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8/3/2019 SSA Banks Nigeria Kenya Uganda Deja Vu
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3Q11 Review and 4Q11 Expectations: I ts dj vu
Peter MushangweLawrence Madzwara
October 5, 2011Tele hone: 011 5513675 e-mail: eterm le ae.co.za
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Dj vu - Salient takeaways
Major SSA markets have performed poorly to end of 3Q11. Nigeria is -17.8% (-21.2% in US$ terms); Kenya is -27.2% (-41.2% in US$ terms). Only Mauritius andGhana have +ve US$-terms returns. (see slide 3).
As we enter into 4 11 erformance of the SSA banks under our covera e has beenabysmal. Our 6 Nigerian banks have an average return of -32.8%. Diamond bank isworst performer (-53.3%) while GT Bank is the best performer (-9.6%). On averageour universe underperformed the Nigeria ALSI return by ~15percentage points (pps)(see Slide 5);
In Kenya, our banks losses are subdued (relative to Nigeria) but they remaincolossal nonetheless. The Top 5 banks lost 29.6% on average. The worst performer
is Equity Bank (-34%) while the best performer is KCB (-24.8%). Our universeunderperformed the Nairobi ASLI by ~2pps (see Slide 6);
Generally, bank shares have performed worse than other sectors. Bank shares arethe most liquid shares in most markets and dominate market caps in some cases,hence have performed worst in this market sell-off;
Pressure on currencies, with the KES/US$ rate having depreciated ~19% and the
NGN/US$ rate ~5% has exacerbated losses to foreign investors. This currencydepreciation has worsened the negativity.
We still see value in the two banking systems. For the first time, we are BUYing allNigerian banks under our coverage. In Kenya we continue to BUY KCB and Equitybank. We upgrade Barclays to BUY but downgrade Coop to SELL. We have increasedour required return (CoE) for our Kenyan banks to reflect the increased volatility and
currency risk and our Target Prices have reduced accordingly. 2
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Dj vu Putting losses into context: Most major SSA markets have lost
significant value up-to 3Q11, and much worse in US$-terms.
TickerLocalcurrency
US$returnKen a NSEASI 27.2% 41.4%
Uganda UGSINDX 26.0% 39.9%
Zimbabwe ZHMINUSD 23.9% 23.9%
Nigeria NGSEINDX 17.8% 21.7%
Mauritius SEMDEX 3.4% 2.4%
Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/09/11
Ghana GGSECI 9.8% 2.3%
3
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Dj vu Putting losses into context: On average the banks we cover in
Nigeria and Kenya underperformed the MSCI EM Banks and JSE Banks Indices
5.0%
0.0%
6.1%
15.0%
10.0%
25.0%
20.0%
32.8%
29.6%
26.9%
35.0%
30.0%
Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/09/11
NigeriaUniverse KenyanUniverse MSCIEMBanks JSEBanks
4
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Dj vu Nigeria Banks: Diamond bank lost >50% of shareholder value,
underperforming the NSE ALSI materially. GT Bank continues to outperform
9.6%GTBank
US$r eturn NGNreturn
17.8%
17.3%
NSEALSI
ZenithBank
40.8%
28.8%
AccessBank
FirstBank
47.1%
DiamondBank
UBA
.
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/09/11.
5
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Dj vu Kenya Banks: Equity Bank is the worst performer with a -34%
return, underperforming the NSE ALSI by ~7pps.
24.8%KCB
US$ KES
26.1%Cooperative
31.0%
27.2%
StanChart
34.0%
31.9%
EquityBank
Barclays
Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/9/11
50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
6
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Dj vu Our Q411 expectations are not buoyant. Confidence continues tolack. Good banks can get cheaper, providing opportunities to BUY
Nigeria: We expect the negative sentiment to carry on into 4Q11. Foreign investors aremost likely to continue selling shares despite our strong belief that there is value in thebanks we cover. Varying by bank, we expect further disconnection between the banksfundamentals (strong CAR, high liquidity, improving credit losses, rebounding ROEs) andva ua ons, ma n y ue o g o a uncer a n es;
Possib le catalysts and headwinds: However, strong 3Q11 results could catalyze somere-rating, particularly if earnings are supported by operating income drivers (interestincome, fee income) rather than credit-loss reduction. The Nigerian banks are also better
- .recent M&A activities should also bring clarity to the system. The primary headwindscontinue to be the equity (global/EM/frontier) markets sell-off.
