April, 2017 - Cytonn Home · mixed FY’2016 results, mainly banking sector (listed) with weighted...

Kenya Listed Commercial Banks Analysis

Cytonn FY’2016 Banking Sector Report

“Consolidation & resilience in a challenging operating environment”

10th April, 2017

22

Table of Contents

I. Overview of the Firm

II. Kenya Economic Review and Outlook

III. Kenya Banking Sector Overview

IV. Cytonn’s Banking Sector Report

A. Executive Summary

B. Banking Sector Report

V. Appendix

A. Metrics Used

B. Tier I Banks

C. Tier II Banks

33

I. Overview of the Firm

44

What

We S

tand

For Our Values

Our Mission

We deliver innovative&

differentiated financial

solutions that speak to

our clients’needs

Our Vision

To be Africa’s leading

investment manager by

consistently exceeding

clients’ expectations

Integrity

Doing the right things

Client Focus

Putting clients’ interest first at all times

Entrepreneurship

Using innovation and creativity to deliver

differentiated financial solutions

Excellence

Delivering the best at all times

Accountability

We take both corporate andpersonal

responsibility for ouractions

People

Passionate and self-driven people who

thrive in a team context

55

19

About Us

Our Business

Our Solutions

Our People

Core Businesses

Investments

Real Estate

Private Wealth

Diaspora

Technology

Investment Co-operative

Community & CSR

29

Cytonn Foundation

06

Overview of the Firm

Table

of

Conte

nts

66

About Us 8

Our Business 10

Solutions 11

Our People 13

Overviewof The Firm

77

Strategy is

straightforward –

just pick a general

direction and

implement like hell

— Jack Welch

88

About Us

Cytonn Investments is an alternative investment manager with presence in East Africa, Finland

and the US. We provide investors with exposure to the high growth East Africa region. Our

investors include global and local institutional investors, individual high net-worth investors

and the diaspora. We also service retail investors through our Cytonn Co-operative

FACTFILE

Over Kshs. 73 billion under mandate

Three offices across 2 continents

12 investment ready projects

A unique franchise differentiated by:

Independence & InvestorFocus

Focused on serving the interest

of clients, which is best doneon

an independent platform to

minimize conflicts of interest

Alternative Investments

Specialized focus on

alternative assets - Real

Estate, Private Equity, and

StructuredSolutions

StrongAlignment

Every staff member is an ownerin

the firm. When clients do well, the

firm does well; and when the firm

does well, staff do well

CommittedPartners

Strong global and local

partnerships in financing, land

and development affiliate

74

8 Overview of TheFirm

4 150 Over 150

staff members 12

99

Why We Exist

Africa presents an attractive investment opportunity for investors seeking attractive and

long-term returns. Despite the alternative markets in Africa having high and stable returns,

only a few institutional players serve the market. Cytonn is focused on delivering higher

returns in the alternative markets, while providing the best client service and always protecting

our clients’ interests.

WE SERVE FOUR MAIN CLIENTSSEGMENTS:

● Retail segment through Cytonn Co-operative membership

● High Net-worth Individuals through Cytonn Private Wealth

● East Africans in the Diaspora through Cytonn Diaspora

● Global and Local Institutional clients

WE INVEST OUR CLIENT FUNDSIN:

● Real Estate

● Private Equity

● Fixed Income Structured Solutions

● Equities Structured Solutions

We collect fundsfrom our clients

We invest them

in high growth

opportunities

We deliver the

best possible

returns


1010

Our Business

Our Business Lines

Where We Operate

Investments

Alternative investment

manager focused on

private equity and real

estate

RealEstate

We develop institutional

grade real estate

projects for investors

Diaspora

We connect East

Africans in the diaspora

to attractive investment

opportunities in the

region

Technology

We deliver world-class

financial technology

solutions

Co-operative

Provides access to

attractive alternative

investment opportunities

for members

EUROPE

NORTH AMERICA

AFRICA

Overview of TheFirm10

1111

Our Solutions

To unearth the attractive opportunity that exists in alternative markets in Africa, we offer

differentiated investment solutions in four main areas:

PRIVATE REGULAR INVESTMENT SOLUTIONS

Attractive returns in the alternative segmentshave

typically been accessible to institutional andhigh

net-worth investors. Our regular investment solutions

provide access to the alternative investments to

members of the Cytonn Co-operative.

PRIVATE EQUITY

We seek to unearth value by identifying potential

companies and growing them through capitalprovision,

partnering with management to drive strategy and

institutionalizing their processes. Our areas of focus are

Financial Services, Education, Renewable Energy and

TechnologySectors.

HIGH YIELDSOLUTIONS

Our expertise in the alternative markets enables us to

offer investors high yielding investments. Our robust

credit analysis coupled with our quick dealing

capabilities, our extensive research coverage and our

innovative structuring helps to ensure consistent and

above market returns to investors.

REAL ESTATE INVESTMENT SOLUTIONS

Our comprehensive real estate capabilities enable us to

find, evaluate, structure and deliver world-class real

estate investment products to our investors in the East

African region. Our capabilities include fundraising,

market research and acquisition, concept design, project

management and agency and facility management.


1212

Our Products

We serve three main types of clients namely, high net-worth individuals, institutions and retail,

each with diverse needs. Below are the suitability criteria for the various products.

INSTITUTIONALCLIENTS

HIGH NETWORTH

INDIVIDUALS (HNWI) RETAILCLIENTS

Cash ManagementSolutions

Regular InvestmentPlan

● Education InvestmentPlan

● Regular Investment Solution

● Co-op Premier Investment Plan

● Land InvestmentPlan

Real EstateDevelopment

● Real Estate Developments

● Sharpland


1313

Our People

If you could get all the people in an organization rowing the same direction, you could

dominate any industry, in any market, against any competition, at any time.

— Patrick Lencioni

We are focused on one agenda:

THE CLIENT


1414

Board of Directors

To ensure that we remain focused on the clients’ interests, we have put in place proper

governance structures. We have a board of directors consisting of 10 members from diverse

backgrounds, each bringing in unique skill-sets to the firm.

Non-Executive Director

Chairman

Prof. Daniel Mugendi Njiru,PhD


Madhav N. Bhalla,LLB


Antti-Jussi Ahveninen,MSc


Nasser J. Olwero,MPhil

For bios, visit www.cytonn.com


http://www.cytonn.com/

1515


James M. Maina,MA


Michael Bristow,MSc


Rose Kimotho,M.B.S.

ExecutiveDirector

Managing Partner

Edwin H. Dande, CPA,MBA

Executive Director

Senior Partner

Elizabeth N. Nkukuu, CFA,MBA

Executive Director

Partner

Patricia N. Wanjama, CPS (K), MBA

For bios, visit www.cytonn.com


http://www.cytonn.com/

1616

Governance

TECHNOLOGY & INNOVATION COMMITTEE

INVESTMENTS & STRATEGYCOMMITTEE AUDIT RISK & COMPLIANCECOMMITTEE

GOVERNANCE, HUMAN RESOURCES & COMPENSATION COMMITTEE

The committee oversees and provides strategic investment direction,

including the implementation and monitoring process.

The committee consists of fivedirectors with three non-executive directors

namely: James Maina (Chairman), Antti-Jussi Ahveninen, Madhav Bhalla,

Edwin Dande and ElizabethNkukuu.

The committee establishes, oversees and implements governance structure,

human resource policies and firm widecompensations.

The committee consists of four directors with three non-executive directors

namely: Antti-Jussi Ahveninen (Chairman), Prof. Daniel Mugendi, Michael

Bristow and EdwinDande.

The committee establishes, oversees and implements technical expertise

and innovative processes as a driver towardscompetitiveness.

The committee consists of three directors, with two non-executive directors

namely: Nasser Olwero (Chairman), Michael Bristow and Patricia Wanjama.

The committee establishes and oversees risk and compliance, including the

implementation and monitoring process.

The committee consists of four directors with two non-executive directors

namely: Madhav Bhalla (Chairman), Nasser Olwero, Edwin Dande and

PatriciaWanjama.

If you have leadership without governance you risk tyranny, fraud and personal fiefdoms. Ifyou have governance without leadership you risk atrophy, bureaucracy and indifference.

— Mark Goyder


1717

II. Economic Review and Outlook

1818

Inflation turns negative from neutral while Exchange rate turns neutral from negative. Of the 7 indicators we track, 1 has improved while 1 has deteriorated in 2017 pointing to a stable outlook

Summary Economic Outlook

Macro-

Economic

Indicators

2017

Expectations2017 YTD Experience Going Forward

Outlook -

beginning of

2017

Current

outlook

GDPGDP growth

of 5.4%-5.7%

We still expect 2016 GDP to come in at

5.5% – 6.0%. IMF, WB and Treasury expect

GDP to come in at 6.0%

We expect GDP growth for 2017 to come in at

5.4% - 5.7%, a slight decline from the expected

2016 growth of 6.0%

Neutral Neutral

Interest Rates

A stable

outlook on

interest rates

in 2017 with

the CBR

maintained at

10.0%

The CBK has maintained the CBR at 10.0%.

