Kenya Listed Commercial Banks Analysis
Cytonn Q3’2015 Banking Sector Report
7th December, 2015
22
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. Executive Summary
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
33
I. Introduction to Cytonn Investments
44
50 team members, one agenda – the client
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2012
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3
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Introduction to Cytonn Investments
Cytonn Investments is an independent investments management company
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2012
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3
• 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
66
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:
People – We look for the best people who thrive in a team context
Excellence – delivering the best at all times
Client focus – putting the clients interest first at all times
Entrepreneurship – using innovation and creativity to deliver differentiated financial solutions
Accountability – every day we are committing our resources and reputation and we must be
accountable
Integrity – do the right things
77
Cytonn’s Corporate Structure – Kshs 50 bn under mandate
• Financial Services
• Education & HR
• Technology
• Diaspora platform
connecting investors
in the diaspora with
opportunities in the
East African Region
• Development affiliate
providing investment
grade real estate
development
solutions
Cytonn Investments
Cytonn Investments
Ltd
Cytonn Real Estate
Cytonn Diaspora
Cytonn Investments
LLC
• Independent
investment
management
company, serving
HNW & institutional
clients
• US advisory and
investment
management
company
Kenya United States
Private Equity
88
Board of Directors
The board is comprised of 9 members from diverse backgrounds, each bringing unique skill-sets*
Professor Daniel Mugendi Njiru serves as the Chairman of the Board of Directors
Edwin H. Dande,
Managing Partner & CEO
Elizabeth N. Nkukuu,
Partner & CIO
Patricia N. Wanjama,
Partner & Head of Legal
Prof. Daniel Mugendi,
Chairman
Antti – Jussi Ahveninen,
Non-executive DirectorMadhav Bhalla,
Non-executive Director
Nasser Olwero,
Non-executive DirectorJames Maina,
Non-executive Director
Mike Bristow,
Non-executive Director
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Strong Management Team With Diverse, Global & Local Experience
Diverse experience in investments, finance, real estate and legal, with deep commitment to client servicing*
Elizabeth N. Nkukuu,
Partner & CIO
Shiv Arora,
Head of Private Equity
Real Estate
Patricia N. Wanjama,
Partner & Head of Legal
Johnson Denge,
Real Estate Services Manager
Beverlyn Naliaka,
PR & Communication
Edwin H. Dande,
Managing Partner & CEO
Maurice Oduor,
Investment Manager
*For Bios of the Team, visit http://cytonn.com/the-team
Boniface W. Gichimu,
Finance Manager
Robert M Mwebi,
Project Manager
Winfred Ndung'u,
Business Administration
Manager
Gilbert Kibire
Real Estate Services Manager
Gaurang Chavda
Head of Private Wealth
Management
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Cytonn Investment Solutions
We offer differentiated investment solutions in four main areas
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High Yield Solutions
The Team’s expertise and market knowledge enable us to offer investors higher yields than the
market average
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
to find, evaluate, structure and deliver world class real estate investment products for investors
Our platform connects global capital seeking attractive return with institutional grade
development opportunities in the East African region
Cytonn seeks to unearth value by identifying potential companies and growing them through
capital provision and partnering with their management to drive strategy
We primarily invest in the Financial Services, Education and Technology sectors
Private Regular
Investment Solutions
Private Equity
Real Estate Investment Solutions
We understand that investors have varying financial goals. Our highly customized and simple to
understand investment products will enable you to achieve your investment objective
We offer solutions to both local investors, and those in the diaspora interested in the
investment opportunities back in Kenya and the region
1111
24%
12%
9% 9%
0%
5%
10%
15%
20%
25%
30%
Real Estate 10-year Treasury Bond 91 day T-bill Equities (NASI)
Cytonn focuses on the highest returning Asset Class
Traditional investments returning 10% compared to 24% for real estate, & projected to continue
Pe
r a
nn
um
Re
turn
, 5
Ye
ar
Ave
rag
e
Average = 10%
1212
Opportunities in Real Estate - Representation of Listed Markets
Listed markets do not fully represent the Real Economy
• Only 49% of the economy is present in the listed markets, the balance of approx. 50% is in alternative markets which
includes property and private equity
• This leads to money chasing few opportunities due to limited options on stock exchanges; providing an opportunity for
sophisticated investors to make abnormal returns in the alternative markets
Ma
rke
t C
ap
to
GD
P
49%42% 39%
155%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Kenya Uganda Tanzania South Africa
Target Area
Source: Cytonn Research
1313
Global view of economic growth determines regions of focus
There is demand from global capital (light colours) looking for attractive returns (dark colours)
1414
Key Themes driving our Property DevelopmentA large housing deficit, growth of the middle class and demographic trends are just a few on the factors driving our thematicinvestments in Real Estate
KEY THEME REAL ESTATE SECTOR PROVIDING EXPOSURE TO KEY THEME
Master Planned Communities
CommercialOffice Parks
CommercialMixed-Use
Suburban Malls
Three Star Hotels
1. Large Housing Deficit
2. Growth of Middle Class
3. Demographic Trends
4. Improved Infrastructure
5. Political Decentralization
6. Kenya as a Regional Hub
1515
Deal pipeline overview – 85% to low and mid-income housing
Kshs 49 Billion Deal Pipeline
Prime Residential and Mixed-use15%
Low to mid-income Housing85%
• Masterplanned Development
• Comprehensive Development
• Low to mid-income Modular Housing
• High Density Integrated Mixed-use
• Gated Communities
1616
Kshs 49 billion Deal pipeline details
all values in Kshs Millions unless stated
Projects Concept Project Size
SET 1
Amara Ridge Gated community 625.0
Situ Village Gated masterplanned community 3,050.0
Project Ruaka Middle-class residential development 1,600.0
Sub - Total 5,275.0
SET 2
Project Mombasa High density mixed-use development 3,750.0
Project Juja Middle-class gated community 3,832.0
Project Mount Kenya Masterplanned development 1,200.0
Project Mavoko Low to mid income masterplanned city 12,500.0
Project Lukenya Low to mid income masterplanned city 22,500.0
Sub - Total 43,782.0
TOTAL 49,057.0
• 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
1717
Cytonn’s strategy brings three key pillars together
Landowners
1. Creating Jobs
2. Growing the Economy
3. Improving the standards of living
Development CapabilityFinancing Capability
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II. Economic Review and Outlook
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Economic review
Kenya’s GDP growth to be supported by stable inflation and high infrastructure development
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• Kenya’s GDP grew by 5.5% in Q2’2015 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, and 5.4% according to the World Bank
• 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% and moved to hit a high of 7.3% in November
• On the currency, the Kenya Shilling has depreciated by 12.6% YTD on account of;
(i) a strengthening Dollar globally and expectations that the Fed may increase rate,
(ii) a widening current account deficit driven by increased government spending on importation of capital goods to
support infrastructure development, and
(iii) declining foreign exchange inflows on the back of poor revenues from tea, horticulture and tourism
2020
Economic review… continued
Kenya’s 2015 GDP growth downgraded, owing to poor operating environment and higher debt burden
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• As of November, the import cover stood at 4.3 months which is marginally above the mandatory requirement of 4
months, having declined to a 27 month low of 3.9 months
• However the government is yet to utilise IMF credit facility of USD 688 mn, which can be tapped into to complement
the monetary policy in supporting the shilling
• We have seen a number of downgrades to the Kenyan economy. The IMF and World Bank reduced their forecasts to
6.0% and 5.4% respectively from close to 7.0% at the beginning of the year and recently the Treasury who
downgraded their forecasts from 6.9% at the beginning of the year to 5.8% noting (i) a tight monetary policy and (ii)
the El-Nino rains, whose effects would stifle growth
• S&P also downgraded the credit outlook for Kenya from stable to negative maintaining the credit rating at B+
We forecast 2015 Kenya GDP growth to come in at between 4.7% – 4.9%, below Treasury, IMF and World Bank forecast, as a result of the tough operating environment
2121
Key indicators point to a slow down in economic performance
Economic Outlook
Drivers Expectations - Jan 2015 YTD 2015 Experience Medium-term Outlook Effect
GDP5.0% - 6.9% growth in
2015
(i) 4.9% growth in Q1' 2015
Growth to be below target, with Cytonn's estimate for GDP at 4.9%
Negative
(ii) 5.5% growth in Q2'2015
(iii) IMF and World Bank downgrade their GDP projections to 6.0% and
5.4%, respectively
Interest Rates Low and stable
(i) CBR increased 300 bps to 11.5%Rates to remain high given
government’s heavy borrowingNegative(ii) 91 Day T-Bill hitting a high of
22.5%
InflationLow and stable at 6.0%
as at December(i) November inflation at 7.3%
(highest for year)Expected to surpass the 7.5%
upper limitNeutral
Exchange RateShilling to remain under
pressureShilling depreciated 12.6% against
the dollar YTD
Further depreciation given the increased foreign debt payments liabilities and Kenya’s structural
weaknesses
Negative
Corporate Earnings
Improve on credit expansion and a
favorable macroeconomic
environment
(i) Weak earnings from banking sector. Banks recorded slower growth in Q3’15 of 9.3% y/y compared to 13.1% in Q3’14
Weak earnings given the high interest rates and depreciating
shillingNegative
(ii) Weak shilling affected import reliant companies
Investor sentiment
Positive, supported by re-allocation of funds
from the Nigerian market
(i) Peaceful conclusion of Nigerian election resulting to re-allocation to
other cheaper markets
Negative on the back of anticipated rate hikes in the United States and attractive money market yields in the
country
Negative(ii) Increased flows into Kenya's debt market, however few flows into the
equities market
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III. Kenya Banking Sector Overview
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• In Kenya there are a total of 42 commercial banks, 1 mortgage finance company, 12 microfinance banks, 8
representative offices of foreign banks, 86 foreign exchange bureaus, 14 money remittance providers and 3 credit
reference bureaus
• 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
