Kenyan Banks: Time to be selective

We remain concerned by credit risks; Banks managed to expand spreads in spite of rising cost of deposits; We roll forward our Price Targets to FY13 Peter Mushangwe
August 2012 Telephone: 011 722 7330; e-mail: peterm@legae.co.za

Salient takeaways: PT rolled forward to FY13, remain concerned by credit risks

We revise our assumptions to reflect 1H12 trends and roll forward our Price Targets (PTs) to FY13: On average, we revise the interest income/interest earning asset (IEA) and the interest expense/Interest bearing liabilities (IBL) ratios upwards. SCBL strongly out-performed our 1H12 expectations; Revised the deposit growth to 30%. Rolling forward our PTs to FY13; BCBL Kes16.3, HOLD; COOP Kes12.7 (downward revision to our previous PT), HOLD; EQBNK Kes29.0, BUY; KNCB Kes31.6, BUY; and SCBL Kes218.6, HOLD. (downward revision to our previous PT). We remain concerned by credit risks: In spite of the system asset quality improvements, (NPL ratio now at ~4.4%) we reiterate our worries related to the divergence between system loans and NPLs growth. Our fears are compounded by 1) limited structural improvements in asset quality as the NPL and suspended interest/loans ratios stabilize and/or bottom out; 2) strong growth in watch loans in FY11 which could result in greater provisions this year onward, barring restructuring. We see pressure on income drivers hereon: The system earnings growth remains interest income driven, with fee and commission income contributing ~33% of operating income. Pressure on earnings emanate from 1) possible narrowing of interest spreads as yields decline; 2) limited earnings support from further improvements in asset quality as credit costs bottom out; and 3) pressure in noninterest income, particularly transactional fee income, due to both competition and migration to lower margin platforms such as mobile and internet banking. Nonetheless, we see three key structural positives: The Credit Information Sharing (CIS), the new prudential guidelines and the evident structural improvements in asset quality are all constructive to earnings clarity. 2

Macro outlook: CAMEL ratios generally strong; We remain concerned by credit risks
The CAMEL ratios look robust: CAMEL ratio are strong:
C: Sufficient buffers to regulatory requirements. Exception is SCBL and COOP but rights issues should augment buffers; Leverage low at <8x; A: Improvements despite our concerns; SCBL lowest NPL ratio at 1.5%; KNCB highest at 5.4% as at 1H12; Coverage ratios are mixed; M: Efficiency improvements; non-interest income contribution largely flat; E: Unlevered probability on an upward trend as ROAs expand; EQBNK highest ROA at 4.4% and KNCB lowest at 3.3%; COOP lowest RORWAs at 2.4%; L: Adequate internal liquidity with LDR <85%; Liquidity ratios also high. BCBL highest at 39.7%; COOP lowest at 28.1%. (see Fig 1).

Why we remain concerned by credit risks? Our concern arises from:

Continued divergence between loan growth and NPLs growth; Net loans grow 23% y/y to May 12 vs. 7.1% decline in NPLs. NPLs ratio declines to 4.4% in May 12 vs. 8.65% in 3Q08. (see Fig 2); Limited structural improvements in asset quality as the NPL, the Suspended interest/Loans and the Specific provisions/Total provisions ratios stabilize and/or bottom out (see Fig 3- Fig 4); Material growth in watch loans (+40% y/y) in FY11, now constituting 51% of total impaired loans vs. 40% in CY10. Barring restructuring, migration to NPLs could result in elevated provisions this year. (see Fig 5); and Rising coverage ratio in FY11 despite declining NPLs; We are unsure as to 3 whether regulators are having silent words with banks. (see Fig 6).

