NSE Banks: Q1 2009 Results

General comment: Across the board, banks have reduced lending from prior quarter. They are basically wanting to avoid additional defaults. YoY quarter profit growth is slim. Peer analysis should mainly focus on outliers:

Good outliers:

• Net interest margin- thanks to the GoK bond, NBK is enjoying healthy interest income without sweat. It'll be on-going for a while yet.
• Cost Income ratio- this is good because it basically translates to a higher return on capital the more you can get from each shillingi you spend. StanChart despite anaemic income growth, has managed (via use of technology) to maintain leadership here.
• Return on capital- both UK banks standout. No real surprise because this is something that tends to be return as a personal development goal for CEOs/FDs of many UK banks.
• Insider loans as prop of loans: Equity stands out for low prop. Insider loans are notorious source of loan book instability for Kenyan banks.
• Excess liquidity ratio: It bears pointing out that Lehman was brought down by lack of liquidity. Stanchart looks really strong. A bit strange given recent report about all banks but Equity struggling for the stuff.
• Capital/RWA ratio: Equity is standout. This ratio can make or break business. It signifies a bank's ability to grow, but also to absorb nasty stuff like loan loss provisions aka bad debt write-offs.

Bad Outliers:

1. NIM- NIC and DTB must be paying over the odds for deposits. I understand this is what prompted NIC to be among the first to loan rates last year.
2. Cost income ratio-KCB's burden. Equity says it is in its investment phase hence the massive increase in staff costs. Keep an eye out.
3. YoY PAT growth- Whats up KCB?
4. Fwd P/E- Given the lowered growth rate for the year, the fwd multiple for 2009 looks too rich for Equity. Ksh10 looks more comfortable until we see what Q3/4 brings in.
5. NPLs as a prop of loans- Equity (perhaps unsurprisingly given target class and seeing K-Rep), is out here. Several pts of note. Several yrs back, I remember a blogger mentioning that Equity recognises NPLs much earlier than other banks. I'll confirm this in another blog. 2ndly, because of its capital capacity, it can still absorb the whole of its NPL fairly comfortably.

Gap Trading strategy at NSE

Gap trading strategy is used mainly by traders but may also apply to the buy low, sell high investors. It’s basically where you take advantage of a snap back in price to either buy or sell. In most western markets, the time from taken to go either a week/month/year high or low and back to prior level can be a matter of hours and will usually be the first or last trades of the day. This then means that if you are trader you’ll want to put in a sell/buy order at these times. The gap trading will in effect be that you try to buy at the lowest (when it’s falling) and sell once it snap back to previous level. Or once you sense a price may rise, you sell at the highest level and look to buy when it snaps back to prior level. Gap trading strategy is event driven as stock prices react to macro/micro news. As such, the secret is clearly to keep an eye out for events that may impact the price. The worry is that sometimes, you get the opposite of the reaction you expect. A good example is a recent cash call (rights issue) by Lloyds TSB which led to the price going up for several days! Before starting the gradual fall to the rights issue price. So one then has to be agile.

At the NSE, such snap backs take weeks and months to effect. There are exceptions though. During the 3-4 year bull run, liquidity was such that a merger, bonus issue, good results would lead to 20% rise in short-term share price. During the bear period, the snap backs have taken longer. However they are still event-driven and it’s thus possible to benefit from movement.

Kagame on Video

I think he brings alternative leadership that may work in Africa. But it has to be said that he is a dictator and brooks no opposition (media or political). For everyone like him, there is another 10 m-o-1s.

Lakini he sure has added sufurias of Rwandan's sweet potatoes.

Why do we black Africans give ourselves Mzungu names?

How many wazungus do you know that are called Otieno, Mwangi, Kipkoech et al? I can understand that there was that thing in the past about trying to sound Christian, but I am fairly sure the good book says it’s not by works it’s by faith. Some diasporians say that without European sounding names they won't get jobs abroad. Don't think so because Ngugi wa Thiongo is a professor in California. And look at some of those of footballers.

So is it an inferiority complex vis a vis wazungus?

NSE Weekly catch up

NSE stayed flat this week as other markets motored forward. Mainly I suspect that Kenyans are not feeling the bourse like prior years. Cash I think is there, but we all need to see a more convincing political and economic forecast. Stock investment is about hope.