• We maintain our view that Kenya is over-banked with a relatively high ratio of banks to total population, with 42
commercial banks serving of 44 million people, compared to Nigeria's 22 for 180 million and South Africa's 19 for 55
million
• 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
1.0x
0.3x
0.1x
0.0x
0.2x
0.4x
0.6x
0.8x
1.0x
1.2x
Kenya South Africa Nigeria
Commercial Banks / Population (Millions)
Kenya’s Banking Sector Overview
Kenya currently has 42 commercial banks and 1 mortgage finance company
2424
Growth in the Banking Sector
Q3’15 had the most challenging operating environment characterized by high interest rates
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• Year to date, the Banking sector in Kenya has continued to grow in assets, deposits, profitability and products offering,
leveraging on diversification to alternative channels, albeit in a tough operating environment, characterized by high
interest rates in Q3’2015
• The banking sector’s aggregate balance sheet grew by 1.4% from Kshs 3.6 trillion in June 2015 to Kshs 3.7 trillion in
September 2015. Gross loans and advances increased from Kshs 2.2 trillion in June 2015 to Kshs 2.3 trillion in September
2015, translating to a growth of 6.9%
• This growth has mainly been underpinned by:
Banks responding to the needs of the Kenyan market for convenience and efficiency through
alternative banking channels such as mobile, internet and agency banking
Branch network expansion strategy both in Kenya and in the East African community region
Increased use of alternative channels, such agency, mobile and internet banking. Cashless cards use
has also been on the rise
2525
Banking Sector Growth Drivers
Alternative service delivery channels to support banks’ growth and diversification
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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) Technology to drive growth from alternative service delivery channels: Mobile & agency banking have
increased banking penetration in the Kenyan market leading to a greater number of transactions and uptake of banking
services, particularly to the mass market. Launch of merchant cards to support cashless payments will be a key driver
for diversification within the mass market
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, South Sudan and DR
Congo are opening up new channels of revenue in countries with relatively attractive spreads compared to Kenya
5) Regulatory Environment: With the tightening of regulatory environment with emphasis on governance and
capitalization, banks are expected to remain stable and position themselves for growth
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Recent Developments in the Banking Sector
Banks continued to register lower than expected earnings growth
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There were a number of developments in the banking industry;
1) Volatility in Interest Rates: In the third quarter of 2015, interest rates have remained volatile with the interbank
rate and 91-day T-bill touching highs of 25.8% and 22.5% respectively. At the beginning of the third quarter of 2015,
the MPC raised the CBR to 11.5%, and has kept it unchanged
2) Low Loan Uptake: Commercial banks have reported a lower loan uptake given the expensive costs of financing
loans. This was driven by actions by the Central Bank, which raised the Central Bank’s base lending rate by 300 bps in
the quarter
3) Lower earnings growth: Kenya banks have continued to record much lower earnings growth, driven by the
challenging economic environment which has reduced appetite for credit
4) Liquidation of Dubai bank: Dubai bank was placed under receivership with the Kenya Deposit Insurance Corporation
(KDIC) for failure to meet statutory requirements since July. The receiver manager, KDIC, further recommended that
liquidation was the only feasible option Dubai bank to be liquidated owing to the magnitude of weakness in the bank
2727
Recent Developments in the Banking Sector
Imperial Bank put under receivership
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There were a number of developments in the banking industry;
5) Moratorium on the licensing of new banks: The Central Bank of Kenya announced a moratorium on the licensing
of new banks with the exception of cases related to amalgamation and acquisition of banks. With the number of
commercial banks at 42, this high number of banks comes with advantages such as enhancing financial inclusion but
also strains the thoroughness and diligence of the regulatory supervision
6) Imperial Bank put under receivership: Imperial Bank was closed and put under receivership, due to what was
described as unsafe and unsound business practices. The KDIC effected a joint agreement with Kenya Commercial
Bank and Diamond Trust Bank that allowed 89% of depositors access to their deposits to a maximum of Kshs 1 mn.
This is a clear indication that the bank will not reopen. This being the second bank to be closed within a period of 3
months, is an indication that there is a need to enhance the Risk Based Supervision in the banking sector by the
regulator
2828
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)
CAGR-22.8%
Shareholders Equity (Kshs Bn)
CAGR-16.6%
CAGR -16.8%
Source: Central Bank of Kenya
Bank Branches
1,063 1,161
1,272 1,342
1,443
-
200
400
600
800
1,000
1,200
1,400
1,600
2010 2011 2012 2013 2014
CAGR - 7.9%
876
1,152 1,296
1,579
1,941
2,320
-
500
1,000
1,500
2,000
2,500
2010 2011 2012 2013 2014 Q3'2015
266 291
362
432
502
556
-
100
200
300
400
500
600
2010 2011 2012 2013 2014 Q3'2015
1,237
1,488 1,708
1,936
2,292
2,568
-
500
1,000
1,500
2,000
2,500
3,000
2010 2011 2012 2013 2014 Q3'2015
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Banking Sector Metrics, continued…
Loans to deposits ratio at 90.3%, up from 84.4% in Q2’15, showing more aggressive use of funds
Cost to income (%) Loans to deposits (%)
NPLs to total loans ratio(%) Net interest margin (%)
50.0%47.4%
40.1%43.7%
40.9%44.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2010 2011 2012 2013 2014 Q3'2015
70.9%
77.4%75.9%
81.6%84.7%
90.3%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
2010 2011 2012 2013 2014 Q3'2015
6.6%
4.6% 4.8%5.2%
5.6% 5.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2010 2011 2012 2013 2014 Q3'2015
Source: Central Bank of Kenya
8.6% 8.7%
9.5% 9.4%
8.6% 8.7%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
2010 2011 2012 2013 2014 Q3'2015
3030
Banking Sector Multiples
Kenya’s banking sector is trading at an average PBV of 1.4x and a Trailing PE of 7.1x
Source: NSE, Cytonn Banking Sector Report
Bank Share Price *No. of shares
issued (bn)Mkt Cap (bn) PBV
TTM**P/E
Equity Group Holdings 41.8 3.7 154.5 2.2x 8.2x
Barclays Bank of Kenya Ltd 13.2 5.4 71.4 1.9x 8.3x
The Co-operative Bank of Kenya Ltd 18.0 4.9 87.8 1.8x 8.5x
Standard Chartered Bank Kenya Ltd 209.0 0.3 64.8 1.6x 7.7x
I&M Holdings Ltd 99.0 0.4 38.6 1.6x 7.0x
Kenya Commercial Bank Ltd 40.5 3.0 120.7 1.5x 6.7x
Diamond Trust Bank Kenya Ltd 201.0 0.2 48.2 1.5x 8.0x
CFC Stanbic bank 84.5 0.3 26.2 1.2x 7.7x
NIC Bank Ltd 43.0 0.6 27.5 1.1x 6.3x
Housing Finance Co. Kenya Ltd 22.0 0.4 7.7 0.8x 7.4x
National Bank of Kenya 15.6 0.3 4.8 0.6x 2.1x
Median 1.5x 7.7x
Average 1.4x 7.1x
* Share prices are as at 1st December 2015** TTM – Trailing twelve months
The Banking sector has become cheaper on a PBV basis having declined to 1.4x from 2.2x at the beginning of the year
3131
Banking Sector Multiples
Comparative look at Kenya financial sector shows banking stocks getting cheaper than insurance
Source – Cytonn Research
10 year Price to book value: Banking and Insurance
Between banks and insurance companies, we currently prefer investing in banks rather than insurance companies based on price to book valuation.
1.4x
2.2x
1.9x1.9x
1.5x1.4x
2.3x
2.0x
2.3x
3.1x3.1x
2.5x
1.7x
2.5x2.3x
1.7x
1.1x
0.8x
1.4x1.3x1.5x
2.5x
3.4x
1.7x
Nov-1520152014201320122011201020092008200720062005
Banking Average Insurance Average
3232
IV. Cytonn’s Banking Sector Report
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Executive Summary
Cytonn has undertaken this report to offer our investors a comprehensive view of the listed banks
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• 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 Q3’2015 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 rankings were dominated by Tier 1 banks which performed well in terms of both Franchise and Intrinsic
valuation
3434
Rankings by Franchise value
We analyzed the listed banks on a franchise value perspective
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Source: Cytonn Research
• 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
Bank
Loanto
Deposit ratio
Cost to Income ratio
ROACE* NIM**PEG ratio
P/TBVDeposits/
branch NPLs/ Loans
NPLCoverage
Tangible Common
Ratio
Non Interest
Income / Revenue
Camel Rating
***Total
Equity 2 8 3 2 7 11 9 5 4 3 2 4 60
Co-operative bank 1 5 7 4 6 9 7 4 5 4 5 7 64
Standard Chartered 5 4 1 3 11 8 2 10 6 1 8 6 65
Barclays 3 9 6 1 9 10 10 6 3 2 7 1 67
DTBK 8 3 9 7 2 6 8 1 1 9 10 3 67
I&M 9 1 4 8 4 7 4 2 9 7 9 5 69
KCB 7 6 5 6 3 5 6 8 2 8 3 11 70
CfC Stanbic 6 11 10 11 10 3 1 3 7 10 1 2 75
NIC 10 2 8 10 5 4 3 7 8 6 6 9 78
National Bank 4 10 2 5 1 1 11 11 11 11 4 10 81
Housing Finance 11 7 11 9 8 2 5 9 10 5 11 8 96
* ROACE - Return on Average Common Equity** NIM - Net Interest Margin*** Camel Rating incorporates a Governance score
3535
Rankings by Intrinsic value
The banks were also ranked on Intrinsic value perspective
Banks Current PriceTarget Price (Valuation)
UpsideDividend Yield
FY15eTotal Return
KCB 40.5 58.3 43.9% 5.3% 49.2%
DTBK 201.0 246.1 22.4% 1.3% 23.7%
Barclays Bank 13.2 15.3 16.2% 7.4% 23.6%
Equity bank 41.8 49.4 18.4% 4.8% 23.2%
NIC Bank 43.0 49.6 15.4% 2.7% 18.1%
Standard Chartered 209.0 228.5 9.3% 5.2% 14.5%
I&M Bank 99.0 108.8 9.9% 2.7% 12.6%
National Bank 15.6 16.1 3.5% 0.0% 3.5%
Cooperative 18.0 17.8 (0.7%) 3.5% 2.8%
Housing Finance 22.8 19.8 (13.0%) 5.1% (7.9%)
CfC Stanbic Bank 84.5 77.2 (8.7%) 0.0% (8.7%)
• KCB and DTBK have the highest upsides at 49.2% and 23.7%, respectively
• CfC Stanbic registered the highest downside of 8.7%
The target price is based on revisions in banks’ growth assumptions from H1 2015, majorly in;• Equity bank and Standard Chartered bank growth rates of 19.0% and 7.5%, down from 21.0% and 11.5%, respectively,• DTBK and National Bank growth rates of 18.4% and 15.8%, up from 15.6% and 8.7%, respectively; having outperformed our growth estimates
3636
Composite Bank Ranking
Overall, Equity bank was ranked 1st while Housing Finance was ranked last
Banks Franchise Value
Total ScoreTotal Return Score
Weighted Q3 2015 Score
Q3 2015 rank H1 2015 rank
Equity 60 4 26.4 1 1
DTBK 67 2 28.0 2 8
KCB 70 1 28.6 3 3
Barclays 67 3 28.6 3 4
Standard Chartered 65 6 29.6 5 2
Co-operative bank 64 9 31.0 6 5
I&M 69 7 31.8 7 6
NIC 78 5 34.2 8 6
CfC Stanbic 75 11 36.6 9 9
National Bank of Kenya 81 8 37.2 10 10
Housing Finance 96 10 44.4 11 10
• In Q3 2015, franchise value was assigned a weighting of 40% while the intrinsic value was assigned 60% weight, same
as in H1 2015
• Equity Bank maintained its top position ranking based on its robust franchise value backed by high return on average
equity of 29.2%, high net interest margin of 10.2% and a high non interest income contribution to revenue of 39.6%.