KRA missed their first half of FY 2016/17

target by 3.2% and is expected to meet

the Kshs 1.5 tn overall target. Government

has borrowed Kshs 236.8 bn ahead of its

pro-rated target of Kshs 176.6 bn

The interest rate environment is expected to

remain relatively stable with the CBK not

accepting higher yields on treasury securities and

the MPC maintaining the CBR at 10.0%. There

however seems to be an upward pressure on

interest rates due to government borrowing

pressure

Neutral Neutral

Inflation

Expected to

average 7.2%,

within the

2.5%-7.5%

government

target

Inflation increased to 10.3% in March from 6.4% in December mainly due to effects of

the drought causing a 8.2% increase in food prices and increase in petrol and

diesel pump prices causing a 1.6% increase in transport costs

We expect upward inflationary pressure to persist in the 1st half of 2017, averaging 8.6% over the course of the year, above the 7.5%

upper bound government target. This is despite the expectation that the food situation will

improve in the 2nd half of 2017

Neutral Negative

Exchange

Rate

Shilling to

depreciate

against major

currencies

The shilling has depreciated by 0.5%

against the dollar YTD on account of

increased dollar demand from oil

importers and strengthening of the US

dollar after the March Fed rate hike,

despite retail goods importers coupled

with dollar inflows from foreign investors

and horticultural produce exporters

We expect the currency to depreciate against the

dollar driven by (i) global strengthening of the

dollar as the Fed plans to increase the pace of

rate hike in 2017, and (ii) recovery of the global

oil prices. However, it is important to note that

the CBK has sufficient reserves (equivalent to 5.1

months of import cover) to support the shilling in

the short term

Negative Neutral

1919

Inflation turns negative from neutral while Exchange rate turns neutral from negative. Of the 7 indicators we track, 1 has improved while 1 has deteriorated in 2017 pointing to a stable outlook

Summary Economic Outlook, continued…

Macro-

Economic

Indicators

2017 Expectations 2017 YTD Experience Going Forward

Outlook -

beginning of

2017

Current

outlook

Corporate

Earnings

Corporate earnings

growth of 8.0% in 2017

due to lower earnings

for commercial banks

attributed to the cap on

interest rates

Several companied so far have released

mixed FY’2016 results, mainly banking

sector (listed) with weighted average

growth in core EPS of 4.4% from 2.8%

in FY’2015

We still expect corporate earnings to be

worse than 2016, exhibiting decline in

profits owing to slower private sector

credit growth at 4.0% and effects of the

cap on interest rates. We expect

corporate earnings growth of 7.2%-8.0%

in 2017

Neutral Neutral

Investor

Sentiment

Foreign investors to

demand higher

premiums due to

political risks posed by

elections and economic

risk due to the planned

rate hikes by the US Fed

Investor sentiment has been high with

foreign investors being net buyers

throughout the year with inflows of

USD 17.3 mn

Political and economic risks on frontier

markets still remains a risk, however, we

expect long term investors to enter the

market seeking to take advantage of the

current low valuations

Neutral Neutral

Security

Expect the government

to put initiatives in place

to ensure improved

security, however, the

2017 election remains a

challenge

In January, the U.S. Department of

State issued a travel warning regarding

threats by Al-Shabaab on the Somalia

border, coastal and north-eastern

counties. In March, the U.K government

issued a warning due to security

concerns in parts of Laikipia County

Security is expected to be tight as we head

towards the elections with the

government expected to keep this in

check. However, uncertainty still exists

due to the August elections

Neutral Neutral

2020

III. Kenya Banking Sector Overview

2121

• In Kenya there are a total of 40 commercial banks; reducing from 42 as Giro Commercial Bank has been acquired by

I&M Holdings and Diamond Trust Bank Kenya is in the process of acquiring Habib Bank Limited Kenya, while Chase

Bank and Imperial Bank are in receivership

• In addition there is 1 mortgage finance company, 12 microfinance banks, 8 representative offices of foreign banks, 86

foreign exchange bureaus, 14 money remittance providers and 3 credit reference bureaus

• Financial inclusion in Kenya has continued to rise, with the percentage of the population living within 3 kilometers of a

financial services access point rising to 77.0% in 2016 from 59.0% in 2013. This has been driven by digitization, with

Mobile Financial Services (MFS) rising to be the preferred method to access financial services in 2016

Kenya’s Banking Sector Overview

Financial Inclusion in Kenya continues to rise, driven by mobile and digital channels

14%20%

29%38%

0%

28%

62%71%

0.0%

20.0%

40.0%

60.0%

80.0%

2006 2009 2013 2016

Use of Financial Service Providers over the Years

Bank SACCO MFI Insurance MFS Informal Group

2222

• Kenya’s banking environment is already going through consolidation as evidenced by heightened M&A activity over the

last 4 years

• Below is a summary of key transactions done over the last few years and their transaction multiples

Kenya’s Banking Sector Overview, continued…

Consolidation in the sector gathered pace in 2016, with 2 foreign entries into Kenya’s local banking space

• For local bank acquisitions, the average price-to-book multiple is at 1.8x, with an average acquisition stake of 80.3%.

We expect increased M&A activity given the current low valuations, with banks that are uncompetitive in the market

being bought out, and banks with common significant shareholders likely to merge

• The lifting of the moratorium on licensing new banks by the Central Bank of Kenya will also see more foreign entries

into the Kenyan banking space, and currently two institutions have already been granted an “approval in principle”,

namely Dubai Islamic Bank, and Mayfair Bank

Acquirer Bank AcquiredBook Value at

Acquisition (Kshs bns)Transaction

StakeTransaction Value

(Kshs bns)P/Bv

MultipleDate

Diamond Trust Bank Kenya Limited Habib Bank Limited Kenya 2.38 100.0% 1.82 0.8x Mar-17

SBM Holdings Fidelity Commercial Bank 1.75 100.0% 2.75 1.6x Nov-16

M Bank Oriental Commercial Bank 1.80 51.0% 1.30 1.4x Jun-16

I&M Holdings Giro Commercial Bank 2.95 100.0% 5.00 1.7x Jun-16

Mwalimu SACCO Equatorial Commercial Bank 1.15 75.0% 2.60 2.3x Mar-15

Centum K-Rep Bank 2.08 66.0% 2.50 1.8x Jul-14

GT Bank Fina Bank Group 3.86 70.0% 8.60 3.2x Nov-13

Average 80.3% 1.8x

2323

Growth in the Banking Sector

Listed bank’s FY’2016 EPS grew by 4.4% y/y on the back of structural challenges in the sector

20

12

20

13

• Kenya’s listed banks recorded anemic EPS growth in FY’2016, coming in at 4.4%, compared to 2.8% in FY’2015, and a 5

year average of 13.9%. The poor performance was on the back of structural challenges in the sector especially on the

provisioning for non-performing loans, decline in private sector credit growth and liquidity challenges

• Listed banks recorded gross loans and advances growth of 8.1% to Kshs 1.9 trillion in December 2016 from Kshs 1.8

trillion in December 2015, slowing down from the 5 year average growth rate of 14.6%, while deposits grew 6.7% to Kshs

2.1 trillion in December 2016 from Kshs 2.0 trillion in December 2015, also slower than the 5 year average of 14.6%

2424

Banking Sector Growth Drivers

Alternative channels, cost containment and increased innovation support banks’ growth and diversification

20

12

20

13

1) Diversification to different revenue streams: Banks are exploring different avenues of revenue generation such as

bancassurance, in a bid to increase non-funded income and further diversify their revenue sources, given the

introduction of the interest rate cap which will negatively impact funded income for banks

2) Increased adoption of technology to improve on efficiency: In a bid to minimize costs, banks have embraced

technology to reduce operational costs and hence drive up efficiency. Some of these measures include integration with

mobile application platforms and internet banking to facilitate increased collection of deposits and disbursement of

loans with fewer operating costs

3) Agency Banking: The year 2016 witnessed banks advocate more on the use of agency banking, in a bid to reduce

operating expenses and improve efficiency. Agents have become a key driver of diversification for banks and

distribution channel of banking products

4) Growth of the middle class : As the middle-class grows rapidly in Kenya, faster than majority of the countries in the

region, there is an inherent increase in consumption expenditure and an increase in the percentage of the population

which will require banking services

2525

Recent Developments in the Banking Sector

The sector is braced for the adoption of IFRS 9 and lifting of the moratorium on licensing new banks

20

12

20

13

1. Increased regulations in the Banking Sector: During the year, the Banking Sector experienced passing of new

regulations including the cap on Interest Rates and introduction of the International Financial Reporting Standards

(IFRS) 9, which requires banks to increase their loan loss provisioning. The new standard stipulates that banks should

implement a forward looking approach to estimate credit losses, compared to the current International Accounting

Standards (IAS) 39 standard that requires banks to only provide for loans after they have become non-performing

2. Licencing of commercial banks: The Central Bank of Kenya announced its intention to finalise the processing of

licence applications for two institutions that had already been granted an “approval in principle”, these include: Dubai