FY Results:

Eagads a coffee and tea grower, saw a vast improvement in turnover but also benefited from Ksh20m gain from revaluation to record profit for the year. The cash flow statement looks peculiar to say the least with cash from operations somehow going down by Ksh12m. No dps.

Kenya Orchards, reported a Ksh7m loss for '08 on the back of a Ksh10m operating loss whose detail is not given and 26% decline in turnover. Cash from operations was massively in the red presumably relating to the operating loss issue but overall cash was positive. No dps for the year.

Q1 Results:

KCB opened the Q1 show with a 3% PAT growth on prior yr. I have switched my remaining stake in KCB to AK on the back of results which were a puzzle. Like the fact that annual reports will be emailed to shareholders in future though.

Finally, HFCK is showing the potential one suspected it had. PAT grew by 1.5 times on prior year driven by massive growth in loans. I suspect Kenyans are switching from NSE to real estate in a big way and HFCK has really aligned itself to take advantage of this. Still not sure how Equity intends to help HFCK leverage on its brand and network but this has to be the way forward. HFCK has been very innovative in terms of products and distribution. One of the products out there is its Makao project management which I'd recommend to NRKs.

Rumours:

AK is a takeover target.

Macro:

Its either the supplementary budget got in the way of UK's serious imbibing time or the fruit never falls too far from the tree. Excellent work by MARS though.

FTSE & other markets:

Turned green for the first time this yr yesterday. Risk appetite is back. Dudes are unhappy gettting 1-2% savings rate. Plus depression, swine flu et al have all been overhyped so that when reality hits, there is relief. And this is the result.

Great leakage work by Tim Geithner on the stress tests. The numbers were no different from those reported by FT almost two weeks ago.

Bond issues and the NSE

GoK kicked off '09 with a small-ish but oversubscribed Ksh18bn so-called "infrastructure bond". Since then, its done some smaller issuances. Significantly, its $300m international bond never got off the ground due "le credit crunch". Since the NSE remains sideways, and there are likely to be few takers of its assets on a premium, I can a situation where it continues to issue more t-bills. Result, interest rates will climb slowly upwards.

Corporate bonds are also on the way:

• Safcom confirmed its forthcoming Ksh12bn issuance although I don't recall it retiring the other lot. The funds are apparently to upgrade network in preparation for fibre optic.
• Centum has a Ksh4bn bond, though only 2bn in '09-see excellent investor presentation here. Centum wants to take advantage of low prices as well launch a private equity and a real estate fund
• KenGen has several bonds coming into the market including a Ksh15bn this year.

Apart from the well-known supply-side factors contributing to the inflation situation, the other has to be amount of cash in the economy lying idle. Some of it is finding it way into real estate, with a bubble now building up nicely in prime areas.

So what of the NSE? Well market cap is now down Ksh300bn from last July's high (admittedly Safcom induced) to Ksh680bn. Although some of the bucks are hotmoney, a significant portion is being diverted to everyday uses until the NSE cleans up its act. And the economy picks up.

For banks, the bonds will further compress interest rate margins, but also offer stable earnings.

Reducing 900k cases- a novel suggestion

If you've ever been unfortunate to have a case running through the hallowed turfs of Kenyan courts, you'll notice that unless you grease the clerk's assistant's palm; the clerk's palm; the court registrar's palm; the magistrate's palm and possibly the prosecutor and that branch, if its a criminal case, your case will take long because of

• of the existing and looong line of cases
• missing files-where the greasing comes in
• magistrates and judges holiday, seminar and training schedule.

Most are off for the whole of December, April and August. Additionally, they have seminars every few weeks.

So my novel suggestion is to take a month's holiday like every other civil servant and do some cases so we can see a 30% reduction.

CMA & Brokers: Kudos for some transparency

At last, investors know which broker is on their avoid list. Given that DSL was in a similar situation last year, investors should make their own conclusions and move on to either bank-owned brokers and ibs or the high net wealthy serving brokers such as Kestrel. The sea has indeed gone out and all those previously swimming naked can be seen. The issue appears to be liquidity i.e. inability to meet all the demands for payments as they fall due in layman terms. Its as bad as being short on capital and is ofcoursse what brought down Lehmans, Merill Lynch and Bear Stearns, 3 of the 5 largest ibs in the world. How about Unreliable, Suntra and Ngenye Kariuki?

