Saturday, January 31, 2009

NSE weekly catch up: Jan'09 report card gives it E

E is for empty on which NSE has been running on this past month. Apart from the global deliveraging which has had an indirect impact; inflation; school fees; directionless governance (think Titanic without a captain); winds buffeting the economy and broker scandals (SIB is now in the frame), have left investors in a contemplative passive rather than active mood.

Highest Gainers- Jan'09
EA Portland Ksh85 6%; Jubilee Ksh130 5%; BAT Ksh136 4%; StanChart Ksh161 1%
Biggest losers
Unga Ksh9 (51%) Mumias Ksh5 (35%) Centum Ksh14.55 (29%) Co-op Ksh8.55 (24%)

February and March will defintely be better months though with the profitable bankers announcing their results.
As expected, Equity has confirmed that it has acquired an investment bank licence from Juanco Investment. Funnily enough, Juanco used to be one of its shareholders and has never as far as I know participated at the NSE as an IB (its not a must I know, but its difficult to see what else you be doing in Kenya as of now)-in fact I wonder what criteria CMA used to guarantee it an IB licence. In any case, most brokers may as well close shop given Equity's distribution network and superior delivery mechanism. Equity on its part will need to sigficanctly gear up its risk management. Brokerage fraud is now a recurring theme as shown by the arrest warrant for SIB's officials.

Results announcement:
As with CMC, Car and General had a very good year (to Sept'08) with PAT up 23% supported by turnover which was up 62%. Gross margin at 24% was lower than prior year perhaps reflecting the weaker shilling's adverse impact on its import costs. Mumias on the other hand released horrendous interim numbers to December with PAT down to Ksh162m from Ksh564 in prior year. Kidero is blaming heavy rains; higher import costs; higher cost of cane among other reasons. Note cash flow went negative despite a Ksh2.4bn loan from abroad (I don't think anybody has learned from EA Portland). Investor hopes are now pegged on the power generation revenue. KQ announced improved numbers for Q3. Read CT's commentary.

Last week's summary missed out on Waruinge's resignation as chair of CMA (must be the little effect he had). It turns out he was driven to distraction by brokers who resent higher standards he was apparently trying to set. My view is that we'll have to have fewer but stronger independent brokers in the next 2 years if the bourse is to grow as it should and we can either get their via collapse of more brokers or an orderly merger or consolidation as envisaged by the higher capital requirements.

Other Markets:
I like Soros piece in the FT.

Thursday, January 29, 2009

First IPO of 2009: GoK's Infrastructure Bond

Who is issuing: GoK
For: To finance roads, geothermal steam wells, sewers, and other dilapated infrastructure that is holding back economic growth
Amount to be raised: Ksh18bn
Minimum application amount: Ksh100k and in multiple of Ksh50k thereafter
Maximum application amount: Ksh10mn
How do I apply? Open CDS account at CBK office (Nairobi, Kisumu, Mombasa, Eldoret)
And if in Diaspora: not yet...
Application Dates: 28 January to 18 February 2009
Upside: 12.5% per annum paid every 6 MONTHs on outstanding amount, so first payment in August
Downside: None. GoK has never defaulted
Subscription: Likely to be oversubscribed

Nurturing reading habits in Kenya

Here is a quiz. How many public libraries are there in Nai? I can only name National Library on Upperhill and I don't even know of any others outside Nai. And yet Kenyans do like to read just going by the way they go thru the daily newspapers (not a good measure but as a good as an indicator as any). I think the main reason Kenyans don't read much as they'd like to is because of the trade-off. Between buying a book costing Ksh50+ even in Gikomba vs Safaricom credit or even Unga. Book-reading is an expensive affair.
And yet, I remember when I first landed here, I was told my composition was terrible (some people say it still is. And the cure was to read as much stuff as I could get hold off. I joined the local library and whenever I have moved within the UK, I've joined the local library within a short period of time.
More than better composition, reading also can improve comprehension a necessary tool for us Kenyans to debate better.
So how about setting a public library system initially in the major towns. This can be done as a social venture or even straight up business venture. You lend readers books either a guarantor system (Ojera being a member of the Library will act as a guarantor for Mugambi who he has recently introduced-if book is lost Ojera foots the replacement bill).
Failing that, organise book clubs where readers bring books to a central repository and borrow others. So if you bring 5 books, you can borrow another 5 though all done one at a time.

