SSA Banks Nigeria Kenya Uganda

8/3/2019 SSA Banks Nigeria Kenya Uganda

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Nigeria: A contrarian trade not for risk averse/short-term

investorsKenya: Pockets of value emerging, higher valuation risk matchinghigher ROEs

Peter MushangweLawrence Madzwara

August 2011Tele hone: 011 5513675 e-mail: eterm le ae.co.za


2/14

Salient takeaways

All the banks under our coverage have reported their 1H11 results, hence werevise our assumptions to reflect 1H11 trends and medium term managementteams strategic guidance;

- -

short-term views that could be captured by our FY11 forecasts. However, inNigeria, we believe that earnings recovery, particularly driven by interestincome and fee income growth rather than provisions/credit losses reductions,

Primary potential risks remain macro i.e. politics, inflation and global economicrisks. All banks under our coverage, on average carry ample capital and

liquidity. Credit risks are still elevated in Nigeria but a firmer regulatory. ,

NPL formation could spike in 2H11 and 1H12 as inflation and drought effectskick in. Lower system coverage ratio is a disturbing risk;

Kenyan banks trade at a premium to Nigerian banks at 2.2x vs. 0.9x to our

FY11 BV respective y. However, Kenyan an s enjoy ig er ROEs. Nigeriabanks ROE recovery should see expansion in PBVRs;

Kenyan banks YTD return in US$-terms is -30.3% vs. a -19.8% in KES-terms.The stable NGN protected US$ returns at -30.6% vs. -29.4% in NGN-terms;

Core holdings are Zenith Bank, Diamond bank, GT Bank, KCB, Equity Bank, and

DFCU in the three countries. 2


3/14

Nigeria: Macro outlook and medium- to long-term views

Medium-to-long-term growth: We expect a medium- to long-term systemasset growth rate of ~20%, being a credit multiplier of ~2.7x and an averageGDP growth rate of ~7%;

catalyst for a rebound in share prices. 1H11 remained a credit-cost led recoverybut operating income drivers showed strong signs for some banks;

Profitability: The rising interest rates should be constructive to margins andsprea s n e espec a y as oan grow s expan ng an epos cos sdeclining. However, competition in the corporate sector could mute the impact;Credit risks remained stubborn but AMCON is aiding. Management guidance is

largely toned down; Supervision is tighter; Our coverage universe average ROE.

Valuation: We have increased the discount rates (CoE) for the banks underour coverage. We are also no longer adjusting our ROEs for excess equity. Wevalue banks with Justified PBVR


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Nigeria: 1H11 in brief and stock highlights

On average, banks produced earnings that we thought were sufficient to induceinvestor interest.

Access bank: 1H11 was fair as per our expectations; We revise out FY11 EPS.

ICB merger is a concern to us since we are uneducated enough on relatedcosts;

Diamond bank: Disappointed as it lagged our expectations by a significantmarg n; u our n a orecas y o . ; e a eposfranchise growth is going on well; provisions negatively surprised 1H11;

First Bank: Fair 1H11 from the market leader; We revise our FY11 EPSforecast by 26% to NGN1.89;

GT bank: In line 1H11 performance. We cut our FY11 EPS forecast by 4%. Weexpect >20% ROE for FY11; Declining cost of deposits is constructive for abank that grows organically;

UBA: Lackluster 1H11 erformance non-interest income roduction continues

to be poor; Low LDR provides hope but we continue to be concerned bystrategic/execution risks; Large bank trading at sub-mean PBVR; and

Zenith bank: Robust 1H11. We increase our FY11 EPS by 18% to NGN1.97..

its market shares (high CAR, sufficient liquidity, and declining cost of deposits).

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Kenya: Macro outlook and medium- to long-term views

Medium-to-long-term growth: We anticipate a system asset medium-to-long-term growth of ~22.8%, a product of a credit multiplier of ~3.5x andaverage GDP growth of 6.5%. We expect the credit multiplier to shrink to ~2xin the lon -term as enetration increases

High earnings growth rates should be sustained by robust penetration inmortgages. Both retail and corporate business should remain highlycompetitive. Loan growth could outpace deposit growth, leading to higher LDRs

Share price catalyst(s): Earnings growth has been strong enough in 1H11, inour opinion, that we do not view it as a key catalyst in 2H11. Investors are

going to try and pick up value. Investors should be selective;

Profitability: High system ROA means sufficient room for higher ROEs shouldbanks increase their leverage but we doubt banks will increase risk by leveragein the short-term. Banks may allow ROEs to shrink;