Islamic Bank, and Mayfair Bank. This is as a first step to lifting the moratorium on licensing of new commercial banks,

that was put in place in November 2015

2626

Recent Developments in the Banking Sector…Continued

Chase Bank stake sale is expected to bring the bank out of receivership

20

12

20

13

3. Chase Bank sale of majority stake: The Central Bank of Kenya is seeking to bring Chase Bank out of receivership

through the sale of a majority stake in the bank to a credible and well-funded investor, as KCB Group’s role in managing

the bank came to a close. In this move, CBK has invited bids for a majority stake from local and foreign financial

institutions. The selected investor would have to inject capital to raise Chase Bank’s equity under a restructuring being

pursued by the CBK. This move would likely see a first in Kenya’s history where a bank comes back to full operations after

being put in receivership

2727

Effects of Recent Developments in the Banking Sector

Banks have shifted to digital banking in a bid to improve efficiency

20

12

20

13

1. Increased consolidation through M&A activities: The Kenya banking sector has witnessed increased

consolidation through acquisition activities, with local banks such as Diamond Trust Bank acquiring Habib Bank, and

I&M Holdings’ acquisition of Giro Bank; while foreign banks namely M Bank’s acquisition of Oriental Commercial Bank,

and SBM Holdings, which is set to acquire Fidelity Commercial Bank

2. Staff lay-offs and closure of branches: With rising operating expenses in the sector, and the expected reduced

margins owing to the enactment of the Banking (Amendment) Act 2015, banks resorted to laying off staff and closing

branches, with close to 840 bank employees affected last year, and 21 branches closed

3. Adoption of technology: Kenya Bankers Association (KBA) launched its real-time interbank switch, PesaLink, and

kicked off a phased rollout of the digital payments platform. PesaLink will let customers make payments between banks

in real-time without the need for intermediaries. Additionally, the customers using PesaLink can initiate transactions

from diverse channels including from mobiles, banks’ branches, ATMs, agency banking outlets and through the internet

4. Decline in private sector credit growth: Private sector credit growth has been on a decline for 16 consecutive

months, coming in at 4.3% in December 2016 from a high of 21.0% in August 2015. The decline is attributed to

structural reforms in the banking sector and strict adherence to prudential guidelines in terms of loan book quality and

sufficient provisioning. This prompted banks to prefer to lend to the government as it is risk free as opposed to the

private sector, which is considered riskier

2828

Listed Banking Sector MetricsDeposits and loan growth remain strong, however the growth is slowing down, with a growth of 12.8% and14.6%, respectively over the last 6 years

Loans and Advances (Kshs Bn) Deposits (Kshs Bn)

Shareholders Equity (Kshs Bn)

Source: Central Bank of Kenya

Bank Branches

703

926 1,039

1,214

1,466

1,676 1,831

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2010 2011 2012 2013 2014 2015 2016

CAGR = 14.6%

191 211

270

321

382 418

481

-

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016

CAGR = 17.9%

969

1,175 1,327

1,501

1,757

2,012 2,147

-

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 2015 2016

CAGR = 12.8%

653 721

792 848

912 954

1,089

-

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014 2015 2016

CAGR = 8.6%

2929

Listed Banking Sector Metrics, continued…Net Interest Margin remains high, however, rising levels of NPLs and costs remain a point of concern forthe sector

Cost to Income (%) Loan to Deposits (%)

NPLs to Total Loans (%) Net Interest Margin (%)

Source: Central Bank of Kenya

55.9% 54.5% 54.4% 54.6% 52.7%

59.4%62.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2010 2011 2012 2013 2014 2015 2016

7.2%

7.8%8.0% 8.0%

7.6%7.8%

8.8%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

2010 2011 2012 2013 2014 2015 2016

72.6%

78.8% 78.3%

80.9%

83.4% 83.3%

85.3%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

2010 2011 2012 2013 2014 2015 2016

5.7%

3.8% 4.0%

5.0% 5.1%

6.1%

8.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2010 2011 2012 2013 2014 2015 2016

3030

Listed Banks FY’2016 Earnings & Growth Metrics

Kenya’s banking sector FY’2016 core EPS growth was 4.4% faster than 2.8% growth in FY’2015

Listed Banks FY'2016 Earnings and Growth Metrics

BankCore EPS Growth

Deposit Growth

Loan Growth

Net Interest Margin

Loan to Deposit Ratio

Exposure to Government

Securities

SCBK 43.9% 7.6% 6.6% 10.1% 65.8% 31.5%

DTBK 16.6% 22.7% 4.9% 7.4% 78.2% 17.3%

I&M Holdings 8.4% 10.2% 5.4% 8.3% 91.9% 18.3%

Co-op Bank 8.3% (2.0%) 11.0% 9.0% 91.1% 23.8%

KCB Group (0.5%) 5.6% 11.5% 8.8% 86.1% 22.9%

NIC Bank (3.3%) (0.5%) (1.3%) 8.0% 102.4% 27.2%

Equity Group (4.6%) 11.6% (1.4%) 11.0% 78.9% 29.8%

Stanbic Holdings (9.9%) 1.4% 3.4% 5.8% 84.1% 32.1%

Barclays Bank (12.6%) 7.9% 15.9% 10.5% 94.6% 27.3%

HF Group (24.3%) (8.6%) 2.7% 6.5% 143.0% 5.7%

National Bank N/A* (12.3%) (12.5%) 8.2% 61.2% 30.2%

FY’2016 Weighted Average 4.4% 6.4% 6.3% 9.2% 87.3% 25.0%

FY’2015 Weighted Average 2.8% 21.6% 17.2% 8.7% 84.8% 22.2%

*-Cannot be calculated since NBK had a loss in 2015

3131

Listed Banking Sector Multiples

Kenya’s banking sector is trading at an average PBV of 1.2x and a PE of 6.7x

Source: NSE, Cytonn Banking Sector Report

BankShare Price

*No. of Shares Issued (bns)

Market Cap (bns)

PBV P/E

National Bank of Kenya 6.1 0.31 2.0 0.2x 7.4x

Housing Finance Group 10.8 0.35 3.4 0.3x 2.6x

NIC Bank 30.5 0.64 17.0 0.6x 4.0x

Stanbic Holdings 60.0 0.40 24.9 0.6x 4.7x

Diamond Trust Bank Kenya 120.0 0.27 30.9 0.8x 4.5x

I&M Holdings 93.0 0.39 34.1 1.0x 5.1x

Barclays Bank of Kenya 8.0 5.43 43.2 1.0x 5.5x

Co-operative Bank of Kenya 14.0 4.89 68.2 1.2x 5.1x

KCB Group 33.8 3.07 106.5 1.2x 6.7x

Equity Group Holdings 35.0 3.77 124.5 1.5x 8.3x

Standard Chartered Bank Kenya 213.0 0.34 73.9 1.7x 9.5x

Weighted Average** 1.2x 6.7x

Median 1.0x 5.1x

For P/E calculation for NBK we used normalized earnings over a period of 5 years• - Price as at 7/04/2017• **- Weighted on market cap

3232

Banking Sector Multiples

Listed Insurance companies are currently priced similar to banks on a Price to Book basis

Source – Cytonn Research

10 year Price to book value: Banking and Insurance

On a price to book valuation, listed insurance companies are currently priced similar to those in the listed banking sector at 1.2x, with both lower than their historical averages of 1.6x for the banking sector and

1.7x for the insurance sector

2.5x3.1x

3.1x

2.3x

2.0x

2.3x

1.4x1.5x

1.9x

1.9x

1.6x

1.2x1.7x

3.4x

2.5x

1.5x1.3x

1.4x

0.8x

1.1x

1.7x

2.3x

1.5x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Kenya

Banking Insurance

3333

Summary of the FY’2016 Earnings

The banking sector remains attractive on a valuation basis

20

12

20

13

1. At 4.4%, core earnings growth was faster in 2016 than in 2015, which recorded a 2.8% growth. This indicates that on

average, Banks’ earnings were not significantly affected by the interest rate cap in 2016, with the full effects of the cap

expected to show in FY’2017 performance

2. Deposits grew relatively the same as loans at 6.4% and 6.3%, respectively, but slower than the 6-year averages of

12.8% and 14.6%, respectively

3. The levels of NPLs remains a concern within the banking sector with loan loss provisions growing at 67.3% and 77.7%

for the non-listed and listed banks, respectively. We expect the level of provisioning to increase going forward as

banks adopt IFRS 9 that requires a forward looking approach to estimate credit losses

4. Growth for most banks with regional subsidiaries was driven mainly by the Kenyan business as their regional

operations underperformed, notably in South Sudan that experienced a devaluation of the South Sudan Pound and

hyperinflation in the economy

5. With a sector valuation of 1.2x price to book and 6.7x price to earnings, against a historical average of 1.6x and 7.9x,

respectively, we think that the sector has become fairly attractive for a long-term investor

3434

IV. Cytonn’s Banking Sector Report

3535

Consolidation & resilience in a challenging operating environment

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13

Summary Effect on Banking Sector

Consolidation

Focus Area

The sector has remained resilient by adopting a prudent banking approach. Consolidation is set to gather pace as key issues

such as increased loan loss provisioning and the regulated loan and deposit pricing framework prevail in this challenging

operating environment.