Macro outlook: Income drivers can come under pressure as yields decline and fee income margin decline
Interest spreads have expanded as rates increased but could reverse as interest rates decline: System interest spread expanded to an average of 11.79% between 3Q11 and 2Q12 compared to an average of 10.4% in 1H11 and an average of 11.0% since CY00. As yields decline, the interest spread could shrink, notwithstanding its historical resilience; The demand deposits/total deposits ratio has reduced to 29% in Dec 11 vs. 32% in Jan 09, which is unconstructive to cost of deposits. (see Fig 7) but there are ample opportunities for asset mix changes to support NIMs in FY12, in our view; Limited tailwind from asset quality improvements: As we highlighted above, we do not see further meaningful improvements in asset quality as the ratios seem to bottom out. Some management teams view mortgages as a possible problem area. While loan growth was significant as well, the past decade was predominantly a credit-cost-led earnings recovery hence Pre-provision income growth will be key; Possible reduction in fee margins, particularly related to deposits and transactions as clients migrate to mobile and internet platforms: Penetration continues to increase. Deposit accounts increased to 14.2mn (~74% of bankable population estimate). (see Fig 8). The rising penetration/competition has negative effects to fee income margins. Volume will be critical. Nonetheless, this is a medium term issue/theme; and For banks expanding into region costs could create headwinds too: Regional banks, mainly KNCB and EQBNK could witness some headwinds to cost management despite management indicating that most regional operations are post-investment stage. COOP does not hold sufficient capital to support its regional strategy 4

Macro outlook: The system has few positive developments, most important among them being the CIS
Credit Information Sharing takes off: The introduction of the CIS mechanism through the Credit Reference Bureaus in CY10 has gained momentum. Two key effects are: 1) strengthening the credit appraisal and decision making process for banks, particular for personal and SMEs loans; and 2) imparting a positive behavioral effect to new and traditional willing defaulters; Structural improvements in asset quality as risk management procedures improve: Despite our documented anxiety on credit risks going forward, it is evident the system has enjoyed a structural improvement in asset quality. Management ascribe the improvements to better credit risks monitoring/appraisal procedures. Surveillance has also improved, enabling regulators to carry out on-site surveillance in order to review procedures and troubled loans, and request for additional provisions when/where necessary; New prudential guidelines likely to strengthen governance: In addition to increasing Core CAR to 10.5% from the current 8%, the new guidelines would require Board of Directors to be dominated by Independent Non-Executive Directors i.e. at least 2/3. We expect the regulators to provide banks enough time to rectify their situations but we believe it is step in the right direction; and Opportunities to lever ROA as leverage ratio is low: From a profitability perspective, the upward trend in ROA could come under pressure but banks carry opportunities to support ROEs through leverage. Our universes average leverage ratio is 6.5x.
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Fig 1: On average, the CAMEL ratios are robust for the banks under our coverage
1H12 CAMEL ratios
C: Core CAR C: Total CAR C: Leverage ratio A: NPLs/Loans A: Coverage ratio M: NII/Op. income M: Cost/inc ome E: Profit/Deposits E: NIM* E: ROA* E: Return on RWA E: ROE* L: LDR L: Liquidity ratio
* FY12 LS expectations

Barclays 18.5% 22.0% 6.6 4.5% 78.5% 34.5% 50.5% 3.5% 11.0% 4.3% 3.5% 31.5% 82.5% 39.7%

Cooperative 17.2% 17.6% 4.5 4.6% 58.1% 35.2% 53.1% 2.8% 14.1% 3.9% 2.4% 25.4% 77.3% 28.1%

Equity 18.0% 27.0% 6.1 2.4% 63.9% 35.8% 57.0% 3.6% 11.7% 4.4% 3.8% 23.8% 82.4% 39.0%

KCB 18.4% 19.2% 7.5 5.7% 43.4% 29.0% 50.8% 2.2% 10.0% 3.3% 2.9% 22.7% 72.5% 34.9%

StanChart 13.0% 15.0% 7.9 1.5% 29.4% 33.4% 37.6% 3.3% 8.6% 3.9% 3.6% 33.8% 75.3% 38.0%

Source: Company reports, Legae Securities

Fig 2: but we remain concerned by risks to asset quality as the divergence between loans and NPLs growth rates continues

Net loans 3.5

Total NPLS 50.0% 40.0%

Net loans

Total NPLs

3.0 30.0% 2.5 20.0% 10.0% 0.0% 1.5 -10.0% -20.0% -30.0% 0.5 -40.0%
Mar- Mar- Mar- Mar- Mar- Mar-

2.0

1.0

0.0
Sep-06 Jun-06 Dec-06

-50.0%
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Source: CBK, Legae Securities