Credit risks: the low system NPLs coverage ratio of ~55% could create

earnings vulnerability in the short- to medium-term; Valuation: Kenyan banks are trading at a premium (av. 2.2 FY11 BV) relative

to Nigerian banks due to higher profitability. Recent inflation worries andshillin s de reciation catal zed a sell-off. We do not ad ust our CoEs Shareprice declines look more like a rerating than irrationality, in our view,

Regulatory risks are rising as indicated by the recent volatile policy rate. 5


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Kenya: 1H11 performance and stock highlights

Barclays: 1H11 performance was slightly behind; 1H11 EPS -10% to ourforecast; Deposit growth was in line, but we notice managements intention togain market share. Cost of deposits could increase in a bid to price awayde osits from com etitors Fee waives are ne ative to NIR ROE remains fairlhigh;

Cooperative: 1H11 slightly above, we increase our FY11 EPS by 8%; We arestill concerned by the poorer ROE structure specifically higher cost of

aggressiveness in balance sheet expansion;

Equity: 1H11 earnings came in slightly below our expectations but maintains a

strong growth momentum; We still envy the regional exposure; Share price has.

KCB: 1H11 performance was in-line with our expectations; We have reducedour FY11 EPS by 9.8% to Kes3.14; We are still positive on growing mortgageand regional exposures; One of the most liquid stocks but depressed PBVR; and

StanChart: We have cut our FY11 EPS materially; Inferior CAR shouldcontinue to restrain RWAs growth in 2H11 although there is room to raise otherforms of capital; Highest FY11 PBVR in our universe; Still the most efficientbank in the system.

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8/14

Our forecasts show strong recovery in EPS for Nigerian banks

Stock Loans and advances Deposits Earnings/share

2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013F

Nigeria NgnAccess 550,348 664,837 764,563 667,088 782,161 899,485 0.94 1.33 1.52

Growth 28% 21% 15% 37% 17% 15% 49% 41% 15%

amon , , , , , , . . .

Growth 26% 20% 28% 20% 20% 20% 144% 139% 58%

First 1,468,699 1,997,431 2,396,917 1,958,265 2,349,919 2,819,902 1.89 2.37 3.07

Growth 28% 36% 20% 35% 20% 20% 85% 25% 30%

GTBank 692,687 949,971 1,211,213 989,553 1,187,464 1,424,957 1.85 2.24 2.72

Growth 17% 37% 28% 30% 20% 20% 14% 21% 21%

UBA 728,623 961,783 1,206,600 1,457,247 1,748,696 2,011,000 0.53 0.69 1.09

Growth 16% 32% 25% 15% 20% 15% 1942% 31% 58%

Zenith 988,554 1,202,873 1,489,711 1,581,686 1,850,573 2,128,159 1.97 2.36 2.88

Growth 39% 22% 24% 20% 17% 15% 66% 20% 22%

Kenya Kes

Barcla s 95,346 114,416 131,578 136,209 152,554 175,437 1.36 1.65 1.81

Growth 9% 20% 15% 10% 12% 15% -30% 21% 10%

Cooperat ive 113,813 136,576 160,477 151,751 182,101 213,969 1.94 2.12 2.39

Growth 31% 20% 18% 23% 20% 18% 48% 9% 13%

Equity 104,431 127,927 153,513 130,538 159,909 191,891 2.82 3.33 3.85

Growth 20% 23% 20% 20% 23% 20% 46% 18% 16%

, , , , , , . . .

Growth 28% 20% 20% 20% 20% 20% 28% 14% 38%

Stanchart 92,464 106,333 122,283 115,580 132,917 152,854 16.41 19.23 22.78

Growth 53% 15% 15% 15% 15% 15% -12% 17% 18%

Uganda UgxStanbic 1,553,275 1,824,600 2,159,361 2,071,033 2,432,800 2,879,148 9.10 11.90 13.94

8Source: Company reports, Legae Securities

Growth 29% 17% 18% 13% 17% 18% 29% 31% 17%

DFCU 582,140 688,370 816,004 591,618 721,773 880,564 46.68 56.59 83.08

Growth 47% 18% 19% 24% 22% 22% 26% 21% 47%


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Valuation: Kenyan banks trade at a premium; We have increased

discount rates due to the extreme negative sentiment in NigeriaValuation Summary

Stock Tota l assets Pr ice/ Earnings Pr ice/ Book Value Return on Asse ts Return on Equity Justf ied CoE

2010A 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013F PBVR

Nigeria US$mn

Access 4,087.4 6.2 4.4 3.8 0.6 0.5 0.5 1.4% 1.6% 1.6% 9.0% 11.7% 12.2% 0.3 20.8%

Diamond 3,166.9 18.7 7.8 5.0 0.5 0.5 0.4 0.4% 0.8% 1.0% 2.8% 6.2% 8.9% 0.2 22.1%First 14,969.2 5.7 4.6 3.5 0.9 0.8 0.6 2.1% 1.9% 2.1% 15.7% 16.6% 17.9% 0.7 20.3%