With the acquisition of ProCredit bank (Congo) and the roll out of Equitel expected to boost growth in the near term, the
stock has an upside of 23.2% (including dividend yield)
• Housing Finance ranked the lowest overall. It registered poor profitability, with ROACE at 12.6% and their NIM at 7.2%,
which was the third lowest in the market. In addition, they are hampered by liquidity issues, with a loan to deposit ratio
of 137.6%. The stock has a 7.9% downside
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Banking Sector Report Results
Diamond Trust Bank improves by 6 positions owing to higher growth rate
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12
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Source: Cytonn Research
• Diamond Trust Bank of Kenya rose 6 ranks to position 2 based on its second highest upside of 23.7%. This was boosted
by an increase in the banks’ growth rate to 18.4% owing to (i) their regional expansion strategy, and (ii) increased focus
on more efficient channels of distribution like agency banking. The banks’ high quality loan book and risk management
also boosted its franchise value
• Standard Chartered bank declined 3 ranks to position 5 based on its increase in non performing loans that brought down
its NPLs / Loans ratio which the bank did not provide as much for thus affecting their NPL coverage and also bringing
down their CAMEL rating score. In addition, the reduction of the bank’s expected growth rate reduced the stock’s total
return score, with the stock having an upside of 14.5%
• Barclays Bank ranked the third highest overall, having the highest net interest margin attributable to the more expensive
loans, yet sticky customer base. The stock has a 23.6% upside mainly attributable to their aggressive entry into the SME
market
• National Bank of Kenya, was the second most inefficient bank in terms of cost containment, operating at cost to income
ratios of 56.9%. In addition, they have the lowest quality of assets in their loan portfolio, as can be seen by their NPLs
which are 8.8% of their total loan book
3838
Future of the Banking Sector
The future is bright for the banking sector given the resilience to maintain margins
20
13
• Going forward we expect banks’ net interest margins to remain depressed, and the only way for the banks to drive
revenue is by diversification to increase their non funded income. The ability of the banks to diversify their top line
helps reduce risks in uncertain and volatile economic environments
• Alternative channels of distribution, such as mobile and internet banking, agency banking and cashless (cards) banking
will continue to drive growth in non-funded income while keeping costs low for most banks
• From the recent closure of Dubai and Imperial bank, we expect an enhanced risk-based analysis and supervisions for
commercial banks, and indeed all financial institutions, in Kenya by considering factors other than financial ratios
3939
V. Appendix
4040
A. Metrics Used
4141
Banking Sector Report – Metrics Used
Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
20
12
20
13
• 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 higher profits
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 11.5%, we expect banks to maintain their NIMs in 2015.
Barclays had the highest NIM at 10.93%, with the lowest for CfC Stanbic at 6.32%
• 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’ equity. 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. National bank has the highest ROACE at
30.1%, which was much above the industry average of the listed banks of 22.7%, while Housing Finance had the lowest
at 12.6%
4242
Banking Sector Report – Metrics Used, continued…
Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
20
12
20
13
• 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 account 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. National Bank of
Kenya had the lowest PEG ratio at 0.2x, while Standard Chartered was the most overvalued at 1.6x
• 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 4.7 bn and 4.5 bn, respectively, while
Barclays bank and National bank have the lowest deposits per branch at 1.3 bn and 1.2 bn, respectively. This is due to the
large corporate book of CfC Stanbic and Standard Chartered
4343
Banking Sector Report – Metrics Used, continued…
Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
20
12
20
13
• 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 85%, we found that Co-operative was
closest to the target at 83.8%, while Housing Finance was the farthest at 137.6%
• 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 more 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 49.0%, in line with the industry average. I&M maintained the lowest cost to income ratio of 34.4%,
while CfC Stanbic had the highest ratio at 59.0%
4444
Banking Sector Report – Metrics Used, continued…
Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
20
12
20
13
• 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 National Bank maintained its position as the most undervalued bank as per this metric at 0.7x, while Equity bank
is still the most overvalued at 2.4x
• 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 16.8%, while National Bank was the least solvent
at 6.0%
• 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 1.6%, while
National Bank had the highest non-performing loans at 8.8%
4545
Banking Sector Report – Metrics Used, continued…
Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
20
12
20
13
• Non-Performing Loans Coverage - 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 77.8%, while National Bank has the lowest at
8.9%. This is ironic given that DTBK has the lowest NPLs/ Loans of 1.6% while NBK has the highest NPLs/Loans of 8.8%
• 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 41.7%, while Housing Finance
has the lowest at 12.9%
• 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. We also incorporated a governance score in the ranking
4646
B. Tier I Banks
4747
I. Barclays Bank
4848
Company Description
Barclays bank has been in operational in Kenya for over 97 years
Company Description
Pros Cons
• Barclays Bank has operated in Kenya for over 97 years• The bank listed its shares on the Nairobi Stock
Exchange in 1986• Before 2013, the bank was a subsidiary of Barclays
bank plc, an international financial servicesconglomerate
• In 2013, all Barclays plcs in Africa (Except Egypt andZimbabwe) were merged with the aim of operating asone bank in Africa, leading to the formation of BarclaysAfrica Group which now owns 68.5% of Barclays BankKenya
• As of 2014, the bank had 119 braches
• Diversification into other markets: The bank is looking
to expand into the SME banking, mortgage banking,
investment banking and bancassurance. Recently, the
bank set aside a Kshs 30 bn loans for SME's
• The bank has the highest net interest margin of 10.9%
as at Q3’2015
• Faster decision making and greater autonomy under
Barclays Africa Group Limited
• Stiff competition in the retail and SME banking market
• The bank will continue lagging its peers in the capture of
the retail market
• Challenges in deposit mobilisation compared to its peers
• Barclays Bank of Kenya (BBK) increased the fees itcharges its customers on credit card rates, raising thecharge to 3.9% from 3.7% on amounts used on the cardfor purchase of goods if not settled within the grace period
• BBK increased the minimum amount of unsecured loanscustomers running a small business can borrow to Kshs 6mn based only on their credit history, and the turnaroundtime to 48 hrs
• BBK has upgraded its ATMs to allow both account holdersand non-customers to make cash deposits in real-time,allowing deposits up to Kshs 120,000 per transaction inbatches of Kshs 40,000; with no limit on the number oftransactions they can make per day
Developments during the quarter
Source – Annual Reports and Q3’ 2015 Investor Brief
4949
Financial Statements Extracts
Barclays bank has an estimated 5-year PAT CAGR of 7.6%
201
3
Income Statement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
Net Interest Income 18.9 19.6 20.7 23.4 25.0 27.2 29.7 8.6%
Non Funded Income 9.1 8.7 8.9 9.8 10.7 11.7 12.8 8.0%
Loan Loss Provision (1.2) (1.4) (1.4) (1.9) (2.1) (2.3) (2.5) 11.8%
Total Operating Expenses (16.0) (15.9) (17.1) (19.4) (21.0) (22.9) (25.0) 9.4%
Profit Before Tax 11.1 12.3 12.6 13.5 14.6 16.0 18.4 7.1%
Profit After tax 7.6 8.4 8.8 9.4 10.2 11.1 12.9 8.8%
% PAT Change YoY (12.8%) 10.7% 4.1% 7.8% 8.6% 9.2% 10.9%
CIR 52.9% 51.4% 53.1% 53.2% 53.2% 53.2% 53.1%
EPS 1.4 1.6 1.6 1.7 1.9 2.1 2.2
DPS 0.7 1.0 1.0 1.0 1.1 1.2 1.3
ROaE 24.6% 23.9% 24.2% 24.1% 26.2% 26.8% 28.6%
ROaA 3.9% 3.9% 3.8% 3.8% 3.9% 4.2% 4.2%
Balance Sheet 2012 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
Government Securities 47.5 47.6 55.3 60.3 65.7 71.6 78.1 55.3 6.4%
