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Kenya Listed Commercial Banks Analysis
Cytonn H1’2015 Banking Sector Report
14th September, 2015
Table of Contents
2
I. Introduction to Cytonn Investments
II. Economic Review and Outlook
III. Kenya Banking Sector Overview
IV. Cytonn’s Banking Sector Report
A. ExecutiveSummary
B. Banking SectorReport
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
I. Introduction to Cytonn Investments
3
Client Focus drives the TeamCytonn Investments is a company with over 25 team members
44
Introduction to Cytonn InvestmentsCytonn Investments is an independent investments management company
• Our mission is that “we work to deliver innovative & differentiated financial solutions that speak to our clients needs”
• Cytonn Investments is differentiated in several respects:
1. Independence & Investor Focus: Cytonn is solely focused on serving the interest of clients,which is best done on an independent investment management platform to minimize conflicts ofinterest
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 firmdoes well; and when the firm does well, staff do well
5. Capture Market Opportunity: Huge opportunity for private capital to drive economic growth,while creating above average returns for investors
5
Our ValuesOur 6 core values help us drive a high performing culture
• To achieve our vision that “we will be Africa’s leading investment manager by consistently exceeding client expectations,” we have key values which propel us forward:
vv People – We look for the best people who thrive in a team context
vv Excellence – delivering the best at all times
vv Client focus – putting the clients interest first at all times
vv Entrepreneurship – using innovation and creativity to deliver differentiated financial solutions
vv Accountability – every day we are committing our resources and reputation and we must be accountable
vv Integrity – do the right things
6
Cytonn’s Corporate Structure – Kshs 50 bn under mandate
• 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
LtdCytonn Real
EstateCytonn
Diaspora
Cytonn Investments
LLC
• Independent investment management company, serving HNW & institutional clients
• US advisory and investment management company
Kenya United States
Private Equity
7
GovernanceThe board is comprised of 8 members from diverse backgrounds, each bringing unique skill-sets*
Professor Daniel Mugendi Njiru serves as the Chairman of the Board of Directors
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-executiveDirector
Madhav Bhalla,Non-executiveDirector
Nasser Olwero,Non-executiveDirector
James Maina,Non-executiveDirector
8*See Appendix 1 for Bios of the Board Members
Management – 80 years of cumulative industry experience80 years of combined experience in investments, finance and real estate*
Edwin H. Dande, Managing Partner & CEO
Elizabeth N. Nkukuu, Partner & CIO
Patricia N. Wanjama, Partner & Head ofLegal
Andrew Ayuya, ProjectManager
Johnson Denge,Real Estate Services Manager
Beverlyn Naliaka,PR & CommunicationAssociate
Shiv Arora, InvestmentAssociate
Maurice Oduor, InvestmentManager
Julius Kibanya, Distribution Manager
9*See Appendix 2 for Bios of the Team
Strong Track Record With Brands in Regional and Global Markets
10
Cytonn Investment SolutionsWe offer differentiated investment solutions in four main areas
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 EstateInvestmentSolutions
�� 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
11
24%
9% 9%
0%
5%
10%
15%
12%
20%
25%
30%
RealEstate 10--year Treasury Bond 91day T--bill Equities(NASI)
Cytonn focuses on the highest returning Asset ClassTraditional investments returning 10% compared to 24% for real estate, & projected to continue
Per a
nnum
Ret
urn,
5 Y
ear A
vera
ge
Average = 10%
12
Global view of economic growth determines regions of focusThere is demand from global capital (light colours) looking for attractive returns (dark colours)
13
Deal pipeline overview – 85% to low and mid-income housing
Kshs49BillionDeal Pipeline
PrimeResidentialandMixed--use15%
Lowtomid--incomeHousing85%
• Masterplanned Development
• ComprehensiveDevelopment
• Low to mid-income Modular Housing
14
• High Density Integrated Mixed-use
• Gated Communities
Kshs 49 billion Deal pipeline details
Projects Concept ProjectSizeSET 1AmaraRidgeSituVillageProjectRuaka
Gated communityGatedmasterplannedcommunity
Middle--class residential development
625.03,050.0
1,600.0Sub--Total 5,275.0
SET 2ProjectMombasaProject JujaProjectMountKenyaProjectMavokoProject Lukenya
Highdensitymixed--use developmentMiddle--class gatedcommunity
Masterplanned developmentLowtomidincomemasterplannedcity
Lowtomidincomemasterplannedcity
3,750.03,832.0
1,200.012,500.022,500.0
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
allvaluesinKshsMillionsunlessstated
15
Cytonn’s strategy brings three key pillars together
Landowners
1. Creating Jobs
2. Growing theEconomy
3. Improvingthestandardsof living
Development CapabilityFinancing Capability
16
II. Economic Review and Outlook
17
Economic reviewKenya’s GDP growth to be supported by stable inflation and high infrastructure development
• Kenya’s GDP grew by 4.9% in Q1’2015 supported by high spending on infrastructure by the government and globally
low oil prices which boosts the manufacturing and the construction sectors since Kenya is a net oil importer. Kenya is
expected to grow by 6.5% in 2015 according to the IMF
• Inflation has remained stable during the year and within the CBK range of 2.5% to 7.5%. The inflation rate started the
year at 5.5%, moved on to hit a high of 7.1% in April on the back of rising fuel prices but declined to 5.8% in August
• On the currency, the Kenya Shilling has depreciated by 15.9% YTD on account of (i) a strengthening Dollar globally and
expectations that the Fed may increase rates, (ii) a widening current account driven by high government spending and
(iii) declining foreign exchange inflows on the back of poor revenues from tea, horticulture and tourism. As of
September, the import cover stands at 4.1 months which is marginally above the mandatory requirement of 4 months.
However the government has an unutilised credit facility from the IMF of Kshs. 63 bn
• Since June, CBK has increased Central Bank Rate (CBR) by 300 bps to 11.5% in order to stabilise the currency, and
eventually, the KBRR also increased by 133 basis points to 9.87%
18
Outlook
Political Environment
Economic Growth
Inflation
The Currency
Kenya’s economic outlook remains positive despite insecurity issues and a weakening currency
• The drought experienced in the first quarter of 2015 affected the agricultural productionas the industry is highly dependent on the March-May long rains. This in turn led to anuptick of inflation. Despite this inflation is within the CBK range of 2.5% to 7.5% and isexpected to remain within this range
• The political scene in Kenya is stable but insecurity still remains a threat• Corruption is still rampant but the Governments war on graft is a step in the right
direction• The tourism sector having being hampered by insecurity issues and travel advisories is
expected to recover after the advisories were lifted
• Pressures from a widening current account, high government expenditures and astrengthening dollar will affect the shilling moving forward. The MPC have taken severalmeasures to tame the shilling downfall including raising CBR by 300 bps to 11.5%
• Kenya’s economic growth is expected to be below target having grown only by 4.9% in Q1 2015
• The effects of devolution is expected to drive the economy as the various counties aregiven independence and transparent allocation of funds
• The recent Obama visit GES summit raised investor confidence in the country and is setto attract private investment in the country
Interest Rates
19
• The is expected to step up the domestics borrowing for fiscal year 2015/16 since theyhave a net repayment of Kshs 21.9bn which will result into upward pressure on interestrates
III. Kenya Banking Sector Overview
20
1.0x
0.3x
0.1x
1.2x1.0x0.8x0.6x0.4x0.2x0.0x
Kenya’s Banking Sector OverviewKenya currently has 42 commercial banks, all regulated by the Central Bank of Kenya
• In Kenya there are a total of 42 commercial banks, 12 microfinance banks and 1 mortgage finance institution
• All banks are regulated by the Central Bank of Kenya. The Capital Markets Authority has additional oversight over the
listed banks. All banks are required to adhere to certain prudential regulations such as minimum liquidity ratios andcash reserve ratios with the Central Bank
• Kenya has a high relative ratio of banks to the total population, with the 42 commercial banks serving a country of 44
million people, compared with Nigeria's 22 for 180 million inhabitants and South Africa's 19 for 55 million
CommercialBanks/Population(Millions)
Kenya SouthAfrica Nigeria
• Credit Information Sharing systems (CIS), agency banking, revised prudential guidelines and mobile banking are someof the new developments in banking that have spurred increased efficiency in the sector, as well as enhanced
competition
21
Growth in the Banking SectorGrowth in the banking sector has been underpinned by alternative banking offerings
• Over the last few years, the Banking sector in Kenya has continued to grow in assets, deposits, profitability and products
offering
• The banking sector’s aggregate balance sheet grew by 6.8% from Kshs 3.37 tn in March 2015 to Kshs 3.60 tn in June
2015, faster than the 3.4% increase in Q1’2015
• The growth has mainly been underpinned by:
ØØ Banks responding to the needs of the Kenyan market for convenience and efficiency through alternative banking
channels such as mobile, internet and agency banking
ØØ Industry wide branch network expansion strategy both in Kenya and in the East African community region
ØØ A resilience by banks to reduce their rates following the introduction of the KBRR. Kenyan banks have been fairly
good at protecting their margins regardless of the rate environment
22
Banking Sector Growth Drivers
23
We expect banks to remain profitable in 2015 driven by cost containment and increased use of alternative channelsThere are a number of factors which will drive growth in Kenya’s banking sector:
1) Cost containment initiatives: In the event that NIMs decrease due to the increase in competition, banks will opt formore cost effective measures which ensure operational efficiency
2) Increased use of alternative service delivery channels: With the growth of mobile and agency banking,penetration in the market has increased and this will lead to a greater number of transactions as well as offer loan
products to the mass market e.g. M-benki which was launched by KCB and Safaricom, and M-shwari which was a
partnership between Safaricom and CBA
3) Growth of the retail segment: As the middle-class grows rapidly in Kenya, faster than majority of the countries inthe 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 moreaggressive in trying to capture the opportunities that exist at county levels, which will increase their customer base. In
addition, banks looking to expand in the less penetrated markets of Tanzania, Uganda, Rwanda and South Sudan are
opening up new channels of revenue in countries with a relatively attractive spread compared to Kenya
Recent Developments in the Banking SectorBanks register the slowest growth in 6 years
There were a number of developments in the banking industry:
1) Increase in Interest Rates: The Kenya Bankers Reference Rate increased by 133 bps to 9.87% largely as a result of
an increase in the CBR by 300 bps to 11.5%. This will raise interest on all loans pegged on the KBRR
24
2) Lower earnings release: Banks recorded the slowest year on year growth in 6 years of 8.3% during H1’2015, as
compared to 15.6% in H1’ 2014
3) Rejection of increase in Core Capital Requirements as proposed in the 2015/2016 Budget: Parliament
rejected the proposal to increase core capital in banks to 5 bn by 2018
4) Dubai Bank Liquidation: Dubai bank was placed under receivership with the Kenya Deposit Insurance Corporation
(KDIC) for failure to meet statutory requirements since July and for failure to honour a Kshs 48.2 mn financial
obligation due to Bank of Africa. The KDIC further recommended that the bank be liquidated
Banking Sector MetricsRobust growth in the banking sector as evidenced by constant increase in loans and deposits
Loans and Advances (Kshs Bn) Deposits (Kshs Bn)
CAGR-22.3%
Shareholders Equity (Kshs Bn)
CAGR-17.6%
CAGR - 17.2%
Bank Branches
1,0631,161
1,2721,342
1,4431,600
1,400
1,200
1,000
800
600
400
200
--2010 2011 2012 2013 2014
CAGR - 7.9%
876
1,1521,296
1,579
1,9412,170
--
1,000
1,500
2,000
2,500
2010 2011 2012 2013 2014 H1'2015
1,2371,488
1,7081,936
2,2922,570
--
1,000
500500
1,500
2,000
2,500
3,000
2010 2011 2012 2013 2014 H1'2015
266
Source: Central Bank of Kenya 25
291
362
432
502543
--
100
200
300
400
500
600
2010 2011 2012 2013 2014 H1'2015
Banking Sector Metrics, continued…Net interest margins are becoming compressed owing to stiff competition in the industry
Cost to income (%) Loans to deposits (%)
NPLs to total loans ratio(%) Net interest margin (%)
50.0%47.4%
40.1%43.7%
40.9% 42.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2010 2011 2012 2013 2014 H1'2015
70.9%
77.4%75.9%
81.6%
84.7% 84.4%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
2010 2011 2012 2013 2014 H1'2015
6.6%
4.6% 4.8%5.2%
5.6% 5.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2010 2011 2012 2013 2014 H1'2015
8.6%
Source: Central Bank of Kenya 26
8.7%
9.5% 9.4%
8.6%
7.9%
9.5%9.0%8.5%8.0%7.5%7.0%6.5%6.0%5.5%5.0%
10.0%
2010 2011 2012 2013 2014 H1'2015
Banking Sector MultiplesKenya’s banking sector is trading at an average PBV of 1.6x and a Trailing PE of 7.6x
27
Source: NSE, Cytonn Banking Sector Report
Bank Sha rePrice*
No. ofshares Mkt Cap (bn)issued (bn) PBV
TTM**P/E
EquityGroup Holdings 43.00 3.7 154.59 2.45x 8.8x
I&MHoldings Ltd 107.00 0.39 41.98 2.05x 8.3x
BarclaysBankofKenya Ltd 13.00 5.43 70.61 1.93x 8.0x
TheCo--operative BankofKenya Ltd 18.00 4.89 88.01 1.89x 9.3x
StandardCharteredBankKenya Ltd 234.00 0.31 72.34 1.87x 6.2x
KenyaCommercialBankLtd 45.00 2.98 134.29 1.78x 7.7x
DiamondTrustBankKenya Ltd 200.00 0.24 48.42 1.59x 8.2x
CFCStanbic bank 89.50 0.31 72.34 1.36x 8.8x
NICBankLtd 45.75 0.64 29.28 1.26x 7.0x
HousingFinanceCo.Kenya Ltd 21.25 0.35 7.49 0.77x 7.8x
NationalBankof Kenya 18.15 0.31 5.59 0.41x 3.2x
Median 1.8x 8.0x
Average 1.6x 7.6x
* Share prices are as at 8th September2015** TTM – Trailing twelve months
IV. Cytonn’s Banking Sector Report
28
Executive SummaryCytonn has undertaken this report to offer our investors a comprehensive view of the listed banks
• All listed banks in the Kenyan market were analysed by the Cytonn Investment Team
• The analysis was brought about by a need to be able to recommend to our investors which banks are the most stable
from a franchise value and from a future growth opportunity perspective
• The analysis covers the health and future expected performance of the financial institution, by highlighting their
performance using metrics to measure profitability, efficiency, growth, asset quality, liquidity, revenue diversification,
capitalization and intrinsic valuation
• The analysis was undertaken using H1’2015 results (franchise value) and analyst’s projections of future performance of
the banks (future growth opportunities)
• For banks which are part of a group structure, the financials of the group were utilised to take into consideration the
listed counter which an investor will purchase
• The overall ranking was based on a weighted average ranking of Franchise value (accounting for 40%) and Intrinsic
value(accounting for 60%)
• The top ranking was dominated by Tier 1 banks which performed well in terms of both Franchise and Intrinsic valuation
29
30
Cytonn’s Banking Sector Report – The RankingsWe analyzed the listed banks on a franchise value perspective
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
Loan toDepositratio
Cost toIncomeratio ROACE* NIM**
PEGratio P/TBV
Deposits/branch (billions)
NPLs/Loans
NPLCoverage
TangibleCommon Ratio
Non InterestIncome/ Revenue
CamelRating
StandardChartered 5 4 1 3 8 9 2 7 2 1 8 4Equity 4 7 2 2 2 11 10 3 3 2 2 7I&M 9 1 5 7 7 8 4 2 7 7 9 1KCB 7 6 3 5 1 6 6 8 6 8 4 10Co--operative bank 1 5 7 4 4 7 7 5 9 6 5 8NIC 10 2 9 10 3 4 3 9 8 3 7 5Barclays 2 8 4 1 11 10 9 6 4 4 6 2CfCStanbic 3 11 10 11 10 3 1 4 5 10 1 6DTBK 8 3 8 8 9 5 8 1 1 9 10 3NBK 6 10 6 6 5 1 11 11 11 11 3 11Housing Finance 11 9 11 9 6 2 5 10 10 5 11 9
* ROACE - Return on Average Common Equity** NIM - Net Interest Margin
Cytonn’s Banking Sector Report – The RankingsThe banks were also ranked on Intrinsic value perspective
Upside
31
TotalReturn DividendYieldBanks Current Price Valuation FY15e Total Return
KCB 46.5 57.4 29.1% 5.7% 34.8%
Equitybank 43.0 50.3 22.1% 5.1% 27.2%StandardChartered 243.0 263.0 15.0% 6.8% 21.8%Barclays Bank 12.9 13.5 12.8% 7.9% 20.7%NICBank 46.8 47.6 4.1% 2.4% 6.5%Housing Finance 21.8 20.3 (0.9%) 5.6% 4.7%DTB 204.0 206.5 2.5% 1.3% 3.8%Cooperative 18.2 16.5 (6.1%) 3.3% (2.8%)I&MBank 121.0 99.5 (15.6%) 2.2% (13.4%)CfCStanbic Bank 90.0 71.3 (20.8%) 0.0% (20.8%)National Bank 17.8 6.5 (63.5%) 0.0% (63.5%)
• KCB and Equity have the highest upsides at 34.8% and 27.2%, respectively
• NBK registered the highest downside of 63.5%
Cytonn’s Banking Sector Report – The RankingsOverall, Equity bank was ranked 1st while NBK and HF were ranked last
Banks Franchise Value Total Return WeightedH1Total Score Score 2015 Score H12015 rank Q12015 rank
Equity 55 2 23.2 1 4
StandardChartered 54 3 23.4 2 3KCB 70 1 28.6 3 5Barclays 67 4 29.2 4 9Co--operative bank 68 8 32 5 7NIC 73 5 32.2 6 8I&M 67 9 32.2 6 2DTBK 73 7 32.8 8 6CfCStanbic 75 10 36 9 1NationalBankof Kenya 92 11 43.4 10 10Housing Finance 98 6 43.4 10 11
32
• In H1 2015, franchise value was assigned a weighting of 40% while the intrinsic value was assigned 60% weight• The Q1 2015 rank was based only on franchisevalue• Equity Bank rose 3 positions to top the ranking based on a high upside and on the franchise value backed by high return
on average equity of 30.5%, high net interest margin of 10.5% and a high non interest income contribution to revenue of
41.1%
• CfC Stanbic declined from rank 1 in Q1 2015 to rank 8 in H1 2015 because of a high cost to income ratio of 60.0% vs an
industry average of 48.1% and low net interest margin of 5.3% vs an industry average of 8.3%
33
Banking Sector Report Results
Source: Cytonn Research
Equity Bank ranks highest overall in the banking sector analysis• Equity Bank ranked top, ranking high in return on capital, efficiency and revenue diversification. With the planned
acquisition of ProCredit bank (Congo) and the roll out of Equitel which will the stock has an upside of 27.9% (includingdividend yield)
• Standard Chartered ranked the second highest overall, ranking high in return on capital and deposit mobilisation despitebeing weighed down by low revenue diversification. The ranking was further boosted by the bank’s 21.8% upside
• Barclays Bank had the highest net interest margin attributable to the more expensive loans. The stock has a 20.7%upside mainly attributable to their aggressive entry into the SME market
• National Bank of Kenya, despite being associated with the Government, was the second most inefficient bank in terms ofcost containment, operating at cost to income ratios of 54.3%. In addition, they have the lowest quality of assets in their
loan portfolio, as can be seen by their NPLs which are 9.5% of their total loan book. The stock has a 63.5% downside
• Housing Finance ranked the lowest overall. It registered poor profitability, with the ROACE at 12.5% and their NIM at7.1%, which was the third lowest in the market. In addition, they are hampered by liquidity issues, with a loan to depositratio of 133.5%. The stock has a 4.7% downside
Future of the Banking SectorThe future is bright for the banking sector given the resilience to maintain margins• There are concerns as to whether banks will be able to maintain their profitability margins with the increase of the CBR
to 11.5%. With the exception of minimal increases in non-performing loans, we do not think the banking businesses will
be impacted significantly by the increases as historically, Kenyan banks have been fairly good at protecting their margins
regardless of the rate environment
34
V. Appendix
35
A. Metrics Used
36
Banking Sector Report – Metrics UsedCytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Net Interest Margin - A bank’s net interest margin (NIM), is the difference between the interest paid on deposits and
the interest earned on loans, relative to the amount of interest-earning assets with higher net interest margins translatinginto higherprofits
Output:Majority of Bank’s funding is towards the issuing of loans rather than the purchase of government securities. Even withthe introduction of the KBRR and the raising of the CBR to 10%, we expect banks to maintain their NIMs in 2015.
Barclays had the highest NIM at 10.91%, with the lowest for CfC Stanbic at 5.32%
37
• 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 acompany generates with the money shareholders have invested
Output:Banks with higher ROACEs are better at utilizing capital to generate profits. Equity bank has the highest ROACE at
30.53%, which was much above the industry average of the listed banks of 22.79%, while Housing Finance had the
lowest at 12.47%
Banking Sector Report – Metrics Used, continued…Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Price/Earnings to Growth Ratio - The price/earnings to growth (PEG) ratio is the stock’s market price to earnings ratiodivided 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 itsearnings
Output:To obtain this ratio, we estimated each bank’s 5-year growth rate based on analysis of (i) bank’s fundamentals, (ii)
projections using each bank’s models and (iii) management’s input on a bank’s strategy going forward. KCB had the
lowest PEG ratio at 0.34x, while Barclays was the most overvalued at 0.84x
38
• 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 indeposits
Output:CFC Stanbic and Standard Chartered have the highest deposits per branch at 4.79 bn and 4.41 bn, respectively, while
Equity bank and National bank have the lowest deposits per branch at 1.31 bn and 1.30 bn, respectively. However, this isdue to the high number of branches which Equity Bank has, as well as the large corporate book of CfC Stanbic andStandard Chartered
Banking Sector Report – Metrics Used, continued…Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics• Loans to Deposits Ratio - A bank’s loans to deposit ratio (LDR) is a measure of liquidity as it shows how much of a
bank’s loans are being funded by its deposits. Low LDR ratios indicate that the bank may not be earning a lot of interest.