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Fig 3: We do not see further meaningful structural improvements in asset quality

3Q06 Gross Loans Growth Net Loans Growth Gross NPLs Growth Gross NPLs/Gross loans Net NPLs Growth Net NPLs/Net Loans Total provisions Growth Specific provisions Specific provisions/Total provisions 40.8 90.5% 15.88% 45.1 22.74% 66.6 103.8 419.3 456.5 3Q07 492.4 7.9% 476.4 13.6% 59.1 -43.1% 12.00% 43.1 -35.3% 9.05% 27.5 -39.0% 22.8 82.9% 3Q08 657.45 33.5% 644.2 35.2% 56.85 -3.8% 8.65% 43.6 1.2% 6.77% 27.3 -0.7% 22.6 82.8% 3Q09 736 11.9% 720.5 11.8% 60.6 6.6% 8.23% 45.1 3.4% 6.26% 24.8 -9.2% 19.4 78.2% 3Q10 878.8 19.4% 868.7 20.6% 61.2 1.0% 6.96% 51.1 13.3% 5.88% 34.3 38.3% 28.9 84.3% 3Q11 1192.5 35.7% 1181.7 36.0% 57.7 -5.7% 4.84% 46.9 -8.2% 3.97% 35.4 3.2% 27.7 78.2% 4Q11 1205.5 1.1% 1194.3 1.1% 53.1 -8.0% 4.40% 41.9 -10.7% 3.51% 32.1 -9.3% 23.4 72.9% 1Q12 1235.7 2.5% 1224.9 2.6% 53.7 1.1% 4.35% 42.9 2.4% 3.50% 34.5 7.5% 25.8 74.8% May-12 1291.4 4.5% 1279.7 4.5% 56.5 5.2% 4.38% 44.8 4.4% 3.50% 34.8 0.9% 26 74.7%

Source: CBK, Legae Securities

Fig 4: as the NPL and Suspended interest/Gross loans ratios seem to have stablised and may bottom out

Gross NPLs /Gross Loans 25.0%

Total provisions/Net loans

9.00% 8.00% 7.00%

Suspended interest/Gross loans

20.0% 6.00% 15.0% 5.00% 4.00% 10.0% 3.00% 2.00% 5.0% 1.00% 0.96% 0.0%
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-12 Mar-11 Mar-09 Mar-10 Mar-08 Mar-07 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

0.91%
Mar-12 Dec-11

0.00%
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Sep-11 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

Source: CBK, Legae Securities

Fig 5: High interest rates in FY11 resulted in a spike in watch loans. Restructuring is the primary way to delay migration to substandard

2010 2010 Gross loans Normal Impaired Loans o/w Watc h NPLs o/w Substandard o/w Doubtful o/w Loss 914 910 816 467 98 443 39 541 58 902 11 431 36 329 11 142 2011 1 190 985 1 082 805 108 180 55 373 52 807 10 848 32 382 9 577 Growth % of Gross % of rate Loans Impaired 30.2% 32.6% 9.9% 40.0% -10.3% -5.1% -10.9% -14.0% 100% 89.2% 10.8% 4.3% 6.4% 1.2% 4.0% 1.2% 100.0% 40.2% 59.8% 11.6% 36.9% 11.3%

2011 % of Gross % of Loans Impaired 100.0% 90.9% 9.1% 4.6% 4.4% 0.9% 2.7% 0.8% 100.0% 51.2% 48.8% 10.0% 29.9% 8.9%

Source: CBK, Legae Securities

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Fig 6: Yet despite reduction in lost loans, system coverage ratio increased. Silent words from regulators could be the reason

Provisions/Total NPLs
85.0% 70.0% 80.0% 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0%
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-11 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Mar-12 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Specific Provisions/NPLS

Average

65.0%

60.0%

55.0%

50.0%

45.0%

40.0%
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-11 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Mar-12 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Source: CBK, Legae Securities

11

Fig 7: Interest spreads could come under pressure as yields fall and demand deposits contribution to system deposit decline