Net Loans and Advances 104.2 118.4 125.4 140.3 152.0 165.7 180.6 196.8 9.4%
Total Assets 184.9 206.8 237.10 237.1 259.1 283.2 309.3 337.9 8.4%
Customer Deposits 137.9 151.1 169.02 169.0 184.2 200.8 218.9 238.6 7.7%
Total Liabilities 155.2 174.4 187.7 203.2 221.4 241.4 263.1 286.8 8.9%
Shareholders Equity 29.6 32.4 38.2 33.9 37.7 41.8 46.2 51.1 6.0%
Book value Per share 5.4 6.0 7.0 6.2 6.9 7.7 8.5 9.4 6.0%
5050
Valuation Summary
Barclays bank is undervalued by with an upside of 23.6%
201
3
Cost of Equity Assumptions: 1st Dec 2015
Risk free rate * 12.6%
Beta 0.6
Country Risk Premium 6.0%
Extra Risk Premium 0.5%
Cost of Equity 16.5%
Terminal Assumptions:
Growth rate 5.0%
Mature Company Beta 1.0
Terminal Cost of Equity 19.1%
Return on Average Equity 30.0%
Justified Price to Book value 1.8x
Shareholder Equity - FY19e 51.9
Terminal Value 92.2
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted Value
DDM- Integrated 15.6 80% 12.5
PBV Multiple 13.8 15% 2.1
PE Multiple 14.9 5% 0.7
Fair Value 15.3
Current Price 13.2
Upside/(Downside) 16.2%
Dividend Yield 7.4%
Total Upside(Downside) 23.6%
5151
II. Kenya Commercial Bank
5252
Company Description
Kenya Commercial Bank is the largest bank by asset base in Kenya
Company Description
Pros Cons
• Kenya Commercial Bank opened office in Kenya underthe name National Bank of India in 1904. It latermerged with Grindlays bank. After independence, thegovernment of Kenya acquired 100% ownership of thebank and renamed it Kenya Commercial Bank in 1970
• Kenya Commercial Bank is the biggest bank in Kenya,with: (i) Total assets of Kshs 607.3 bn, (ii) Totalcustomer deposits at Kshs 471.1 bn, (iii) Total loans atKshs 347.7 bn, (iv) Total shareholders funds Kshs 81.8bn;
• The bank has over 250 branches and more than 7 mncustomers
• KCB Mpesa, a partnership with Safaricom, is expectedto be a key growth driver for the bank in terms ofdeposits and loans
• Strong growth in alternative channels including mobilebanking and agency banking to enhance digitalpayments and more efficient delivery of services
• Launch of KCB Insurance to enhance integratedservice offerings on bancassurance and investmentbanking
• Exposure to different political, economic and regulatoryenvironments as the bank has regional subsidiaries indifferent countries hence is exposed to different changesin its operating environment
• The bank seems to be struggling in utilising its asset basecompared to its peers in generation of returns (e.g. ROaAat 3.8% as compared to Equity bank at 5%)
Source – Annual Reports and Q3’ 2015 Investor Brief
• KCB bank partnered with GoSwiff to facilitate mobilepayments through a high performance Bluetooth cardreader, targeting SMEs and merchants
• Global ratings agency S&P gave KCB Group a B+ creditrating with a stable outlook, then downgraded theoutlook to negative, following the downgrade of Kenya’ssovereign outlook to negative
Developments during the quarter
5353
Financial Statements Extracts
KCB has a high return on equity at 24%, 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 39.0 51.3 62.5 76.9 92.0 20.7%
Non Funded Income 17.1 22.0 23.7 28.6 34.0 40.4 48.1 17.0%
Loan Loss Provision 2.9 5.1 4.8 6.2 7.5 9.1 11.0 16.8%
Total Operating Expenses 30.0 34.2 36.3 47.5 57.4 69.4 83.5 19.6%
Profit Before Tax 20.1 23.8 26.5 32.3 39.1 47.9 56.7 19.0%
Profit After tax 14.3 16.9 18.6 22.6 27.4 33.5 39.7 18.7%
% PAT Change YoY 17.5% 17.5% 10.1% 21.9% 21.0% 22.5% 18.4%
CIR 60% 59% 59.5% 59.5% 59.5% 59.2% 59.6%
EPS 4.7 5.6 6.1 7.5 9.1 11.1 13.1
DPS 2.0 2.0 2.2 2.6 3.2 3.9 4.6
ROaE 24.4% 24.2% 23.8% 25.8% 26.4% 27.1% 26.9%
ROaA 3.8% 3.8% 3.4% 3.4% 3.4% 3.5% 3.5%
Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR
Net Loans and Advances 227.7 283.7 353.1 427.8 515.5 621.0 752.2 21.5%
Government Securities 47.5 61.1 74.5 89.4 109.3 131.2 149.4 19.6%
Total Assets 390.9 490.3 615.0 726.7 862.8 1027.2 1224.3 20.1%
Customer Deposits 305.7 377.3 480.5 576.6 691.9 830.3 996.3 21.4%
Borrowings 7.7 12.7 22.5 22.5 22.5 22.5 22.5 12.1%
Total Liabilities 327.5 414.7 534.8 631.8 750.1 892.8 1064.1 20.7%
Shareholders Equity 63.4 75.6 80.2 94.9 112.6 134.4 160.2 16.2%
Book value Per share 20.9 25.0 26.5 31.4 37.2 44.4 53.0 16.2%
5454
Valuation Summary
KCB is undervalued with an upside of 49.2%
Cost of Equity Assumptions: 1st Dec-15
Risk free rate * 12.6%
Beta 0.9
Country Risk Premium 6.0%
Extra Risk Premium 0.5%
Cost of Equity 18.2%
Terminal Assumptions:
Growth rate 5.0%
Mature Company Beta 1.0
Terminal Cost of Equity 19.1%
Return on Average Equity 26.9%
Justified PBV 1.6x
Shareholder Equity - FY19e 160.2
Terminal Value-(Year 2019) 249.4
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted Value
DDM- Integrated 62.5 80% 50.0
PBV Multiple 42.9 15% 6.4
PE Multiple 37.9 5% 1.9
Fair Value 58.3
Current Price 40.5
Upside/(Downside) 43.9%
Dividend Yield 5.3%
Total Upside/(Downside) 49.2%
5555
III. Co-operative Bank
5656
Company Description
Co-op Bank embarked on its transformation agenda to sustain growth and improve customer experience
Company Description
Pros Cons
• Co-operative Bank was founded by Kenyan co-operativesocieties and unions well versed in the difficulties ofaccessing credit from existing banks
• As at October, it has a customer base of 5.4 mn and 143branches
• In 2014, Co-operative bank embarked on an ambitioustransformation journey called the Soaring EagleTransformation Agenda, in order to sustain and put thebank on a new trajectory for growth
• Co-op bank has: (i) Total assets of Kshs 332.9 bn, (ii)Totalcustomer deposits at Kshs 253.5 bn (iii)Total loans at Kshs212.4 bn, (iv) Total shareholders funds Kshs 49.4 bn;
• Co-operative Bank is the 3rd largest bank by asset size ofKshs. 333 billion and uses a unique model of wholesalebanking to over 15,000 cooperative societies
• The bank is following through on its transformationagenda, and is reaping the benefits that come with it
• Co-operative bank has a large Sacco banking base,and the opportunity to grow upon the model in itsregional expansion strategy
• Regional expansion that started with South Sudanwith a unique joint venture with the Government ofSouth Sudan
• Co-operative bank is a financial one-stop shop owingto its full range of financial services
• The bank is slow in embracing technology compared to itspeers in deposit mobilisation
• The bank might be losing out in first mover advantage intheir expansion strategy
• The bank seems to be stretched in Tier I capitalrequirements as compared to its peers
Developments during the quarter
• Co-operative Bank of Kenya has partnered with digitalmoney transfer provider SimbaPay to offer internationalmoney transfer services, with SimbaPay being able to offerthe transactions for free as it gains from the forex trades
• Co-operative Bank of Kenya is set to receive USD 105 mn,Kshs 10.7 bn, in long term financing from theInternational Finance Corporation, which will be usedtowards bosting loans to small and medium enterprises
• Co-operative bank of Kenya, through its Co-opConsultancy Agency will issue motor vehicle insurancestickers in all its branches, and will offer insuranceservices of several insurance providers
Source – Annual Reports and Q3’ 2015 Investor Brief
5757
Financial Statement Extracts
Co-operative Bank improved 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 24.4 26.9 32.5 38.4 44.2 15.7%
Non Funded Income 9.3 10.8 12.2 14.2 16.3 19.0 22.1 15.4%
Loan Loss Provision 0.8 1.2 2.2 2.6 3.0 3.5 4.2 28.7%
Total Operating Expenses 17.4 20.1 21.1 23.4 28.4 33.5 38.8 14.0%
Profit Before Tax 10.9 10.9 15.6 17.9 20.6 24.1 27.6 20.4%
Profit After tax 9.1 8.0 10.9 12.5 14.4 16.9 19.3 19.3%
% PAT Change YoY 18.2% (12.0%) 36.1% 14.7% 15.2% 16.9% 14.7%
CIR 62% 63% 57.7% 56.8% 58.1% 58.3% 58.5%
EPS 1.9 1.6 2.2 2.6 2.9 3.4 4.0
DPS 0.4 0.5 0.6 0.7 0.8 1.0 1.1
ROaE 27.4% 20.0% 23.7% 23.5% 22.9% 22.7% 22.2%
ROaA 4.2% 3.1% 3.5% 3.4% 3.3% 3.3% 3.2%
Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR
Net Loans and Advances 137.1 179.5 216.7 247.6 293.4 347.6 407.6 17.8%
Government Securities 14.0 24.6 22.2 30.9 47.7 56.5 66.7 22.0%
Total Assets 231.2 285.4 344.3 402.0 473.9 552.9 647.0 17.8%
Customer Deposits 175.4 217.7 261.1 309.4 366.7 434.5 512.8 18.7%
Borrowings 10.3 18.3 19.6 19.6 19.6 19.6 19.6 1.4%
Total Liabilities 194.1 242.0 295.3 344.0 405.5 472.4 552.6 18.0%
Shareholders Equity 36.8 43.3 48.8 57.8 68.2 80.3 94.2 16.8%
Book value Per share 7.5 8.9 10.0 11.8 13.9 16.4 19.3 16.8%
5858
Valuation Summary
Co-operative Bank is fairly valued
Cost of Equity Assumptions: 1st Dec-15
Risk free rate* 12.6%
Beta 0.8
Country Risk Premium 6.0%
Extra Risk Premium 0.3%
Cost of Equity 17.5%
Terminal Assumptions:Growth rate 5.0%Mature Company Beta 1.0Terminal Cost of Equity 18.8%Return on Average Equity 22.2%Justified Price to Book Value 1.2xShareholder Equity - FY19e 94.2Terminal Value-(Year 2019) 116.9