Tuesday, January 27, 2009

Kenya: 11 top investment ideas for 2009

  1. Real estate: If you can, start with building two floors. Sell them and fund the rest of your floors with the cash. Unable or unwilling to build? Buy and hold. This is doable in every town in Kenya. Start with Mutula's map of Nai. Think urbanisation-look at your own extended family and you'll notice the majority are in one urban area or the other. I could give you so many examples of serious gains doing buy and hold in any town you care to think of.
  2. Agro-business: Kenya has shortage of all types of foods. Who will meet the supply but you and me? Maize. Yes the crop takes almost 6 months, but even a quarter can pay for itself over two harvests. Dairy (two average cows 10 litres each a day * 30 days* Ksh15= Ksh9k). Trees, cassava, greens.
  3. Solar: Sooner or later, we are going to wake up in Kenya and realise (a) we don't have oil (b) geothermal costs too much to produce (c) rains are unrealible... The market is there and just needs GoK supportive policies.
  4. NSE: Changed paradigm due to inflation and realisation that the game is rigged for many. The NSE will remain one for speculators at least this year and some of 2010. Investors should try...
  5. USE/LUSE/DSE: Oil/copper and other minerals/likely unification of stock exchanges should be your consideration in each of these markets
  6. Venture funding: Rewarding at all levels. Start with own family and move on to investing good commercial ideas. You'll have to do with a small share of profits in initial years though.
  7. Mpesa agency: More of a social enterprise. You don't need to raise 300k (Ksh150k including rental is enough)and its easy to monitor on a daily basis via an Equity online bank account.
  8. Education: Set up own school or jointly with others. Become a part-time lecturer or tutor. Set up a college for technical qualifications like ACCA, IT and even sciences.
  9. T-bills: Entry amount is down to Ksh100k and paying around 8.5% per year after tax. Not open to nrks because the myopic CBK employees won't set up online facilities for guys to open an account from abroad.
  10. Computers, laptops: Good and growing business as Kenyans await faster internet. But need to find ways of getting the pieces to Kenya cheaply.
  11. Hospitality: Build cottages and villas either for bed and or breakfast. This can be done in any town. Or to cater for tourists. Sublet apartments to tourists or NRKs coming home for short periods.

Other unexplored ideas: How about a mobile-based credit provider or sacco? Commodity futures or auction (basically NCB needs real competition for our sake). Or leasing land or offices? Any others? Online ones will follow in other post...

Monday, January 26, 2009

Credit Crunch: according to a banking regulator

Interesting take on the recent happenings and the way forward by Lord Turner who has recently taken over as Chair of the UK FSA. One of the reasons risk must become a big issue for bankers is not because of their new found risk aversion. Rather, it must be the realisation that the search for beta will lead to slippery slopes. Another of his ideas is how banks should take on more regulatory capital during the boom times and do the reverse during the recession period.

KCB's actions continue to confuse many who recall its former days with unfond memories. Its deal with Triton especially the last loan makes no commercial sense. Only political sense...

Victimhood, Kenyans, Black people and Success

We had a very interesting discussion on how black people and Africans have had it rough in the past and how this continues to adversely impact us. The group was composed of several black Britons a Sierra Leonean, a Congolese, the ubiquitous Nigerian and I and started on the topic of colonialism and the damage it did to Africa. Then it shifted to slavery and the damage it has done to black people (an example was given descendants of slaves who carry the worst form bitterness in their hearts even today) and the terms of trade...However, the conclusion was that unless we black people and Africans learned to be more sincere, realistic but also ambitious, our grandchildren will be talking about these same topics.

As Africans we cry about;

  1. Slavery-but who sold the slaves and are we still slaves today (in mental rather than physical way)?
  2. Scramble for Africa and the arbitrarily drawn boundaries- we can change them or learn to live with them
  3. Colonialism-yes it happened, but almost 50 years ago. Ethiopia wasn't colonised but where is it today? And the list as long as my arm of dictators and incomptent leaders?
  4. Terms of trade of skewed against our goods- this has applied to China, India, Brazil too, but what have they done differently? Provided the West what id needs cheaply therefore growing their economies in the process. China has provided products using cheap and available labour; India recognised the need for IT support and trained many of its students and is now reaping the fruits. Last year, we were paying programmers £700 per day, we outsourced their work to Bangalore where we were paying between £1,000-£2,000 per month for the same-ish quality of programming and just employing good business analysts.
  5. We don't get enough aid- Say what? How many 45-year olds do you know who would ordinarily be queing up for aid? Why can't we change the game and talk to some of these corporations like Google, Microsoft and get them to hire 50 Kenyan graduates each and take them on 2 year contracts in their nations before sending them back to Kenya?
Blacks in the UK:

  1. Complain that their kids are not taught well in schools and not steered into the right career choices. Well, the kids have bad bad attitudes to learning and are disruptive. Parents can supplement but teaching them at home and manners. Parents can also be careful about the schools they take their kids to e.g. take them to predominantly white schools where facilities are on average of higher quality and quantity. For some parents, there is an option to send them to their country of origin. You can't teach ambition but you can nurture it.

  2. Racism in employment-its a fact, but the Obama template is worth observing. Despite his lack of so-called experience, he was clearly better than McCain, the Clintons and of course Bush. He took off the rough edges (look at the way he repudiated Rev Wright) because he realises he is black and there is no point in telling whites that oh I am black and proud; my people were enslaved by your folks. You are not telling them anything new. But if you try and be twice as they good as they are at what it is you are supposed to be doing, then that is new to them. This doesn't mean you shouldn't fight racism when you encounter it, but be smart about how we overcome it. And when you make it, don't look down on other black people, but bring some to your company because it will then become common place.