Regulation

• Price controls have been put in place in theindustry following the enactment of the BankingAct (Amendment) 2015

• Transition to IFRS 9 from IAS 39: IFRS 9 requiresbanks to adopt a forward looking approach in creditrisk assessment

• Stringent taxation policies as general provisionswill not be an allowable deduction for taxationpurposes

• Increased consolidation in the industry, mainlythrough acquisitions In 2016, we witnessed 3acquisitions in the sector. This year, Diamond TrustBank Kenya (DTBK) has already announced plans toacquire Habib Bank (K) Limited (HBL) setting theplatform for more consolidation this year

• Banks will experience a compression in net margins in2017. We expect this to result in reduced profitability,and effectively reduced return on equity

• This will lead to an increase in bank’s provisioning levels,resulting to lower profitability

• Banks will witness increased effective taxation, whichwill lead to lower return on equity for bank shareholders

• Consolidation in the banking sector will only gather paceas stable banks target to acquire small, weaker banks.This will lead to fewer and stronger banks, hence a morestable banking sector

Asset Quality

• The increased NPLs will force banks to adopt prudentbanking based on more stringent risk assessmentframework

• Increase in non-performing loans: With theGross NPL ratio currently at 8.4% from 6.1% in2015, this raises concerns around asset quality inthe sector

3636

Executive Summary

Cytonn has undertaken this report to offer our investors a comprehensive view of the listed banks

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12

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• All listed banks in the Kenyan market were analysed by the Cytonn Investment Team

• The analysis was brought about by a need to be able to take a view on the banking sector to determine 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 FY’ 2016 results (franchise value) and analyst’s projections of future performance of

the banks (future growth opportunities)

• For banks which are part of a group structure, the financials of the group were utilised to take into consideration the

listed counter which an investor will purchase

• The overall ranking was based on a weighted average ranking of Franchise value (accounting for 40%) and Intrinsic

value (accounting for 60%)

• The top rankings were dominated by local Tier 1 banks which performed well in terms of both Franchise and Intrinsic

valuation

3737

Rankings by Franchise Value

Co-operative Bank emerged top in the franchise value rankings, with NBK coming last

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Source: Cytonn Research

• The bank ranking assigns a value of 1 for the best performing bank, and a value of 11 for the worst

• The metrics highlighted a bank’s profitability, efficiency, growth, asset quality, liquidity, revenue diversification,capitalization and soundness

• Cooperative Bank ranked 1st position on the back of low Non performing loans at 4.8%, a high return on equity of22.9%, and a high tangible common ratio of 17.0%, against an average of 10.9%, 16.8% and 14.9%, respectively forthe industry

• *LDR- Loan to Deposit Ratio • **CIR- Cost to Income Ratio • ***ROACE - Return on Average Common Equity • ****NIM - Net Interest Margin

Key Ranking Metrics

Rank BankLDR

*CIR**

ROACE***

NIM****

PEG ratio

P/TBVDeposit/Branch

NPLs/ Loans

NPL Coverage

Tangible Common

Ratio

Non Interest Income/Revenue

Camel Rating

Corporate Governance

Score

Total Score

1 Co-operative 5 6 1 3 3 9 6 2 6 2 5 5 6 59

2 KCB Group 2 7 3 5 1 8 7 7 2 7 3 7 1 60

3 Equity 3 5 4 1 5 11 10 5 3 5 2 2 5 61

4 DTBK 4 2 6 9 2 5 5 1 1 10 10 3 4 62

5 StanChart 8 4 5 4 8 10 1 9 7 3 4 4 2 69

6 I&M 6 1 2 6 6 7 3 6 8 4 8 8 6 71

7 Stanbic 1 10 9 11 9 4 2 3 9 8 1 1 11 79

8 NIC 10 3 8 8 4 3 4 10 5 1 9 6 9 80

9 Barclays 7 8 7 2 10 6 9 4 4 6 6 9 3 81

10 HF Group 11 9 10 10 7 1 8 8 10 9 11 10 10 114

11 NBK 9 11 11 7 11 2 11 11 11 11 7 11 8 121

3838

Rankings by Intrinsic Value

KCB Group has the highest upside with a potential return of 27.5%

• KCB Group and Barclays have the highest upsides at 27.5% and 8.8%, respectively. KCB Group maintained its intrinsic

value ranking from Q3’2016, while Barclays rose 6 positions to position 2

• National Bank registered the highest downside of 71.2%, maintaining its intrinsic value ranking from Q3’2016

Banks Current Price Target Price UpsideDividend

Yield

Total

Return

FY‘2016

Ranking

Q3’2016

Ranking

KCB Group 33.8 40.1 18.8% 8.9% 27.7% 1 1

Barclays 8.0 7.9 (1.1%) 10.0% 8.9% 2 8

Co-operative Bank 14.0 14.4 3.1% 5.7% 8.8% 3 7

Stanbic Holdings 60.0 60.2 0.2% 7.9% 8.1% 4 2

I&M Holdings 93.0 88 (5.4%) 3.8% (1.6%) 5 6

Standard Chartered 215.0 189.5 (11.8%) 6.5% (5.3%) 6 10

Equity Group 35.0 30.7 (12.3%) 5.7% (6.6%) 7 4

HF Group 10.8 9.2 (14.7%) 4.6% (10.1%) 8 5

NIC Bank 30.5 26.4 (13.3%) 3.0% (10.4%) 9 3

Diamond Trust Bank 120.0 104 (13.3%) 2.2% (11.1%) 10 9

NBK 6.1 1.7 (71.8%) 0.0% (71.8%) 11 11

3939

Composite Bank Ranking

Overall KCB Group ranked highest, while 8 banks shifted positions from Q3’2016

• In our ranking, franchise value was assigned a weighting of 40% while the intrinsic value was assigned 60% weight

• KCB was up 1 position to rank the 1st, Equity moved down 2 positions, and Standard Chartered was the biggest mover,

moving 3 positions up from Q3’2016

CYTONN’S FY'2016 BANKING REPORT RANKINGS

BankFranchise Value Total

ScoreTotal Return

ScoreWeighted

ScoreFY‘2016

RankQ3‘2016

Rank

KCB Group 60.0 1.0 24.6 1 2

Co-operative Bank 59.0 3.0 25.4 2 3

Equity Group 61.0 7.0 28.6 3 1

Diamond Trust Bank 62.0 10.0 30.8 4 5

Standard Chartered 69.0 6.0 31.2 5 8

I&M Holdings 71.0 5.0 31.4 6 4

Barclays 81.0 2.0 33.6 7 6

Stanbic Holdings 79.0 4.0 34.0 8 7

NIC Bank 80.0 9.0 37.4 9 9

HF Group 114.0 8.0 50.4 10 10

NBK 121.0 11.0 55.0 11 11

4040

Appendix

4141

A. Metrics Used

4242

Banking Sector Report – Metrics Used

Cytonn has undertaken analysis of the listed banks in Kenya using 13 key metrics

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1. Net Interest Margin - A bank’s net interest margin (NIM), is the difference between the interest paid on deposits and

the interest earned on loans, relative to the amount of interest-earning assets with higher net interest margins

translating into higher profits

Output:

Majority of Bank’s increased their allocation to government securities following the interest rate cap, as opposed to giving

out more loans. Equity Group had the highest NIM at 11.0%, with the lowest for Stanbic at 5.8%

2. Return on Average Common Equity - A bank’s return on average common equity (ROACE), is the amount of profit

the bank earns as a percentage of average common shareholders’ equity. It’s a profitability measure that shows how much a

company generates with the money shareholders have invested

Output:

Banks with higher ROACEs are better at utilizing capital to generate profits. Co-operative Bank has the highest ROACE at

22.9%, which was much above the industry average of the listed banks of 16.8%, while National Bank had the lowest at

3.0%

4343

Banking Sector Report – Metrics Used, continued…


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3. Price/Earnings to Growth Ratio - The price/earnings to growth (PEG) ratio is the stock’s market price to earnings

ratio divided by its growth in earnings for a specified period of time. The PEG ratio is used to determine the value of a stock

while taking into account its growth rate, with lower PEG ratios showing the stock is undervalued given the growth in its

earnings

Output:

To obtain this ratio, we estimated each bank’s 5-year growth rate based on analysis of (i) bank’s fundamentals, (ii)

projections using each bank’s models and (iii) management’s input on a bank’s strategy going forward. KCB Group had the

lowest PEG ratio at 0.5x, while National Bank was the most overvalued at 2.4x

4. Deposits per Branch - A bank’s deposits per branch shows the amount of deposits a bank collects from each of its

branches, hence a measure of efficiency. Banks with higher deposits per branch are preferred, as it shows for each unit cost

of capital expenditure required to open new branches and their subsequent operating costs, a bank receives more in

deposits.

Output:

Standard Chartered and Stanbic have the highest deposits per branch at Kshs. 4.7 bn and Kshs 4.5 bn, respectively, while

Equity Group and National Bank have the lowest deposits per branch at Kshs. 1.3 bn and Kshs. 1.2 bn, respectively

4444



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5. Loans to Deposits Ratio - A bank’s loans to deposit ratio (LDR) is a measure of liquidity as it shows how much of a

bank’s loans are being funded by its deposits. Low LDR ratios indicate that the bank may not be earning a lot of interest.