35 Deposit rate Lending rate Lending rate less Deposit rate Savings rate Overdraft rate 45%

Demand

Time and Savings

Other

30

25

40%

20

35%

15 30% 10 25%

0
Nov-00 Nov-05 May-03 May-08 Nov-10 Sep-01 Feb-02 Sep-06 Feb-07 Sep-11 Aug-04 Mar-04 Mar-09 Aug-09 Dec-02 Dec-07 Feb-12 Oct-03 Apr-01 Apr-06 Oct-08 Apr-11 Jun-00 Jun-05 Jun-10 Jul-02 Jan-00 Jan-05 Jul-07 Jan-10

20%
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Source: CBK, Legae Securities

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Fig 8: As penetration continue to rise, competition will intensify, negatively affecting margins, especially on non-interest income

2002 Number of deposit accounts Number of loan accounts Deposit Accounts/Population Deposit Accounts/Bankable population Loan accounts/Bankable population Number of system branches
Source: CBK, Legae Securities

2006 3 329 161 9.2% n/a 575

2008 6 428 509 17.2% n/a 887

2010 11 881 114 1 740 000 29.9% 61.9% 9.1% 1 063

2011 14 250 503 1 998 786 35.9% 74.2% 10.4% 1 161

1 682 916 5.2% n/a 446

1H12 14 893 628 2 051 658 37.5% 77.6% 10.7% 10.7% 1 196

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1H12 PERFORMANCE HIGHLIGHTS AND STOCK RECOMMENDATIONS

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We continue to BUY KNCB and EQBNK on their exposure to our medium and long-term themes (region and mortgages)

Barclays Cooperative Current price FY13 Price Target Potential return to FY13 Recommendation Trailing PER (FY11 EPS) Forward PER (FY13 LS est.) Trailing PBVR (FY11 BVPS) Forward PBVR (FY13 LS est. BVPS) Justified PBVR Forward Div. Yield (FY13 LS est.) 12 Month price return YTD price return 14.0 16.3 25.5% HOLD 9.4 8.2 2.6 2.4 2.8 8.6% 5.9% 9.2% 11.1 12.7 22.5% HOLD 7.2 5.0 1.8 1.1 1.3 8.0% -7.0% 8.2%

Equity 21.3 29.0 44.5% BUY 7.6 5.0 2.3 1.4 1.9 8.0% 3.6% 31.1%

KCB 25.0 31.6 38.2% BUY 6.7 4.2 1.7 1.2 1.5 11.8% 19.3% 46.9%

StanChart 198.0 218.6 20.7% HOLD 9.7 6.3 2.7 2.0 2.2 10.3% -4.0% 20.6%

Source: Bloomberg, Company reports, Legae Securities

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1H11 performance and stock highlights: On average banks perform enough to catalyse interest but valuations are stretched already
BCBL, FY13 PT Kes16.3, HOLD: 1H12 performance was stronger than our expectations on both net interest income (Kes10.6bn vs. LS est. 8.3bn) and non-interest income (Kes8.9bn vs. LS est. 7.6bn). Negative deposit growth continues to cloud balance sheet management strategy; Provisions were stronger than our expectations but remain in comfortable range. Our Justified PBVR is 2.8x; Key catalyst: clarity of strategy. COOP, FY13 PT Kes12.7, HOLD: 1H12 performance was largely in line with our forecasts. Interest income at Kes7.44bn vs. LS est. of Kes7.36bn; Operating income at Kes11.48bn vs. LS est. of Kes11.33bn. Loans and advances growth was behind at only 0.9% but net interest income was stronger due to loan re-pricing. We remain concerned by higher credit risks, inferior deposit franchise and poorer CAR; Justified PBVR is 1.4x; Key catalysts: continued improvements in asset quality; rights issue. EQBNK, FY13 PT Kes29.0, BUY: Deposit growth was slower than our expectation, supporting stronger interest income at Kes14.9bn vs. LS est. of Kes13.7bn as the bank managed to expand the interest spread the most. PBT slightly stronger at Kes7.6bn vs. LS est. of Kes7.2bn. NPLs increased by 11% q/q vs. loan growth of 2.8%. Our Justified PBVR is 1.9x; Key catalyst: regional contribution. Share price susceptible to reversal. KNCB, FY13 PT Kes31.6, BUY: Deposits and loan growth behind LS est. but PBT stronger at Kes9.06bn vs. LS est. Kes8.42bn. Other fee and commission decline by 26%; We continue to favour the regional and mortgage exposure; Stock is best performer YTD but susceptible to profit taking despite relatively reasonable valuation. SCBL, FY13 PT Kes218.6, HOLD: Stronger growth vs. our expectations and vs. history. Managed to expand interest spread despite strong growth in deposits. NPLs increased by 84.5% q/q but NPL ratio remains the best in our universe. Capital buffer is thin and capital raising overhang/dilution risks remain. Justified PBVR is 2.2x. Key catalyst: rights issue. 16

