Opportunities in Africa Financial Services · 2017-02-03 · Investment case Kenya Commercial Bank...

Opportunities in Africa

Financial Services 7 May 2013

Ronak Gadhia

Equity analyst, Exotix Limited

Contact: [email protected]

Tel: +44 (0)20 7725 1080

2 2

Agenda

Sub-Saharan Africa: the fundamentals 1

2

3

Opportunities in the Financial Sector

The BIG EIGHT banks

4 The NEXT DOZEN banks

5 Investment summary

3

Sub-Saharan Africa: the fundamentals

Strong GDP growth: one of the fastest growing regions over the last 10 years

Growth expected to remain strong

Source: IMF WEO April 2013 data

-

2.0

4.0

6.0

8.0

10.0

World Advanced economies

Central and Eastern Europe

Developing Asia

Latin America and the

Caribbean

Middle East and North

Africa

Sub-Saharan Africa

0

2

4

6

8

10

2011 2012 2013 2014 2015 2016 2017 2018

World Advanced economiesCentral and eastern Europe Developing AsiaLatin America and the Caribbean Middle East and North AfricaSub-Saharan Africa

Source: IMF WEO April 2013 data

4


SSA’s share of world GDP has almost doubled over the past 10 years

Central and eastern

Europe, 1.9

Developing Asia, 8.0

Sub-Saharan

Africa, 1.0

Latin America

and the Caribbean,

5.4


Africa, 2.4

ASEAN-5, 1.6

Central and eastern

Europe, 2.5

Developing Asia, 17.9

Sub-Saharan

Africa, 1.8

Latin America

and the Caribbean,

8.0


Africa, 4.1

ASEAN-5, 2.7

SSA forecast to have 24 of 50 fastest growing economies in the world between 2013 and 2047

Country

2013 Real

GDP growth

South Sudan 69.6

Libya 16.7

Mongolia 15.7

Iraq 14.7

Bhutan 13.5

Paraguay 11.0

Democratic Republic of

Timor-Leste 10.0

The Gambia 9.7

Kyrgyz Republic 8.5

Mozambique 8.4

Source: IMF WEO October 2012 data

Source: IMF WEO October 2012 data

5


Source: World Bank 2011 data

Demographic dividend: large population within the right age group

SSA, 12.6

Rest of the world,

87.4

Population aged 15 -64, 54.0

Population aged 15 -64, 46.0


• Population has grown at 2.5% per annum over last 10 years

• More than half the population within the working age group

• Labour force participation rate of 70%

6


Source: IMF WEO April 2013.

Inflation is generally under control…

0

2

4

6

8

10

12

14

16

18

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f

Inflation (%)

Sub Sahara Africa

Emerging markets and developing countries

7


…as monetary policy is becoming more sophisticated

Country Operating framework Supporting material

Botswana M/t inflation objective (since 2008) Annual monetary policy statements, MPC meetings and press release.

m-t inflation objective (3-6%).

Ghana Inflation targeting (formalised May 2007) MPC meetings with press release and various supporting papers.

inflation target is below 10%.

Kenya Price stability Half yearly monetary policy statements, MPC meetings and press release.

m/t inflation target is 5%.

Mauritius Dual pillar framework (adopted Dec 2006) Monetary policy statements, MPC meetings and press release, minutes and votes

published since Dec 2011.

Nigeria Multiple objectives (new framework in 2006) MPC meetings with press release, minutes and voting with personal statements.

Focus on single digit inflation.

Uganda Price stability Inflation-targeting "lite" framework in July 2011. Adopted a policy interest rate.

MPC meetings, press release and monthly monetary policy reports.

Zambia Price stability Half yearly monetary policy statements. Monthly press statement. Adopted a policy

interest rate in March 2012, instead of money growth targetting, and targets for inflation.

Source: Exotix, national central banks

8


Source: IMF WEO April 2013 database

0

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120

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Public debt / GDP ratio (%)

Debt burdens have also improved

9 9

Agenda


2

3


The BIG EIGHT banks



10

Sub-Saharan Africa: Financial Sector remains under-penetrated

Account at a formal financial institution (% age 15+)

80.1 53.6

42.3 39.9 39.7

31.0 30.3 29.7

21.4 20.5

18.5 17.3

15.3 14.8

9.0 7.2 6.9

- 20.0 40.0 60.0 80.0 100.0

MauritiusSouth Africa

KenyaMozambique

ZimbabweSomalia

BotswanaNigeriaZambiaUgandaLesotho

TanzaniaSierra Leone

CameroonCongo, Rep.