GTBank 7,480.5 6.9 5.7 4.7 1.8 1.6 1.5 3.9% 3.8% 3.9% 25.9% 27.9% 30.6% 2.4 19.3%

UBA 10,504.5 7.9 6.1 3.8 0.7 0.7 0.7 0.9% 1.0% 1.4% 9.2% 11.6% 17.4% 0.5 20.8%

Zenith 12,305.4 6.3 5.2 4.3 1.0 0.9 0.9 2.6% 2.6% 2.6% 16.4% 18.0% 20.2% 0.9 19.3%

Average 8.6 5.6 4.2 0.9 0.8 0.8 1.9% 1.9% 2.1% 13.2% 15.3% 17.9% 0.82 20.4%

Kenya US$mn

Barclays 1,874.1 9.6 7.9 7.2 2.7 2.3 2.0 4.4% 4.4% 4.3% 28.0% 29.4% 28.1% 3.2 17.3%

Cooperative 1,677.6 7.3 6.7 5.9 1.8 1.5 1.3 3.5% 3.2% 3.1% 24.8% 22.8% 21.7% 2.2 18.5%

, . . . . . . . . . . . . . . .

KCB 2,732.1 6.3 5.5 4.0 1.3 1.1 1.0 2.9% 2.9% 3.3% 20.6% 20.8% 24.2% 1.7 18.3%

Stanchart 1,551.6 12.3 10.5 8.8 3.1 2.8 2.5 2.9% 2.9% 2.9% 25.3% 25.3% 25.3% 3.7 17.5%

Average 8.5 7.3 6.2 2.2 1.9 1.6 3.8% 3.8% 3 .7% 25.1% 24.8% 24.8% 2 .7 17.9%

Uganda US$mn

DFCU 284.03 8.6 7.1 6.0 2.5 2.0 2.0 3.0% 3.1% 3.0% 28.8% 28.5% 32.9% 2.9 19.0%

Source: Company reports, Legae Securities

Stanbic 849.61 15.4 11.8 10.0 4.6 3.7 3.0 3.4% 3.4% 3.3% 31.5% 30.3% 27.5% 4.7 19.8%

Average 12.0 9.4 8.0 3.6 2.9 2.5 3.2% 3.2% 3.2% 30.2% 29.4% 30.2% 3.8 19.4%

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10/14

Valuation: Kenyan banks premium explained by superior ROE;

Nigeria ROE recovery should provide an attractive risk/return profile

Stanbic

4.5

5.0

PBVR

StanChart3.0

3.5

4.0

Barclays

CoopEquity

Kenya DFCU

2.0

2.5

DiamondFirst

UBAZenith

Nigeria

KCB

0 5

1.0

1.5

Access

.

0% 5% 10% 15% 20% 25% 30% 35%

ROE

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Capital and liquidity levels of most banks are sufficient to support

material loan growthOther Salient informat ion

Stock

Total

deposits

Total

lo ans Ra nk CA R Le ve ra ge LDR L iq uid ity NI M

Credit

cost

ratio

NII / Op.

i ncome CIR

Profits/

Deposits

Nigeria US$mn US$mn # 1H11 X FY11 FY11 Fy11 FY11 FY11 FY11 FY11

Access 5,078.97 4,317.12 5 22.0% 6.6 82.5% 43.0% 7.4% 1.5% 68.1% 63.3% 2.5%Diamond 3,852.77 2,889.57 6 16.2% 7.3 75.0% 48.3% 9.7% 3.7% 71.3% 58.6% 0.8%

First 15,259.21 12,970.33 1 17.3% 7.6 75.0% 42.8% 7.8% 0.9% 68.9% 59.3% 3.2%

GTBank 9,252.97 6,168.64 4 24.7% 6.7 70.0% 59.3% 8.1% 0.8% 67.9% 47.3% 5.5%

UBA 11,355.17 6,245.34 3 17.0% 9.8 50.0% 56.6% 5.9% 0.6% 62.6% 75.8% 1.2%

Zenith 12,016.71 7,810.86 2 32.0% 6.2 62.5% 65.1% 8.0% 2.8% 64.4% 55.0% 3.9%

Average 21.5% 7.4 69.2% 52.5% 7.8% 1.7% 67.2% 59.9% 2.8%

Kenya

Barclays 1,480.53 1,036.37 3 25.1% 6.7 70.0% 35.8% 10.5% 0.9% 58.2% 55.8% 5.4%

Cooperative 1,649.47 1,237.10 2 15.0% 7.0 75.0% 32.0% 10.2% 1.0% 63.7% 51.5% 4.5%