The Kenyan mwananchi complains about;

  • Politicians: We voted for them, but more importantly, when we tell them "Unga", some are listening. This is what we must work harder doing i.e. reminding them that we can ignore them; we'll vote them out and we can stage a revolution if things came to it.
  • Corruption: many of us pay bribes than spending the night in jail.
  • Power cuts: The sun shines throughtout the year 12 hours a day. Shouldn't you consider soalr power?

Above all, we Kenyans, Africans, black people must be masters of our lives, in a similar manner others are unless we want to be treated like children...

Yes to Mpesa no Zain (Zap) = what gives?

Friday's simultaneous announcements that CBK had given Mpesa a clean bill of health but also denied Zain to start an almost similar type of business is a little strange. Firstly, I am grateful that common sense has prevailed on Mpesa. Banks must get into the service either in collaboration with Mpesa or on their own and stop whining about a competitor.
On Zain, yes its offering additional services like withdrawals; paying of bills (doesn't Mpesa offer this?) and transferring cash between bank accounts, but why deny Zain the licence? Won't it have been better to offer it a licence with level of regulation than say Mpesa? Kenya needs this business! Btw, why does Zain have to keep changing names, its products every few months?

I doubt if Nd'ung'u has any inkling of how the NSE works, because if he did, Safcom will be very grateful for his actions. Last week's announcement that it was going back into the market for more lending drove its share to Ksh3. These two will restore some upward momentum.

Coming after nani unceremoniously reappointed "I would rather die than resign" despite the Cockar report, its embarrassing to watch Rao in this poorly shot piece. Is he saying Grand Coalition is not incorrigibly corrupt or Ruto is not a looter? Do politicians live in their own insular worlds?

Saturday, January 24, 2009

NSE weekly catch up: pause for thought

Volumes went a little higher this week but brokers won't see anything like the pre-Safcom volumes without the two key ingredients. Confidence. Economy.

Rea Vipingo announced PAT up 46% on one-off gain from acquisition gain for year ended Sept 08. Removing this one-off gain, shows PAT was flat vs last year. Turnover was 10% higher so its not exactly a growth story. DPS was reduced from Ksh0.80 to Ksh0.20. Investors have downloaded the share this week in disappointment.

So what to make of Safaricom's plan to issue a bond (I doubt if banks feel bold enough to do a syndicated loan)?NSE's initial reaction has been to punish the share with price nugging Ksh3.00. But an investor should explore the possible impacts so as to price the share correctly

a) If its a revenue generating e.g. to acquire bolt-on internet knowhow ahead of fibre optic or for network capacity or capability enhancement (I keep hearing Mpesa is getting teething network issues). This will be positive.

b) If its a defensive move e.g. to roll current debt; enhance cash flow or mere repair to network. Then its a negative because the jaw effect will be narrowed (revenue is under pressure).

Macro view: Uhuru Kenyatta's appointment probably wasn't what the NSE was looking for. Firstly you ask yourself what kind of finance minister would you expect as a minimum:

  1. Qualifications related to finance (accounting, banking, insurance, CFA)-political science graduate
  2. Experience of finance and or business- no finance experience but run's father mammoth businesses (?)
  3. Knowledge/familiarity/ appreciation of IT- nothing suggests he doesn’t have average IT competency
  4. Specifically for Kenya, strong anti-corruption and dynamic credentials- he is establishment thru and thru and only seems aware of Gatundu...

One hopes we can all agree that our economy performs better if:

  • Corruption is low/ered
  • Rainfall is average or above for the time of the year
  • And global economy environment is benign (tourism, FDI and remittances)

Those 3 are currently absent so you have to hope for a strong dynamic anti-corruption fin min. Mmmh…As for Muhinga, I said that if he was cleared, he should have his job back. He wasn't and that says it all.

FTSE: Bad economic data (unemployement just under 2m); recession confirmed has turned heat on the banks this week. Barclays was near 50p... Funny story about bad cost averaging by one of its directors.

Wednesday, January 21, 2009

Credit crunch and response eerily a replay of Japan's depression

I previously argued in this post that unless the West learned from Japan's depression and worked fast to slow or halt the housing drop, we were in for it. Instead the model they are following is very similar to Japan's and though it won't lead to a 10+yr depression, will surely lead to a more prolonged and deeper recession. Yani the choice is between fast costly and tough cure OR slow and even more costly cure.

Lets re-visit Japan and the pre-credit crunch era...
In Japan, banks via Zaibatsu cross-shareholding system would lend to their associated companies which they also crossheld shares in, coroprate profits would go up, coroprate share prices would appreciate. This would in turn mean that the banks capital went up, they were able to lend more and especially to the real estate market. In the UK/US banks lend to their depositors/shareholders who invest in mortgages. The banks then set up special purpose vehicles aka off balance sheet vehicles which take on these loans bundle them up, put a gilt and package the whole as a AAA rated product. Banks then lend some more to others who buy properties from the banks original mortgagees who now swelling in cash buy more properties. Properties appreciate in value. Borrowers take this as home equity loans. And on the virtuous circle goes on and on.