BurundiSudan

145.5 87.8

44.5 33.8

29.4 25.8

23.4 23.0

16.2 15.8

13.6 12.6 11.9 11.6 11.5 10.4

- 50.0 100.0 150.0

South AfricaMauritius

ZimbabweKenya

NigeriaMozambiq…Botswana

BurundiTanzania

UgandaLesotho

NigerCameroon

SudanZambia

Sierra …

Domestic credit to private sector (% of GDP)


Increase in penetration rate driven by:

• Banks seeking alternative opportunities as competition in corporate market intensifies

• Declining yields on government bond portfolios

• Conducive Central Bank policies, e.g. agency banking regulations

• Increasing literacy levels

• Technological adoption, e.g. mobile banking

What is the opportunity?

11

Botswana 2013

Nominal GDP (US$ billion) 18.2

Population (million) 1.9

Real GDP growth (%) 4.1

Inflation (%, eop) 6.1

Stock Market Capitalisation USD, bn 5.0

Financials market cap % total market cap 74

International Bonds -

Kenya




Inflation (%, eop) 7



International Bonds Expected 2H13

Ghana







International Bonds USD750m, 8.5% 10/04/2017, YTM 4.6%

Mauritius








Nigeria






Financials market cap % total market cap 44.7


Tanzania







International Bonds USD600m, 6.4499% 03/08/2020, ytm 5.3%

Uganda




Inflation (%, eop) 5




Zambia








Zimbabwe






Financials market cap % total market cap


BRVM region

Nominal GDP (US$bn) 0.0


Rel GDP growth (%) 3 - 7%

Inflation (%, eop 2 -12%



International Bonds USD 2,332m, 2.5% 12/31/2032, YTM 6.6%, USD500m, 8.75% 05/13/2021, YTM 5.5%


12

Where is the opportunity?

• Public equity investors:

• Relatively lower stock market capitalisation to GDP ratio relative to developed countries

• Increasing number and size of IPOs (e.g. Dangote secondary lisitng, I&M Banks, Nakumatt, Umeme cross

border listing)

• Fixed income investors:

• Increasing number of countries planning to issue Euro bonds (Kenya, Rwanda, Uganda, Angola, Tanzania)

• Increasing sovereign euro bond issuance will lead to increase in corporate bond issuance (e.g. Nigerian

banks)

• Compelling yields on local currency bonds (e.g. Nigeria, Ghana)

• Private equity investors:

• Lack of long-term funding from local banks

• Increasing sophistication of businesses requiring better expertise

13 13

Agenda


2

3


The BIG EIGHT banks



14

Where to invest? The BIG EIGHT

Name Ticker Market

Cap

(USDm)

Trading

volume

(USD ‘000)

FY12

P/E (x)

FY12

P/B (x)

FY12

ROE (%)

Exotix

rec.

Investment case

Kenya

Commercial

Bank

KNCB KN

Equity

1,474 1,020 10.0 2.3 25.0 BUY •Strong East Africa franchise

•Legacy inefficiencies being resolved

Equity Bank EQBNK KN

Equity

1,505 514 10.4 2.9 31.3 BUY •Rapid increase in market share and earnings

• Strong retail focus

Access Bank ACCESS NL

Equity

1,246 1,905 5.1 0.8 19.2 BUY •Graduating into a Tier 1 bank,

•Trading at discount relative to other Tier 1

banks

First Bank

Holdings^

FBNH NL

Equity

3,921 2,911 13.6^ 1.7^ 13.0^ HOLD •Biggest bank in Nigeria

• Strong and diversified earnings growth

Guaranty

Trust

GUARANTY

NL Equity

4,337 3,193 7.9^ 2.4^ 33.8^ SELL •Consistently the most profitable bank in

Nigeria

•Good corporate governance and

management

UBA

Holdings^

UBA NL

equity

1,470 1,545 - 1.4 -6.1 BUY •Improving operating efficiency and asset

quality

•Contribution from Africa subsidiaries

increasing

Zenith ZENITHBA

NL Equity

3,872 3,011 6.1 1.3 23.4 SELL •Consistently good asset quality

•Improving operating efficiency

•Good management

Mauritius

Commercial

MCB MP

Equity

1,523 498 10.9 1.7 15.4 BUY •Dominant market share

•Growing international franchise

•Good management

Source: Company annual reports, Exotix estimates, ^Based on 2011 earnings as 2012 figures not released

