Sub Sahara Africa Banks

Nigeria: A contrarian trade not for risk averse/short-term investors Kenya: Pockets of value emerging, higher valuation risk matching higher ROEs Peter Mushangwe Lawrence Madzwara

August 2011 e ep o e 0 55 36 5; e a pete @ egae co a Telephone: 011 5513675; e-mail: peterm@legae.co.za

Salient takeaways
All the banks under our coverage have reported their 1H11 results, hence we revise our assumptions to reflect 1H11 trends and medium term management teams strategic guidance; We still believe the medium- to long-term views are more important than the short-term views that could be captured by our FY11 forecasts. However, in Nigeria, we believe that earnings recovery, particularly driven by interest income and fee income growth rather than provisions/credit losses reductions, is a critical catalyst for the rebound of share prices; Primary potential risks remain macro i.e. politics, inflation and global economic risks. All banks under our coverage, on average carry ample capital and liquidity. Credit risks are still elevated in Nigeria but a firmer regulatory environment and lower risks (muted leverage) should tame them In Kenya them. Kenya, NPL formation could spike in 2H11 and 1H12 as inflation and drought effects kick 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 respectively. H i l However, K Kenyan b k enjoy hi h banks j higher ROE ROEs. Ni Nigeria i banks 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.
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Nigeria: Macro outlook and medium- to long-term views

Medium-to-long-term growth: We expect a medium- to long-term system asset growth rate of ~20%, being a credit multiplier of ~2.7x and an average GDP growth rate of ~7%; Share price catalyst(s): We believe a robust earnings momentum is a critical catalyst for a rebound in share prices. 1H11 remained a credit-cost led recovery but operating income drivers showed strong signs for some banks; Profitability: The rising interest rates should be constructive to margins and spreads in the 2H11 especially as loan growth is expanding and deposit costs declining. 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 is 13 2% for FY11; 13.2% Valuation: We have increased the discount rates (CoE) for the banks under our coverage. We are also no longer adjusting our ROEs for excess equity. We value banks with Justified PBVR <1x at 1x FY11 BV except for First bank (1.2x). We do hi in d W d this i order to reflect the current excessive negative sentiments; fl h i i i Long-term view: We are still constructive on the medium- to long-term profitability of the system (appealing demographic structure, positive consolidation impact to ROA, robust economic growth, moderate penetration). Restructuring overhang is likely to be removed by end of year.
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Nigeria: 1H11 in brief and stock highlights

On average, banks produced earnings that we thought were sufficient to induce investor interest. Access bank: 1H11 was fair as per our expectations; We revise out FY11 EPS to NGN0 94 (+17% to our initial); managements overly positive outlook on the NGN0.94 management s ICB merger is a concern to us since we are uneducated enough on related costs; Diamond bank: Disappointed as it lagged our expectations by a significant margin; Cut our initial EPS forecast by 47% to NGN0 22; Retail deposit NGN0.22; franchise growth is going on well; provisions negatively surprised 1H11; First Bank: Fair 1H11 from the market leader; We revise our FY11 EPS forecast by 26% to NGN1.89; GT bank: In line 1H11 performance. We cut our FY11 EPS forecast by 4%. We expect >20% ROE for FY11; Declining cost of deposits is constructive for a bank that grows organically; U UBA: Lackluster 1H11 performance, non-interest income production continues ac uste pe o a ce, o te est co e p oduct o co t ues to be poor; Low LDR provides hope but we continue to be concerned by strategic/execution risks; Large bank trading at sub-mean PBVR; and Zenith bank: Robust 1H11. We increase our FY11 EPS by 18% to NGN1.97. Credit risks continue to improve We believe the bank is well placed to defend improve. 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-tolong-term growth of ~22.8%, a product of a credit multiplier of ~3.5x and average GDP growth of 6.5%. We expect the credit multiplier to shrink to ~2x in the long-term as penetration increases; long term High earnings growth rates should be sustained by robust penetration in mortgages. Both retail and corporate business should remain highly competitive. Loan growth could outpace deposit growth, leading to higher LDRs and eventually a possibility of a contained loan growth in medium term; Share price catalyst(s): Earnings growth has been strong enough in 1H11, in our 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 f h h ROEs should fi bili h O ff for higher O h ld banks increase their leverage but we doubt banks will increase risk by leverage in 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 and g p y j ; shillings depreciation catalyzed a sell-off. We do not adjust our CoEs; Share price declines look more like a rerating than irrationality, in our view, Regulatory risks are rising as indicated by the recent volatile policy rate.
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Kenya: 1H11 performance and stock highlights