Fig 10: Muted loan growth vs. history; SCBL boasts the lowest NPL ratio; BCBL boasts the highest NPL coverage ratio
Barclays 3Q11 Loans and advanc es Growth, q/q Gross NPLs Suspended interest Total NPLs Growth, q/q Loss Provisions Net NPLs Growth, q/q Gross NPLs/Loans and advanc es Total NPLs/Loans and advanc es Loss provisions/Loans and advances Net NPLs/Loans and advanc es Provisions/NPLs 5.8% 5.8% 5.0% 0.8% 86.7% Suspended interest/Loans and advanc es 0.0% 4 941 758 5 699 0 5 699 98 901 4Q11 99 072 0.2% 5 482 0 5 482 -3.8% 4 930 552 -27.1% 5.5% 0.0% 5.5% 5.0% 0.6% 89.9% 1Q12 100 274 1.2% 4 226 0 4 226 -22.9% 3 524 702 27.1% 4.2% 0.0% 4.2% 3.5% 0.7% 83.4% 2Q12 101 100 0.8% 4 509 0 4 509 6.7% 3 538 971 38.3% 4.5% 0.0% 4.5% 3.5% 1.0% 78.5% 3.2% 0.5% 2.7% 1.4% 1.3% 51.4% 1 523 1 438 3 503 542 2 961 3Q11 109 367 Equity 4Q11 113 824 4.1% 3 251 562 2 689 -9.2% 1 118 1 570 9.2% 2.9% 0.5% 2.4% 1.0% 1.4% 41.6% KCB 2Q12 112 605 -0.9% 5 995 867 5 128 6.2% 2 978 2 150 -4.6% 5.3% 0.8% 4.6% 2.6% 1.9% 58.1% 8.2% 0.9% 7.3% 3.5% 3.7% 48.5% 6 831 7 240 15 878 1 808 14 070 3Q11 193 889 4Q11 198 725 2.5% 12 228 1 226 11 003 -21.8% 5 241 5 762 -20.4% 6.2% 0.6% 5.5% 2.6% 2.9% 47.6% 1Q12 195 323 -1.7% 12 549 1 260 11 289 2.6% 5 781 5 508 -4.4% 6.4% 0.6% 5.8% 3.0% 2.8% 51.2% 2Q12 202 068 3.5% 13 141 1 625 11 516 2.0% 5 000 6 515 18.3% 6.5% 0.8% 5.7% 2.5% 3.2% 43.4% 1Q12 121 125 6.4% 3 311 625 2 686 -0.1% 1 772 914 -41.8% 2.7% 0.5% 2.2% 1.5% 0.8% 66.0% 2Q12 124 461 2.8% 4 036 1 056 2 981 11.0% 1 906 1 075 17.6% 3.2% 0.8% 2.4% 1.5% 0.9% 63.9%