Then the record stops playing...
Governments are then give the chance to act to stop the multiplier adverse effects. They have to take charge and instead of acting fast, stumble through huge but ineffective bailouts that don't touch the heart of the problem. Falling house prices, associated financial instruments and myriuad support insurance policies and wider deleveraging of the economy. In my humble opinion there are several stark choices:
  1. Continue with incremental but costly bail outs as the housing market goes down. It will prolong the recession by another 12 months into 2011.
  2. Tell banks to come clean on the how deep their problems are. Its easy to actually find this out via scenario and stress tools already being used. Set aside the funds to buy out the bad loans in exchange for management changes; changes in bonus structures and products/business lines. Those that refuse to take the funds must justify how they'll get the funds or govts take stakes in them. We start seeing the floor.
  3. Nationalise all the weak ones, hiving off their good portions. More here...

Tuesday, January 20, 2009

Obama: We don't want aid, we want an anti-corruption stance

Today is a great day for us all. We Kenyans may not get an extra portion of ugali, but a son of our own will ascend to the most powerful position in the world. So it should mean something. It'll mean even more if 8 years from now, the Kenyan mwanachi can look back and say the son of our own has exceeded our expectations. He has been a real friend.

A real friend is the one who tells you when you are going wrong. A real friend tells you when you stink, when your spouse or girlfriend is wack/a fraud. And they are there when you are in real need.

Obama understands our critical issue. We've had aid since independence, but because of corruption, we are worse off today. I believe its Einstein who defined insanity as doing the same thing over and over and expecting a diferent outcome. Corruption is the genesis of most of Kenya's problems including last year's clashes. It'll cost more lives unless its dealt with the seriousness it deserves.

Rais Obama must refuse to deal with corrupt African regimes and give them similar parriah status to Mugabe. If we are to end up in the arms of the Chiness and Arab goons so be it, but we need a different way of dealing with our proudly corrupt regimes. Kibz and RAO are now in that list of proudly corrupt regimes and Obama must deal with them as such...

Best wishes President Barrack Obama.

Monday, January 19, 2009

KCB-Triton: even more unanswered questions

So KCB has decided to settle out of court.

  1. So are we taxpayers footing Ksh7bn and foregoing another Ksh2bn owed to KRA? Yani a third of what our Ksh18m SUV-driving corrupt ministers were begging for on Friday.
  2. In the meantime, Devani can arrange his next Ksh300m party. A nice % of what our criminally-low paid teachers are asking for?
  3. What did happen to the 126m litres of oil? Did Triton employees drink it?
  4. KCB-apparently has a credit risk committee that meets twice a month. To play golf and review the odd Ksh0.9bn loan here and there. Every bank has what are called credit limits for each of its loan officers. So a loan of this amount would almost certainly have required some senior authorisation. So why were juniors sent home?

Democracy in Kenya

"The great thing about democracy is that it gives every voter the right to do something stupid."

Saturday, January 17, 2009

NSE weekly catch up: signs of maturing bourse

NSE eased down towards the latter part of the week and continues hoevering at 3,400 level ahead of the results season which should kick off in earnest in the first week of Feb. We might have a small rally towards 4,000 before easing back in April.
CMC released its results for its financial year which closed in September (btw, I always thought that the NSE/CMA vigorously enforce the 3 month window for results announcement). Kenyans are still buying cars. PAT was up 50% helped by a strong jaw effect (revenue-27% growing much faster than costs-6.2%). CMC has 18% of the mwananchi car market, so I am assuming it derives most of its revenue from higher market share in buses and tractors. I don't see it having as strong a year in 2009 given macroevents. DPS went up to Ksh0.45 equating to a 3% dividend yield at close of play on Friday-okay for a growth company. Books for the dividend close end of Jan.. .
KCB's share price seems to have gotten away with just small scratches despite its debacle with Triton. However, Africa Alliance downgraded its earnings outlook for 2009 by 36%! About the maturing NSE, this was first time in a while that live news transmitted to instant price changes so transaprently.

Macro: Kenyan analyst confirmed the lower growth expectations for 2009. We are sending a huge delegation to watch tv in the US while appealing for food aid.

LUSE remains weak and subdued.
FTSE: Short selling is back as of yesterday and banks took a terrible pasting as short sellers flooded in in earnest. The other reason is that credit crunch is now on mainstreet with job losses feeding into bad debs. And Bank of America has this week discovered that it bought the wrong bank.

Thursday, January 15, 2009

Vision for Kieni

I was surprised to see this document. Because of the quality of leadership that we have in this nation, its a pity that something like this, a clearly detailed vision doesn't even have any timelines for when it might be actualised. The vision covers 2005-15 so almost 4 years have already been spent with no tangible movement. The glossy hardcopy is probably being used as a mousepad somwhere in OP.
The document as you'd expect from consultants is very well laid and looks at;
  • Area's key resources
  • SWOT analysis of the area. I noticed they picked upon solar and wind energy which are very obvious. Who and when will deliver a cheap solar energy solution? They'll make billions... Honey bee farming; Tourism; Dairy farming were other opportunities. I like the idea of commercial agro-forestry which would have the dual purpose of preserving the area of desertification.
  • Vision (sustainable improved and equitable utilisation of available resources) and mission (empowerment to deliver vision) for the area
  • Prioritising key challenges and solutions
Its a detailed piece and I believe something that the area can utilise to tangibly change lives. Are you listening bwana Warongongo?