Barclays: 1H11 performance was slightly behind; 1H11 EPS -10% to our forecast; Deposit growth was in line, but we notice managements intention to gain market share. Cost of deposits could increase in a bid to price away deposits from competitors; Fee waives are negative to NIR; ROE remains fairly high; Cooperative: 1H11 slightly above, we increase our FY11 EPS by 8%; We are still concerned by the poorer ROE structure specifically higher cost of deposits; We expect further market share gains nonetheless due to its 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 declined materially; Highest ROA yet lowest leverage leverage. KCB: 1H11 performance was in-line with our expectations; We have reduced our FY11 EPS by 9.8% to Kes3.14; We are still positive on growing mortgage and regional exposures; One of the most liquid stocks but depressed PBVR; and StanChart: We have cut our FY11 EPS materially; Inferior CAR should continue to restrain RWAs growth in 2H11 although there is room to raise other forms of capital; Highest FY11 PBVR in our universe; Still the most efficient bank in the system.
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Buying most of the Nigerian banks on low valuation risk; Kenya and Uganda are more expensive but show p g p pockets of value
Stock Nigeria Access Diamond First GTBank Ticker Bloomberg AC C ESS NL DIAMOND B NL FIRSTBAN NL GUARANTY NL Market cap US$mn 679.5 382.5 2,294.9 2,411.2 Current Target Potential Price Price NGN 5.85 4.07 10.83 12.74 NGN 10.43 7.87 12.53 16.77 78.3% 93.5% 15.7% 31.6% BUY BUY HOLD BUY BUY BUY HOLD BUY Room to grow RWAs in the upturn cycle; Short term ALM benefits. Poorer deposit structure a risk; M&A risks Strong NIM and deposit structure possible rerating after strong structure, underperformance; Asset quality remains an issue; Liquidity ratio building up but C AR on lower end. Higher unsecured book; Strong footprint and remains a key player; Normalization of cost/income ratio beneficial; Best-in-class ROE due to efficiency; Our Justified PBVR > current, higher PBVR than peers can scare some investors; Our Buy recommendation based on low valuation risk with submean PBVR ; Strategic/execution risks remain C onservative bank but consistent; Ample room to grow RWAs; Strong asset quality and deposit structure. Our core holding. Old rating Current Rating Stock views

UBA

UBA NL

875.6

4.17

5.75

37.8%

HOLD

BUY

Zenith Kenya Barclays C ooperative Equity KC B Stanchart Uganda Stanbic DFC U

ZENITHBAN NL Bloomberg BC BL KN C OOP KN EQBNK KN KNC B KN SC BL KN Bloomberg SBU UG DFC U UG

2,517.9 US$mn 767.5 531.4 796.8 638.2 603.2 US$mn 506.19 103.58

12.35 KES 13.00 14.20 19.90 19.80 201.00 UGX 140 1005

15.60 KES 15.61 17.39 26.60 25.97 241.16 UGX 142 1163

26.3%

BUY

BUY

20.1% 22.5% 33.7% 31.2% 20.0%

SELL HOLD BUY BUY HOLD

HOLD HOLD BUY BUY HOLD

Strong franchise but no regional play; C onstrained asset growth despite high C AR (in pursuit of quality assets); Disconnect between ROE and valuation and a poorer ROE structure; Higher leverage vs. peers; higher NPL overhang; Strong franchise in a strong market segment; regional play to become value accretive in a material manner. Elevated NPL risks; Regional markets no more a drag on local earnings; strong R i l k t d l l i t mortgage player; Pure Kenyan play, most efficient bank in the system leading to a stronger ROA; losing market share and poorer C AR

1.2% 15.7%

SELL BUY

HOLD BUY

#1 bank that could find it difficult to grow RWAs meaningfully; high valuation risk trading at 4 6x FY11 BV 4.6x Improving deposit mix; strong local franchise that can break the internationals hegemony yet lower valuation risk; Asset quality concerns.

Source: Company reports, Legae Securities . Prices cob 26/09/11

Our forecasts show strong recovery in EPS for Nigerian banks

Stock 2011F Loans and advances 2012F 664,837 21% 444,994 444 994 20% 1,997,431 36% 949,971 37% 961,783 961 783 32% 1,202,873 22% 2013F 764,563 15% 569,593 569 593 28% 2,396,917 20% 1,211,213 28% 1,206,600 1 206 600 25% 1,489,711 24% 2011F 667,088 37% 494,438 494 438 20% 1,958,265 35% 989,553 30% 1,457,247 1 457 247 15% 1,581,686 20% Deposits 2012F 782,161 17% 593,326 593 326 20% 2,349,919 20% 1,187,464 20% 1,748,696 1 748 696 20% 1,850,573 17% 2013F 899,485 15% 711,991 711 991 20% 2,819,902 20% 1,424,957 20% 2,011,000 2 011 000 15% 2,128,159 15% 2011F 0.94 49% 0.22 0 22 144% 1.89 85% 1.85 14% 0.53 0 53 1942% 1.97 66%