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted Value
DDM- Integrated 18.1 80% 14.4
PBV Multiple 17.1 15% 2.6
PE Multiple 16.3 5% 0.8
Fair Value 17.8
Current Price 18.0
Upside/(Downside) (0.7%)
Dividend Yield 3.5%
Total Upside/(Downside) 2.8%
5959
IV. Equity Bank
6060
Company Description
Equity bank is the largest bank in East Africa in terms of customer base
Company Description
Pros Cons
• Equity Group Holdings Limited was formed as EquityBuilding Society (EBS) in 1984. EBS was a provider ofmortgage financing for customers in the low incomepopulation
• As at Q3’2015, it had an asset base of Kshs 445.8 bnand shareholders' equity of Kshs 71.1 bn
• It has 228 branches across the region: (i) Kenya 166,Nairobi 45 (ii) Uganda 31, Kampala 17 (iii) South Sudan11, Juba 6 (iv) Tanzania 9, Dar-es Salaam 6 (v) Rwanda11, Kigali 5
• Equity Insurance Agency is currently the largestinsurance intermediary with revenues growing with aCAGR of 63.7% for the past 5 years
• Equity Investment Bank is the 2nd largest Stockbrokerin the country with a market share of 16%. They offera one day settlement for transactions
• Equitel is the fastest growing MVNO (Mobile VirtualNetwork Operator)
• Their agency banking platform is the fastest growingplatform outpacing both ATMs and branch transactionswith 46% of total transactions
• Cost control: In the short term, implementation ofEquity’s 3.0 strategy will impact negatively on their costto income ratio
• Exposure to different political, economic and regulatoryenvironments as the bank has regional subsidiaries indifferent countries hence is exposed to different changesin its operating environment
• The contribution of different subsidiaries does not reflectthe asset base of these subsidiaries
• Key man risk – the bank’s strategy is heavily reliant onthe current group CEO
Developments during the Quarter
• Equity finalized on the acquiscition of a 79.0% stake in
Pro-Credit Bank Congo. This was done through a share
purchase agreement where Equity bank issued
70,897,782 share to the sellers
• Equitel continues to grow its market share and
according to the Q2’2015 report by CAK, Equitel’s
market share increased to 2.4% from 1.9%
Source – Annual Reports and Q3’ 2015 Investor Brief
6161
Financial Statements ExtractsEquity bank has a high return on equity of 30%
Source – Company Financials
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome Statement
Net Interest Income 26.5 29.2 33.0 39.9 47.6 57.3 69.0 18.8%Non Funded Income 15.4 18.5 23.8 29.6 36.7 45.6 57.0 25.3%Loan Loss Provision 2.4 1.6 2.2 2.3 2.8 3.4 4.0 20.5%Total Operating Expenses 22.7 26.3 30.4 38.2 46.0 55.7 67.6 20.7%Profit Before Tax 19.0 22.4 26.4 31.3 38.2 47.1 58.4 21.2%Profit After tax 13.3 17.2 18.5 21.9 26.7 33.0 40.9 19.0%% PAT Change YoY 29.2% 7.8% 18.6% 21.9% 23.4% 23.8%EPS 3.6 4.6 5.0 5.9 7.2 8.9 11.0 DPS 1.5 1.8 2.0 2.4 2.9 3.6 4.4 Cost to Income 48.8% 52.0% 49.7% 51.5% 51.3% 50.9% 50.4%ROaE 28.1% 29.7% 27.8% 28.9% 29.5% 30.4% 31.3%ROaA 5.1% 5.5% 4.6% 4.5% 4.6% 4.8% 5.0%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet
Net Loans and Advances 171.4 214.2 265.5 318.6 382.3 458.8 550.6 20.8%Government Securities 44.6 48.4 49.8 59.7 71.7 86.0 103.2 16.4%Total Assets 277.7 344.6 452.3 532.5 629.0 745.3 885.7 20.8%Customer Deposits 194.6 245.4 331.9 398.3 477.9 573.5 688.2 22.9%Total Liabilities 226.2 280.8 382.8 449.9 530.3 626.9 742.7 21.5%Shareholders Equity 51.6 63.8 69.4 82.6 98.6 118.4 143.0 17.5%Book value Per share 13.9 17.2 18.7 22.3 26.6 32.0 38.6 17.5%% Change in BPS YoY 24% 9% 19% 19% 20% 21%
6262
Valuation Summary
Equity bank is undervalued with an upside of 23.1%
Cost of Equity Assumptions: 1st Dec 15
Risk free rate* 12.6%
Beta 0.8
Country Risk Premium 6.0%
Extra Risk Premium 0.8%
Cost of Equity 18.3%
Terminal Assumptions:
Growth rate 5.0%
Mature Company Beta 1.0
Terminal Cost of Equity 19.4%
Return on Average Equity 31.3%
Justified Price to Book Value 1.8x
Shareholder Equity - FY19e 143.0
Terminal Value-(Year 2019) 261.1
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted Value
DDM- Integrated 54.3 80.0% 43.4
PBV Multiple 29.3 15.0% 4.4
PE Multiple 32.4 5.0% 1.6
Fair Value 49.4
Current Price 41.8
Upside/(Downside) 18.3%
Dividend Yield 4.8%
Total Upside/(Downside) 23.1%
6363
V. Standard Chartered Bank
6464
Company Description
Standard Chartered Bank is one of the oldest bank in Kenya formed in 1910
Company Description
Pros Cons
• Standard Chartered Bank was formed in 1910 and
became listed on the NSE in 1989
• The bank currently operates 37 branches
• As at Q3’2015, the bank had assets in excess of Kshs
231.6 bn and shareholders’ funds amounting to Kshs
41.5 bn
• Diversification – The bank approved the setting up and
operationalisation of the bancassurance business to be
carried out by Standard Chartered Insurance Agency
Limited, which will lead to diversification of their
revenues through a diversified product portfolio
• Custody business will continue providing the bank with
a niche when it comes to wholesale banking
• Strong in SME banking business
• Recently high non performing loans have affected the
revenues for Standard Chartered Bank. Their NPL/Total
loans was at 8.5% which is above the industry average of
5.5%
• The recent mass sale of mortgage products might have
taken the bank out of their niche market
• Activities are limited to the Kenyan market as the parent
company prefers to operate independently in other
markets
Developments during the Quarter
• Standard Chartered has partnered with Safaricom to
introduce a platform that allows business customers
and M-PESA agents using the Lipa na Mpesa service to
convert their e-value to cash in real time
Source – Annual Reports and Q3’ 2015 Investor Brief
6565
Financial Statement Extracts
Standard Chartered has a high return on equity of 27%
Source – Company Financials
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
Income Statement
Net Interest Income 16.8 17.9 15.1 18.5 21.4 24.7 27.9 9.3%
Non Funded Income 7.1 8.2 7.0 8.8 9.8 11.0 12.3 8.6%
Loan Loss Provision 1.0 1.3 2.0 1.9 2.2 2.5 2.8 16.4%
Total Operating Expenses 10.5 11.7 11.6 12.9 14.7 16.7 18.8 9.9%
Profit Before Tax 13.4 14.3 10.6 14.3 16.6 19.0 21.4 8.3%
Profit After tax 9.3 10.4 7.4 10.0 11.6 13.3 15.0 7.5%
% PAT Change YoY 14.9% 12.5% -29.2% 35.7% 15.6% 14.8% 12.4%
EPS 30.0 33.8 23.9 32.5 37.5 43.1 48.4
DPS 15.0 12.8 10.8 14.6 16.9 19.4 21.8
Cost to Income 44.0% 45.0% 52.3% 47.4% 47.0% 46.7% 46.8%
ROaE 27.7% 27.2% 18.3% 23.8% 24.2% 24.3% 23.9%
ROaA 4.5% 4.7% 3.1% 4.0% 4.2% 4.3% 4.3%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
Balance Sheet
Net Loans and Advances 129.7 122.7 129.9 146.8 165.9 187.5 211.9 11.5%
Government Securities 56.2 58.8 62.4 60.7 68.6 77.5 87.6 8.3%
Total Assets 220.4 222.5 238.9 258.4 290.5 326.9 368.0 10.6%
Customer Deposits 154.7 154.1 173.3 195.8 221.2 250.0 282.5 12.9%
Total Liabilities 184.2 181.8 199.6 213.6 239.3 268.4 301.2 10.6%
Shareholders Equity 36.2 40.7 39.3 44.8 51.2 58.5 66.8 10.4%
Book value Per share 117.1 131.5 127.2 145.0 165.7 189.4 216.0 10.4%
% Change in BPS YoY 12.3% -3.3% 14.0% 14.2% 14.3% 14.1%
6666
Valuation Summary
Standard Chartered Bank is undervalued with an upside of 14.5%
Cost of Equity Assumptions: 1st Dec 15
Risk free rate * 12.6%
Adjusted Beta 0.8
Country Risk Premium 6.0%
Extra Risk Premium 0.0%
Cost of Equity 18.1%
Terminal Assumptions:
Growth rate 5.0%
Mature Company Beta 1.0
Terminal Cost of Equity 18.6%
Return on Average Equity 23.9%
Justified Price to Book Value 1.4x
Shareholder Equity - FY19e 66.8
Terminal Value-(Year 2019) 92.9
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted Value
DDM- Integrated 248.3 80.0% 149.0
PBV Multiple 227.3 15.0% 56.8
PE Multiple 226.9 5.0% 22.7
Fair Value 228.5
Current Price 209.0
Upside/(Downside) 9.3%
Dividend Yield 5.2%
Total Upside/(Downside) 14.5%
6767
Valuation Summary – Tier I Banks
Tier I banks on average presents an upside of 20.4%
Capital Adequacy Equity Barclays KCB Stanchart Co-op Bank Minimum Statutory
Core Capital to Total Liabilities 20.5% 22.0% 16.7% 19.7% 16.4% 8.0%
Core Capital to RWA 14.8% 16.3% 13.9% 17.3% 14.2% 10.5%
Total Capital to RWA 16.6% 19.1% 15.6% 21.7% 21.2% 14.5%
Company Name PriceIssued Shares
Market Cap
P/E Dividend YieldPEG CoE Fair Value Upside
TTM FY 2014 FY 2015e
Equity Bank 41.8 3.7 154.7 8.2 4.2% 4.8% 0.5 18.3% 49.4 23.0%
Barclays Bank 13.2 5.4 71.0 8.3 7.8% 7.4% 0.9 16.5% 15.3 23.6%
KCB 40.5 3.0 121.5 6.7 4.3% 5.3% 0.4 18.2% 58.3 49.3%
Standard Chartered 209.0 0.3 62.7 7.7 5.3% 5.2% 1.6 18.1% 205.7 3.6%
Co-operative Bank 18.0 4.9 88.2 8.5 2.8% 3.5% 0.5 17.5% 17.8 2.5%
Min 6.7 2.8% 3.5% 0.4 16.5% 15.3 2.5%
Median 8.2 4.3% 5.2% 0.5 18.1% 49.4 23.0%
Average 7.9 4.9% 5.2% 0.8 17.7% 69.3 20.4%
Max 8.5 7.8% 7.4% 1.6 18.3% 205.7 49.3%
6868
C. Tier II Banks
6969
I. National Bank of Kenya
7070
Company Description