Wednesday, January 14, 2009

Political loans are Kenya's equivalent of sub-prime mortgages

They make no economic rationale. If the bet goes wrong, the lender has no leg to stand on.
They are driven by greed (of borrowers and lenders alike)
They end up costing the tax payer
Their collateral is a mirage i.e. it doesn't really exist
They are lent to borrowers who won't ordinarily get any loans
Banks don't learn. KCB just had a case with Mugoya the other day. Remember warehouses that had been cleaned up?

One type of loan involves coercion. I can't decide which

Why Triton stole and unanswered questions

Having read through the stories in the daily (I think DN has done a very good job so afr on this oil story), one can conclude that:
  1. The loan that KCB is running after is considerably higher than the Ksh2bn that is out there. As DN makes clear today, this was based on a KPC estimate of the import price at Ksh60*126m litres. But remember that prices during this period (and the period seems to be almost 9 months) were alot higher, so its better to use say Ksh90. That means that KCB share of the loan now goes up to Ksh3bn. The questions, given volatile oil prices, how does KCB (1) value its loans (2) keep up with the collateral needs for such loans?
  2. Triton stole the oil because it wanted to create an artificial shortage so that prices would temporarily go up allowing it to make money or breakeven on its omporting prices.
  3. Its still not clear why KPC was not the one importing the oil. Why?
  4. The collateral agreements are not agreements. It is merely a process and one that can easily be breached. A collateral agreement always has a clause that in effect makes you the guarantor. Is KPC (and by extension GoK) the guarantor of these loans?
  5. MTNs-when did they become legal financial instruments in Kenya? Is CMA aware?

Monday, January 12, 2009

Setting up bank branches in the West just got harder

Up until the latest economic crisis in Kenya engendered by the events of January yesteryear, several banks were thinking of having small operations in the UK or in the US to tap into the diaspora. In theory, I didn’t think this was necessary. I for example never needed to go to Kenya to open my online bank account with Equity. However, KCB had for example explored this seriously and Equity is apparently thinking of doing so in Baltimore (?).

Time for a re-think...

From October, any UK-based has to in effect be self-sufficient in terms of liquidity. Other nations will also follow suit. What does this mean? In addition to the fairly onerous capital commitment, banks operating in all G10 and other signatories to Basel 2 will in effect have to demonstrate that in normal and stressed situations, their operations can withstand any cash flow requirements either to hand or from funding that is easily accessible. Sounds simple but one thing the regulators don’t want to hear is that especially in periods of stress, your operations will be dependant on parent bank to provide liquidity. The credit crunch has demonstrated that this doesn’t happen (Iceland banks, Lehman Brothers all swiped cash into home territory as soon things went pear-shaped).

You in effect need to demonstrate that this will be a stand alone banking business...

KPC, KCB, KTB: we are not or are we?

In the 90's you read a financial scandal and re-read to see if what you were reading was true or some fictional thriller. One gets the same feeling reading some of the stories now.
One Samuel Gichuru is now known for his billions made at KPLC via various schemes such as the treated or untreated poles, deliberate reduction of HEP and ofcourse his appetite for "relations". Then you recall NBK and its laundry list of bad uncollateralised and unrecorded loans to the honourable MPs.
Now KPC has a missing 56m litres of oil which was allegedly bought by Triton. Triton had used this oil as collateral to borrow (wait for it), Ksh2bn from KCB (and I am ignoring the Ksh90bn that KCB has apparently lent to Triton over 4 years on the assumption most of it has been paid)! KCB which I unfortunately commended the other day for being ahead in its risk management now risks having to provide for a large portion of this loan as it didn't actually have anything but letters of assurance from KPC about its collateral. Triton collapsed just before year end... And yes, KPC is due to be listed this year... By the way, why was Triton doing KPC's job for it?

Memo to KCB: In good times, risk management has to be first class, in bad times, natural risk aversion should kick in. Its your collateral and it doesn't matter if KPC is the only one with storage, you have to have letters of guarantee that says KPC will bear the substantial risk of the collateral. Its not me being clever in hindsight. Did anybody evaluate Triton's cashflow and finances before the loan?

As for KTB, the story shows another sad state of affairs especially when the tourism industry needs all the positive PR it can get.
So are we regressing back to m-o-i days again? My take is we are and I really hope that GoK is serious about divesting itself from business asap.

Saturday, January 10, 2009

NSE weekly catch up: Have we hit the bottom?

The NSE continues to benefit from investors re-positioning to take advantage of the results season. Olympia was highest gainer in the week despite a blind strategy, while Centum and Equity topped the losers table.

The answer to the question is maybe. We did hit bottom at the NSE in October but have we bottomed out? The answer is no and we'll continue to yo-yo along the bottom for a while and may even work ourselves into going  below 3,000. There are various reasons for this not least the uncertain Kenyan macroeconomy and the very sickly global situation. Volumes at the NSE remain wafer-thin (see graph for comparison to the first 6 days in the '08) a combination of the anaemic cash positions of many investors (inflation and school fees) and confidence levels.