Very high LDR’s indicate that the bank might not have enough liquidity to cover any unforeseen funding requirements, andratios above 1 show that the bank supplemented their loan issues with outside borrowings
Output:Our analysis showed us that in Kenya, the loan to deposit ratio has been steadily increasing, showing increased uptake of
loans and more aggressive use of deposits by banks. Taking a preferred LDR of 86.5% which was the mean, we found
that Co-operative was closest to the target at 82.5%, while Housing Finance was the farthest at 133.5%
39
• 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 bymanagement’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 toincome ratio down to 47.6%, in line with the industry average. I&M maintained the lowest cost to income ratio of 33.8%,while CfC Stanbic had the highest ratio at 59.9%
Banking Sector Report – Metrics Used, continued…Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics• Price to Tangible Book Value - This is a valuation ratio that expresses the bank’s market price to its tangible book
value. It shows the price an investor would pay for a unit amount in the event of a liquidation. A ratio of less than one
indicates that the bank’s assets are undervalued in the market while a ratio greater than one signifies overvaluation Output:We find Housing Finance maintained its position as the most undervalued bank as per this metric, while Equity bank is still the most overvalued
• Tangible Common Equity Ratio - This is the ratio of a bank’s common equity less intangible assets to its tangibleassets. It is a common indicator of a bank’s risk and capitalization and measures how much losses a bank can take before
shareholder’s equity is wiped out, hence solvency
Output:Standard Chartered is the most solvent with a tangible common ratio of 16.5%, while National Bank was the least solvent
at 5.5%
• Non-Performing Loans to Total Loans Ratio - This is a measure of the percentage of a bank’s issued loans that are
non-performing that is, in default, or close to being in default
Output:Diamond Trust bank had the highest quality loan book with a non-performing loans to total loans ratio of 0.9%, while
National Bank had the highest non-performing loans at 9.5%40
Banking Sector Report – Metrics Used, continued…Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics
• Provisions to Non-Performing Loans (NPLs) - This is a credit quality metric that measures the credit risks for banks.
It shows the extent to which the NPLs are covered by provisions hence the degree of stability of the bank’s lending base,with higher ratiospreferred
Output:Diamond Trust Bank has the highest provisions to non-performing loans at 87.2%, while National Bank has the lowest at 10.7%. This is ironic given that DTBK has the lowest NPLs/ Loans of 0.9% while NBK has the highest NPLs/Loans of 9.5%
• Non-Interest Income to Revenue - The non interest income is the income earned from sources other than loans and
investments. The non-interest income to revenue therefore shows the extent of diversification of a bank’s operations.High levels are preferred, not exceeding the point where the bank loses focus of its primary business
Output:We see that Kenyan banks’ non-interest income is set to benefit from new initiatives such as banc-assurance and mobilebanking. CfC Stanbic has the highest non-interest income as a percentage of revenue at 41.6%, while Housing Finance has the lowest at 15.2%
• Camel Rating - This is a ranking system that assesses the overall condition of a bank, that is, Capital Adequacy, AssetQuality, Management Quality, Earnings Quality and Liquidity
41
B. Tier I Banks
42
I. Equity Bank
43
Company DescriptionEquity bank is the largest bank in East Africa in terms of customer base
Company Description
Pros
• 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 June, it had an asset base of Kshs 401.0 bn andshareholders' equity of Kshs 65.0 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 of Equity’s3.0 strategy will impact negatively on their cost to income ratio
• Exposure to different political, economic and regulatoryenvironments as the bank has regional subsidiaries indifferent countries hence is exposed to different changes inits 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 on thecurrent group CEO
No. Shareholders %1. NorfininvestASof Norway 12.232. British--AmericanInvestments Company 10.633. EquityBankEmployees’ShareOwnershipPlan 4.074. JamesNjugunaMwangi 3.455. FortressHighlands Limited 2.736. NationalSocialSecurityFundof Uganda 2.457. AndrewMwangi 2.448. NelsonMuguku 1.769. Others 60.24
Total 100Cons
44Source – Annual Reports and H1’ 2015 InvestorBrief
Financial Statements ExtractsEquity bank has a high return on equity of 30%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet
NetLoansandAdvances 171.4 214.2 274.4 329.3 395.1 474.2 569.0 21.6%Government Securities 44.6 48.4 58.3 70.0 84.0 100.8 120.9 20.1%Total Assets 277.7 344.6 450.4 534.4 635.1 756.5 902.9 21.2%CustomerDeposits 194.6 245.4 343.0 411.6 493.9 592.7 711.3 23.7%Borrowings 11.4 14.8 14.9 22.7 22.3 26.6 24.8 10.9%Total Liabilities 226.2 280.8 381.8 451.1 534.3 634.0 753.8 21.8%Shareholders Equity 51.6 63.8 68.6 83.3 100.8 122.4 149.1 18.5%BookvaluePer share 13.9 17.2 18.5 22.5 27.2 33.1 40.3 18.5%
2013 2014 2015e 2016e 2017e 2018e 2019eCAGRIncome Statement
NetInterest Income 26.5 29.2 35.7 44.3 52.3 62.8 75.5 21.0%NonFunded Income 15.4 18.5 24.1 30.7 37.5 46.6 58.2 25.8%LoanLoss Provision 2.4 1.6 2.0 2.4 2.9 3.5 4.2 21.3%TotalOperating Expenses 22.7 26.3 31.0 40.0 48.0 58.0 70.3 21.7%ProfitBefore Tax 19.0 22.4 28.9 35.0 41.8 51.4 63.5 23.2%ProfitAfter tax 13.3 17.2 20.2 24.5 29.3 36.0 44.4 21.0%%PATChange YoY 29.2% 18.0% 20.9% 19.7% 22.9% 23.4%EPS 3.6 4.6 5.5 6.6 7.9 9.7 12.0DPS 1.5 1.8 2.2 2.6 3.2 3.9 4.8CIR 48.8% 52.0% 48.4% 50.1% 50.2% 49.8% 49.4%ROaE 28.1% 29.7% 30.6% 32.2% 31.8% 32.3% 32.7%ROaA 5.1% 5.5% 5.1% 5.0% 5.0% 5.2% 5.4%
45Source – Company Financials
Valuation SummaryEquity bank has an upside of 22%
Costof Equity Assumptions: 8th Sep--15
46
Risk free rate*BetaCountry RiskPremiumExtraRiskPremium
Costof Equity
12.0%
0.96.0%0.8%
18.1%
Terminal Assumptions:Growth rate 5%MatureCompany Beta 1.0TerminalCostof Equity 18.8%ReturnonAverage Equity 32.7%JustifiedPricetoBook Value 2.0xShareholderEquity--FY19e 149.1TerminalValue--(Year 2019) 298.6
DDM 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Dividends 8.1 9.8 11.7 14.4 17.8Terminal Value 298.6Time 0.3 1.3 2.3 3.3 4.3Discount Factor 0.9 0.8 0.7 0.6 0.5Present value 7.7 7.9 8.0 8.3 154.4
Valueof equity 186.3Numberof shares 3.7Valueper share 50.3CurrentPriceper share 43.0Upside/(Downside) 17.0%DividendYield 5.1%Upside 22.1% Undervalued
* Five years average yields on a 10 year Treasury bond
II. Barclays Bank
47
48
Company DescriptionBarclays 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 f inanc ial 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
• 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 itspeers
• 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 forSME's
• The bank has the highest net interest margin of 10.9% as at H1’2015
• Faster decision making and greater autonomy under
Barclays Africa Group LimitedSource – Annual Reports
No. Shareholding %1 BarclaysAfricaLimited 68.5%2 Others 31.5%
Total 100.0%
Financial Statements ExtractsBarclays bank has an estimated 5-year PAT CAGR of 9%IncomeStatement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRNetInterest Income 18.9 19.6 23.5 26.2 28.3 30.9 33.7 11.4%NonFundedIncome 9.1 8.7 9.2 10.4 11.3 12.3 13.5 9.2%LoanLossProvision (1.2) (1.4) (1.7) (2.0) (2.2) (2.4) (2.6) 13.2%TotalOperatingExpenses (16.0) (15.9) (19.5) (22.1) (24.0) (26.1) (28.5) 12.3%ProfitBeforeTax 11.1 12.3 13.2 14.5 15.7 17.1 18.7 8.6%ProfitAftertax 7.6 8.4 9.2 10.1 10.9 11.9 13.0 9.0%%PATChangeYoY (12.8%) 10.7% 9.1% 9.5% 8.3% 9.2% 9.2%CIR 52.9% 51.4% 54.3% 54.8% 54.9% 54.9% 54.9%EPS 1.4 1.6 1.7 1.9 2.0 2.2 2.4DPS 0.7 1.0 1.0 1.1 1.2 1.3 1.4ROaE 24.6% 23.9% 25.0% 25.3% 27.3% 27.4% 29.2%ROaA 3.9% 3.9% 3.8% 3.9% 4.0% 4.1% 4.2%
49
BalanceSheet 2012 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRGovernmentSecurities 47.5 47.6 57.2 70.6 77.0 83.9 91.5 99.7 11.8%
NetLoansandAdvances 104.2 118.4 125.4 149.6 162.1 176.6 192.5 209.9 10.8%Total Assets 184.9 206.8 225.8 257.9 281.9 308.1 336.7 367.8 10.2%
CustomerDeposits 137.9 151.1 164.8 180.2 196.4 214.1 233.4 254.4 9.1%Borrowings -- -- -- -- -- -- -- -- --Total Liabilities 155.2 174.4 187.7 222.5 242.5 264.3 288.1 314.1 10.8%
ShareholdersEquity 29.6 32.4 38.2 35.4 39.4 43.8 48.5 53.7 7.1%BookvaluePershare 5.4 6.0 7.0 6.5 7.3 8.1 8.9 9.9 7.1%
Valuation SummaryBarclays bank is undervalued by 12.8%
59
CostofEquity Assumptions: 8thSept 2015
Riskfree rate* 12.0%
Beta 0.9