Cooperative 3Q11 Loans and advanc es Growth, q/q Gross NPLs Suspended interest Total NPLs Growth, q/q Loss Provisions Net NPLs Growth, q/q Gross NPLs/Loans and advanc es Total NPLs/Loans and advanc es Loss provisions/Loans and advances Net NPLs/Loans and advanc es Provisions/NPLs 5.2% 4.3% 3.5% 0.8% 81.2% 3 678 851 5 585 1 056 4 529 106 434 4Q11 109 409 2.8% 5 208 1 071 4 137 -8.7% 2 394 1 743 104.8% 4.8% 1.0% 3.8% 2.2% 1.6% 57.9% StanChart 3Q11 Loans and advanc es Growth, q/q Gross NPLs Suspended interest Total NPLs Growth, q/q Loss Provisions Net NPLs Growth, q/q Gross NPLs/Loans and advanc es Total NPLs/Loans and advanc es Loss provisions/Loans and advances Net NPLs/Loans and advanc es Provisions/NPLs 1.6% 1.2% 0.5% 0.7% 38.5% 441 704 1 500 354 1 145 94 390 4Q11 96 098 1.8% 1 031 354 677 -40.9% 424 253 -64.0% 1.1% 0.4% 0.7% 0.4% 0.3% 62.6% 1Q12 96 526 0.4% 1 236 372 865 27.8% 405 459 81.4% 1.3% 0.4% 0.9% 0.4% 0.5% 46.9% 2Q12 104 073 7.8% 1 992 396 1 595 84.5% 469 1 126 145.1% 1.9% 0.4% 1.5% 0.5% 1.1% 29.4% 1Q12 113 583 3.8% 5 660 833 4 827 16.7% 2 572 2 254 29.3% 5.0% 0.7% 4.2% 2.3% 2.0% 53.3%

Suspended interest/Loans and advanc es 1.0%

Key observations Generally muted loan growth on a q/q this year. StanChart rec ord the highest growth rate at 7.8%; Coop rec ord the lowest at -0.9%. StanChart rec ord the strongest growth in NPLs at 84.5% q/q; Cooperative's NPLs grew the least by 6.2% Barc lays shows the highest Provisions/NPLs ratio while StanChart has the lowest. StanChart's rec ent strong loan book growth c ould be suppressing c overage ratio as NPLs migration to lost status is yet to fully materialise. KCB has the highest NPLs/Loans ratio at 5.7%. StanChart has the lowest at 1.5%. Strong loan growth by StanChart c ould skew the ratio but generally we believe StanChart boast better asset quality Suspended interest/Loans ratio averages 0.8%. for the universe.

Suspended interest/Loans and advanc es 0.4%

Source: Company reports, Legae Securities

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Fig 11: Interest spreads expanded in spite of the rising cost of deposits. Coops inferior deposit franchise is evident
Coop 1H12 Interest on Advances, Kesbn Interest on deposits Advances Deposits Interest/Advances Interest expense/Deposits Interest spread 1H11 11.07 -4.40 112.61 145.68 9.8% -3.0% 6.8% 13.31 -2.59 124.46 151.11 10.7% -1.7% 9.0% 16.81 -5.71 202.07 278.55 8.3% -2.1% 6.3% 7.34 -1.22 101.10 122.48 7.3% -1.0% 6.3% 7.78 -1.81 104.07 138.20 7.5% -1.3% 6.2% 8.7% -1.8% 6.9% Equity KCB Barclays StanChart Average Average*

9.6% -2.3% 7.4%

Interest on Advances, Kesbn Interest on deposits Advances Deposits Interest/Advances Interest expense/Deposits Interest spread Yield change, bps Cost of deposit change, bps Spread change, bps

6.02 -1.26 95.12 130.71 6.3% -1.0% 5.4% 350 206 144

6.97 -0.73 97.71 123.99 7.1% -0.6% 6.5% 356 112 244

9.71 -1.04 175.20 215.74 5.5% -0.5% 5.1% 277 157 120

6.25 -0.25 91.83 128.43 6.8% -0.2% 6.6% 45 80 -35

3.65 -0.35 83.69 109.24 4.4% -0.3% 4.0% 312 99 213 6.0% -0.5% 5.5% 268 131 137 6.3% -0.7% 5.7% 328 158 170