Kenya: Kenyas risks have worsened, in our opinion. Policy (monetary and fiscal) risks arehigher while regulatory risks have also heightened. The KES depreciation has scared someforeign investors as expectations continue to point to a weaker KES/US$ rate. The highvolatility of shares and the currency risk mean higher required rate of returns/cost ofequity. We do not expect a strong 4Q11 share price performance, despite our positive3Q11 results outlook;
interest. Kenyas real economic recovery (from 1.5% in CY08 to 5.6% in CY10) meansstronger demand for imports (pressure on KES in short- to medium-term). We do not think3Q11 results will be an important catalyst. A tighter monetary policy could reduce systemloan growth into 4Q11. Kenya is relatively small to attract significant frontier moneyshould risk appetite pick up. We see most of the headwinds in Kenya emanating frommacro-issues. Elevated levels of inflation rate should be unconstructive to both loan growth
and credit risk. 7
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Dj vu We are now BUYing all the 6 banks we cover in Nigeria; In Kenya weBUY Equity Bank and KCB and Barclays bank. We downgrade Coop to SELL.
Stock TickerCurrent
Price
Target
PricePotential
Old
rating
Current
RatingStock v iews
Nigeria Bloomberg NGN NGN
Access ACCESS NL 5.62 10.43 85.6% BUY BUYRoom to grow RWAs in the upturn cycle; Short term ALM benefits.
Poorer deposit structure a risk; M&A risks
Stron NIM and de osit structure ossible reratin after stronD amon DIAMOND B NL 3.50 7.87 125.0% BUY BUY
underperformance; Asset quality remains an issue;
First FIRSTBAN NL 9.77 12.53 28.2% HOLD BUYLiquidity ratio building up but CAR on lower end. Higher unsecured
book; Strong footprint and remains a key player; Normalization of
cost/income ratio beneficial;
GTBank GUARANTY NL 12.85 16.77 30.5% BUY BUYBest-in-class ROE due to efficiency; Our Justified PBVR > current,
higher PBVR than peers can scare some investors;
UBA UBA NL 3.87 5.75 48.5% HOLD BUYOur Buy recommendation based on low valuation risk with sub-
mean PBVR ; Strategic/execution risks remain
Zenith ZENITHBAN NL 12.41 15.60 25.7% BUY BUYConservative bank but consistent; Ample room to grow RWAs;
Strong asset quality and deposit structure. Our core holding.
Kenya Bloomberg KES KES
Barclays BCBL KN 10.65 13.71 28.8% HOLD BUY
Strong ranc se ut no reg ona p ay; Constra ne asset growt
despite high CAR (in pursuit of quality assets);
Cooperative COOP KN 14.05 13.73 -2.3% HOLD SELLDisconnect between ROE and valuation and a poorer ROE structure;
Higher leverage vs. peers; higher NPL overhang;
Equity EQBNK KN 17.65 22.23 26.0% BUY BUYStrong franchise in a strong market segment; regional play to
become value accretive in a material manner. Elevated NPL risks;
KCB KNCB KN 16.35 21.73 32.9% BUY BUY
mortgage player;
Stanchart SCBL KN 176.00 185.92 5.6% HOLD HOLDPure Kenyan play, most efficient bank in the system leading to a
stronger ROA; losing market share and poorer CAR
Uganda Bloomberg UGX UGX
Stanbic SBU UG 145 142 -2.3% HOLD HOLD#1 bank that could find it difficult to grow RWAs meaningfully; high
valuation risk trading at 4.6x FY11 BV
8Source: Company reports, Legae Securities . Prices as at cob 30/09/11
DFCU DFCU UG 1015 1163 14.6% BUY BUYImproving deposit mix; strong local franchise that can break the
internationals hegemony yet lower valuation risk; Asset quality
concerns.
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Dj vu Strategic positioning of the banks under our coverage differs.Generally Nigerian banks have lower retail exposure than Kenyan banks.
