Kenya Listed Commercial Banks Review Cytonn FY’2020 Banking Sector Report “Subdued Growth in Earnings Amidst Deteriorating Asset Quality” 16th April, 2021 Table of Contents 1 Introduction to Cytonn 4 Listed Banking Sector Metrics 2 Kenya Economic Review and Outlook 5 Bank Valuation Reports 3 Banking Sector Overview 6 Appendix www.cytonn.com 2 I. Introduction to Cytonn 3 About Us Cytonn Investments is an alternative investment manager, with real estate development capability, and a primary focus on private equity and real estate investments in the high growth Kenyan Region. Cytonn has a unique strategy of coupling two compelling demand areas - the lack of high yielding investment products and the lack of institutional grade real estate. We provide high yielding investment instruments to attract funding from investors, and we deploy that funding to largely pre- sold investment grade real estate. With offices in Kenya and Washington, DC - USA, we are primarily focused on offering alternative investment solutions to global and local institutional investors, individual high net-worth investors, and diaspora investors interested in the East-African region. Real estate investments are made through our development affiliate, Cytonn Real Estate, where we currently have over Kshs. 82 billion (USD 820 mn) of projects under mandate across ten projects. In private equity, we invest in banking, education, and hospitality. Over Kshs. 82 Three offices across 2 Over 500 staff 10 investment billion worth of continents members, including readyprojects in 82 projects under 3 500 Cytonn Distribution 10 real estate mandate A unique franchise differentiated by: Independence & Investor Alternative Investments Focus StrongAlignment CommittedPartners Specialized focus on Focused on serving the Every staff member is an Strong global and local alternative assets - interest of clients, which is ownerin the firm. When partnerships in financing, Real Estate, Private best done on an clients do well, the firm does land and Cytonn Real Equity, and Structured independent platform to well; and when thefirm does Estate, our development Solutions minimize conflicts of interest well, staff do well affiliate www.cytonn.com 4 Why We Exist Africa presents an attractive investment opportunity for investors seeking attractive and long-term returns. Despite the alternative markets in Africa having high and stable returns, only a few institutional players serve the market. Cytonn is focused on delivering higher returns in the alternative markets, while providing the best client service and always protecting our clients’ interests. WE SERVE THREE MAIN CLIENT SEGMENTS: WE INVEST OUR CLIENT FUNDS IN: ● Real Estate, and Real Estate Related Businesses ● High Net-worth Individuals through Cytonn Private Wealth. This is done through our captive Distribution Network ● Private Equity ● East Africans in the Diaspora through Cytonn Diaspora ● Fixed Income Structured Solutions ● Global and Local Institutional Clients. These clients are served from our ● Equities Structured Solutions Investment & Fundraising Team We invest them in We deliver the We collect funds high growth best possible from ourclients opportunities returns www.cytonn.com 5 Our Business Structure Cytonn Investments Management Plc Cytonn Asset Managers Cytonn Capital Partners Cytonn (Regulated by (Private Markets) Real Estate Other Strategic Initiatives CMA & RBA) Private Offers and Real Estate Unit Trust Funds Research and Deal Origination Cytonn Distribution Investments East African Forum for Cytonn Hospitality Cytonn Africa Financial Fund Project Management Alternative Investments Superior Homes Kenya Cytonn Advisory Quality Assurance/ Control Pension Fund Management Cytonn Procurement - Cymatt Cytonn Real Estate Legal Cytonn Properties Cytonn Centre for Affordable Housing www.cytonn.com 6 II. Kenya Economic Review and Outlook 7 The economic growth expected to remain slow in 2021 Q3'2020 GDP Sectorial Contribution Kenya GDP Growth rate 8.0% Education 4.1% 6.3% 5.7% 5.9% Information and Communication 4.2% 6.0% 5.4% 4.9% 5.4% 4.9% Construction 6.8% 4.0% Financial & Insurance 6.8% Transport and Storage 7.8% 2.0% -1.1% Wholesale and retail trade 8.6% 0.0% Real estate 9.0% 2014 2015 2016 2017 2018 2019 Q1' 20 Q2' 20 Q3' 20 Manufacturing 9.4% -2.0% Taxes on Products 11.4% -4.0% Agriculture and Forestry 19.5% -6.