National Bank’s largest shareholder is NSSF with a 48.1% stake
Company Description
Pros Cons
• National Bank was incorporated in 19th June 1968 but
officially opened on November 14th 1968. At the time it
was fully owned by the government
• As at Q3’2015 the bank had assets totaling 118.1 bn
and Shareholder funds in excess of Kshs 13.5 bn
• It currently has 75 branches across Kenya
• Introduction of Islamic Banking that capitalized on the
unbanked Islam community contributing to deposit
growth
• The introduction of bancassurance and custodial
services has seen the bank diversify its revenue
• Branch expansion – in 2014 NBK opened 15 branches
that saw the bank grow its deposits
• High cost of funds. Despite NBK serving retail customers, it
has maintained high cost of funds averaging 5.4% thus
leading to lower NIMs of 8.6%
• NBK has the worst loan book among the listed banks with
an NPL/Total loan ratio of 8.9%
• Low NPL coverage of 8.9%, despite having the highest
NPLs
• Despite being associated with the Government, the bank is
slow in county expansion
Developments during the Quarter
Source – Annual Reports and Q3’ 2015 Investor Brief
• NBK’s plan to have a Kshs. 13.0 bn via rights issue has
received further delay after parliament denied
Treasury’s allocation of Kshs. 49 bn to the cash call
• NBK announced plans to sell more of its non core
assets after realizing Kshs. 1.2 bn from the sale of
assets. This move was to raise additional capital and
reduce exposure to real estate as they do not earn
optimum profit
7171
Financial Statements Extracts
National Bank has a low return on equity of 7%
Source – Company Financials
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome Statement
Net Interest Income 5.6 6.8 6.5 7.2 7.4 8.0 8.5 4.6%Non Funded Income 2.9 3.1 4.4 4.0 4.2 4.5 4.8 8.9%Loan Loss Provision 0.3 0.5 0.8 1.0 1.0 1.1 1.2 17.0%Total Operating Expenses 6.7 7.5 7.9 9.2 9.4 10.0 10.7 7.4%Profit Before Tax 1.8 1.3 2.9 2.1 2.3 2.4 2.6 14.7%Profit After tax 1.1 0.9 2.0 1.5 1.6 1.7 1.8 15.8%% PAT Change YoY 52.5% -21.8% 132.6% -27.7% 8.3% 6.8% 6.9% 15.8%EPS 4.0 3.1 7.2 5.2 5.7 6.1 6.5 DPS - - - - - - -Cost to Income 75.3% 70.2% 65.4% 72.8% 71.9% 71.9% 71.9%ROaE 10.0% 7.2% 15.9% 10.5% 10.2% 9.9% 9.6%ROaA 1.4% 0.8% 1.7% 1.2% 1.2% 1.2% 1.2%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet
Net Loans and Advances 39.6 65.6 74.6 74.8 80.0 85.6 91.6 6.9%Government Securities 27.5 30.3 27.4 29.3 31.4 33.6 35.9 3.5%Total Assets 92.6 123.1 120.0 128.4 137.5 147.1 157.5 5.0%Customer Deposits 78.0 104.7 94.5 101.1 108.1 115.7 123.8 3.4%Total Liabilities 80.7 110.9 106.7 113.7 121.1 129.1 137.6 4.4%Shareholders Equity 11.9 12.2 13.3 14.7 16.3 18.0 19.8 10.2%Book value Per share 42.5 43.7 47.4 52.7 58.3 64.4 70.9 10.2%
7272
Valuation Summary
National Bank is fairly valued with an upside of 3.4%
*Five years average yield on a 10 year Treasury bond
Cost of Equity Assumptions: 3-Dec-15
Risk free rate * 12.6%
Beta 0.7
Country Risk Premium 6.0%
Extra Risk Premium 0.0%
Cost of Equity 17.0%
Terminal Assumptions:Growth rate 5.0%Mature Company Beta 1.0Terminal Cost of Equity 18.6%Return on Average Equity 9.6%Justified Price to Book value per share 0.3xPreference Shares 5.7
Valuation Summary: Implied Price Weighting Weighted Value
Residual Income 14.4 80.0% 11.5
PBV Multiple 22.6 15.0% 3.4
PE Multiple 24.2 5.0% 1.2
Fair Value 16.1 Current Price 15.6
Upside/(Downside) 3.4%Dividend Yield 0.0%
Total Upside/(Downside) 3.4%
7373
II. CfC Stanbic Bank
7474
Company Description
CfC Stanbic Holdings’ majority shareholder is the Stanbic Africa Holdings (UK)
Company Description
Pros Cons
• CfC Stanbic Holdings was listed in NSE on April 2011
• This comes after CfC Stanbic Limited and CfC holdings
limited merged and demerged from the CfC insurance
holdings limited (later became Liberty Holdings)
• As at Q3’15, CfC had assets in excess of Kshs. 208.2 bn
and shareholder’s funds of Kshs. 269 bn
• As at Q3’15, the bank operates 24 branches and is
planning to open 1 more branch in the year
• The Corporate and Investment banking is a key driver
for CfC Stanbic revenue as it contribute to 64% of the
banks total income
• CfC is a one stop financial services shop offering
investment banking, custodial and brokerage services
• The recent launch of their mobile banking platform is
set to reduce costs associated with branch transactions
• Political Instability in the countries they operate. The
recent instability in S.Sudan proved to be a challenge as it
affected their overall income
• Their expansion strategy is limited by the presence of
Standard Bank in the region
• Lack of operational efficiency owing to a high cost to
income ratio of 59.0%, which is the highest among listed
banks as at June
Developments during the Quarter
• CfC Stanbic Bank announced they have signed both a 2
year and a 3-year USD 155.0 mn loan to fund the bank’s
core business. The facility is priced at 245 basis points
over the London Interbank Offered Rate (LIBOR) for the
2-year tenor and 290 basis points over LIBOR for the 3-
year tenor
Source – Annual Reports and Q3’ 2015 Investor Brief
7575
Financial Statements Extracts
CfC Stanbic has a return on equity of 23%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome Statement
Net Interest Income 7.5 8.4 7.0 10.4 12.6 14.6 16.4 14.4%Non Funded Income 8.5 8.2 9.5 10.7 12.0 13.4 14.8 12.6%Loan Loss Provision 0.9 0.8 1.0 1.1 1.3 1.5 1.7 15.5%Total Operating Expenses 8.8 8.9 10.8 13.1 15.1 17.3 19.3 16.6%Profit Before Tax 7.2 7.6 5.7 8.0 9.4 10.7 12.0 9.4%Profit After tax 5.1 5.7 4.0 5.6 6.6 7.5 8.4 7.9%% PAT Change YoY 51% 11% -30% 39% 18% 13% 12%EPS 13.0 14.5 10.2 14.1 16.7 18.9 21.2 DPS - - - - - - - -Cost to Income 49.6% 49.1% 59.4% 56.8% 56.3% 56.5% 56.4% 2.8%ROaE 25.4% 23.3% 14.7% 18.0% 17.8% 17.0% 16.1% -7.1%ROaA 3.4% 3.3% 2.0% 2.3% 2.4% 2.5% 2.5% -5.8%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet
Net Loans and Advances 69.1 88.3 106.6 119.9 137.9 158.5 172.2 14.3%Government securities 48.4 28.1 17.4 33.3 38.3 44.0 50.6 12.5%Total Assets 170.7 171.3 229.3 260.9 285.4 319.9 354.7 15.7%Customer Deposits 95.7 96.8 115.8 133.2 153.2 176.2 202.6 15.9%Total Liabilities 148.4 144.7 201.2 227.2 245.1 272.1 298.5 15.6%Shareholders Equity 22.4 26.6 28.1 33.7 40.3 47.8 56.2 16.1%Book value Per share 56.5 67.4 71.1 85.2 101.9 120.9 142.1 16.1%
7676
Valuation Summary
CfC Stanbic is overvalued by 8.7%
Cost of Equity Assumptions: 1st Dec 15
Risk free rate * 12.6%
Beta 0.7
Country Risk Premium 6.0%
Extra Risk Premium 0.0%
Cost of Equity 18.0%
Terminal Assumptions:
Growth rate 5.0%
Mature Company Beta 1.0
Terminal Cost of Equity 18.6%
Return on Average Equity 16.1%
Persistency Factor 0.7
Justified Price to Book Value 0.8x
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted Value
Residual Income 77.8 80.0% 62.2
PBV Multiple 81.4 15.0% 20.4
PE Multiple 55.4 5.0% 8.3
Fair Value 77.2 Current Price 84.5
Upside/(Downside) (8.7%)Dividend Yield 0.0%
Total Upside/(Downside) (8.7%)
7777
III. NIC Bank
7878
Company Description
NIC bank is fairly liquid owing to the counter’s 48% free float
Company Description
Pros Cons
• NIC Bank (formerly National Industrial Credit BankLimited) was incorporated in Kenya on 29th September1959 as a joint venture between Mercantile Credit Limitedand Standard Bank. NIC Bank was among the first non-bank financial institutions to provide hire purchase andinstalment credit finance facilities in Kenya
• In early 2015, NIC Leasing LLP, a partnership betweenNIC Bank Limited and Mercantile Finance Limited, wasincorporated to undertake direct operating lease business.The leasing product is available for Small and Medium sizeenterprises (SME’s), Corporates and both County andCentral Government
• As at October 2015, NIC has: (i) total assets of Kshs155.6 bn, (ii) Total customer deposits of Kshs 105.8 bn(iii) Total loans at Kshs 111.2 bn (iv) Total shareholdersfunds at Kshs 23.9 bn
• Well developed IT network T24, that enables the bankto centralize operations across its subsidiaries
• NIC bank partnered with Post Bank Limited to offerAgency Banking services, allowing NIC customers todeposit or withdraw cash from any of the 102 PostBank branches countrywide
• NIC bank has maintained its pole positioning in assetfinancing and curved a niche in the market
• Traditional SME market now being targeted by Tier 1banks, hence it’s market share is under threat
• NIC has a high cost of funding at 5.4%, due to heavyreliance on corporate deposits, resulting in a compressionof the bank’s net interest margins
• Exposure to different political, economic and regulatoryenvironments, especially Tanzania with their upcomingelections might slow down business
Developments during the quarter
• NIC Bank and the African Trade Insurance Agency haveagreed to extend their SME loan cover agreementallowing the bank to keep lending to enterprisecustomers.