*average excluding Barclays and Stanchart

Source: Company reports, Legae Securities

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Salient assumptions: We expect varied deposit growth rates and LDRs but expect COOP and SCBL to be restrained by inferior CARs
BCBL: Deposit growth of 5% y/y and a LDR of 85%; Loan growth is 12% for FY12 declining to 5% in FY13. Interest income/IEA at 12.3% for FY12 and 12% for FY13; Credit cost/Loans at 0.9% but increase to 1% for FY13. COOP: Deposit growth at 10% for FY12, declining to 7.5% for FY13 on CAR worries; LDR maintained at 75% leading to loan growth of 7.6% for FY12 and 7.5% for FY13. Interest income/IEA at 13.6% but reduce in FY13. Credit costs/Loans at 1% for FY12 and increase to 1.5% for FY13. EQBNK: Deposit growth is strongest at 20% for FY12 and FY13 as regional subsidiaries gain market share. We maintain the LDR at 80% resulting in loan growth of 18.5% for FY12 and 20% for FY13. Interest income/IEA at 15.4% in FY12 reducing to 13.1% in Fy13. Interest expense/IBL at 3.5% in FY12. Credit costs/Loans at 1.8% for both FY12 and FY13. KNCB: Deposit growth 2nd highest at 17% for both FY12 and FY13; LDR at 72.5% for FY12 but rises to 80% for FY13. Loan growth is 10.7% for FY12. Interest income/IEA is 13.5% for FY12 but declines to 10.5% for FY13. Credit costs/loans is 1.5% for FY12 increasing to 1.8% for FY13. SCBL: Deposit growth at 30% for FY12 but reduces to 10% in FY13. We maintain the LDR at 75%, resulting in loan growth of 24% for FY12 and 10% for FY13. Capital needed to support RWAs growth. Credit costs/Loans at 0.8% but increases to 1% for FY13. (see Fig 12). Kenyan banks trade at premium vs. SSA ex peers: Kenyan banks trade at significant premiums to SSA ex universe (Nigeria), reflecting the superior ROEs.
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Fig 12: We increase the credit costs/loans ratio for all the banks except EQBNK which we maintained constant.

Barclays 2012F Deposit growth Deposits LDR Loans and advances Loan growth Interest income/IEA Interest expense/IBL NIR/Total assets Credit costs/Loans Profit before tax Growth EPS 5.0% 130 418 85.0% 110 855 11.9% 12.3% -1.50% 3.5% -0.9% 12 229 1.8% 1.58 2013F 5.0% 136 939 85.0% 116 398 5.0% 12.0% -1.50% 4.0% -1.0% 13 273 8.5% 1.71

Coop 2012F 10.0% 156 896 75.0% 117 672 7.6% 13.6% -5.28% 5.1% -1.0% 9 295 46.1% 2.07 2013F 7.5% 168 663 75.0% 126 497 7.5% 11.5% -3.15% 4.7% -1.5% 9 609 3.4% 2.20

Equity 2012F 20.0% 168 536 80.0% 134 829 18.5% 15.4% -3.47% 5.3% -1.8% 14 220 10.8% 2.88 2013F 20.0% 202 243 80.0% 161 794 20.0% 13.3% -1.51% 6.4% -1.8% 20 861 46.7% 4.23 2012F 17.0% 303 391 72.5% 219 959 10.7% 13.5% -3.00% 4.3% -1.5% 16 835 11.3% 4.01

KCB 2013F 17.0% 354 968 80.0% 283 974 29.1% 12.0% -1.25% 4.1% -1.8% 24 114 43.2% 5.89

StanChart 2012F 30.0% 159 020 75.0% 119 265 24.1% 11.0% -2.50% 3.4% -0.8% 12 256 48.5% 29.89 2013F 10.0% 174 922 75.0% 131 191 10.0% 10.0% -2.25% 3.6% -1.0% 12 865 5.0% 31.36

Source: Company reports, Legae Securities

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Fig 13: In our SSA ex universe, Kenyan banks trade at higher PBVRs reflecting the superior ROEs
4.0 PBVR
Expensive value destroying banks Expensive value creating banks

3.5

3.0 StanChart Stanbic 2.5 Equity 2.0 DFCU Coop 1.5 Zenith Nigeria 1.0 Access First UBA 0.5 Diamond
C heap value destroying banks C heap value creating banks

Barclays Kenya GT bank

KCB

0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 ROE/CoE 1.4 1.5 1.6 1.7 1.8 1.9

Source: Company reports, Bloomberg, Legae Securities

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Disclaimer and Disclosures

Legae Securities (Pty) Ltd Member of the JSE Securities Exchange 6A Sandown Valley Crescent, Sandton, Johannesburg, South Africa P.O Box 650361, Benmore 2010, Johannesburg, South Africa Tel +27 11 772 7330, Fax +27 11 772 7350 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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