CountryRiskPremium 6.0%
ExtraRisk Premium 0.0%
Costof Equity 17.2%
Terminal Assumptions:Growth rate 5.0%
MatureCompanyBeta 1.0
TerminalCostof Equity 18.0%
Return onAverageEquity 29.2%
JustifiedPrice toBook value 1.9x
Shareholder Equity--FY19e 53.7
Terminal Value 99.7
YearEnded 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Dividends 5.5 6.1 6.6 7.2 7.8TerminalCash flow 99.7TimeinYears 0.3 1.3 2.1 3.3 4.3Discountingfactor 0.9 0.8 0.7 0.6 0.5PVofCash Flows 5.3 4.9 4.5 4.2 54.3ValueofEquity 73.2Numberof Shares 5.4ValuePerShare 13.5CurrentPrice 12.9Upside/Downside 4.9%Dividendyield 7.9%Upside 12.8% UnderValued
* Five years average yields on a 10 year Treasury bond
III. Kenya Commercial Bank
51
Company Description
52Source – Annual Reports and H1’ 2015 InvestorBrief
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 the bank and renamed it Kenya Commercial Bank in 1970
• Kenya Commercial Bank is the biggest bank in Kenya,with: (i) Total assets of Kshs 566.6 bn, (ii) Totalcustomer deposits at Kshs 443.0 bn, (iii) Total loans atKshs 320.6 bn, (iv) Total shareholders funds Kshs 78.1bn;
• 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. ROaA at 3.8% as compared to Equity bank at 5%)
No. Shareholders %1. PermanentSecretarytotheTreasuryof Kenya 17.312. NationalSocialSecurity Fund 7.523. StandardCharteredKenyaNominees Ltd/CKE18965 2.164. StandardCharteredNomineesNR,A/C9318 1.755. StandardCharteredNomineesNR,A/C9069 1.656. KanaksinhKarsandasBablaandSandipBabla 1.557. StandardCharteredNomineesA/C9688 1.518. StandardCharteredKenyaNomineesLtd,A/CKE20531 1.509. Others 65.05
Total 100
Financial Statements ExtractsKCB has a high return on equity at 25%, and is one of the most profitable banks in Kenya
53
Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGRNetInterest Income 33.0 36.0 45.0 56.6 67.7 81.4 97.9 22.2%NonFunded Income 17.1 22.0 25.4 30.0 35.5 42.1 49.9 17.8%LoanLoss Provision 2.9 5.1 5.1 6.3 7.5 9.0 10.8 16.5%TotalOperating Expenses 30.0 34.2 41.7 51.2 61.3 73.4 88.0 20.8%ProfitBefore Tax 20.1 23.8 28.7 35.4 42.0 50.1 59.8 20.2%ProfitAfter tax 14.3 16.9 20.1 24.8 29.4 35.1 41.8 19.9%%PATChange YoY 18% 17% 19% 23% 19% 19% 19%CIR 60% 59% 59% 59% 59% 59% 60%EPS 4.7 5.6 6.6 8.2 9.7 11.6 13.8DPS 2.0 2.0 2.7 3.3 3.9 4.6 5.5ROaE 24.4% 24.2% 25.7% 28.1% 28.1% 28.3% 28.5%ROaA 3.8% 3.8% 3.6% 3.7% 3.7% 3.7% 3.7%Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGRNetLoansandAdvances 227.7 283.7 356.4 427.7 513.3 615.9 739.1 21.1%Government Securities 47.5 61.1 73.2 87.9 105.5 126.6 151.9 20.0%Total Assets 390.9 490.3 618.2 731.0 868.8 1,034.0 1,232.2 19.9%CustomerDeposits 305.7 377.3 488.3 585.9 703.1 843.7 1,012.5 21.8%Borrowings 7.7 12.7 22.5 22.5 22.5 22.5 22.5 12.0%Total Liabilities 327.5 414.7 537.3 635.2 755.4 899.6 1,072.7 20.9%
Shareholders Equity 63.4 75.6 80.9 95.8 113.4 134.4 159.5 19.9%BookvaluePer share 20.9 25.0 26.8 31.7 37.5 44.4 52.7 19.9%
Valuation Summary
Riskfreerate * 12.0%Beta 0.9Country RiskPremium 6.0%
ExtraRiskPremium 0.8%Costof Equity 17.9%
54
Terminal Assumptions:Growth rate 5.0%MatureCompany Beta 1.0TerminalCostof Equity 18.8%ReturnonAverage Equity 28.5%JustifiedPBV 1.7xShareholderEquity--FY19e 159.5TerminalValue--(Year 2019) 271.4
DividendDiscount model 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Dividends 8.0 9.9 11.7 14.0 16.7Terminal Value 271.4Time 0.3 1.3 2.3 3.3 4.3Discount Factor 1.0 0.8 0.7 0.6 0.5Present value 7.6 8.0 8.0 8.1 142.0Valueofequity 173.8Numberofshares 3.0Valuepershare 57.4CurrentPrice per share 46.5Upside/(Downside)
23.5%DividendYield 5.7%Upside
29.2%
Undervalued
* Five years average yields on a 10 year Treasury bond
IV. Standard Chartered Bank
55
Company DescriptionStandard Chartered Bank is one of the oldest bank in Kenya formed in 1910
Company Description
Pros Cons
in 1910 and• Standard Chartered Bank was formed became listed on the NSE in 1989
• The bank currently operates 37 branches• As at June 2015, the bank had assets in excess of Kshs
228.2 bn and shareholders’ funds amounting to Kshs
40.1 bn
• Diversification – The bank approved the setting up and
operationalisation of the bancassurance business to becarried out by Standard Chartered Insurance AgencyLimited, 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 therevenues for Standard Chartered Bank. Their NPL/Total
loans was at 6.8% which is above the industry average of5.5%
• The recent mass sale of mortgage products might havetaken the bank out of their nichemarket
• Activities are limited to the Kenyan market as the parentcompany prefers to operate independently in othermarkets
Shareholding
56Source – Annual Reports and H1’ 2015 InvestorBrief
Standard Chartered Group
LocalOwnership74%
26%
Total 100%
Financial Statement Extracts
57Source – Company Financials
Standard Chartered has a high return on equity of 27%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome Statement
NetInterest Income 16.8 17.9 18.4 20.4 22.7 25.9 29.5 10.5%NonFunded Income 7.1 8.2 9.7 10.8 12.1 13.5 15.2 13.2%LoanLoss Provision 1.0 1.3 1.3 1.4 1.4 1.6 1.9 7.2%TotalOperating Expenses 10.5 11.7 11.9 13.1 14.7 16.7 18.9 10.1%ProfitBefore Tax 13.4 14.3 16.2 18.0 20.1 22.7 25.7 12.4%ProfitAfter tax 9.3 10.4 11.4 12.6 14.1 15.9 18.0 11.5%%PATChange YoY 14.9% 12.5% 8.8% 11.2% 11.5% 13.0% 13.0%EPS 30.0 33.8 36.7 40.9 45.6 51.5 58.2DPS 15.0 12.8 16.5 18.4 20.5 23.2 26.2CIR 44.0% 45.0% 42.3% 42.1% 42.1% 42.3% 42.4%ROaE 27.7% 27.2% 26.0% 27.5% 26.4% 25.8% 25.4%ROaA 4.5% 4.7% 4.9% 5.0% 5.0% 4.9% 4.9%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet
NetLoansandAdvances 129.7 122.7 129.9 148.0 168.8 192.4 219.3 12.3%Government Securities 56.2 58.8 58.9 67.1 76.5 87.2 99.4 11.1%Total Assets 220.4 222.5 235.2 266.6 302.2 342.8 389.0 11.8%CustomerDeposits 154.7 154.1 173.2 197.4 225.0 256.5 292.4 13.7%Total Liabilities 184.2 181.8 192.6 217.1 245.0 276.9 313.1 11.5%Shareholders Equity 36.2 40.7 42.5 49.5 57.2 66.0 75.8 13.3%BookvaluePer share 117.1 131.5 137.5 160.0 185.0 213.3 245.3 13.3%
Valuation SummaryStandard Chartered Bank is undervalued by 15%
58
CostofEquity Assumptions: 8th Sep--15Riskfreerate * 12.0%Raw Beta 0.9Country RiskPremium 6.0%ExtraRiskPremium 0.0%Costof Equity 17.4%AdjustedBeta 0.9
Terminal Assumptions:Growth rate 5.0%MatureCompany Beta 1.0TerminalCostof Equity 18.0%ReturnonAverage Equity 25.4%JustifiedPricetoBook Value 1.6xShareholderEquity--FY19e 75.8TerminalValue--(Year 2019) 118.4
DividendDiscountModel 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Dividends 5.1 5.7 6.3 7.2 8.1Terminal Value 118.4Time 0.3 1.3 2.3 3.3 4.3Discount Factor 1.0 0.8 0.7 0.6 0.5Present value 4.9 4.6 4.4 4.2 63.3
Valueof equity 81.3Numberofshares 0.3Valueper share 263.0CurrentPriceper share 243.0Upside/(Downside) 8.2%DividendYield 6.8%Upside 15.0% Undervalued
* Five years average yields on a 10 year Treasury bond
V. Co-operative Bank
59
Company DescriptionCo-op Bank embarks on its transformation agenda to sustain growth and improve customer experience
Company Description
Pros
• Co-operative Bank was founded by Kenyan co-operativesocieties and unions well versed in the difficulties ofaccessing credit from existing banks
• As at June, 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 325.1 bn,(ii)Total customer deposits at Kshs 248.4 bn (iii)Totalloans at Kshs 204.8 bn, (iv) Total shareholders fundsKshs 47.1 bn;
• Co-operative Bank is the 3rd largest bank by asset sizeof Kshs. 325 billion and uses a unique model ofwholesale banking 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 its regional expansion strategy
• Regional expansion that started with South Sudan witha unique joint venture with the Government of SouthSudan
• 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 its peers 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
No. Shareholders %1. Co-op Holdings Co-op Society Ltd 64.562. Dr. Gideon Maina Muriuki 1.993. NIC Custodial Services A/C 077 0.89
60Source – Annual Reports and H1’ 2015 InvestorBrief
4. Kenya Commercial Bank Nominees Ltd A/C 771A
5. Standard Chartered Nominees NR A/CKE176056. Standard Chartered Nominees A/C 92307. CfC Stanbic Nominees Ltd A/C NR10306828. CfC Stanbic Nominees Ltd A/C R576019. Others
0.56
0.490.470.390.31
30.34Total 100
Cons
Financial Statement ExtractsCo-operative Bank improves its cost to income ratio and set to deliver solid growth in earnings
61
Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGRNetInterest Income 18.6 21.3 23.3 27.8 33.5 40.0 47.5 17.4%NonFunded Income 9.3 10.8 11.4 13.4 15.8 18.5 21.7 14.9%LoanLoss Provision 0.8 1.2 2.1 2.5 3.0 3.6 4.2 29.1%TotalOperating Expenses 17.4 20.1 19.9 23.4 28.3 33.7 39.8 14.7%ProfitBefore Tax 10.9 10.9 15.0 17.9 21.1 25.0 29.4 21.9%ProfitAfter tax 9.1 8.0 10.5 12.5 14.7 17.5 20.6 20.7%%PATChange YoY 18% (12%) 31% 19% 18% 19% 18%CIR 62% 63% 57% 57% 57% 57% 58%EPS 1.9 1.6 2.1 2.6 3.0 3.6 4.2DPS 0.4 0.5 0.6 0.7 0.8 1.0 1.2ROaE 27.4% 20.0% 22.8% 23.7% 23.5% 23.5% 23.4%ROaA 4.2% 3.1% 3.3% 3.3% 3.4% 3.4% 3.4%Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGRNetLoansandAdvances 137.1 179.5 207.4 246.7 296.0 350.7 415.6 18.3%Government Securities 14.0 24.6 32.9 40.6 48.1 57.0 67.5 22.3%Total Assets 231.2 285.4 345.8 403.8 473.6 556.4 654.4 14.9%CustomerDeposits 175.4 217.7 263.5 312.2 370.0 438.4 519.5 19.0%Borrowings 10.3 18.3 18.7 18.7 18.7 18.7 18.7 0.4%Total Liabilities 194.1 242.0 297.3 346.2 405.5 475.7 558.9 20.7%Shareholders Equity 36.8 43.3 48.4 57.4 68.0 80.6 95.4 20.7%BookvaluePer share 7.5 8.9 9.9 11.7 13.9 16.5 19.5 20.7%
Valuation SummaryCo-operative Bank has a downside of 6.1%
62
CostofEquity Assumptions: 8th Sep--15Riskfree rate* 12.0%
Beta 0.8
Country RiskPremium 6.0%
ExtraRiskPremium 0.3%
Costof Equity 17.4%
Terminal Assumptions:Growth rate 5.0%MatureCompany Beta 1.0TerminalCostof Equity 18.3%ReturnonAverage Equity 23.4%JustifiedPricetoBook Value 1.4xShareholderEquity--FY19e 95.4TerminalValue--(Year 2019) 131.9
DividendDiscountModel 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--1831--Dec--19Dividends 2.9 3.5 4.1 4.9 5.8Terminal Value 131.9Time 0.3 1.3 2.3 3.3 4.3Discount Factor 1.0 0.8 0.7 0.6 0.5Present value 2.8 2.8 2.9 2.9 69.1Valueof equity 80.42Numberof shares 4.89Valueper share 16.45CurrentPriceper share 18.15Upside/(Downside) (9.4%)Dividend Yield 3.3%Downside (6.1%) Overvalued
* Five years average yields on a 10 year Treasury bond
VI. Valuation Summary – Tier I Banks
63
Valuation Summary – Tier I BanksTier I banks on average presents an upside of 14.6%
64
CompanyName Price Issued Market P/E Dividend Yield PEG CoE Fair UpsideShares Cap TTM FY2014 FY2015e Value
EquityBank 43.0 3.7 159.1 8.8x 4.2% 5.1% 0.4x 18.1% 50.3 22.1%Barclays Bank 12.9 5.4 69.4 8.0x 7.8% 7.9% 0.8x 17.2% 13.5 12.8%KCB 46.5 3.0 140.9 7.7x 4.3% 5.7% 0.4x 17.9% 57.4 29.1%StandardChartered 243.0 0.3 75.3 6.2x 5.3% 6.8% 0.6x 17.4% 263.0 15.0%Co--operative Bank 18.2 4.9 88.8 9.3x 2.8% 3.3% 0.4x 17.4% 16.5 (6.1%)
Min 6.2x 2.8% 3.3% 0.4x 17.2% (6.1%)Median 8.0x 4.3% 5.7% 0.4x 17.4% 15.0%Average 8.0x 4.9% 5.8% 0.5x 17.6% 14.6%Max 9.3x 7.8% 7.9% 0.8x 18.1% 29.1%
Capital Adequacy Equity Barclays KCB Stanchart Co--opBank Minimum StatutoryCoreCapitaltoTotal Liabilities 18.4% 20.7% 17.2% 20.0% 16.0% 8.0%CoreCapitaltoRWA 14.6% 15.9% 14.6% 17.3% 13.8% 10.5%TotalCapitaltoRWA 16.6% 18.5% 15.9% 21.5% 21.0% 14.5%
C. Tier II Banks
65
I. I&M Bank
66
Company DescriptionI&M bank was listed on NSE in 2013 through a reverse takeover transaction
Company Description
Pros Cons
• I&M Bank was founded in 1974 as a financial services
Banque Commerciale du Rwanda
• Quality loan book: The bank has low NPLs of approx. 2%
• 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 assurance in 2014
• Planned acquisition of Giro bank will boost its clientreach hence growth
• Traditional SME market now being targeted by tier 1banks hence market share under threat
• Low branch network in other counties in Kenya other thanNairobi
• Exposure to different political, economic and regulatory
environments, especially Tanzania with their upcomingelections might slow down business
No. Shareholders %
67Source – Annual Reports
company and later converted to a commercial bank in 1 Ziyungi Limited 18.741996 2 Minard Holding 17.27
• I&M Bank is a the flagship company of the I&M Group 3 Tecoma Limited 16.66of Companies that has a major presence in banking 4 Biashara Securities Ltd 13.92(I&M) and insurance (GA), manufacturing and real 5 DEG 6.25estate 6 Proparco 4.43
• In 2013 I&M Bank’s shareholders exchanged their Bhagwanji Raja Charitable Foundation The Registeredshares for those of City Trust in a reverse takeover 7 Trustees 2.41enabling I&M share to be publicly traded 8 Investments and Mortgages Nominees Ltd (A/c-0001229) 2.14
• I&M Bank’s international network includes Bank One 9 Investments and Mortgages Nominees Ltd (A/c-0004047) 2.13Limited in Mauritius, I&M Bank Tanzania Limited and 10 Standard Chartered Nominees (A/c -9660B) 0.73
11 Others 15.32Total 100
Financial Statements ExtractsI&M bank has an estimated 5-year PAT CAGR of 17.8%
68
Income Statement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRNetInterest Income 8.8 9.1 11.0 13.6 15.4 18.1 21.1 18.4%NonFunded Income 3.6 3.1 3.4 4.0 4.7 5.4 6.2 15.3%LoanLoss Provision 0.4 0.8 1.1 1.3 1.2 1.3 1.5 13.3%TotalOperating Expenses 5.1 4.8 6.1 7.3 8.0 9.1 10.4 16.8%ProfitBefore Tax 7.3 7.5 8.3 10.3 12.2 14.3 16.9 17.7%ProfitAfter tax 5.0 5.2 5.8 7.2 8.5 10.0 11.9 17.8
%%PATChange YoY 20.9% 5.1% 11.3% 24.1% 17.8% 17.9% 18.0%CIR 38.2% 33.1% 34.2% 34.1% 33.8% 33.3% 32.8%EPS 12.7 13.3 14.9 18.4 21.7 25.6 30.2DPS 2.1 2.6 2.7 3.3 3.9 4.6 5.4ROaE 25.1% 23.9% 21.6% 20.6% 20.4% 20.3% 20.3%ROaA 3.8% 3.5% 3.4% 3.4% 3.4% 3.4% 3.4%
Balance Sheet 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRGovernment Securities 21.1 32.8 22.3 33.5 39.2 45.9 53.7 10.4%
NetLoansandAdvances 91.9 101.6 123.8 152.3 178.2 208.5 243.9 19.1%Total Assets 141.4 154.2 191.7 233.2 272.7 318.8 372.9 19.3%
CustomerDeposits 97.1 99.2 123.8 152.3 178.2 208.5 243.9 19.7%Borrowings 11.6 14.3 17.5 21.4 24.9 29.1 34.0 18.8%Total Liabilities 117.5 131.7 158.7 194.3 226.7 264.5 308.8 18.6%
Shareholders Equity 22.1 21.7 32.2 38.2 45.2 53.5 63.3 23.9%BookvaluePer share 0.1 0.1 0.1 0.1 0.1 0.1 0.2 23.9%
Valuation SummaryI&M bank is overvalued with a downside of 15.6%
CostofEquity Assumptions: 8thSept2015
Riskfree rate* 12.0%
Beta 0.9
Country RiskPremium 6.8%
ExtraRiskPremium 0.2%
Costof Equity 18.0%
Terminal Assumptions:Growth rate 5.0%
MatureCompany Beta 1.0
TerminalCostof Equity 19.0%
ReturnonAverage Equity 20.3%
JustifiedPricetoBook value 1.1x
ShareholderEquity--FY19e63.3
Terminal Value 69.2
Year Ended 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19
Dividends 1.0 1.3 1.5 1.8 2.1
TerminalCashflow 69.2
Timein Years 0.3 1.3 2.3 3.3 4.3
Discounting factor 1.0 0.8 0.7 0.6 0.5
PVofCash Flows 1.0 1.0 1.0 1.0 34.9
Valueof Equity 39.0Numberof Shares 0.4ValuePer Share 99.5Current PriceUpside/ Downside
121.0(17.8%)
Dividend yieldDownside
2.2%(15.6%) Overvalued
69
* Five years average yield on a 10 year Treasury bond
II. NIC Bank
70
Company DescriptionNIC bank is fairly liquid owing to the counter’s 48% free float
71Source – Annual Reports and H1’ 2015 InvestorBrief
Company Description
Pros Cons
• NIC Bank (formerly National Industrial Credit BankLimited) was incorporated in Kenya on 29th September1959 as a joint venture between Mercantile CreditLimited and Standard Bank. NIC Bank was among thefirst non-bank financial institutions to provide hirepurchase and instalment credit finance facilities inKenya
• In early 2015, NIC Leasing LLP, a partnership betweenNIC Bank Limited and Mercantile Finance Limited, wasincorporated to undertake direct operating leasebusiness. The leasing product is available for Small andMedium size enterprises (SME’s), Corporates and bothCounty and Central Government
• As at June 2015, NIC has: (i) total assets of Kshs 153.2bn, (ii) Total customer deposits of Kshs 105.2 bn (iii)Total loans at Kshs 108.3 bn (iv) Total shareholdersfunds at Kshs 23.7 bn
• Well developed IT network T24, that enables the bank to 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 branchescountrywide
• NIC bank has maintained its pole positioning in asset financing 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 compression of the bank’s net interest margins
• Exposure to different political, economic and regulatoryenvironments, especially Tanzania with their upcomingelections might slow down business
No. Shareholders %1. FirstChartered Securities 15.84
2. ICEAAssetManagementLtdA/C2000 9.163. LivingstoneRegistrars Ltd 8.734. RivelKenya Ltd 8.29
5. Saimar Ltd 4.216. AmwaHoldings Ltd 2.12
7. MakimwaConsultants Ltd 1.358. MurwokiHoldings Limited 1.109. StandardCharteredNomineesA/C9230 1.0010. Others 48.2
Total 100
Financial Statements ExtractsNIC bank has an average return on equity of 20%
72
Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGRNetInterest Income 7.3 8.0 8.6 10.1 12.0 14.1 16.5 15.5%NonFunded Income 3.2 3.6 4.2 4.9 5.7 6.5 7.4 15.6%LoanLoss Provision 1.1 0.3 0.5 0.6 0.7 0.8 1.0 24.3%TotalOperating Expenses 5.5 5.3 6.1 7.0 8.2 9.6 11.1 15.8%ProfitBefore Tax 5.0 6.2 6.8 8.0 9.4 10.9 12.7 15.3%ProfitAfter tax 3.2 4.1 4.8 5.6 6.6 7.7 8.9 16.7%%PATChange YoY 7% 27% 15% 17% 18% 16% 16%CIR 52% 46% 47% 47% 47% 47% 47%EPS 5.1 6.4 7.4 8.7 10.3 12.0 13.9DPS 0.6 1.0 1.1 1.3 1.5 1.8 2.1ROaE 20.1% 20.6% 19.7% 20.0% 19.9% 19.6% 19.3%ROaA 2.8% 3.1% 3.1% 3.2% 3.3% 3.3% 3.4%
Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGRNetLoansandAdvances 81.4 102.0 114.9 134.6 156.1 181.1 210.0 15.5%Government Securities 18.1 19.2 11.4 13.2 15.3 17.8 20.6 1.4%Total Assets 121.1 145.8 162.6 185.6 212.8 244.5 281.2 16.7%CustomerDeposits 91.6 100.4 113.7 131.9 153.0 177.5 205.9 15.4%Borrowings 3.6 14.4 15.7 15.7 15.7 15.7 15.7 1.8%Total Liabilities 103.5 122.4 136.6 154.9 176.6 201.7 230.9 13.5%Shareholders Equity 17.2 22.9 25.5 30.2 35.8 42.3 49.9 16.7%BookvaluePer share 26.9 35.7 39.8 47.2 55.9 66.1 77.9 16.7%
Valuation Summary
Riskfreerate * 12.0%Beta 0.8MatureMarketRiskPremium 6.0%
ExtraRiskPremium 0.3%Costof Equity 17.2%
73
Terminal Assumptions:Growth rate 5.0%MatureCompany Beta 1.0TerminalCostof Equity 18.3%ReturnonAverage Equity 19.3%JustifiedPricetoBook value 1.1xShareholderEquity--FY19e 49.85TerminalValue--(Year 2019) 53.7
DividendDiscountModel 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Dividends 0.7 0.8 1.0 1.2 1.3Terminal Value 53.7Time 0.3 1.3 2.3 3.3 4.3Discount Factor 1.0 0.8 0.7 0.6 0.5Present value 0.7 0.7 0.7 0.7 27.7Valueofequity 30.4Number of shares 0.6Valuepershare 47.6CurrentPrice per share 46.8Upside/(Downside)
1.8%DividendYield
2.4%Target Price 47.6Upside
4.2%
Fairly Valued* Five years average yields on a 10 year Treasury bond
III. National Bank of Kenya
74
Company DescriptionNational 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 itwas fully owned by the government
• As at June the bank had assets totaling 124.4 bn and Shareholder funds in excess of Kshs 13.3 bn
• It currently has 75 branches across Kenya
• Introduction of Islamic Banking that capitalized on theunbanked Islam community contributing to depositgrowth
• The introduction of bancassurance and custodialservices has seen the bank diversify its revenue
• Branch expansion – in 2014 NBK opened 15 branchesthat saw the bank grow its deposits
• High cost of funds. Despite NBK serving retail customers,it has maintained high cost of funds averaging 4.5% thusleading to lower NIMs of 8.5%
• NBK has the worst loan book among the listed banks withan NPL/Total loan ratio of 9.5%
• Low NPL coverage of 10.7%, despite having the highestNPLs
• Despite being associated with the Government, the bankis slow in county expansion
%ShareHolding %
75Source – Annual Reports and H1’ 2015 InvestorBrief
1 NationalSocialSecurityFund(Kenya) 48.052 KenyaMinistryofFinance 22.53 NICCustodial Services 0.414 EquityNomineeLimited:00084 0.375 EquityNomineeLimited:00111 0.346 StandardCharteredNominees 0.347 EphraimMwangiMaina 0.338 CraysellInvestments Limited 0.329 JubileeInsuranceCompanyofKenya Limited 0.2910 DavidMwangiNdegwa11 Over49,200Other Investors
0.2626.79
Total 100
Financial Statements Extracts
76Source – Company Financials
National Bank has a low return on equity of 7%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome Statement
NetInterest Income 5.6 6.8 6.2 6.2 6.7 7.3 7.8 2.9%NonFunded Income 2.9 3.1 4.2 3.7 4.0 4.3 4.6 8.2%LoanLoss Provision 0.3 0.5 0.8 0.9 0.9 1.0 1.1 15.9%TotalOperating Expenses 6.7 7.5 8.4 8.5 9.1 9.8 10.6 7.1%ProfitBefore Tax 1.8 1.3 2.0 1.4 1.6 1.8 1.9 7.7%ProfitAfter tax 1.1 0.9 1.4 1.0 1.1 1.2 1.3 8.7%%PATChange YoY 52.5% (21.8%) 56.8% (26.7%) 14.7% 7.3% 7.3% 8.7%EPS 4.0 3.1 4.9 3.6 4.1 4.4 4.7DPS -- -- -- -- -- -- --CIR 75.3% 70.2% 73.7% 76.9% 75.9% 76.0% 76.1%ROaE 10.0% 7.2% 10.9% 7.5% 7.9% 7.9% 7.8%ROaA 1.4% 0.8% 1.1% 0.7% 0.8% 0.8% 0.8%
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet
NetLoansandAdvances 39.6 65.6 64.6 69.7 75.3 81.3 87.8 6.0%Government Securities 27.5 30.3 32.3 34.9 37.7 40.7 43.9 7.7%Total Assets 92.6 123.1 130.4 140.5 151.4 163.2 176.0 7.4%CustomerDeposits 78.0 104.7 107.6 116.2 125.5 135.6 146.4 6.9%Total Liabilities 80.7 110.9 117.6 126.6 136.4 147.0 158.4 7.4%Shareholders Equity 11.9 12.2 12.9 13.9 15.0 16.3 17.6 7.5%BookvaluePer share 42.5 43.7 46.0 49.6 53.7 58.1 62.8 7.5%
Valuation SummaryNational Bank is overvalued by 64%
77
CostofEquity Assumptions: 8th Sep--15Riskfreerate * 12.0%Beta 0.9Country RiskPremium 6.0%ExtraRiskPremiumCostofEquity
0.0%17.2%
Terminal Assumptions:Growth rate 5.0%MatureCompany Beta 1.0TerminalCostof Equity 18.0%ReturnonAverage Equity 7.8%JustifiedPricetoBook ValuePreferenceShares
0.2x5.7
JustifiedTerminal Price(2019) 3.8
BV(2019) 11.9
TerminalResidual CF (8.1)
Residual Income 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Beginningbookvalueof equity 6.5 7.2 8.2 9.4 10.6Costof equity 17.2% 17.2% 17.2% 17.2% 17.2%Equity cost 1.1 1.2 1.4 1.6 1.8
Net Income 1.4 1.0 1.1 1.2 1.3Equity cost 1.1 1.2 1.4 1.6 1.8Residual Income 0.2 (0.2) (0.3) (0.4) (0.5)Terminal Value (8.1)Time 0.3 1.3 2.3 3.3 4.3Discount Factor 1.0 0.8 0.7 0.6 0.5Present value 0.2 (0.2) (0.2) (0.2) (4.4)
BookValueof equity 6.5PVofequityexcess return (4.7)Valueof equity 1.8Numberofshares 0.3Valueper share 6.5CurrentPriceper share 17.8Upside/(Downside) (63.5%) Overvalue
d*Five years average yield on a 10 year Treasurybond
IV. Diamond Trust Bank
78
Company DescriptionDTBK’s stock is fairly liquid with a free float of 48%
Company Description
Pros Cons
• Diamond Trust Bank was incorporated in 1945 asDiamond Jubilee Investment Trust and later changed itsname to DTB Kenya in 1972 when it was listed on theNSE
• 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 TanzaniaLtd• 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
• Strong backing from financing partners, i.e. Aga Khan Fund for Economic Development and Habib bank
regional Burundi
• Strong performance of subsidiaries: Thesubsidiaries in Tanzania, Uganda andcontribute approx. 25% of the group’sPAT
• 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, engage in forex trading and money transfers
• Traditional SME market now being targeted by tier I banks hence 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
• High cost of funding at 4.6%, resulting in lower NIMs at 9.3%
No. Shareholder %
79
1 AgaKhanFundForEconomicDevelopment 17.32 HabibBankLimited 12.03 TheJubileeInsuranceCompanyofKenya Limited 10.44 StandardCharteredNomineesA/C KE18965 4.15 StandardCharteredNomineesA/C KE18972 2.86 StandardCharteredNomineesa/cA/C KE11752 1.97 TheDiamondJubileeInvestmentTrust(U)Limited 1.48 StandardCharteredNomineesA/C KE18986 1.19 CraysellInvestments Limited 1.010 Others 48.1
Total 100
Financial Statements Extracts
80
DTB has an estimated 5-year PAT CAGR of 15.6%
Income Statement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR
NetInterest Income 11.0 12.8 15.8 20.0 23.2 27.4 32.3 20.4%
NonFunded Income 3.4 3.8 4.2 5.4 6.4 7.6 8.9 18.6%
LoanLoss Provision (0.9) (0.9) (1.3) (1.9) (2.2) (2.6) (3.0) 28.5%
TotalOperating Expenses (7.2) (8.1) (11.0) (15.0) (17.6) (20.8) (24.6) 24.9%
Costto Income 43.3% 43.4% 48.6% 51.9% 52.2% 52.2% 52.2% 3.8%
ProfitBefore Tax 7.2 8.5 8.9 10.3 12.0 14.1 16.7 14.4%
ProfitAfter tax 5.2 5.7 6.3 7.4 8.5 10.0 11.8 15.6%
%PATChange YoY 11.0% 9.1% 11.3% 15.9% 15.5% 17.7% 17.7%CIR 43.3% 43.4% 48.6% 51.9% 52.2% 52.2% 52.2%EPS 21.6 23.6 26.2 30.4 35.1 41.3 48.6DPS 2.1 2.4 2.6 3.0 3.5 4.1 4.9ROaE 27.9% 22.8% 20.3% 21.0% 21.6% 22.4% 23.4%ROaA 3.5% 3.0% 2.7% 2.9% 2.9% 3.0% 3.2%
Balance Sheet 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRGovernment Securities 25.4 35.1 37.8 44.7 52.7 62.2 73.4 15.9%
NetLoansandAdvances 110.9 137.7 170.3 200.9 237.1 279.8 330.2 19.1%Total Assets 166.5 211.5 251.2 296.4 349.6 412.3 486.2 18.1%
CustomerDeposits 128.8 161.0 189.2 223.3 263.5 310.9 366.8 17.9%Borrowings 5.8 12.3 19.3 22.8 26.9 31.7 37.4 24.9%Total Liabilities 142.8 179.3 214.3 252.9 298.4 352.1 415.5 18.3%
Shareholders Equity 21.0 29.0 33.5 40.1 47.7 56.7 67.3BookvaluePer share 86.7 119.6 138.2 165.6 197.1 234.3 278.1
81
Valuation SummaryDTB’s stock is fairly valued with an upside of 2.5%
Terminal Assumptions:Growthrate 5.0%MatureCompany Beta 1.00TerminalCostof Equity 18.2%ReturnonAverageEquity 23.4%Justified PricetoBook value 1.4xShareholder Equity--FY19e 67.3Terminal Value 93.4
CostofEquity Assumptions: 8thSept 2015
Riskfreerate * 12.0%
Beta 0.8
Country Risk Premium 6.0%
ExtraRiskPremium 0.2%
Costof Equity 17.2%
Year Ended 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Dividends 0.6 0.7 0.8 1.0 1.2
TerminalCashflow 93.4Timein Years 0.3 1.3 2.3 3.3 4.3Discounting factor 1.0 0.8 0.7 0.6 0.5PVofCash Flows 0.6 0.6 0.6 0.6 47.6
Valueof Equity 50.0Numberof Shares 0.2
ValuePer Share 206.5Current Price 204.0
Upside/ Downside 1.2%Dividend yield 1.3%Upside 2.5% Fairly valued
* Five years average yield on a 10 year Treasury bond
82
V. CfC Stanbic Bank
83
Company DescriptionCfC Stanbic Holdings’ majority shareholder is the Stanbic Africa Holdings (UK)
Company Description
Pros Cons
• CfC Stanbic Holdings was listed in the NSE on April2011
• This comes after CfC Stanbic Limited and CfC holdings
limited merged and demerged from the CfC insuranceholdings limited (later became Liberty Holdings)
• As at June 2015, CfC had assets in excess of Kshs.