Wellcapitalised
LowLDR Highretailexposure
Regionalexposure
Boldmanagement
Nigeria
Access
Diamond
First
GTBank
UBA
Zenith
Kenya
Barclays
oopera ve
Equity
KCB
Stanchart
Source: Company reports, Legae Securities. Low LDR = LDR
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Dj vu We still expect meaningful earnings recovery in Nigeria. We are alsopositive on Kenyan banks earnings for FY11
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%
Cooperative 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
10Source: 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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Dj vu Attractive forward PERs for Kenya and Nigeria. We increased theCoE for Kenyan banks by 100bps to reflect the negative outlook/sentiment
Valuation Summary
Stock Tota l a ss ets P ric e/ Ea rnings P ric e/ Bo ok Va lue Re tur n on A ss ets Re tur n on Equity Jus tf ie d CoE
2010A 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013F PBVR
Access 4,087.4 6.0 4.2 3.7 0.5 0.5 0.4 1.4% 1.6% 1.6% 9.0% 11.7% 12.2% 0.3 20.8%
Diamond 3,166.9 16.1 6.7 4.3 0.4 0.4 0.4 0.4% 0.8% 1.0% 2.8% 6.2% 8.9% 0.2 22.1%
First 14,969.2 5.2 4.1 3.2 0.8 0.7 0.6 2.1% 1.9% 2.1% 15.7% 16.6% 17.9% 0.7 20.3%
GTBank 7,480.5 7.0 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%
, . . . . . . . . . . . . . . .
Zenith 12,305.4 6.3 5.3 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 8.0 5.3 4.0 0.9 0.8 0.7 1.9% 1.9% 2.1% 13.2% 15.3% 17.9% 0.82 20.4%
Kenya US$mn
Barclays 1,874.1 7.8 6.5 5.9 2.2 1.9 1.7 4.4% 4.4% 4.3% 28.0% 29.4% 28.1% 2.8 18.0%
Cooperative 1,677.6 7.3 6.6 5.9 1.8 1.5 1.3 3.5% 3.2% 3.1% 24.8% 22.8% 21.7% 1.8 19.5%
Equity 1,554.5 6.3 5.3 4.6 1.7 1.4 1.1 5.6% 5.4% 5.2% 26.9% 25.9% 24.7% 2.1 19.0%
KCB 2,732.1 5.2 4.6 3.3 1.1 0.9 0.8 2.9% 2.9% 3.3% 20.6% 20.8% 24.2% 1.4 19.3%
Stanchart 1,551.6 10.7 9.2 7.7 2.7 2.4 2.2 2.9% 2.9% 2.9% 25.3% 25.3% 25.3% 2.9 18.5%
Average 7.5 6.4 5.5 1.9 1.6 1.4 3.8% 3.8% 3.7% 25.1% 24.8% 24.8% 2.2 18.9%
Uganda US$mn
Source: Company reports, Legae Securities. Prices as at c.o.b 30/9/11
DFCU 284.03 8.7 7.2 6.1 2.5 2.0 2.0 3.0% 3.1% 3.0% 28.8% 28.5% 32.9% 2.9 19.0%Stanbic 849.61 15.9 12.2 10.4 4.8 3.8 3.1 3.4% 3.4% 3.3% 31.5% 30.3% 27.5% 4.7 19.8%
Average 12.3 9.7 8.3 3.7 2.9 2.6 3.2% 3.2% 3.2% 30.2% 29.4% 30.2% 3.8 19.4%
11
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Dj vu Kenyan banks attract premium valuation for their superior ROEs.Surprisingly, the regression model shows fair valuation in both markets.
5.0
6.0
PBVR
4.0
Barclays
StanChart
Kenya DFCU2.0
3.0
Diamond First
GTbank
UBAZenithNigeria
Coop
Equity
KCB1.0
Access
0% 5% 10% 15% 20% 25% 30% 35%
ROE
12
Source: Company reports, Bloomberg, Legae Securities est. FY13
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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
Te +27 11 551 3601, Fax +27 11 551 3635
Web: www.legae.co.za, email: research@legae.co.za
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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