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% -5.7% -8.0% • According to Kenya National Bureau of Statistics (KNBS), the Kenyan economy recorded a 1.1% contraction in Q3’2020, down from a growth of 5.8% recorded in Q3’2019. This was the second consecutive contraction, following the 5.7% contraction recorded in Q2’2020 • We expect the growth rate to be slower in the coming quarters following the imposition of new restrictions owing to the spread of COVID-19 coupled with the absence of tax incentives issued in 2020 8 Inflation Inflation averaged 5.3% in Q4’2020, up from 4.3% in Q3’2020 5-Year Inflation Rates 14.0% 11.5% 12.0% 10.0% 5.9% 8.0% 6.3% 6.7% 6.0% 4.0% 5.6% 6.3% 3.8% 2.0% 0.0% 1-Feb-15 1-Jul-15 1-Dec-15 1-May-16 1-Oct-16 1-Mar-17 1-Aug-17 1-Jan-18 1-Jun-18 1-Nov-18 1-Apr-19 1-Sep-19 1-Feb-20 1-Jul-20 1-Dec-20 *Source: KNBS • In Q4’2020, inflation averaged 5.3%, a 1.0% points increase from the 4.3% recorded in Q3’2020. Q1’2021 inflation also increased to an average of 5.8%, while March inflation came in at 5.9%. The rising inflation rate can be attributed to the rising fuel prices since the start of the year • We expect inflation to remain within the government’s range of 2.5%-7.5% despite supply-side disruption due to COVID-19 mainly supported by stable food prices as a result of the current favorable weather conditions 9 Stanbic PMI Index Kenya PMI Index 65 60 59.1 55 Average - 51.6 50 46.6 50.6 45 40 35 34.4 34.8 30 *Source: Markit Economics PMI Average • In Q4’2020, the economic prospects of the country deteriorated, with the Stanbic PMI index averaging 53.9, a decline from the 54.5 recorded in Q3’2020. In Q1’2021, the PMI Index also declined, coming in at an average of 51.6 • Key to note, a PMI reading of above 50 indicates improvements in the business environment, while a reading below 50 indicates a worsening outlook. Despite the stronger growth seen in the period under review, the level of sentiments was weak, as firms were concerned that the economy could face a setback from the pandemic 10 Currency Year-to-date, the Kenyan shilling has appreciated by 1.9% against the US Dollar 115.0 115.0 Kshs. vs USD 107.1 110.0 110.0 108.2 105.0 105.0 10-yr moving average 100.0 100.0 95.0 95.0 90.0 90.0 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Oct-17 Oct-16 Oct-18 Oct-19 Oct-20 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Feb-20 Feb-17 Feb-18 Feb-19 Feb-21 Dec-17 Dec-16 Dec-18 Dec-19 Dec-20 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 Exchange Rate 10 Yr Moving Average *Source: Central Bank of Kenya • In Q4’2020, the Kenya shilling depreciated by 0.6%, mainly attributable to the uncertainty in the global economy and also the decline in dollar inflows as trade was impacted. On a YTD basis, the shilling has appreciated by 1.9%, in comparison to the 7.7% depreciation in 2020 • In our view, the shilling will come under pressure due to continued uncertainty globally making people prefer holding dollars and other hard currencies 11 Interest Rates and Monetary Policy Central Bank Rate (%) Weighted Average Interest Rates (%) 20.0 14.0 12.1 18.0 12.0 16.0 7.0 14.0 10.0 12.0 7.1 10.0 8.0 8.0 6.0 6.0 4.0 4.0 2.0 5.0 2.0 0.0 0.0 Jul-19 Jul-20 Jan-21 Jan-19 Jan-20 Jun-19 Jun-20 Oct-19 Oct-20 28-Feb-14 29-Feb-16 28-Feb-21 29-Feb-12 28-Feb-13 28-Feb-15 28-Feb-17 28-Feb-18 28-Feb-19 29-Feb-20 Feb-19 Apr-19 Feb-20 Apr-20 Feb-21 Sep-20 Sep-19 Dec-19 Dec-20 Aug-19 31-Aug-11 31-Aug-12 31-Aug-13 31-Aug-14 31-Aug-15 31-Aug-16 31-Aug-17 31-Aug-18 31-Aug-19 31-Aug-20 Aug-20 30-Nov-13 30-Nov-11 30-Nov-12 30-Nov-14 30-Nov-15 30-Nov-16 30-Nov-17 30-Nov-18 30-Nov-19 30-Nov-20 Nov-19 Nov-20 Mar-19 Mar-20 Mar-21 31-May-11 31-May-12 31-May-13 31-May-14 31-May-15 31-May-16 31-May-17 31-May-18 31-May-19 31-May-20 May-19 May-20 Central Bank Rate Average Rate Deposit Interest Spread Lending • During Q4’2020, the Monetary Policy Committee met once and held the both the Central Bank Rate stable at 7.0% and the Cash Reserve ratio remained unchanged at 4.25% • The MPC concluded that the current accommodative monetary policies together with the package of policy measures implemented over the last year have protected the economy from substantial decline and supported vulnerable citizens. As a result of the adoption of the accommodative policy in 2020, commercial banks’ lending rates declined to 11.9% in December 2020 from 12.0% seen in September 2020.