15 15

Agenda


2

3


The BIG EIGHT banks



16

Where to invest?...the NEXT DOZEN

Name Ticker Market

Cap

(USDm)

Trading

volume

(USD ‘000)

FY12

P/E (x)

FY12

P/B

(x)

FY12

ROE

(%)

Investment case

Co-op Bank COOP KN

Equity

840 152 7.7 2.0 30.1 •Strong retail franchise; leading bank for cooperative and

savings societies Kenya

•Improving operating efficiency

Diamond Trust DTKL KN

Equity

369 107 8.3 1.8 25.8 •Lucrative niche model (Aga Khan Community)

•Growing East Africa franchise

Skye SKYENL

Equity

484 536 6.3

0.7 11.8 •Recovering profitability after banking crisis

•Trading at P/B < 1

Diamond DIAMONDB

NL Equity

565 715 3.2 0.7 22.7 •Strong retail franchise

•Trading at P/B < 1 despite ROE of 20%+

First City Monument FCMB NL

Equity

530 362 6.0 0.6 11.3^ •Synergy benefits from acquiring Finbank; strong growth in

non-interest income, higher leverage

•Recovering profitability after banking crisis

First National Bank

Botswana

FNBB Equity 1,095 29 15.0 5.6 42.4 •Leading market share of loans/ deposits

•High cost efficiency and good quality assets

Letshego LETSHEGO

Equity

625 287 9.3 2.3 27.7 •Highest in class return on assets

•Significant scope for increasing balance sheet leverage

State Bank Mauritius SBM MP

Equity

1,018 216 5.4 1.3 15.4 •Improving profitability

•Trading at a discount relative to MCB and historical levels

Zanaco ZANACO ZL

Equity

421 18 14.4 3.2 24.1 •Improving legacy issues; cost efficiency and asset quality

improved significantly after Rabobank investment in 2007

Stanbic Uganda SBU UG

Equity

497 20 6.5 2.1 37.6 •Leading corporate and retail franchise in Uganda

•High NIM and efficient cost structure

National Microfinance

Bank

NMB TZ

Equity

435 30 6.9 1.9 30.4 •Leading retail franchise in Tanzania

•High NIM and good asset quality

Ghana Commercial

Bank

GCB GN

Equity

594 46 8.0 3.9 60.3 •Impressive turnaround in profitability after restructuring of

loans by Government

•Significant scope for loan growth

Source: Company annual reports, Exotix estimates

17

The NEXT DOZEN…why they should not be ignored

NEXT DOZEN under-researched and under-invested relative to the BIG EIGHT due to:

• Smaller market capitalisation and less liquidity

• Belief that lower market share will translate to lower profitability

• Listed in un-benchmarked markets (not in the MSCI) and therefore less known

• Under-appreciated business models

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-

0.5

1.0

1.5

2.0

2.5

3.0

01-Jan-09 01-Jan-10 01-Jan-11 01-Jan-12 01-Jan-13

NEXT 12 Big 8

NEXT 12 have similar profitability and outperformed the BIG 8

Average 2012 Return on Equity (%)

Source: Company annual reports, Bloomberg data, Exotix estimates

* FCMB estimate base on 3Q12 earnings as bank is yet to announce FY12 results

Simple average returns

18

The NEXT DOZEN…the fundamentals

NEXT DOZEN able to earn high NIMs due to:

• Dominant market share, e.g. Zanaco, Stanbic Uganda, Ghana Commercial Bank

• Profitable niche model, e.g. Co-op Bank, Diamond Trust Kenya, Diamond Bank Nigeria, National

Microfinance Bank Tanzania, Letshego

Strong NIMs



-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

19


• Letshego continues to maintain best in class cost efficiency

• Potential for improvement in cost to income ratios at GCB, Zanaco as banks shed their legacy

inefficiencies

• Nigerian banks’ C/I should gradually improve as recovery from banking crisis continues

• Kenyan banks’ C/I should also improve as banks adopt alternative banking channels

• State Bank of Mauritius C/I ratio better than MCB’s

Relatively higher C/I ratio, potential for efficiency improvement

Source: Company annual reports, Exotix estimates

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

20


• Letshego writes-off all its non-performing loans

• Nigerian banks’ NPL ratio and cost of risk gradually improving after the crisis