Earnings/share
2012F 1.33 41% 0.52 0 52 2013F 1.52 15% 0.82 0 82

Nigeria Ngn
Access Growth Diamond Growth First Growth GTBank Growth UBA Growth Zenith Growth 550,348 28% 370,829 370 829 26% 1,468,699 28% 692,687 17% 728,623 728 623 16% 988,554 39%

139%
2.37 25% 2.24 21% 0.69 0 69 31% 2.36 20%

58%
3.07 30% 2.72 21% 1.09 1 09 58% 2.88 22%

Kenya Kes
Barclays y Growth Cooperative Growth Equity Growth KCB Growth Stanchart Growth 95,346 , 9% 113,813 31% 104,431 20% 189,096 189 096 28% 92,464 53% 114,416 , 20% 136,576 20% 127,927 23% 226,915 226 915 20% 106,333 15% 131,578 , 15% 160,477 18% 153,513 20% 272,298 272 298 20% 122,283 15% 136,209 , 10% 151,751 23% 130,538 20% 236,370 236 370 20% 115,580 15% 152,554 , 12% 182,101 20% 159,909 23% 283,643 283 643 20% 132,917 15% 175,437 , 15% 213,969 18% 191,891 20% 340,372 340 372 20% 152,854 15% 1.36 -30% 1.94 48% 2.82 46% 3.14 3 14 28% 16.41 -12% 1.65 21% 2.12 9% 3.33 18% 3.58 3 58 14% 19.23 1.81 10% 2.39 13% 3.85 16% 4.94 4 94 38% 22.78

17%
11.90

18%
13.94

Uganda Ugx
Stanbic Growth DFCU Growth 1,553,275 29% 582,140 47% 1,824,600 17% 688,370 18% 2,159,361 18% 816,004 19% 2,071,033 13% 591,618 24% 2,432,800 17% 721,773 22% 2,879,148 18% 880,564 22% 9.10 29% 46.68 26%

31%
56.59

17%
83.08

21%

47%

Source: Company reports, Legae Securities

Valuation: Kenyan banks trade at a premium; We have increased discount rates due to the extreme negative sentiment in Nigeria g g
Valuation Summary
Stock Nigeria Access Diamond First GTBank UBA Zenith Average Kenya Barclays C ooperative Equity KC B Stanchart Average Uganda DFC U Stanbic Average US$mn 284.03 849.61 8.6 15.4 12.0 7.1 11.8 9.4 6.0 10.0 8.0 2.5 4.6 3.6 2.0 3.7 2.9 2.0 3.0 2.5 3.0% 3.4% 3.2% 3.1% 3.4% 3.2% 3.0% 3.3% 3.2% 28.8% 31.5% 30.2% 28.5% 30.3% 29.4% 32.9% 27.5% 30.2% 2.9 4.7 3.8 19.0% 19.8% 19.4% US$mn 1,874.1 1,677.6 1,554.5 1 554 5 2,732.1 1,551.6 9.6 7.3 7.1 71 6.3 12.3 8.5 7.9 6.7 6.0 60 5.5 10.5 7.3 7.2 5.9 5.2 52 4.0 8.8 6.2 2.7 1.8 1.9 19 1.3 3.1 2.2 2.3 1.5 1.5 15 1.1 2.8 1.9 2.0 1.3 1.3 13 1.0 2.5 1.6 4.4% 3.5% 5.6% 5 6% 2.9% 2.9% 3.8% 4.4% 3.2% 5.4% 5 4% 2.9% 2.9% 3.8% 4.3% 3.1% 5.2% 5 2% 3.3% 2.9% 3.7% 28.0% 24.8% 26.9% 26 9% 20.6% 25.3% 25.1% 29.4% 22.8% 25.9% 25 9% 20.8% 25.3% 24.8% 28.1% 21.7% 24.7% 24 7% 24.2% 25.3% 24.8% 3.2 2.2 2.5 25 1.7 3.7 2.7 17.3% 18.5% 18.0% 18 0% 18.3% 17.5% 17.9% Total assets 2010A US$mn 4,087.4 3,166.9 14,969.2 7,480.5 10,504.5 12,305.4 6.2 18.7 5.7 6.9 7.9 6.3 8.6 4.4 7.8 4.6 5.7 6.1 5.2 5.6 3.8 5.0 3.5 4.7 3.8 4.3 4.2 0.6 0.5 0.9 1.8 0.7 1.0 0.9 0.5 0.5 0.8 1.6 0.7 0.9 0.8 0.5 0.4 0.6 1.5 0.7 0.9 0.8 1.4% 0.4% 2.1% 3.9% 0.9% 2.6% 1.9% 1.6% 0.8% 1.9% 3.8% 1.0% 2.6% 1.9% 1.6% 1.0% 2.1% 3.9% 1.4% 2.6% 2.1% 9.0% 2.8% 15.7% 25.9% 9.2% 16.4% 13.2% 11.7% 6.2% 16.6% 27.9% 11.6% 18.0% 15.3% 12.2% 8.9% 17.9% 30.6% 17.4% 20.2% 17.9% 0.3 0.2 0.7 2.4 0.5 0.9 0.82 20.8% 22.1% 20.3% 19.3% 20.8% 19.3% 20.4% Price/Earnings 2011F 2012F 2013F Price/Book Value 2011F 2012F 2013F Return on Assets 2011F 2012F 2013F Return on Equity 2011F 2012F 2013F Justfied CoE PBVR