My preference would be for CMA to think like an investor. If Abroker has no cash, they'll use my cash to pay their staff. SO suspend their licences untill they can sort out their liquidity issues. 2ndly, please get brokers to publish quarterly financial statements. Insurers have to do it, all banks have to do it. Kwani whats special about brokers?

For the brokers:

1. Stop employing everybody and your relas. Get a working online brokerage system. Its initially expensive but cheaper in the long-run.
2. Pride comes before a fall. You know, we know and everybody who needs to knows a broker licence isn't worth Ksh250mn. It wasn't worth that much even in the bull days.
3. Find partners: Banks have something you don't have. Distribution networks. They'll fill the gap.

KCB Q1 2009 Results- 3% on Q1 2008 plus history

KCB announced Q1 results showing Net Interest Income up 16% driven by the Ksh30bn growth in the loan book; Fees and Comm up 3% as Other Fees fell. Therefore total income increased by 10% compared to the dreadful Q1 2008. Hhhm. Then the story gets even worrying because in a classic BBK scenario, costs went up by 13% hence the shrunk yoy movement in PAT. The other eyebrow raising number was the halving of loan loss provisioning despite that fact the economy is still not out of the woods yet.

Reading its own results commentary, I note that KCB reckons Q1 tends to be a slow quarter. This is not borne by historical results or even by simple accounting. You take the loan amounts multiply by interest rate times the number of days in the quarter (would have an extra day last year) and that should be that. Loans are Ksh30bn higher this quarter compared to last quarter and interest rates don't seem to have moved. Interesting...

I await Equity's and DTB results with interest.

Which city or town?

My limited Jewish tells me schmuck doesn't mean gold...


What is this?

Is this the ladies or the gents?
Would you eat here?
Multi-colored buildings are a novelty for one from London.

Sausages and potatoes are favourite dish.

NSE weekly catch up- bear is over

NSE was up 14pts on week at close of play in April and is now up some 25% since its low January signalling bear is behind us.

Results:
This week it was the turn of the insurers. Anybody reported 2008 after Thursday will be doing so in overtime (4mnths after year end), but would in any case not incur any fines.
Kenya Re was up 85% primarily due to some overdue revaluation of its property portfolio. The revaluation is ofcourse a one-off event performed either every year or in most cases every 3 years. The performance has helped caution it from the falls in its equities portfolio. Aside from that, KenRe did grow its underwriting while keeping claims flat over 2007. DPS is 50c some 15c higher than last year. All in all, good job Mrs Mbogo. Looks well shaped for the future. Please stop restating every prior yr's numbers.
Jubilee also rolled in with a weirdly presented set of annual results. PAT is up 10% on prior year driven by higher premiums. Solid insurance company compared to Pan Africa. Strong cash flow.
Express announced PAT down some 32% on last year driven by lower sales I suspect on the back of the slowdown in the economy. The company has been showing some seriously good momentum since its takeover by the Greeks. Cashflow looks a concern as it more than doubled. Negatively. Funnily enough, no dividend was proposed.
Crown Berger reported some Ksh28m PAT for the 2008, down almost 2/3rds clearing feeling the effects of oil costs, the fuel debacle and of course of worsening economy. DPS is Ksh1.
Sasini announced excellent interim numbers with turnover up 57% allowing it to record a profit of Ksh78m compare to a loss last yr. No detail was given on its beverage shops although they seem to be doing well.
KCB became the first bank to report the highly anticipated Q1 earnings and immediately blew my predication out of the water by only managing 5% PAT growth from the dreadful Q1'08.
Announcements: CMA confirmed that 3 brokers are short of cash and therefore won't get their licences for another 3 months. This sort of asymmetrical information remains a big no-no for investors and CMA need to be bright enough to figure out that if it announces 3 unnamed brokers are short of cash, investors will be wary as the 3 brokers will fix the situation by dipping into investors' cash. Eddie Njoroge is new NSE chairman. Nice enough chap, though perhaps not the step change that NSE investors are looking to see.
Macro: Despite my disappointment about the eventual outcome of the HBC issue, looks like many have taken it positively. Medium/long-term we are still in a swamp. Govt finances are in bad shape and now affecting banks' liquidity. All about the economy.
FTSE: In good shape. Pity US bank stress tests won't be announced on Monday as they are keeping some twitchy investors out of the markets. Need to get a move on and the sooner Tim G realises the better markets will perceive him.