Grapevine says that NMG sacked 100 of its journalists. My info has always been that for a listed company, it pays atrociously, so cutting staff might not be the easiest way to reduce costs. Instead, attention should go to its many dailies especially in Kenya. Even a willing, able person like me when on my hols, would struggle to justify buying BDA, DN, and Standard in the same day. Not to mention Daily Metro and Taifa Leo. My suggestion would be for the time being, to make BDA a pullout paper within DN; make daily metro a free newspaper financed by ads and probably re-think Taifa Leo.
FTSE corner: How do you tell the market is lousy? Walk past broker/investment bank offices and see guys sitting down infront of three screens while playing on their blackberries. Normally, you'd see them watching all three screens while holding 2 phones.

Friday, January 09, 2009

LUSE-why now, what to buy and how?

A few good reasons:
Weak Kwacha: when I first started looking at opportunities there, I was getting around 6800, now its 7400. To the pound. If you are doing $ or Ksh, its even better.

  • Its not just Ghana that had succesive African elections. By any standards (I don't who sets them), the el;ction went well and despite the opposition complaining (and they always do even Hillary Clinton and McCain murmured about this or the other), Zambians were able to move one from death via peaceful election. Next elections are 2011...

  • Copper and other minerals: Zambia is rich in copper and cobalt. The fall in prices of some of these commodities is temporary driven by brief lull in China's economy (though the Swiss are its main export partners according to CIA's factbook) and deliveraging. Clearly, leverage won't ever reach the 2007 levels, but China and the other BRIC countries will resume growth path. The country is also developing tourism around the Victoria falls and game parks.

  • Prices are genuinely under valued: I will cover specific stocks in another post

Reasons not to:

Adverse impact of falling copper prices now being seen in mine closures. Economy may take a break this year. Illiquid market. Selling at choice price might be an issue. FX rates: the converse of above might be true

I use stockbrokersszambia, who are very efficient in account opening and who do send daily/weekly and monthly reports and the occasional results announcement.

Thursday, January 08, 2009


Kimunya said he'd rather die than resign. then he promptly resigned...but lived
Dick Fuld turned down no less than 5 different offers for a stake or takeover of Lehman Brothers because his valuation was double or more that of those offering. He didn't believe what the prospective buyers said about his beloved Lehman's toxic balance sheet and also believed Hank Poulson.
Around 4/5/6 months traders on Wall Street and elsewhere were still paying out £10k+ in a restraunt, today many are having to take pay cuts or re-orientation courses.
Tupac used to swagger after surviving a pac-getting shooting and believed he'd live for ever. He died shortly, of the same.
The other day, the captain of the England Cricket (a glorified drunk's day in the park) team went to the Cricket Board and told them that he being the best batsman since sliced bread would step down as captain, if the board didn't fire England head coach who he reckoned was useless. The board thought about it and told him thus;
we agree the coach his rubbish, so we'll sack him
but we also think you are a rubbish captain, so you're fired. lol...

Its called the law of indespensability...and will catch up with Kenyan politicians

Wednesday, January 07, 2009

Africap reduced stake in Equity to 1%

BDA (finally, and it still repeated that mistake with the shareprice perfomance) confirms the trade that took place just before year end.
Africap haven't yet explicitly confirmed this and its website still shows that it does still hold a stake in Equity.
Does it matter that Africap has exited? Not really, it has held the stake for over 5 years and crucially gave Equity the credibility it required at the time in addition to the funding. The end of the lockdown in August was always meant to give some of the shareholders an opportunity to exit. Equity today has some other strong foreign stakeholders such as Britak and Helios (by the way, I am willing to bet any money that some of the large investors in Helios are Kenyans). Still, having some local investors will add to that feeling of deja vu...

Investment Club Software featuring NSE...

If you are an investment club and are looking to bring your club's share investment activity at the NSE into the 21st century, help might be at hand.

If you struggle to value your share holdings at a corporate and member level and want to be able to give members access to monitor share transactions centrally, time to trade have unveiled just the software for you...

Tuesday, January 06, 2009

Kenyan Banks & BASEL II: Implementation

Why is it important for Kenyan banks to adopt Basel 2 in its entirety?
  1. Growth: Any bank looking to grow domestically and internationally will need robust and scalable risk management systems and processes. As it grows, it'll notice different types risks e.g. market risk (fx and interest rate exposures) for international banks; for a domestic bank that is growing, its branch mangers will no longer have time to relation manage every creditor thus credit risk grows. A bank acquiring a broker for example opens itself to huge operational and market risks (proprietary equity positions).
  2. Capital sourcing: For banks that look to source funding from either NSE or abroad; risk management is a consideration for the investors. Having class "A" risk management may reduce the premium that investors require
  3. Reputational: the risk of not having risk management in place is that the bank will find its reputation in tatters or worse when one type of risk trips it up.
  4. Contigency planning: Part of Basel 2 risk management is stress testing which is about capitalising for one-off capital destroyers.
  5. Shareprice: Could be impacted by the feeling that a certain bank is at risk from its reckless risk management. As an investor in Equity, one question I always ask myself is this, if say Equity was to be hit by one of the above risks; was discovered to have insuffcient capital as a result and had to de-scale its operations, would CBK's Ndungu have tell Equity to reduce its operations? And I think we all know the answer to that.
In terms of Implemntation, CBK would like to start implementing Basel 2 from next year so that is our starting point.