Source: Company reports, Legae Securities

Valuation: Kenyan banks premium explained by superior ROE; Nigeria ROE recovery should provide an attractive risk/return profile g y p p
5.0 PBVR 4.5 4.0 3.5 3.0 2.5 2.0 Coop 1.5 KCB 1.0 0.5 05 0% 5% 10% 15% ROE 20% 25% 30% 35% Diamond Access Nigeria UBA First Zenith StanChart Barclays Kenya Equity GTbank GT bank DFCU Stanbic

Source: Company reports, Legae Securities

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Capital and liquidity levels of most banks are sufficient to support material loan growth g
Other Salient information
Stock Total deposits Total loans Rank CAR Leverage LDR Liquidity NIM Credit cost ratio NII/Op. income Profits/ Deposits

CIR

Nigeria Access Diamond First GTBank UBA Zenith Average Kenya Barclays C ooperative Equity KC B Stanchart Average Uganda d DFC U Stanbic Average

US$mn 5,078.97 3,852.77 15,259.21 9,252.97 11,355.17 12,016.71

US$mn 4,317.12 2,889.57 12,970.33 6,168.64 6,245.34 7,810.86

# 5 6 1 4 3 2

1H11 22.0% 16.2% 17.3% 24.7% 17.0% 32.0% 21.5%

X 6.6 7.3 7.6 6.7 9.8 6.2 7.4 6.7 7.0 4.8 7.2 8.8 6.9 8.9 10.4 9.6

FY11 82.5% 75.0% 75.0% 70.0% 50.0% 62.5% 69.2% 70.0% 75.0% 80.0% 80.0% 80.0% 77.0% 70.0% 75.0% 72.5%

FY11 43.0% 48.3% 42.8% 59.3% 56.6% 65.1% 52.5%

Fy11 7.4% 9.7% 7.8% 8.1% 5.9% 8.0% 7.8%

FY11 1.5% 3.7% 0.9% 0.8% 0.6% 2.8% 1.7%

FY11 68.1% 71.3% 68.9% 67.9% 62.6% 64.4% 67.2%

FY11 63.3% 58.6% 59.3% 47.3% 75.8% 55.0% 59.9%

FY11 2.5% 0.8% 3.2% 5.5% 1.2% 3.9% 2.8%

1,480.53 1,649.47 1,418.89 2,569.23 1,256.30

1,036.37 1,237.10 1,135.12 2,055.39 1,005.04

3 2 4 1 5

25.1% 15.0% 24.0% 16.7% 13.0% 18.8%

35.8% 32.0% 15.2% 31.6% 28.0% 28.5%

10.5% 10.2% 11.9% 9.9% 7.0% 9.9%

0.9% 1.0% 2.0% 1.0% 0.6% 1.1%

58.2% 63.7% 57.3% 62.3% 62.7% 60.9%

55.8% 51.5% 52.3% 58.8% 49.6% 53.6%

5.4% 4.5% 8.0% 3.9% 4.1% 5.2%

209.42 733.11

206.07 549.83

2 1

17.0% 13.0% 15.0%

27.6% 44.7% 36.1%

11.8% 9.0% 10.4%

1.1% 1.4% 1.3%

78.2% 59.7% 69.0%

57.0% 55.0% 56.0%

4.9% 4.5% 4.7%

Source: Company reports, Legae S S C t L Securities iti

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Share price performances

Nigeria: Best performer on a YTD basis is GT Bank, YTD return of -10.3%; worst performer is Diamond bank, YTD is -45.7% . GT Bank has outperformed the ALSI by 0.8pps; Diamond bank has underperformed by 34.6pps. Average local currency return for the banks under our coverage is -29.4%, a -18.2% 29.4%, 18.2% underperformance to the ALSIs -11.2%. The fairly stable (or managed) Naira has protected returns from a foreign investor perspective (relative to Kenyan and Ugandan shares) with a US$ return of -30 6% -30.6% Kenya: Best performer is KCB, with a YTD return of -9%; Worst performer is Equity bank with a YTD of -25.6%. KCB outperforms the ALSI by 12.6pp; Equity underperforms b 4pps. The Kenyan b k ( d d f by h banks (under our coverage) ) average return is 19.8%, a 1.9pps outperformance to the ALSI. The KES has lost 13.% to the US$ YTD, exacerbating losses to foreign investors in particular. Average US$ return for banks under our coverage is -30.3%. Uganda: Ugandan banks are the only banks in our SSA banks coverage with positive YTD returns. DFCU and SBU have returned 22.5% and 4.5% respectively. respectively The UGXs loss vs US$ has lead to ve US$ returns nonetheless UGX s vs. ve nonetheless, with a -14.6% for SBU and 0.0% for DFCU.