• Under the agreement, NIC lends up to USD 5 mn perclient; with ATI able to cover single obligations worth upto USD 50 mn
Source – Annual Reports and Q3’ 2015 Investor Brief
7979
Financial Statements Extracts
NIC bank has an average return on equity of 21%
Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR
Net Interest Income 7.3 8.0 9.2 10.1 11.7 13.4 15.5 14.1%
Non Funded Income 3.2 3.6 4.6 5.3 5.9 6.6 7.4 15.7%
Loan Loss Provision 1.1 0.3 1.0 0.9 1.0 1.1 1.3 30.9%
Total Operating Expenses 5.5 5.3 6.8 7.3 8.3 9.5 10.8 15.2%
Profit Before Tax 5.0 6.2 7.0 8.1 9.3 10.6 12.1 14.1%
Profit After tax 3.2 4.1 4.9 5.7 6.5 7.4 8.5 15.5%
% PAT Change YoY 7% 27% 19.7% 15.7% 14.0% 13.9% 14.2%
CIR 52% 46% 49.2% 47.2% 47.2% 47.2% 47.3%
EPS 5.1 6.4 7.7 8.9 10.1 11.6 13.2
DPS 0.6 1.0 1.2 1.3 1.5 1.7 2.0
ROaE 20.1% 20.6% 20.8% 21.1% 20.2% 19.5% 18.9%
ROaA 2.8% 3.1% 3.3% 3.4% 3.4% 3.4% 3.4%
Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR
Net Loans and Advances 81.4 102.0 113.8 129.1 147.7 168.2 193.4 13.6%
Government Securities 18.1 19.2 10.8 12.5 14.3 16.5 18.9 (0.3%)
Total Assets 121.1 145.8 156.4 177.5 202.2 230.6 263.2 12.5%
Customer Deposits 91.6 100.4 108.4 124.7 143.4 164.9 189.6 13.6%
Borrowings 3.6 14.4 16.0 16.0 16.0 16.0 16.0 2.2%
Total Liabilities 103.5 122.4 131.4 147.7 166.9 188.9 214.3 11.9%
Shareholders Equity 17.2 22.9 24.5 29.4 34.9 41.2 48.4 16.2%
Book value Per share 26.9 35.7 5.6 6.7 8.0 9.4 11.0 16.2%
8080
Valuation Summary
NIC bank has an upside of 18.1%
Cost of Equity Assumptions: 1st Dec-15
Risk free rate * 12.6%
Beta 0.8
Mature Market Risk Premium 6.0%
Extra Risk Premium 0.5%
Cost of Equity 17.7%
Terminal Assumptions:Growth rate 5.0%Mature Company Beta 1.0Terminal Cost of Equity 19.1%Return on Average Equity 18.9%Justified Price to Book value 1.0xShareholder Equity - FY19e 48.4 Terminal Value-(Year 2019) 47.7
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted Value
DDM- Integrated 51.6 80% 41.3
PBV Multiple 42.0 15% 6.3
PE Multiple 41.6 5% 2.1
Fair Value 49.6
Current Price 43.0
Upside/(Downside) 15.4%
Dividend Yield 2.7%
Total Upside/(Downside) 18.1%
8181
IV. Diamond Trust Bank
8282
Company Description
DTB has continued to focus on investing in alternative channels to drive growth
Company Description
Pros Cons
• Diamond Trust Bank (DTB) has operated in East Africafor over 70 years, with a focus on the SME sector
• The bank currently has the following subsidiaries:• DTB Tanzania Ltd• DTB Uganda Ltd• DTB Burundi• Diamond Trust Insurance Agency Ltd• Premier savings and finance Ltd• Network Insurance Agency Ltd
• As of 2014, the bank had a total of 110 branches
Source – Annual Reports and Q3’ 2015 Investor Brief
Developments during the Quarter
• Strong backing from financing partners, i.e. Aga KhanFund for Economic Development and Habib bank
• Strong performance of subsidiaries: The regionalsubsidiaries in Tanzania, Uganda and Burundicontribute approx. 25% of the group’s PAT
• Partnerships to drive NFI growth: DTBK has partneredwith Nakumatt and Master Card to create theNakumatt Global MasterCard which allows users to paybills, facilitate cash withdrawals and deposits, engagein forex trading and money transfers
• Traditional SME market now being targeted by tier I bankshence market share under threat
• Exposure to different political, economic and regulatoryenvironments, especially Tanzania with their upcomingelections might slow down business and high country risk intargeted expansion regions such as DRC
• DTB and KCB have been picked by the KDIC with the
endorsement of the CBK, as agents to disburse funds to
depositors of Imperial Bank Limited, in receivership
• DTB bank is launching Huduma Card, which will support
payments for all services within Huduma centers and
consequently to be used as a government payment
platform for all rendered services
8383
Financial Statement Extracts
DTB has an estimated 5-year PAT CAGR of 18.4%
Source – Company Financials
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
Income Statement
Net Interest Income 11.0 12.8 16.3 21.1 25.0 29.4 34.7 22.1%
Non Funded Income 3.4 3.8 4.6 5.8 6.9 8.1 9.6 20.4%
Loan Loss Provision (0.9) (0.9) (1.4) (2.0) (2.3) (2.8) (3.3) 30.2%
Total Opex (7.2) (8.1) (11.8) (15.4) (18.2) (21.5) (25.4) 25.7%
Profit Before Tax 7.2 8.5 9.1 11.5 13.7 16.1 19.0 17.4%
Profit After tax 5.2 5.7 6.4 8.1 9.6 11.3 13.3 18.4%
% PAT Change YoY 29% 9% 12% 26% 18% 18% 18%
EPS 21.6 23.6 25.9 28.3 30.6 36.6 43.8
DPS 2.1 2.4 2.6 2.8 3.1 3.7 4.4
Cost to Income 43.3% 43.4% 49.5% 49.9% 49.8% 49.8% 49.8%
ROaE 27.9% 22.8% 20.6% 22.9% 23.9% 24.7% 25.5%
ROaA 3.5% 3.0% 2.7% 3.2% 3.3% 3.5% 3.6%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
Balance Sheet
Net Loans and Advances 110.9 137.7 181.9 214.6 253.3 298.9 352.7 20.7%
Government Securities 25.4 35.1 37.1 43.8 51.7 61.0 72.0 15.4%
Total Assets 166.5 211.5 255.5 292.0 345.3 408.1 482.3 17.9%
Customer Deposits 128.8 161.0 185.6 219.0 258.4 305.0 359.9 17.5%
Total Liabilities 142.8 179.3 218.7 248.0 292.7 345.4 407.5 17.9%
Shareholders Equity 21.0 29.0 33.2 40.5 49.1 59.2 71.2 19.7%
Book value Per share 86.7 119.6 137.9 163.4 191.0 224.0 263.4
8484
Valuation Summary
DTB’s stock is undervalued with an upside of 23.8%
* Five years average yields on a 10 year Treasury bond
Cost of Equity Assumptions: 1st Dec 15
Risk free rate * 12.6%
Adjusted Beta 0.6
Country Risk Premium 6.0%
Extra Risk Premium 0.5%
Cost of Equity 16.5%
Terminal Assumptions:Growth rate 5.0%
Mature Company Beta 1.0Terminal Cost of Equity 19.1%Return on Average Equity 25.5%Justified Price to Book Value 1.5x
Shareholder Equity - FY19e 71.2
Terminal Value-(Year 2019) 103.5
Valuation Summary: Implied Price Weighting Weighted ValueDDM 283.3 80.0% 226.7 PBV Multiple 86.6 15.0% 13.0 PE Multiple 129.2 5.0% 6.5
Fair Value 246.1 Current Price 201.0 Upside/(Downside) 22.4%Dividend yield 1.3%Total return 23.8%
8585
V. HF Group
8686
Company Description
HF Group is the country’s mortgage service provider with mandate in property development
Company Description
Source – Annual Reports and H1’ 2015 Investor Brief
Developments during the Quarter
Pros Cons
• HF Group (Formerly Housing Finance Company ofKenya) was incorporated on 18th of November 1965and is the premier mortgage Finance Institution inKenya licensed under the Banking Act
• The HF Group started operations in 1966 with the mainobjective of implementing the government’s policy ofpromoting thrift and home ownership by providingsavings and mortgage facilities to the Kenyan public
• In August 2015 the Company establish a non-operatingholding company and rebranded to HF Group limitedwith subsidiaries (i) HFC Limited; (ii) HFDI (PropertyDevelopment and Investment Solutions); (iii) HFInsurance Agency; and (iv) HF Foundation
• Revival of Kenya building society. This is an advantagefor HF since in addition to providing mortgage financing,it can also develop the houses, hence additional revenuestreams
• Vibrant real estate market in Kenya with an annualhousing supply which does not satisfy demand,especially in the middle and lower income segment
• The bank is the market leader in provision of mortgagefinancing
• Lack of a vibrant mortgage market in Kenya