Very high LDR’s indicate that the bank might not have enough liquidity to cover any unforeseen funding requirements, and

ratios above 1 show that the bank supplemented their loan issues with outside borrowing

Output:

Our analysis showed us that in Kenya, the loan to deposit ratio has been steadily increasing, showing increased uptake of

loans and more aggressive use of deposits by banks. Taking a preferred LDR of 85%, we found that Stanbic was closest to

the target at 84.1%, while HF Group was the farthest at 143.0%

6. Cost to Income Ratio - The cost to income ratio is a measure of a bank’s efficiency, showing its costs in relation to its

income. A lower ratio is preferred, as it indicates a bank is more profitable. An increase in the ratio often highlights potential

problems as it shows a bank’s costs rose faster than its income; while a fall in the ratio could be brought by management’s

cost cutting measures

Output:

We see many Kenyan banks making an effort to be more efficient. Many banks have opted to restructure, and others have

resorted to laying off staff in a bid to bring down costs and subsequently this ratio. I&M Holdings maintained the lowest cost

to income ratio of 34.7%, while National Bank of Kenya had the highest ratio at 73.9%

4545



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7. 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 HF Group as the most undervalued bank as per this metric at 0.3x, while Equity bank is still the most overvalued at

1.7x

8. Tangible Common Equity Ratio - This is the ratio of a bank’s common equity less intangible assets to its tangible

assets. It is a common indicator of a bank’s risk and capitalization and measures how much losses a bank can take before

shareholder’s equity is wiped out, hence solvency

Output:

NIC Bank is the most solvent with a tangible common ratio of 21.3%, while National Bank was the least solvent at 3.6%

9. 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:

DTBK had the highest quality loan book with a non-performing loans to total loans ratio of 3.9%, while National Bank had

the highest non-performing loans ratio at 43.7%

4646



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10. Non-Performing Loans Coverage - This is a credit quality metric that measures the credit risks for banks. It shows

the extent to which the NPLs are covered by provisions hence the degree of stability of the bank’s lending base, with higher

ratios preferred

Output:

Diamond Trust Bank has the highest provisions to non-performing loans at 66.0%, while National Bank has the lowest at

20.2%

11. Non-Interest Income to Revenue - The non interest income is the income earned from sources other than loans

and investments. The non-interest income to revenue therefore shows the extent of diversification of a bank’s operations.

High levels are preferred, not exceeding the point where the bank loses focus of its primary business

Output:

We see that Kenyan banks’ non-interest income is set to benefit from new initiatives such as banc-assurance and mobile

banking. Stanbic has the highest non-interest income as a percentage of revenue at 41.4%, while HF Group has the lowest

at 16.1%

12. Camel Rating - This is a ranking system that assesses the overall condition of a bank, that is, Capital Adequacy, Asset

Quality, Management Quality, Earnings Quality and Liquidity. We also incorporated a governance score in the ranking

4747



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13. Corporate Governance Score –This is a ranking system where we analyse 25 metrics to rank listed companies on

their corporate governance. Main areas of analysis are in the board composition, audit functions, CEO tenor and evaluation,

remuneration and transparency

Output:

The score assumes a diffusion index with 50% as the base. Anything below 50% should be flagged as having serious

corporate governance issues while anything above is skewed towards proper governance. However the variance from 100%

gives the risk associated with corporate governance

4848

B. Tier I Banks

4949

Tier 1 Banks Value Drivers and Cons

2013

KCB Group

Value Drivers Cons

• KCB Mpesa, is expected to be a key growth driverin terms of deposits and loans

• Alternative channels including mobile bankingand agency banking

• Exposure to different political, economic andregulatory environments especially the impact ofSouth Sudan operation

• The bank seems to be struggling in utilising its assetbase compared to its peers in generation of returns

Co-op Bank

• It has a large Sacco banking base, and theopportunity to grow upon the model

• Increased operational efficiency and costreduction due to its recent transformation project

• The bank is slow in embracing technology comparedto its peers in deposit mobilisation

Bank

Equity Group

• Equity Bank is currently the largest insuranceintermediary and Equity Investment Bank is the2nd largest Stockbroker in the country with amarket share of 16%

• Cost control: Equity bank has a big challenge tomaintain their cost as they are investing highly in IT

• Expansion Setbacks: Equity bank has encounteredsome setback in their regional expansion where theyhave not been as profitable as in others

Standard Chartered

Barclays Bank

• Custody business will continue providing the bankwith a niche when it comes to wholesale banking

• Strong in corporate banking business

• High NPLs have affected their revenues but adoptionof prudent screening criteria is bound to address this

• Limited to Kenya as the parent company prefers tooperate independently in other markets

• Barclays has historically enjoyed cheaper fundingfrom its parent company and has not hadborrowings historically, this however might haveto change going forward if Barclays Plc exits Africa

• The bank has one of highest net interest marginof 10.9% as at Q3’2016

• 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 mobilization compared to its

peers

DTB Bank• Strong backing from financing partners, i.e. Aga

Khan Fund for Economic Development and Habibbank

• Competition in the SME banking market• Exposure to different political, economic and

regulatory environments

5050

I. Equity Group Holdings

5151

Financial Statements Extracts

Equity Group’s PAT is expected to grow at a 5-year CAGR of 12.9%

Income Statement 2015 2016 2017e 2018e 2019e 2020e 2021e CAGR

Net Interest Income 34.1 41.8 41.1 47.2 53.9 61.9 70.4 11.0%Non Funded Income 21.9 22.2 23.7 27.1 33.1 39.1 44.0 14.6%Loan Loss Provision 2.4 6.6 7.3 8.5 9.7 11.2 12.9 14.1%

Other Operating Expenses 29.7 32.5 33.9 38.0 44.1 50.9 58.0 12.3%Total Operating Expenses 32.1 39.1 41.2 46.5 53.8 62.1 70.9 12.6%

Profit Before Tax 24.0 24.9 23.6 27.8 33.2 38.8 43.5 11.8%Profit After tax 17.3 16.6 16.5 19.5 23.3 27.2 30.5 12.9%% PAT Change YoY 1.0% -4.2% -0.4% 17.9% 19.4% 16.8% 12.0%EPS 4.6 4.4 4.4 5.2 6.2 7.2 8.1 12.9%DPS 2.0 2.0 1.8 2.1 2.5 2.9 3.2 10.0%Cost to Income 52.9% 50.7% 52.3% 51.1% 50.6% 50.5% 50.7%

NIM 10.6% 11.1% 10.2% 9.9% 9.9% 9.9% 9.9%ROaE 25.5% 21.5% 19.0% 19.9% 21.0% 21.6% 21.3%

ROaA 4.5% 3.7% 3.3% 3.4% 3.6% 3.7% 3.7%

Balance Sheet 2015 2016 2017e 2018e 2019e 2020e 2021e CAGR

Net Loans and Advances 269.9 266.1 295.2 335.0 385.3 443.1 509.5 13.9%

Government Securities 42.8 100.6 121.7 138.0 156.7 178.3 203.1 15.1%

Other Assets 115.4 107.1 123.7 131.9 143.8 157.8 174.4 10.3%

Total Assets 428.1 473.7 540.6 604.9 685.8 779.2 887.1 13.4%

Customer Deposits 302.2 337.2 388.4 446.7 513.7 590.8 679.4 15.0%

Other Liabilities 53.8 54.5 60.2 54.6 54.6 54.6 55.6 0.4%

Total Liabilities 355.9 391.7 448.7 501.3 568.3 645.3 735.0 13.4%

Shareholders Equity 72.1 82.0 91.9 103.6 117.5 133.9 152.1 13.2%

Book value Per share 19.1 21.7 24.4 27.5 31.1 35.5 40.3 13.2%

% Change in BPS YoY 13.1% 13.6% 12.1% 12.7% 13.5% 13.9% 13.6%

5252

Valuation Summary

Equity Group is overvalued with a total potential return of (6.7%)

* Five years average yields on a 10 year Treasury bond

Cost of Equity Assumptions: 7-Apr-17

Risk free rate * 13.2%

Beta 0.7

Country Risk Premium 6.4%

Cost of Equity 18.9%

Terminal Assumptions:

Growth rate 5.0%

Mature Company Beta 1.0

Terminal Cost of Equity 21.3%

Return on Average Equity 21.3%

Terminal Price to Book value per share 1.0x

Shareholder Equity - FY21e 152.13

Terminal Value-(Year 2021) 159.40

Valuation Summary: Implied Price Weighting Weighted Value

Intergrated DDM 33.0 40.0% 13.2

Residual Income 29.9 40.0% 12.0

PBV Multiple 26.0 15.0% 3.9

PE Multiple 32.0 5.0% 1.6

Fair Value 30.7

Current Price 35.0

Upside/(Downside) -12.4%

Dividend Yield 5.7%

Total Potential Return -6.7%

5353

II. KCB Group

5454


KCB Group’s PAT is expected to grow at a CAGR of 11.4%

Income Statement 2015 2016 2017e 2018e 2019e 2020e 2021e CAGRNet Interest Income 39.2 47.0 47.9 54.1 59.1 64.7 71.4 8.7%Non Funded Income 23.4 22.5 25.0 26.5 30.9 34.6 36.4 10.2%Loan Loss Provision 4.7 3.8 6.0 6.6 7.1 7.2 7.5 14.4%Other Operating Expenses 31.4 36.6 40.1 41.7 46.4 50.5 51.9 7.3%Total Operating Expenses 36.1 40.4 46.1 48.3 53.5 57.7 59.4 8.0%Profit Before Tax 26.5 29.1 26.8 32.2 36.5 41.6 48.4 10.7%Profit After tax 19.6 19.7 18.7 22.6 25.6 29.1 33.9 11.4%% PAT Change YoY 16.5% 0.5% (5.0%) 20.4% 13.3% 13.9% 16.4%EPS 6.4 6.5 6.1 7.4 8.4 9.5 11.1 11.4%DPS 2.0 3.0 1.8 2.2 2.5 2.9 3.3 2.1%Cost to Income 57.6% 58.1% 63.3% 60.0% 59.4% 58.1% 55.1%ROE 25.0% 22.2% 18.2% 19.2% 19.0% 19.0% 19.3%ROA 3.7% 3.4% 3.0% 3.4% 3.7% 4.0% 4.3%




Other Assets 145.5 154.3 180.6 181.0 197.3 215.9 234.4 8.7%

Total Assets 490.3 558.1 657.4 700.5 761.0 827.7 901.5 10.1%






% Change in BPS YoY 19.4% 7.4% 24.1% 5.2% 35.2% 14.2% 14.5%

5555

Valuation Summary

KCB Group is undervalued with a total potential return of 27.7%



Beta 1.0





Residual Income 36.3 40% 14.5

PBV Multiple 42.2 15% 6.3

PE Multiple 42.1 5% 2.1

DDM Integrated 42.9 40% 17.2

Fair Value 40.1

Current Price 33.8

Upside/(Downside) 18.8%

Dividend Yield 8.9%

Total Return 27.7%


Growth rate 5.0%




Terminal Price to Book Value 1.0x

5656

III. Cooperative Bank of Kenya

5757


Co-operative Bank’s PAT is expected to grow at a 5-year CAGR of 10.6%


Net Interest Income 23.2 29.5 25.8 27.0 30.9 34.6 38.2 5.3%

Non Funded Income 13.2 12.8 15.7 17.3 19.2 21.8 24.7 14.1%

Loan Loss Provision 2.0 2.6 3.1 3.2 3.5 3.7 4.1 9.4%

Other Operating Expenses 19.4 22.0 21.7 21.6 23.9 26.4 29.0 5.6%

Total Operating Expenses 21.4 24.6 24.7 24.9 27.4 30.1 33.0 6.0%

Profit Before Tax 15.4 17.7 16.8 19.6 22.9 26.3 30.0 11.1%

Profit After tax 11.7 12.7 11.7 13.7 16.0 18.4 21.0 10.6%

% PAT Change YoY 46.0% 8.3% -7.4% 16.5% 17.0% 15.1% 13.9%

EPS 2.4 2.6 2.4 2.8 3.3 3.8 4.3 10.6%

DPS 0.8 0.8 0.7 0.9 1.0 1.2 1.3 13.4%

Cost to Income 58.8% 58.3% 59.7% 56.1% 54.6% 53.4% 52.5%

NIM 8.7% 9.9% 8.3% 8.0% 8.1% 8.1% 8.0%

ROE 25.0% 22.7% 18.0% 18.5% 19.0% 19.1% 19.1%

ROA 3.7% 3.7% 3.2% 3.3% 3.5% 3.6% 3.7%




Other Assets 93.0 77.8 100.8 114.1 128.2 142.2 160.1 15.5%

Total Assets 342.5 351.9 392.5 436.2 485.2 540.4 600.1 11.3%






% Change in BPS YoY 15.9% 22.1% 13.2% 13.6% 14.0% 14.2% 14.1%

5858

Valuation Summary

Co-operative Bank is fairly valued with a total potential return of 8.8%




Beta 0.70


Extra Risk Premium 0.8%



Growth rate 5.0%







Valuation Summary: Implied Price Weighting Weighted ValueDDM Integrated 15.71 40% 6.28

Residual income 12.07 40% 4.83PBV Multiple 15.77 15% 2.37


Fair Value 14.4

Current Price 14.0

Upside/(Downside) 3.1%Dividend Yield 5.7%Total Potential Return 8.8%

5959

IV. Standard Chartered Bank

6060


Standard Chartered’s PAT is expected to grow at a 5-year CAGR of 8.7%

Income Statement 2015 2016 2017e 2018e 2019e 2020e 2021e CAGRNet Interest Income 18.1 19.4 20.3 22.3 23.9 25.9 27.9 7.6%Non Funded Income 7.2 8.6 9.3 10.0 10.9 11.9 13.0 8.7%Loan Loss Provision 4.9 2.2 3.2 3.5 3.8 4.2 4.5 15.5%Other Operating Expenses 11.3 12.5 13.0 13.3 14.1 15.0 16.2 5.3%Total Operating Expenses 16.2 14.7 16.1 16.8 17.9 19.1 20.7 7.1%Profit Before Tax 9.2 13.3 13.4 15.5 16.9 18.7 20.2 8.8%Profit After tax 6.3 9.1 9.1 10.5 11.5 12.7 13.8 8.7%% PAT Change YoY -39.2% 42.7% 0.6% 15.4% 9.5% 10.5% 8.2%EPS 18.5 26.3 26.5 30.6 33.5 37.0 40.0 8.7%DPS 12.5 20.0 17.2 19.9 21.8 24.1 26.0 5.4%Cost to Income 63.9% 52.5% 54.6% 52.1% 51.4% 50.6% 50.6%NIM 9.6% 9.6% 9.2% 9.5% 9.5% 9.5% 9.5%ROaE 15.5% 21.3% 20.0% 21.5% 21.8% 22.3% 22.3%ROaA 2.8% 3.7% 3.5% 3.7% 3.8% 3.9% 3.9%

Balance Sheet 2015 2016 2017e 2018e 2019e 2020e 2021e CAGRNet Loans and Advances 115.1 122.7 125.5 136.2 147.8 160.3 174.0 7.2%Government Securities 73.6 86.9 96.6 100.4 108.9 115.6 125.4 7.6%Other assets 45.2 40.7 51.9 54.3 57.2 63.1 66.9 10.4%Total Assets 234.0 250.3 274.0 290.8 313.9 339.0 366.3 7.9%Customer Deposits 172.0 186.6 202.5 219.7 238.3 258.6 280.6 8.5%Other Liabilities 20.7 19.8 24.5 20.4 20.8 21.2 21.6 1.8%Total Liabilities 192.7 206.4 226.9 240.1 259.1 279.8 302.2 7.9%Shareholders Equity 41.3 43.9 47.1 50.8 54.8 59.2 64.1 7.8%Book value Per share 120.1 127.8 137.1 147.8 159.5 172.5 186.5 7.8%% Change in BPS YoY 1.5% 6.4% 14.2% 7.8% 7.9% 8.1% 8.1%

6161

Valuation Summary

Standard Chartered Bank is overvalued with a total potential return of (5.3%)



Default Spread Adjusted Risk free rate

13.2%

Beta 0.7

Mature Market Risk Premium6.4%

Cost of Equity17.6%


Growth rate 5%








Integrated DDM 203.9 40.0% 81.6

Residual Income 197.3 40.0% 78.9

PBV Multiple 143.3 15.0% 21.5

PE Multiple 151.5 5.0% 7.6

Fair Value 189.5

Current Price 215.0

Upside/(Downside) (11.8%)

Dividend Yield 6.5%

Total Potential Return (5.3%)

6262

V. Barclays Bank Kenya

6363


Barclays Bank Kenya PAT is expected to grow at a 5-year CAGR of 4.7%

Income Statement 2015 2016 2017f 2018f 2019f 2020f 2021f CAGRNet Interest Income 20.4 22.3 21.7 22.8 24.7 26.7 28.6 5.1%Non Funded Income 9.1 9.3 9.5 10.2 11.0 11.9 12.9 6.7%Total Operating Income 29.5 31.7 31.3 32.9 35.8 38.7 41.6 5.6%Loan Loss Provision (1.8) (3.9) (4.3) (4.1) (4.4) (4.7) (5.1) 5.4%Other Operating Expenses (15.6) (16.9) (17.5) (18.5) (20.0) (21.5) (23.1) 6.5%Total Operating Expenses (17.4) (20.8) (21.8) (22.6) (24.4) (26.3) (28.2) 6.3%Profit Before Tax 12.1 10.9 9.5 10.3 11.4 12.4 13.3 4.2%

Profit After tax 8.4 7.4 6.6 7.2 8.0 8.7 9.3 4.7%% PAT Change YoY -0.4% -11.9% -10.4% 9.1% 10.1% 9.0% 7.3%EPS 1.5 1.4 1.2 1.3 1.5 1.6 1.7 4.7%DPS 1.0 1.0 0.8 0.9 1.0 1.0 1.1 2.2%Cost to Income 59.0% 65.7% 69.7% 68.6% 68.2% 67.9% 67.9%NIM 10.4% 10.3% 9.5% 9.2% 9.2% 9.2% 9.2%ROaE 21.6% 17.9% 15.2% 15.7% 16.4% 16.9% 17.0%ROaA 3.6% 3.0% 2.6% 2.8% 2.8% 3.0% 3.0%