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Share price performances

Yeat-to-Date Stock Nigeria
Access Diamond First GTBank UBA Zenith Average

6 Months vs. Index in LC

-27.3% -34.6% -10.0% 0.8% -31 9% 31.9% -6.6% -18.2%

Ticker Bloomberg
ACCESS NL DIAMOND B NL FIRSTBAN NL GUARANTY NL UBA NL ZENITHBAN NL

Market cap US$mn

850.55 549.12 2,865.00 3,046.28 1,299.66 3,038.32

Current Price NGN

6.09 4.21 10.98 12.92 4.25 12.4

Abslolute Absolute LC return US$ return

Abslolute LC return

Absolute US$ return

-32.0% -43.2% -21.3% -15.9% -40 1% 40.1% -17.3% -28.3%

vs. Index in LC

-38.4% -45.7% -21.1% -10.3% -43 0% 43.0% -17.7% -29.4%

-39.5% -46.7% -22.5% -11.9% -44 0% 44.0% -19.2% -30.6%

-32.3% -43.5% -21.6% -16.3% -40 3% 40.3% -17.7% -28.6%

-21% -32% -10% -5% -29% 29% -6% -17.1%

Kenya
Barclays Cooperative C ti Equity KCB Stanchart Average

Bloomberg
BCBL KN COOP KN EQBNK KN KNCB KN SCBL KN

US$mn
1,116.16 717.67 717 67 1,105.97 907.61 826.59

KES
13.1 14.2 14 2 19.9 19.55 208 -16.8% -25.3% 25 3% -25.6% -9.0% -22.1% -19.8% -27.7% -35.0% 35 0% -35.3% -20.9% -32.3% -30.3% 4.8% -3.7% 3 7% -4.0% 12.6% -0.5% 1.9% -8.8% -17.4% 17 4% -20.4% -13.9% -22.4% -16.6% -17.1% -25.0% 25 0% -27.6% -21.7% -29.5% -24.2% 6.3% -2.4% 2 4% -5.3% 1.1% -7.3% -1.5%

Uganda
Stanbic DFCU Average

Bloomberg
SBU UG DFCU UG

US$mn
670.83 103.58

UGX
141 1005 4.5% 22.3% 13.4% -14.6% 0.0% -7.3% 21.6% 39.3% 30.4% 1.8% 5.8% 3.8% -13.5% -10.1% -11.8% 12.4% 16.4% 14.4%

Source: Bloomberg, Legae Securities, prices cob 26/09/11

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Disclaimer and Disclosures

Legae Securities (Pty) 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 Tel 27 T l +27 11 551 3601, Fax +27 11 551 3635 3601 F 27 Web: www.legae.co.za, email: research@legae.co.za Analyst Certification and Disclaimer I/we the author (s) hereby certify that the views as expressed in this document are an accurate of my/our personal views on the stock or sector as covered and reported on by myself/each of us herein. I/we furthermore certify that no part of my/our compensation was, is or will be related, directly or indirectly, to the specific recommendations or views as expressed in this document This report has been issued by Legae Securities (Pty) Limited. It may not be reproduced or further distributed or published, in whole or in part, for any purposes. Legae Securities (Pty) Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Legae Securities (Pty) Limited makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion herein are 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) with respect to the stock under analysis in this report. The analyst(s) do not own any shares in the company under analysis.

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