203.6 bn and shareholder’s funds of Kshs. 26.2 bn• As at June 2015, 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 thebanks 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. Therecent instability in S.Sudan proved to be a challenge as itaffected their overall income
• Their expansion strategy is limited by the presence ofStandard Bank in the region
• Lack of operational efficiency owing to a high cost toincome ratio of 60%, which is the highest among listedbanks as at June
Source – Annual Reports and H1’ 2015 InvestorBrief
No. %ShareHolding %1 StanbicAfricaHoldingsLtd. (UK) 41.412 CfCStanbicNominees(K)Ltdnon--resident A/C NR00901 18.593 StandardCharteredNomineesnon--resident A/C 9866 5.854 StandardCharterednomineesnon--resident A/C 9867 4.055 SovereignTrust Ltd 2.726 StandardCharterednomineesnon--resident A/C KE9053 2.037 Archer&WilcockNomineesLimited 1.558 ThePermanentSecretarytotheTreasury ofKenya 1.19 StandardCharteredNomineesaccount9230 1.0510 SCBA/CPanAfricanUnitLinkedFD 0.8611 Others 20.79
Total 100
Financial Statements ExtractsCfC Stanbic has a return on equity of 23%
84
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncomeStatement
NetInterest Income 7.5 8.4 9.2 11.1 13.0 15.0 17.3 15.6%NonFundedIncome 8.5 8.2 9.5 10.6 11.8 13.3 14.9 12.6%LoanLossProvision 0.9 0.8 0.9 1.1 1.3 1.4 1.7 15.6%TotalOperatingExpenses 8.8 8.9 11.3 13.0 15.0 17.1 19.6 17.0%ProfitBeforeTax 7.2 7.6 7.3 8.6 9.8 11.1 12.6 10.5%ProfitAftertax 5.1 5.7 5.1 6.0 6.9 7.8 8.8 9.0%%PATChangeYoY 51% 11% (10%) 17% 14% 13% 13%EPS 13.0 14.5 13.0 15.2 17.4 19.7 22.2DPS -- -- -- -- -- -- --CIR 49.6% 49.1% 55.5% 55.2% 55.3% 55.6% 55.8% 2.6%ROaE 25.4% 23.3% 18.3% 18.6% 17.7% 16.9% 16.1% (7.1%)ROaA 3.4% 3.3% 2.6% 2.6% 2.6% 2.6% 2.6% (4.6%)
2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalanceSheet
NetLoansandAdvances 69.1 88.3 101.6 116.8 134.4 154.5 177.7 15.0%Governmentsecurities 48.4 28.1 35.9 41.2 47.4 54.5 62.7 17.4%TotalAssets 170.7 171.3 218.2 245.3 276.4 312.1 353.0 15.6%CustomerDeposits 95.7 96.8 119.5 137.5 158.1 181.8 209.1 16.6%Borrowings 5.8 6.5 6.5 6.5 6.5 6.5 6.5 (0.1%)Total Liabilities 148.4 144.7 188.8 209.9 234.2 262.1 294.2 15.2%ShareholdersEquity 22.4 26.6 29.4 35.4 42.3 50.0 58.8 17.2%BookvaluePershare 56.5 67.4 74.2 89.5 106.9 126.6 148.8 17.2%
Valuation SummaryCfC Stanbic is overvalued by 21%
85
CostofEquity Assumptions: 8th Sep--15Riskfreerate * 12.0%Raw Beta 0.6Country RiskPremium 6.0%ExtraRiskPremium 0.0%Costof Equity 17.4%AdjustedBeta 0.9
Terminal Assumptions:Growth rate 5.0%MatureCompany Beta 1.0TerminalCostof Equity 18.0%ReturnonAverage Equity 16.1%PersistencyFactor 0.5JustifiedPricetoBook Value 0.9x
ResidualIncome 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Beginningbookvalueof equityCostof equityEquity cost
26.617.4%4.6
29.417.4%5.1
35.417.4%6.2
42.317.4%7.4
50.017.4%8.7
Net IncomeEquity cost
5.14.6
6.05.1
6.96.2
7.87.4
8.88.7
Residual Income 0.5 0.9 0.7 0.4 0.1Terminal Value 0.1Time 0.3 1.3 2.3 3.3 4.3Discount Factor 1.0 0.8 0.7 0.6 0.5Present value 0.5 0.7 0.5 0.2 0.1BookValueof equity 26.2PVofequityexcess return 2.0Valueof equity 28.2Numberofshares 0.4Valueper share 71.3CurrentPriceper share 90.0Upside/(Downside) (20.8%) Overvalue
d* Five years average yields on a 10 year Treasury bond
VI. Housing Finance
86
Company DescriptionHF Group’s mandate is to provide integrated solutions for the property industry
Company Description
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 incomesegment
• The bank is the market leader in provision of mortgagefinancing
• Lack of a vibrant mortgage market in Kenya• The Kshs 726 mn lawsuit poses a significant risk to the
bank’searnings• Low diversification as evidenced by the low percentage of
non interest income to total revenue at 15.2% which isthe lowest among the listed banks
• Asset liability mismatch which forces the bank to resort toexpensive financing
No. Shareholders %
87Source – Annual Reports
1 British American Insurance Company Ltd2 Equity Nominees Ltd3 NSSF4 SCB A/C Pan African Unit5 Permanent secretary treasury6 Jubilee Insurance7 Bai Co. (MTIUS) Ltd8 CFC Stanbic nominees Ltd A/C NR10308339 CFC Stanbic nominees Ltd A/C NR1030852
33.6%12.4%6.8%3.9%3.6%1.1%0.9%0.9%0.8%
10 Others 36.1%Total 100.00%
Financial Statements Extracts
88
HF bank has an estimated 5-year PAT CAGR of 14.5%
IncomeStatement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRNetInterest Income 2.6 3.0 3.6 4.3 5.2 6.0 7.1 18.7%NonFundedIncome 1.4 0.8 0.9 1.2 1.4 1.6 1.9 18.0%LoanLossProvision 0.3 0.6 0.7 0.8 1.0 1.1 1.3 19.5%TotalOperatingExpenses 2.4 2.5 3.0 3.7 4.5 5.3 6.4 21.0%ProfitBeforeTax 1.5 1.4 1.5 1.8 2.1 2.4 2.7 14.4%ProfitAftertax 1.0 1.0 1.1 1.3 1.5 1.7 1.9 14.5
%%PATChangeYoY 33.9% (2.0%) 9.4% 18.1% 16.5% 15.1% 13.6%CIR 55.1% 49.2% 52.2% 53.6% 53.7% 54.3% 55.4%EPS 2.9 2.8 3.1 3.6 4.2 4.9 5.5DPS 1.2 1.0 1.2 1.4 1.7 1.9 2.2ROaE 18.1% 15.7% 12.8% 12.0% 13.0% 13.8% 14.4%ROaA 2.3% 1.8% 1.6% 1.6% 1.5% 1.5% 1.4%
BalanceSheet 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRGovernmentSecurities 0.3 0.3 0.7 0.9 1.1 1.3 1.5 42.1%
NetLoansandAdvances 35.2 45.2 55.4 65.9 79.1 94.2 112.1 19.9%Total Assets 47.4 61.0 74.2 87.4 103.1 121.9 144.4 18.8%
CustomerDeposits 26.5 36.1 43.3 51.9 62.3 74.7 89.7 20.0%Borrowings 14.4 17.1 19.2 23.0 27.4 32.7 39.1 18.0%Total Liabilities 41.5 54.4 64.1 76.5 91.3 109.1 130.5 19.1%
ShareholdersEquity 5.9 6.6 10.1 10.9 11.7 12.8 13.9 16.2%BookvaluePershare 16.9 18.9 29.1 31.2 33.8 36.7 40.0 16.2%
Valuation SummaryHF bank is fairly valued with a downside of 0.9%
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CostofEquity Assumptions: 8thSept 2015
Riskfreerate* 12.0%
Beta 0.9
CountryRiskPremium 6.0%
ExtraRiskPremium 0.0%
CostofEquity 17.2%
Terminal Assumptions:Growthrate 5.0%
MatureCompanyBeta 1.00TerminalCostofEquity 18.0%ReturnonAverageEquity 14.4%JustifiedPricetoBookvalue 0.7xShareholderEquity--FY19e 13.9TerminalValue 10.0
Year Ended 31--Dec--15 31--Dec--16 31--Dec--17 31--Dec--18 31--Dec--19Dividends 0.4 0.5 0.6 0.7 0.8TerminalCashflow 10.0Timein Years 0.3 1.3 2.3 3.3 4.3Discounting factor 1.0 0.8 0.7 0.6 0.5PVofCash Flows 0.4 0.4 0.4 0.4 5.4Valueof Equity 7.1Numberof Shares 0.3ValuePer Share 20.3Current Price 21.8Upside/ Downside (6.6%)Dividend yield 5.6%Downside (0.9%) Fairly valued
* Five years average yields on a 10 year Treasury bond
VII. Valuation Summary – Tier II Banks
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Valuation Summary – Tier II BanksTier II banks on average presents a downside of 15.7%
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CompanyName Price Issued Market P/E Dividend Yield PEG CoE Fair UpsideShares Cap TTM FY2014 FY2015e Value
I&MBank 121.0 0.4 48.4 8.3x 2.1% 2.2% 0.6x 18.0% 99.5 (15.6%)NICBank 46.8 0.6 29.9 7.0x 2.1% 2.4% 0.4x 17.2% 47.6 4.2%National Bank 17.8 0.3 5.0 3.2x 0.0% 0.0% 0.4x 17.2% 6.5 (63.5%)DTB 204.0 0.2 40.8 8.2x 1.2% 1.3% 0.5x 15.9% 206.5 2.5%CfC 90.0 0.4 36.0 8.8x 0.0% 0.0% 0.8x 17.4% 71.3 (20.8%)HF 21.8 0.3 6.5 7.8x 4.6% 5.6% 0.5x 17.2% 20.3 (1.0%)
Min 3.2x 0.0% 0.0% 0.4x 15.9% (63.5%)Median 8.0x 1.6% 1.7% 0.5x 17.2% (8.3%)Average 7.2x 1.7% 1.9% 0.5x 17.2% (15.7%)Max 8.8x 4.6% 5.6% 0.8x 18.0% 4.2%
Capital Adequacy I&M NIC NBK DTB CfC HF Minimum StatutoryCoreCapitalto TotalLiabilities 20.4% 20.0% 11.5% 21.3% 20.6% 18.3% 8.0%CoreCapitaltoRWA 15.4% 14.0% 14.5% 14.9% 15.6% 14.3% 10.5%TotalCapitaltoRWA 17.9% 20.0% 15.5% 18.0% 18.7% 17.6% 14.5%
D: The Board of Directors
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The Board of Directors – Non-executive DirectorsProfessor Daniel Mugendi is the Chairman of the Board
Professor Daniel Mugendi Njiru,PhDChairmanProf. Mugendi is a renowned scholar, researcher, consultant and higher education leader. He has made significantcontributions in the area of agro--ecosystems research and management as well as the development of Universityeducation in Kenya. He is currently the Principal of Embu University College --a constituent collegeof the University ofNairobi. He is theChairman of Board of Trustees of Kenya Forestry Research Institute ("KEFRI"). He has previously servedas the Deputy Vice--Chancellor of Finance, Planning and Development at Kenyatta University and also as the Dean of theSchool of Environmental Studies and Human Sciences. Prof. Mugendi holds a BSc. from Moi University, MSc. FromUniversity ofNairobi and a PhD from University ofFlorida.