Balance Sheet 2015 2016 2017f 2018f 2019f 2020f 2021f CAGR



Other Assets 47.4 42.5 58.7 59.0 59.3 59.6 60.0 7.1%

Total Assets 240.9 259.7 284.2 303.4 324.3 344.5 366.2 7.1%






% Change in BPS YoY 4.0% 6.7% 5.5% 5.7% 5.9% 6.1% 6.2%

6464

Valuation Summary

Barclays Bank Kenya is under valued with a total potential return of 8.9%



Default Spread Adjusted Risk free rate* 13.2%

Beta 0.8

Mature Market Risk Premium 6.4%



Growth rate 5.0%








Integrated DDM 7.6 40.0% 3.0Residual Income 6.8 40.0% 2.7

PBV Multiple 10.9 15.0% 1.6PE Multiple 9.4 5.0% 0.5Fair Value 7.9

Current Price 8.0 Upside/(Downside) (1.1%)

Dividend Yield 10.0%Total Potential Return 8.9%

6565

VI. Diamond Trust Bank

6666

Financial Statement Extracts

DTB has an estimated 5-year PAT CAGR of 10.6%

Source – Company Financials

Income Statement 2015 2016 2017e 2018f 2019f 2020f 2021f 5-Year CAGRNet Interest Income 15.2 20.1 20.6 23.7 27.5 32.1 37.3 13.2%Non Funded Income 4.7 5.2 4.8 5.6 6.4 7.4 8.5 10.4%Loan Loss Provision 2.2 4.3 4.5 5.4 6.5 7.7 9.1 16.3%Other Operating Expenses 4.9 6.0 6.4 7.3 8.5 9.9 11.4 13.8%Total Operating Expenses 10.3 13.8 14.9 17.2 20.0 23.1 26.6 14.0%Profit Before Tax 9.6 11.5 10.6 12.1 14.0 16.4 19.2 10.8%Profit After tax 6.6 8.0 7.3 8.3 9.7 11.3 13.2 10.6%% PAT Change YoY 15.7% 21.2% -9.0% 14.2% 16.2% 17.2% 16.8%EPS 24.8 28.6 26.1 29.7 34.6 40.5 47.3 10.6%DPS 2.5 2.6 2.6 3.0 3.5 4.1 4.7 12.7%Cost to Income 52.0% 54.7% 58.5% 58.9% 58.8% 58.4% 58.1%NIM 7.2% 7.5% 6.9% 7.2% 7.3% 7.4% 7.4%ROE 20.9% 20.6% 15.6% 15.5% 15.6% 15.9% 16.1%ROA 2.7% 2.6% 2.1% 2.1% 2.2% 2.2% 2.3%

Balance Sheet 2015 2016 2017e 2018f 2019f 2020f 2021f 5-Year CAGRNet Loans and Advances 177.5 190.2 204.1 231.0 265.3 302.7 345.8 12.7%Government Securities 47.1 99.6 89.7 105.0 124.6 146.7 172.9 11.7%Other Assets 47.0 50.8 74.9 80.9 87.7 95.0 102.9 15.2%

Total Assets 271.6 340.6 368.6 416.9 477.6 544.4 621.6 12.8%Customer Deposits 194.1 246.3 271.9 315.3 365.8 424.3 488.0 14.7%

Other Liabilities 39.3 45.9 41.9 39.1 40.8 38.8 40.5 -2.5%Total Liabilities 233.3 292.2 313.7 354.5 406.6 463.1 528.5 12.6%



% Change in BPS YoY 17.9% 21.3% 15.1% 15.0% 15.1% 15.4% 15.6%

6767

Valuation Summary

DTB’s stock is overvalued with a total potential return of (11.1%)



Default Spread Adjusted Risk free rate 13.20%

Beta 0.75



Terminal Assumptions: 08-Apr-17

Growth rate 5%



Return on Average Equity 2021 16.1%





Residual 100.4 40.0% 40.2

Integrated DDM 98.9 40.0% 39.6

PBV Multiple 117.7 15.0% 17.7

PE Multiple 133.1 5.0% 6.7

Fair Value 104.0

Current Price 120.0


Dividend yield 2.2%

Total return (11.1%)

6868

C. Tier II Banks

6969

Tier 2 Banks Value Drivers and Cons

2013

NIC Bank

Value Drivers Cons

• Increased investment in digital platforms, NICNow and Internet banking by 29% and 41%,respectively

• NIC bank has maintained its pole positioning inasset 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

• Exposure to different political, economic andregulatory environments, especially in Kenya with theupcoming elections might slow down business

Stanbic

• The Corporate and Investment banking is a keydriver for revenue as it contribute to a majority ofthe banks total income

• Their mobile banking platform is set to reducecosts associated with branch transactions

• Political Instability in the countries they operate. Therecent instability in S.Sudan proved to be a challengeas it affected their overall income

• Their expansion strategy is limited by the presence ofStandard Bank in the region

Bank

National Bank

• Introduction of Islamic Banking and the SMEbanking units. The SME products inlude JengaChama, Jenga Kilimo and Jenga Biashara

• The introduction of bancassurance and custodialservices has seen the bank diversify its revenue

• Bad public image following top management being letgo amid claims of mismanagement

• Capital ratios are below the regulatory requirementsbut the bank plans to raise Kshs 4.4 bn to remedy this

I&M Bank

• They have consistently been among the mostefficient banks in Kenya from a survey released byThink Business Banking Awards

• They have also fully embraced internet bank inKenya to further help drive their efficiency

• They have not been able to aggressively marketthemselves as a local household bank as Equity, Co-opand KCB

• They face stiff competition for clients from largerexisting tier 1 bank in the SME and Retail sectors

HF Group

• Vibrant real estate market in Kenya with anannual housing supply which does not satisfydemand

• The bank is the market leader in provision ofmortgage financing

• Lack of a vibrant mortgage market in Kenya• Competition from larger banks with Mortgage

facilities poses a risk for growth• Asset liability mismatch which forces the bank to

resort to expensive financing

7070

I. National Bank of Kenya

7171


National Bank’s PAT is expected to grow at a 5-year CAGR of 5.0%

Income Statement 2015 2016e 2017e 2018e 2019e 2020e 2021e CAGR

Income Statement




Other Expenses 7.5 8.2 6.6 6.8 7.3 7.9 8.4 0.6%


Profit Before Tax (1.6) 0.2 0.1 0.1 0.2 0.3 0.3 10.2%

Profit After tax (1.2) 0.2 0.1 0.1 0.2 0.2 0.2 5.0%

% PAT Change YoY -232.5% -114.1% -48.6% 25.0% 51.0% 16.8% 12.8%

EPS (3.7) 0.5 0.3 0.3 0.5 0.6 0.7 5.0%

DPS - - - - - - - -

Cost to Income 78.2% 73.9% 67.0% 66.7% 66.4% 66.3% 66.2%

NIM 6.5% 8.2% 6.8% 6.6% 6.6% 6.7% 6.7%

ROaE -9.9% 1.5% 0.7% 0.9% 1.4% 1.6% 1.8%

ROaA -0.9% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%

Balance Sheet 2015 2016e 2017e 2018e 2019e 2020e 2021e CAGRNet Loans and Advances 67.8 59.3 60.5 64.8 69.3 74.2 79.4 6.0%Government Securities 27.3 34.8 37.3 39.9 42.7 45.7 48.9 7.1%Other Assets 30.3 21.2 23.0 23.4 23.8 24.3 24.8 3.2%Total Assets 125.4 115.3 120.9 128.1 135.9 144.2 153.1 5.8%Customer Deposits 110.6 97.0 100.9 108.0 115.5 123.6 132.3 6.4%Other Liabilities 3.8 7.2 8.8 8.8 8.9 8.9 9.0 4.5%Total Liabilities 114.4 104.1 109.7 116.8 124.4 132.5 141.2 6.3%Shareholders Equity 11.1 11.2 11.2 11.3 11.5 11.7 11.9 1.3%Book value Per share 35.9 36.2 36.5 36.8 37.3 37.9 38.6 1.3%% Change in BVPS -9.6% 0.9% 0.7% 0.9% 1.4% 1.6% 1.8%

7272

Valuation Summary

National Bank is overvalued with a total potential return of (71.8%)




Beta 1.0





Growth rate 5.0%



Return on Average Equity (2021e) 1.8%

Justified Price to Book value per share (0.2x)

Preference Shares 5.7

Valuation Summary: Implied Price Weighting Weighted ValueResidual Income (5.46) 50% (2.7)PBV Multiple 13.06 30% 3.9PE Multiple 2.58 20% 0.5

Fair Value 1.7 Current Price 6.1 Upside/(Downside) (71.8%)