• We expect GCB, Zanaco cost of risk to improve as legacy issues are resolved

• State Bank of Mauritius has better asset quality than MCB

• Co-op Bank, Diamond Trust Kenya’s asset quality better than Kenya sector average

Cost of risk moderately higher although asset quality not a significant concern for most of them


* FCMB estimate base on 3Q12 earnings as bank is yet to announce FY12 results, ** FY10 NPL ratio

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

-

2.0

4.0

6.0

8.0

10.0

12.0

FY12 Cost of risk (%) FY12 NPL Ratio (%)

21


• High yields on government securities crowd out private sector loans

• Crowding out effect less evident amongst NEXT DOZEN relative to BIG 8

• GCB’s low loan to deposit ratio attributable to loan restructurings in 2011

• Letshego has the most aggressive balance sheet

Generally more aggressive balance sheets



FY12 Loan to deposit ratio (%) FY12 loans to assets ratio(%)

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

22


• Funding profile of NEXT DOZEN similar to BIG 8; short-term deposits are key funding source

• Letshego is the exception as primary funding source is equity

• Average capital adequacy ratio of 17.9%

• We believe banks will gradually raise Tier 2 capital as maturity of assets increases

Banks mostly funded by deposits and Tier 1 equity


* FCMB estimate based on 3Q12 earnings as bank is yet to announce FY12 results

FY12 deposits to total funding (%) FY12 equity to assets ratio (%)

60.0

65.0

70.0

75.0

80.0

85.0

-

20.0

40.0

60.0

80.0

23 23

Agenda


2

3


The BIG EIGHT banks



24

Valuation summary

Based on the valuation metrics above, our top picks in the segment are:

• Some top-tier Nigerian banks look appealing again after recent sell-off (Access Bank)

• Improving profitability could result in the re-rating of Nigerian Tier 2 banks (Diamond, FCMB)

• Letshego, NMFB, Co-op looking attractive relative to peers

• SBM’s discount relative to MCB unjustified

Bank’s FY12 ROE (Y-axis) vs. FY12 P/B (x-axis)


* FCMB, UBA and FBN estimates based on 3Q12 earnings as yet to announce FY12 results

Co-op

DTK

Skye

Diamond

FCMB*

FNBB

Letshego

SBM

Zanaco

Stanbic UG

NMFB

GCB

KCB

Equity

AccessFBN*

GTB

UBA*

Zenith

MCB

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

- 1.0 2.0 3.0 4.0 5.0 6.0

Disclaimer

25

• The information and opinions contained in this presentation have been derived from sources believed to be reliable

and in good faith or constitute Exotix’s judgment as at the date of this presentation but no representation or

warranty, express or implied, is made as to their accuracy, completeness or correctness and any opinions are

subject to change and may be superseded without notice.

• This presentation is for informational purposes only and not to be relied upon as authoritative or taken in substitution

for the exercise of judgment. This document is not, and should not be construed as, an offer or solicitation to sell or

buy any investment or product. The information contained in this presentation shall not form the basis of any

contract. Exotix accepts no liability (either in negligence or otherwise) for any loss arising from any use of the

material contained in this presentation.

• This presentation may not be reproduced, distributed or published for any purpose, unless with the prior written

consent of Exotix. Exotix and its affiliates and/or their officers, directors and employees may own or have positions

in any investment mentioned herein or any investment related thereto and may from time to time add or dispose of

any such investment. The research department of Exotix Limited provides an impartial and objective assessment of

the securities, companies or other matters that are subject of their analysis. The Conflicts of Interest Policy of Exotix

can be viewed by requesting a copy from your usual contact at Exotix. This presentation has been produced or

compiled for use by Eligible Counterparties and Professional Clients only and it is not intended for Retail Clients as

defined by the rules of the United Kingdom’s Financial Services Authority.

• Distribution of this Material in the United States or to US persons is intended to be solely to major institutional

investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this

document by their acceptance thereof represent and agree that they are a major institutional investor and

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additional information or to effect any transaction in any security or financial instrument mentioned herein, must do

so by contacting a registered representative of our affiliate Exotix USA Inc., a FINRA registered broker dealer at

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• Exotix Limited is authorized and regulated by the Financial Services Authority. Exotix, the Exotix logo and the Exotix lizard are all trademarks of Exotix Limited. © Exotix Limited 2013.

For more detailed information please contact:

Ronak Gadhia

Equity analyst

Exotix Limited

54 Baker Street

London W1U 7BU

Tel: +44-20-7725-1080

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