A n i – Jussi AhveninenNon--executive DirectorAntti--Jussi Ahveninen is a real estate funds specialist with 12 international institutional real estate funds managed, allwith excellent track record. He currently heads the international real estate funds operation of Finland basedTaaleritehdas Private Equity Funds, a financial services house with over USD 4 billion under management. Antti haspreviously set--upand headed the real estate funds operation for the investment banking arm of one of the largest banksin Saudi Arabia based in Riyadh. He has an MSc in Real Estate Finance from Swedish School of Economics and Bachelor'sdegree from Helsinki School of Economics. Antti is also a lecturer with Aalto University School of Engineering (formerlyHelsinki University of Technology), with studies undertaken in Japan andUSA.
JamesMainaNon--executive DirectorJames is the Assistant Director at the Ministry of Lands Housing and Urban Development (MoLH&UD) (Directorate ofNairobi Metropolitan Development) a position hehas held since 2010. Hebringswith him over 15 years of experience inurban planning and management; spatial planning, preparation ofmaster plans and local plans, zoning and developmentcontrol, traffic management and decongestion, all gained with theNairobi City Council and his current position. Heholdsa Masters Degree in Urban and Regional Planning from the University of Nairobi, as well as a BA from the sameinstitution.
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The Board of Directors – Non-executive Directors, continued…The board is comprised of 8 members from diverse backgrounds, each bringing unique skill-sets
Madhav BhallaNon--executive DirectorMadhav is a Founding Partner at the law firm of Taibjee and Bhalla, a well established Litigation and Commercial lawfirm based in Nairobi, Kenya. Madhav possesses over 16 years of experience across transactional and commercial work,corporate advisory, banking, employment law, commercial & civil litigation, intellectual property, trusts and specialisesin real estate conveyancing and property law. Madhav is the Hon. Legal Counsel to the Retailers Trade Association ofKenya (RETRAK) and serves on theboard of many local trusts, charities and foundations. Heholds a LL.B. (Hons) from theUniversity of Birmingham and aDip Law from theKenya School ofLaw.
Nasser OlweroNon--executive DirectorNasser is the Director of Information Science and acting Director of the Science and Innovation group at the WorldWildlife Fund (WWF) in the United States, with over 16 years of experience. He advises on technology applicationcreating an interfacebetween conservation scienceand Information Technology and Systems and has built various toolsto support conservation. His interest is on the intersection of conservation science and technology examining andapplying various information systems to aid conservation efforts around the world. He has been involved in variousnatural capital projects and training in Uganda, Tanzania, Mozambique, Indonesia, Thailand, Bhutan, Mexico, Myanmarand Cambodia. He holds an MPhil. Degree in Environmental Information Systems from the School of EnvironmentalScience, Moi University,Kenya.
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Executive DirectorsCytonn’s Executive Directors bring with them over 35 years of experience in Investment Management
Edwin H. Dande,MBAManaging Partner, Chief ExecutiveOfficerEdwin is theManaging Partner & Chief ExecutiveOfficer of Cytonn Investments Management Limited. Edwin has over 15years of diversified financial services experience spanning investment banking, private equity, investment management,and real estate in global and regional financial services brands such as KPMG, former Lehman Brothers, Bank of AmericaSecurities / Merrill Lynch, and Britam Asset Managers. He holds a MBA, Finance Major from the Wharton SchoolUniversity of Pennsylvania and Bachelor of Science Degree in Accounting from the Monmouth University. He is also aCertified PublicAccountant.
Elizabeth N. Nkukuu, CFAPartner, Chief InvestmentOfficerElizabeth serves as the Chief Investment Officer of Cytonn Investments Management Limited. She has over 10 years ofexperience in Investment Management. Before Joining Cytonn, Elizabeth was a Senior Porsolio Manager at Britam AssetManagers having come from Genesis Investments as an Investment Manager. Elizabeth started her career as anInvestment analyst in PineBridge Investments. Elizabeth has a Master’s of Business Administration (MBA) Degree(Finance) from theUniversity ofNairobi. In addition to being a Chartered Financial Analyst (CFA), she is also a CPA (K).
PatriciaN.Wanjama, CPSPartner, Head of Legal & CompanySecretaryPatricia serves as the Head of Legal and Company Secretary for Cytonn Investments Management. Prior to joiningCytonn, Patricia served as the Head of Legal and Assistant Company Secretary for Britam Asset Managers. Patricia hasover 10 years of experience in the Legal field, with a strong focus on Financial and Investment Law. She holds a MBAfrom StrathmoreBusiness School, a LL.B and is a Registered CPSK.
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E: The Management Team
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The Management Team
AndrewAyuya,MAAKProjectManagerAndrew serves as the Project Manager at Cytonn Real Estate. Andrew has close to 10 years experience in ConstructionProject Management of diverse building projects right from inception, planning, implementation, monitoring andevaluation, handover and closure. He is a member of the Architectural Association of Kenya, ConstructionProjectManagers Chapter. Prior to joining Cytonn, Andrew was the Senior Project Manager at Pinnacle Projects InternationalLimited. He holds a Masters in Project Planning and Management from University of Nairobi and a Bachelors ofConstruction Management from Jomo KenyattaUniversity.
Cytonn’s management team bring with them vast experience in investments, real estate, finance and PRMauriceOduorInvestmentManagerMaurice serves as an Investment Manager at Cytonn Investments Management Limited. He has over six yearsexperience in investment industry having worked with two strong brands in Kenya. Before joining Cytonn Investments,Maurice served as Assistant Porsolio Manager at Britam Asset Managers Ltd focusing on porsolio management andclients relationship management. Maurice started his career at Genesis Kenya Investment Management Ltd as aninvestment Assistant with specialization in Fixed income analysis, investment dealing and porsolio management duties.He holds a Bachelor of Business Administration (Finance option) from Maseno University and is currently a CharteredFinancial Analyst (CFA) level III candidate.
Johnson Denge,MISKReal Estate ServicesManagerJohnson is the Real Estate Services Manager of Cytonn Real Estate. Johnson has close to 10 years of diversified RealEstate development experience spanning from deal origination, Concept development, Real estate research, Valuationand advisory, and real estate market in Regional Real Estate market brands such as Ryden International, and AcornGroup and now at Cytonn Real Estate. He is a full member of Institution of Surveyors of Kenya, a Registered ValuationSurveyor and an Estate Agent. He holds a Bachelors Degree in Land Economics from theUniversity ofNairobi.
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The Management Team, continued…
Shiv A.AroraInvestmentAssociateShiv serves as an Investment Associate at Cytonn Investments Management Limited. His experience within thefinancialservices industry ranges from wealth management with Merrill Lynch Dubai to and also experience with CitibankKenya. Most recently, Shiv served as an Investment Analyst for Britam AssetManagers, focused largely on the Private Market segment, with a key focus on Real Estate. Shiv holds a BSc. Hons inEconomics from theUniversity ofWarwick and is a candidate in theCFAProgramme.
BeverlynNaliakaPR & Communications AssociateBeverlyn serves as a PR and Communications Associate at Cytonn Investments Management Limited. She has over fouryears experience in PR and Communication. Before joining Cytonn Investments, Beverlyn held the position of AccountManager at GinaDin CorporateCommunications. Sheholds a Bsc. in Communications and PR fromMoi University. Sheis currently a finalist at Daystar University pursuingMasters in CorporateCommunications.In addition, Beverlyn is a CPS(K).
Cytonn’s management team bring with them vast experience in investments, real estate, finance and PR
JuliusKibanyaDistributionManagerKibanya serves as the Distribution Manager at Cytonn Investments Management Limited. He has over fifteen yearsexperience in Sales & Marketing and Management Information Systems. Before joining Cytonn Investments, Kibanyaheld the position of Branch Manager at Madison Insurance Company ltd, Unit Manager in BRITAM and JubileeInsurance. hepreviously worked with Directorateof Personnel Management as a lecturer in Information Technology.Heis a graduate of IMIS-- London and amember of the Institute for theManagement of Information Systems.
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Q&A
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