7373

II. NIC Bank

7474


NIC Bank’s PAT is expected to grow at a CAGR of 6.5%

Income Statement 2015 2016 2017e 2018f 2019f 2020f 2021f CAGRNet Interest Income 9.7 12.2 11.6 12.1 12.9 13.6 14.6 3.7%Non Funded Income 4.0 4.0 4.6 4.9 5.3 5.9 6.5 9.9%Loan Loss Provision 1.7 3.7 4.1 3.9 4.1 4.2 4.5 3.8%Total Operating Expenses 7.4 10.0 10.7 10.9 11.5 11.9 12.6 4.7%Profit Before Tax 6.4 6.2 5.5 6.1 6.7 7.5 8.5 6.6%Profit After tax 4.5 4.3 3.9 4.3 4.7 5.2 5.9 6.5%% PAT Change YoY 8.8% -3.3% -10.9% 10.4% 10.0% 11.8% 13.5%EPS 7.0 6.8 6.0 6.7 7.3 8.2 9.3 6.5%DPS 1.3 1.3 0.9 1.0 1.1 1.2 1.4 2.2%Cost to Income 53.6% 61.9% 66.0% 64.2% 63.2% 61.5% 59.7%NIM 6.9% 8.0% 7.3% 7.3% 7.3% 7.3% 7.3%ROE 18.4% 15.5% 12.3% 12.2% 12.1% 12.2% 12.5%ROA 2.9% 2.6% 2.2% 2.3% 2.4% 2.5% 2.7%

Balance Sheet 2015 2016 2017e 2018f 2019f 2020f 2021f CAGR



Other Assets 42.3 49.2 52.2 55.7 57.8 61.7 65.7 5.9%

Total Assets 165.8 169.5 181.5 193.4 201.7 215.8 231.3 6.4%


Other Assets 27.1 27.3 30.3 30.4 26.0 26.1 26.5 -0.6%




% Change in BVPS 13.1% 15.4% 11.0% 10.9% 10.8% 10.9% 11.2%

7575

Valuation Summary

NIC bank is overvalued with a total potential return of (10.4%)




Beta 0.9



Terminal Assumptions: 08-Apr-17

Growth rate 5.0%









Residual Valuation 23.5 40% 9.4



Fair Value 26.4

Current Price 30.5


Dividend Yield 3.0%

Total Potential Return (10.4%)

7676

III. Stanbic Holdings

7777


Stanbic Holdings PAT is expected to grow at a 5-year CAGR of 5.2%




Loan Loss Provision (0.9) (1.8) (2.1) (2.2) (2.3) (2.5) (2.7) 8.6%

Total Operating Expenses (9.6) (12.5) (13.3) (13.8) (14.9) (15.5) (16.7) 6.0%


Profit After tax 4.9 4.4 4.0 4.6 4.9 5.3 5.7 5.2%

% PAT Change YoY (13.7%) (9.9%) (8.3%) 12.6% 7.0% 8.1% 8.0%

EPS 12.4 11.2 10.2 11.5 12.3 13.3 14.4

DPS 6.2 5.3 4.7 5.3 5.7 6.1 6.6

Cost to Income 51.2% 57.9% 58.5% 57.0% 57.4% 56.5% 56.5%

NIM 5.5% 5.8% 5.3% 5.3% 5.4% 5.3% 5.4%

ROaE 13.0% 11.3% 9.6% 10.0% 10.1% 10.3% 10.5%

ROaA 2.5% 2.1% 1.8% 1.9% 2.0% 2.0% 2.0%



Other Assets 80.3 82.1 93.1 100.7 106.7 112.2 121.5 8.2%

Total Assets 208.5 214.7 228.4 242.2 257.9 271.7 293.5 6.5%


Borrowings 6.5 4.0 4.0 4.0 4.0 4.0 4.0 0.0%





% Change in BVPS 4.0% 4.6% 11.0% 5.5% 5.6% 5.7% 5.9%

7878

Valuation Summary

Stanbic Holdings is fairly valued with a total potential return of 8.1%



Beta 0.9




Growth rate 5.0%











Fair Value 60.2

Current Price 60.0

Dividend Yield 7.9%

Upside/(Downside) 8.1%

7979

IV. I&M Holdings

8080


I&M Holdings PAT is expected to grow at a 5-year CAGR of 8.1%Income Statement 2015 2016 2017f 2018f 2019f 2020f 2021f CAGR



Total Operating Income 17.2 20.8 21.6 22.8 24.6 27.0 29.7 7.4%


Other Operating Expenses 6.4 7.2 7.8 7.8 8.3 8.9 9.7 6.1%



Profit After tax 7.1 7.8 7.5 8.3 9.1 10.2 11.5 8.1%

% PAT Change YoY 24.6% 8.6% -3.7% 10.8% 10.2% 11.5% 12.6%

EPS 18.2 19.8 19.1 21.1 23.3 25.9 29.2 8.1%

DPS 3.5 3.5 3.6 4.0 4.4 4.9 5.6 9.7%

CIR 37.2% 34.7% 36.4% 34.0% 33.6% 33.1% 32.5%

NIM 7.2% 8.2% 7.8% 7.9% 7.9% 8.1% 8.2%

ROaE 24.8% 22.7% 18.7% 17.8% 17.1% 16.6% 16.4%

ROaA 3.9% 3.9% 3.4% 3.5% 3.5% 3.6% 3.8%

Balance Sheet 2015 2016 2017f 2018f 2019f 2020f 2021f CAGR

Investment Securities 42.2 45.8 54.0 58.1 62.6 67.4 72.6 9.6%


Other Assets 21.7 30.1 32.9 40.1 46.4 53.6 62.0 15.6%

Total Assets 191.7 210.5 228.9 247.5 267.9 290.3 314.7 8.4%






% BVPS Change YoY 20.7% 17.7% 16.4% 15.6% 14.9% 14.4% 14.2%

8181

Valuation Summary

I&M Holdings is overvalued with a total potential return of (1.6%)



Default Spread Adjusted Risk free rate* 13.2%

Beta 0.9





Growth rate 5.0%








Integrated DDM 96.5 40.0% 38.6Residual Income 93.2 40.0% 37.3

PBV Multiple 55.9 15.0% 8.4PE Multiple 74.2 5.0% 3.7Fair Value 88.0

Current Price 93.0 Upside/(Downside) (5.4%)

Dividend Yield 3.8%Total Potential Return (1.6%)

8282

V. HF Group

8383

Financial Statement Extracts

HF Group’s PAT is expected to grow at a 5-year CAGR of 5.1%

Source – Company Financials

Income Statement 2015 2016 2017e 2018e 2019e 2020e 2021e CAGRNet Interest Income 3.6 3.9 3.8 4.0 4.2 4.5 4.9 4.7%Non Funded Income 1.2 0.8 0.8 1.0 1.1 1.2 1.3 10.9%Loan Loss Provision (0.5) (0.7) (0.8) (0.8) (0.8) (0.9) (0.9) 5.7%Other Operating Expenses (2.6) (2.6) (2.7) (2.9) (3.0) (3.3) (3.6) 6.6%Total Operating Expenses (3.1) (3.3) (3.5) (3.7) (3.9) (4.1) (4.6) 6.4%Profit Before Tax 1.8 1.4 1.2 1.3 1.4 1.5 1.7 4.0%Profit After tax 1.2 0.9 0.8 0.9 1.0 1.1 1.2 5.1%% PAT Change YoY 22.7% (24.3%) (8.5%) 9.4% 7.9% 9.7% 8.4%EPS 3.4 2.6 2.4 2.6 2.8 3.1 3.3 5.1%DPS 1.5 0.5 0.5 0.5 0.6 0.6 0.7 5.9%Cost to Income 54.5% 56.3% 58.4% 58.2% 58.0% 57.8% 58.4%NIM 6.0% 6.5% 6.2% 6.2% 6.1% 6.1% 6.2%ROaE 13.9% 8.3% 7.1% 7.7% 7.7% 7.7% 7.9%ROaA 1.8% 1.3% 1.1% 1.2% 1.3% 1.3% 1.3%

Balance Sheet 2015 2016 2017e 2018e 2019e 2020e 2021e CAGRNet Loans and Advances 53.0 54.5 50.0 51.7 53.3 57.5 62.1 2.7%Government Securities 2.2 4.1 6.9 7.4 9.0 9.7 10.5 20.8%Other Assets 16.5 13.4 19.5 15.1 16.5 17.0 17.1 5.0%Total Assets 71.7 71.9 76.4 74.2 78.8 84.3 89.7 4.5%Customer Deposits 41.7 38.1 43.5 47.0 50.7 54.8 59.2 9.2%Other Liabilities 19.4 22.6 20.9 14.6 14.6 15.2 15.3 (7.4%)Total Liabilities 61.0 60.6 64.4 61.5 65.4 70.0 74.5 4.2%Shareholders Equity 10.6 11.3 11.6 11.8 13.5 14.3 15.2 6.2%Book value Per share 30.4 32.4 33.2 33.9 38.6 41.0 43.7 6.2%% Change in BPS YoY 62.0% 6.3% 2.7% 1.9% 13.9% 6.4% 6.5%

8484

Valuation Summary

HF Group is overvalued with a total potential return of (10.1%)



Beta 0.9









Fair Value 9.2

Current Price 10.8


Dividend Yield 4.6%

Total return (10.1%)


Growth rate 5.0%





8585

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