv A.Arora InvestmentAssociate Shiv serves as an Investment Associate at Cytonn Investments Management Limited. His experience within thefinancial services industry ranges from wealth management with Merrill Lynch Dubai to and also experience with Citibank Kenya. Most recently, Shiv served as an Investment Analyst for Britam Asset Managers, focused largely on the Private Market segment, with a key focus on Real Estate. Shiv holds a BSc. Hons in Economics from theUniversity of Warwick and isa candidatein theCFA Programme.
BeverlynNaliaka PR & Communications Associate Beverlyn serves as a PR and Communications Associate at Cytonn Investments Management Limited. She has over four years experience in PR and Communication. Before joining Cytonn Investments, Beverlyn held the position of Account Manager at Gina Din CorporateCommunications. She holds a Bsc. in Communications and PR from Moi University. She iscurrently a finalist at Daystar University pursuing Masters in CorporateCommunications.In addition, Beverlyn isa CPS (K).
98 Q&A
99