• Competition from larger banks with Mortgage facilitiesposes a risk for growth
• Low diversification as evidenced by the low percentage ofnon interest income to total revenue at 12.9% which isthe lowest among the listed banks
• Asset liability mismatch which forces the bank to resort toexpensive financing
• HF Group marked its 50thJubilee Anniversary in
November 2015, whilst unveiling an ambitious growth
strategy dubbed the Vision 2020
• The bank has signed a memorandum of understanding
with the Kakamega County Government to put up 1,000
housing units, providing both construction financing and
mortgages on the same units
8787
Financial Statement Extracts
HF Group is expected to return a compounded net earnings growth of 10.9%
Source – Company Financials
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome Statement
Net Interest Income 2.6 3.0 3.5 3.8 4.5 5.3 6.2 15.4%
Non Funded Income 1.4 0.8 0.9 1.1 1.3 1.6 1.8 16.9%
Loan Loss Provision (0.3) (0.6) (0.6) (0.7) (0.9) (1.0) (1.2) 17.3%
Total Operating Expenses (2.4) (2.5) (3.0) (3.4) (4.1) (4.8) (5.8) 18.5%
Profit Before Tax 1.5 1.4 1.4 1.6 1.8 2.1 2.3 10.8%
Profit After tax 1.0 1.0 1.0 1.1 1.3 1.4 1.6 10.9%% PAT Change YoY -2.0% 2.8% 9.3% 15.3% 14.6% 13.1%
EPS 0.0 0.0 0.0 0.0 0.0 0.0 0.0
DPS 1.2 1.0 1.2 1.3 1.5 1.7 1.9 Cost to Income 55.1% 49.2% 53.6% 54.1% 54.3% 55.0% 56.2%ROaE 18.1% 15.7% 12.0% 10.5% 11.3% 12.1% 12.7%ROaA 2.3% 1.8% 1.6% 1.5% 1.5% 1.4% 1.4%
` 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet
Net Loans and Advances 35.2 45.2 50.5 60.1 72.1 85.9 102.2 17.7%
Government Securities 0.3 0.3 1.4 1.7 2.1 2.5 3.0 62.4%
Total Assets 47.4 61.0 68.2 79.5 93.8 110.9 131.4 16.6%
Customer Deposits 26.5 36.1 39.4 47.3 56.8 68.2 81.8 17.8%
Total Liabilities 41.5 54.4 58.1 68.8 82.3 98.5 118.0 16.7%
Shareholders Equity 5.9 6.6 10.1 10.8 11.5 12.4 13.4 15.3%
Book value Per share 16.9 18.9 29.1 31.0 33.2 35.7 38.5
8888
Valuation Summary
HF Group is overvalued with a downside of 7.8%
Cost of Equity Assumptions: 1st Dec 15
Risk free rate * 12.6%
Adjusted Beta 0.9
Country Risk Premium 6.0%
Extra Risk Premium 0.0%
Cost of Equity 18.2%
Terminal Assumptions:Growth rate 5.0%
Mature Company Beta 1.0Terminal Cost of Equity 18.%Return on Average Equity 12.7%Justified Price to Book Value 0.6x
Shareholder Equity - FY19e 13.4
Terminal Value-(Year 2019) 7.6
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted ValueDDM 19.1 80.0% 15.3 PBV Multiple 24.7 15.0% 3.7 PE Multiple 16.4 5.0% 0.8
Fair Value 19.8 Current Price 22.8 Upside/(Downside) -12.8%Dividend yield 5.1%Total return (7.8%)
8989
VI. I&M Holdings
9090
Company Description
I&M has acquired Giro commercial bank in a growth strategy driven by synergy
Source – Annual Reports and Q3’ 2015 Investor Brief
Developments during the Quarter
Pros Cons
• I&M Bank was founded in 1974 as a financial servicescompany and later converted to a commercial bank in1996
• I&M Bank is a the flagship company of the I&M Groupof Companies that has a major presence in banking(I&M) and insurance (GA), manufacturing and realestate
• In 2013 I&M Bank’s shareholders exchanged theirshares for those of City Trust in a reverse takeoverenabling I&M share to be publicly traded
• I&M Bank’s international network includes Bank OneLimited in Mauritius, I&M Bank Tanzania Limited andBanque Commerciale du Rwanda
• Quality loan book: The bank has low NPLs of approx.2.3%
• Regional expansion: The bank has plans to expand intoUganda and increase their bank branches in Kenya,having opened 9 more branches in 2014
• Revenue diversification: I&M introduced bank assurancein 2014
• Acquisition of Giro bank set to boost its client reachhence growth
• Traditional SME market now being targeted by tier 1
banks hence market share under threat
• Low branch network in other counties in Kenya other than
Nairobi
• Exposure to different political, economic and regulatory
environments, especially Tanzania with their upcoming
elections might slow down business
Company Description
• I&M has recently acquired Giro commercial bank,
helping it to grow its client base and reach
• The bank is still on an expansion strategy to grow its
network
9191
Financial Statement Extracts
I&M bank has an estimated 5-year PAT CAGR of 15.2%
Source – Company Financials
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome StatementNet Interest Income 8.8 9.1 10.8 12.2 13.8 16.0 18.5 15.3%Non Funded Income 3.6 3.1 3.7 4.3 5.0 5.7 6.5 16.4%Loan Loss Provision 0.4 0.8 1.1 1.3 1.1 1.3 1.4 12.8%Total Operating Expenses 5.1 4.8 6.1 7.1 7.7 8.7 9.9 15.6%Profit Before Tax 7.3 7.5 8.4 9.5 11.1 13.0 15.2 15.2%Profit After tax 5.0 5.2 5.9 6.6 7.8 9.1 10.6 15.2%% PAT Change YoY 20.9% 5.1% 12.8% 12.4% 17.2% 17.0% 16.7%Cost to Income 38.2% 33.1% 34.1% 35.1% 34.8% 34.2% 33.8%EPS 12.7 13.3 15.0 16.9 19.8 23.2 27.1DPS 2.1 2.6 2.7 3.0 3.6 4.2 4.9ROaE 25.1% 23.9% 23.3% 20.9% 20.6% 20.3% 20.1%ROaA 3.8% 3.5% 3.5% 3.2% 3.1% 3.2% 3.2%
Balance Sheet 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
Government Securities 21.1 32.8 21.0 25.8 29.9 34.7 40.2 4.2%
Net Loans and Advances 91.9 101.6 123.3 151.6 175.9 204.0 236.6 18.4%Total Assets 141.4 154.2 187.7 228.7 265.5 308.2 357.9 18.3%
Customer Deposits 97.1 99.2 123.3 151.6 175.9 204.0 236.6 19.0%Borrowings 11.6 14.3 17.4 21.3 24.6 28.5 33.0 18.1%Total Liabilities 117.5 131.7 158.0 193.5 223.8 259.0 299.8 17.9%
Shareholders Equity 22.1 21.7 28.9 34.5 40.9 48.5 57.3 21.5%
Book value Per share 0.1 0.1 0.1 0.1 0.1 0.1 0.1 21.5%
9292
Valuation Summary
I&M bank is undervalued with an upside of 12.6%
Cost of Equity Assumptions: 1st Dec 15
Risk free rate * 12.6%
Adjusted Beta 0.7
Country Risk Premium 6.0%
Extra Risk Premium 0.2%
Cost of Equity 16.7%
Terminal Assumptions:Growth rate 5.0%
Mature Company Beta 1.0Terminal Cost of Equity 18.8%Return on Average Equity 20.1%Justified Price to Book Value 1.1x
Shareholder Equity - FY19e 57.3
Terminal Value-(Year 2019) 62.7
* Five years average yields on a 10 year Treasury bond
Valuation Summary: Implied Price Weighting Weighted ValueDDM 114.5 80.0% 91.6 PBV Multiple 87.3 15.0% 13.1 PE Multiple 82.0 5.0% 4.1
Fair Value 108.8 Current Price 99.0 Upside/(Downside) 9.9%Dividend yield 2.7%Total return 12.6%
9393
Valuation Summary – Tier II Banks
Tier II banks on average presents an upside of 6.9%
Capital Adequacy I&M NIC NBK DTB CfC HFMinimum Statutory
Core Capital to Total Liabilities 20.0% 20.6% 12.5% 22.0% 20.9% 20.7% 8.0%
Core Capital to RWA 15.4% 13.9% 14.5% 14.4% 15.9% 15.8% 10.5%
Total Capital to RWA 17.7% 19.8% 15.4% 17.5% 19.0% 18.6% 14.5%
Company Name PriceIssued Shares
Market Cap
P/E Dividend YieldPEG CoE Fair Value Upside
TTM FY 2014 FY 2015e
I&M Bank 99.0 0.4 39.6 7.0 2.1% 2.7% 0.4 16.7% 108.8 12.6%
NIC Bank 43.0 0.6 25.8 6.3 2.1% 2.7% 0.4 17.7% 49.6 18.1%
National Bank 15.6 0.3 4.7 2.1 0.0% 0.0% 0.2 17.0% 16.1 3.5%
DTB 201.0 0.2 48.2 8.0 1.2% 1.3% 0.4 16.5% 246.1 23.7%
CfC 84.5 0.4 33.8 7.7 0.0% 0.0% 1.4 18.0% 77.2 (8.7%)
HF 22.8 0.4 8.0 7.4 4.6% 5.1% 0.7 18.2% 19.8 (7.9%)
Min 2.1 0.0% 0.0% 0.2 16.5% 16.1 (8.7%)
Median 7.2 1.7% 2.0% 0.4 17.3% 63.4 8.0%
Average 6.4 1.7% 2.0% 0.6 17.3% 86.3 6.9%
Max 8.0 4.6% 5.1% 1.4 18.2% 246.1 23.7%
9494
Q&A