Credit Risk:
-The standard approach won’t be applicable unless
---Bank has significant banking book-applies to most Kenyan banks
---Significant corporate or sovereign (including municipalities, parastatals and county council) exposure
---Significant credit rating coverage-very few corporates are credit rated in Kenya and even those that are, very few keep these ratings updated.

This leaves the two internal rating methodologies. In theory, this should mean a quicker uptake by the banks because many should already have these in place, right? Wrong-many are reliant on credit appraisals some which require subjective judgements. The initial credit approval process lacks the scalability that the use of credit scoring system would bring about. Then regulators have to approve these models. Which is where the next comes especially if different banks use different models as opposed to ones within set industry standards. It places a lot of pressure on the supervisor knowledge wise. How do they know which internal model is delivering adequate credit risk coverage? How do you compare an internal model that Equity uses to credit rate its mass customers with that of Standard Chartered which has middle/upper class customers?
Under the Advanced IRB, the bank can use it own model to estimate pd, as well as loss given default, expected loss, maturity, but in most countries this is only allowed if the bank has been producing these estimates for 3 or more years. Most Kenyan banks don't have these internal credit rating models now let alone for 3 years.
Under Foundation internal rating based approach, the bank is allowed to estimate the probability of default. To estimate PD, most banks would need to have the ability to stratify their customers using various criteria but the main ones might be maturity profile, collateral type and repayment track record. Once, the bank is able to break this down into say 10-15 categories, it can attach risk weightings to each category which will in effect denote the capital that needs to be held against each. Being able to get this model signed off by regulators will thus reduce capital required in most cases if the classification is sufficiently granular.

Market Risk:

Most Kenyan banks will have fx and interest rate risks under this risk category and exceptionally, equity. Daily VaR approach requires the bank to be able to calculate the daily P&L impact of a 1 basis point movement in interest rates on its banking book. Similarly for those parts of its banking and trading book that have exposure to non-domicile currencies. The fx risk will thus apply to KCB, DTB, Equity and others that have foreign businesses.

Operational Risk:

This is in effect the easiest to implement because with the exception of the advanced approach, most banks should be able to get data by business lines for several years and this just then need to apply a factor.

Holistic Scenario Testing:
Once the bank is able to calculate the required regulatory capital from the above and other risks, Basel 2 requires that a bank using the internal models in of the approaches to do stress test its capital against various one-off scenarios. For most Western banks these are events such as; credit crunch; LTCM, the tech bubble burst; oil prices crisis; black Monday et al. In Kenya, banks should consider the likely impact on their regulatory of the following scenarios and then provide the necessary capital buffer:

  • A coup overthrowing current government
  • Civil war lasting 6 months
  • Drought lasting 1 year
  • A run on the bank
  • IMF/WB sactions against Kenya
  • Withdrawal of a shareholder
  • Arresting of CEO for murder
  • Security breach on internet facility
  • NSE fall by 50% in 7 days
  • Global depression

Monday, January 05, 2009

Pick of 16

Of the 16 companies that gova is talking about privatising i.e. introducing to private sector ethos, I'd say that this is the way they'll pan out.
Don't forget, GoK had a ksh127bn deficit when it did the budget, this was to be bridged by the Eurobond loan which won't now happen until uuh late 2010 at the earliest and it has had to take on higher contigency funding than planned for.
KPC- PBT fell last year, but it does need to step up a gear perfomance-wise. Its monopoly so not sure if competitiion will be an issue for the foreseeable future
Development Bank-Already TC has a 10.7% stake in the bank, so I wonder if ICDC would in effect have to put the shares at NSE. Doing ok perfomance wise without being exciting. Its niche of long-term financing is now occupied by many other banks...
New KCC-though 2010 is more likely. And couldn't find a website so something for Mwangi to think about.
Consolidated Bank- again probably one for 2010, though GoK finances may force issues. Made Ksh25m in 07 and Ksh16m in '06 so I really don't see investors queuing up to grab a stake...

Strategic partners:
NBK-though doing well now, I doubt if it GoK can just offload additional shares in the market without it having a strategic partner who will help ease out Marimbi.

Consolidation category:
The sugar companies should be merged to see if economies of scale will alliviate the torrid state of play.
Kenya Meat Commission should look either to acquire players in the market or go new KCC way.

Kenya Wines, hotels owned by KTDA

Saturday, January 03, 2009

NSE weekly catch up: Results season kicks off

If you were looking to buy to take advantage of capital growth induced by the results season which kicked off yesterday until end of March, then you may well have missed the bus on some shares:

Equity was up 22% from Monday and there was this intriguing foreigner sale which no Media house or broker seems to have commented on...
AK was up 12% and has a lot of momentum for the rest of the year in my opinion
EA Cables was up 11% and is another (together with Centum-up 10%) which I see having a solid year shareprice-wise
Unga with results already out and its 1 for 5 bonus issue closure day behind it (30/12), will probably slide slowly (down 7% since Monday).