Equity 1,418.89 1,135.12 4 24.0% 4.8 80.0% 15.2% 11.9% 2.0% 57.3% 52.3% 8.0%

KCB 2,569.23 2,055.39 1 16.7% 7.2 80.0% 31.6% 9.9% 1.0% 62.3% 58.8% 3.9%

Stanchart 1,256.30 1,005.04 5 13.0% 8.8 80.0% 28.0% 7.0% 0.6% 62.7% 49.6% 4.1%

Average 18.8% 6.9 77.0% 28.5% 9.9% 1.1% 60.9% 53.6% 5.2%

Ugan a

DFCU 209.42 206.07 2 17.0% 8.9 70.0% 27.6% 11.8% 1.1% 78.2% 57.0% 4.9%

Stanbic 733.11 549.83 1 13.0% 10.4 75.0% 44.7% 9.0% 1.4% 59.7% 55.0% 4.5%

Average 15.0% 9.6 72.5% 36.1% 10.4% 1.3% 69.0% 56.0% 4.7%

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Share price performances

Yeat-to-Date 6 Months

Stock Ticker Market capCurrent

Price

Abslolute

LC return

Absolute

US$ return

vs.

Index in

LC

Abslolute

LC return

Absolute

US$

return

vs. Index

in LC

Access ACCESS NL 850.55 6.09 -38.4% -39.5% -27.3% -32.3% -32.0% -21%

Diamond DIAMOND B N 549.12 4.21 -45.7% -46.7% -34.6% -43.5% -43.2% -32%

First FIRSTBAN NL 2,865.00 10.98 -21.1% -22.5% -10.0% -21.6% -21.3% -10%

GTBank GUARANTY NL 3,046.28 12.92 -10.3% -11.9% 0.8% -16.3% -15.9% -5%

- - - - - -, . . . . . . .

Zenith ZENITHBAN NL 3,038.32 12.4 -17.7% -19.2% -6.6% -17.7% -17.3% -6%

Average -29.4% -30.6% -18.2% -28.6% -28.3% -17.1%

Kenya Bloomberg US$mn KES

Barclays BCBL KN 1,116.16 13.1 -16.8% -27.7% 4.8% -8.8% -17.1% 6.3%

oopera ve . . - . - . - . - . - . - .

Equity EQBNK KN 1,105.97 19.9 -25.6% -35.3% -4.0% -20.4% -27.6% -5.3%

KCB KNCB KN 907.61 19.55 -9.0% -20.9% 12.6% -13.9% -21.7% 1.1%

Stanchart SCBL KN 826.59 208 -22.1% -32.3% -0.5% -22.4% -29.5% -7.3%

Average -19.8% -30.3% 1.9% -16.6% -24.2% -1.5%

Source: Bloomber Le ae Securities rices cob 26/09/11

Uganda B loomberg US$mn UGXStanbic SBU UG 670.83 141 4.5% -14.6% 21.6% 1.8% -13.5% 12.4%

DFCU DFCU UG 103.58 1005 22.3% 0.0% 39.3% 5.8% -10.1% 16.4%

Average 13.4% -7.3% 30.4% 3.8% -11.8% 14.4%

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Disclaimer and Disclosures

Legae Securities (P ty) Ltd

Member of the JSE Securities Exchange

1st Floor, Building B, Riviera Road Office Park, 6-10 Riviera Road, Houghton, Johannesburg, South Africa

P.O Box 10564, Johannesburg, 2000, South Africa

Te +27 11 551 3601, Fax +27 11 551 3635

Web: www.legae.co.za, email: [email protected]

Analyst Certification and Disclaimer

I we the author s hereb certif that the views as ex ressed in this document are an accurate of m ourpersonal views on the stock or sector as covered and reported on by myself/each of us herein. I/wefurthermore certify that no part of my/our compensation was, is or will be related, directly or indirectly, tothe specific recommendations or views as expressed in this document

.distributed or published, in whole or in part, for any purposes. Legae Securities (Pty) Ltd has based thisdocument on information obtained from sources it believes to be reliable but which it has notindependently verified; Legae Securities (Pty) Limited makes no guarantee, representation or warrantyand accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion hereinare those of the author only and are subject to change without notice. This document is not and should

not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment.Important Disclosure

This disclosure outlines current conflicts that may unknowingly affect the objectivity of the analyst(s) withrespect to the stock under analysis in this report. The analyst(s) do not own any shares in the companyunder analysis.

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SSA Banks Nigeria Kenya Uganda

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