AIM corner:
Any prospective shareholders of Limuru Tea? I forgot to mention that the Tea firm (which now belongs to Brooke Bond given Unilever had a 54% holding), is doing a 1 for 1 bonus share issue. For which the books closed on the 18th of Dec :-(
However, City Trust (minority shareholder of fast rising I&M bank), is also doing a 1 for 10 bonus share issue and this is still open.

AOB: Nice of Reuters to highlight what a miserable yr 2008 was for us NSE investors. Not sure though where BDA got its 3.3% rise for Equity in 2008 (opening price was Ksh150, closing was Ksh176).

Macro view: I still read press reports that peeps are not getting the cheaper Ugali, so who is? Hopefully, we'll get a decent finance minister this year though that will have to wait for the old man to wake up.

Friday, January 02, 2009

Kenyan Banks and BASEL II: Review

At its heart, the current credit crisis is about reckless risk management, failure of risk management regulation and credit ratings...
Basel2 is in my humble opinion one of most complete approaches to risk management designed for the banking industry or any other industry. So what is it and how would it affect Kenyan banks were they to adopt it?

The Basel (Basle) in Basel II is the name of a Swiss town where bank international settlements are done. Its the son of Basel I, which was created back in 1988 as a recognition by the G10 nations plus two other nations that banks required a common approach to risk (credit & market) management and capital set aside to mitigate that risk. Being an initial effort, it was very broad brush and BII was therefore designed to add detail in terms of credit and market risks; cover off other risks (specifically operational risk) and other issues such as disclosure and regulation.
All these facets are covered in 3 pillars. For each of the 3 key banking risks (credit, market and operational), BII recommends a menu of approaches that banks and their regulators can adopt, but importantly specifics for each sub-type of business.
Credit risk: Risk that borrower (counterparty in banking-speak) defaults.The trio of approaches are :

(i) standard: allocate capital based on credit rating of counterparty;
(ii) internal rating-based- where bank uses regulator-sanctioned internal ratings models. Can either be foundation IRB i.e. just use internal model to estimate probability of default
or Advanced IRB where bank is allowed to use its model to estimate PD as well as loss given default and exposure at default.
Market risk: Risk from changing market factors(interest /fx rates; share/commodity prices). VaR for value at risk is the preferred approach.
Operational: Risk arising from banks’ way of doing things. BII recommends either basic indicator approach i.e. capital set aside must be the average of last 3 yrs annual gross income OR standardised approach which divides banks business into 8 different lines, takes their gross income and multiplies with a beta factor OR advanced measurement approach where the bank can use its own model.
The other two pillars deal with how the regulatory approach and in particular ICAAP which is the internal capital adequacy assessment process covering the bank’s approach to pillar 1 risks and other risks and disclosure of the same.

In terms of impact of regulatory capital, the experience in G10 nations has been that capital required is either the same or lower because banks can leverage broad credit rating coverage or strong internal models. As you’d expect, there have been criticisms of Basel II, but most have actually focused on what went wrong to spark the current credit crunch namely very ropey credit ratings and regulators evaluation of internal models used by banks. So far, many countries have taken up Basel 2.

In Africa, South Africa is far ahead having started using B2 in Jan 2008. In most other countries, B2 is only mentioned in passing. However, as a general rule, those nations with presence of international subsidiaries stand a better chance of early adoption. As do those with banks interested in going abroad. To bridge the knowledge and resource gap, some like Egypt are sourcing help from EEC. Adaption is now seen as given banks a competitive advantage.
Turning to Kenya, CBK has handily released a survey of 31 of our banks showing their awareness, intent, understanding and preparedness towards adopting Basel2. The survey fitted neatly with a review I was doing of how the listed banks do risk management. BDA has focused on the so-called talent war but there is a lot of other issues.
Here are my salient points:

  • CBK wants to start adopting Basel II from 2010
  • Banks have not yet adopted Basel1 wholly e.g. none actually allocates capital against market risk
  • Awareness of BaselII is medium, less 5 than have done any assessment for B2 purposes
  • Only 5 banks have in place a Basel II steering process
  • The 7 subsidiaries of international banks were ready to adopt Basel II from 2008
  • Only 3 local banks had any budget for Basel II in 2008
  • CBK does not yet do risk-based supervision of the banks-uses Prudential rules
  • BII is not seen as a competitive tool-parochial view
  • Only 5 of the 31 deal in any non-plain vanilla financial instruments
  • In UK, most banks took 2 to 3 years to prepare
  • For credit and operational risk where there is a menu of approaches on offer, most prefer internal models
  • Majority of local banks have an IT and human resources constraints (hence the BDA headline)

From annual reports, KCB seems to be ahead of the game in terms of its coverage of Basel II ( it was the first to appoint a CRO, already calculates probability of default and Temenos, its new IT system will at least give it the centralised banking data view)

Next post will look at the implementation process for Kenyan banks...

Thursday, January 01, 2009

Happy 2009: some predictions

If you were to go from the Lenana peak at the top of Kirinyaga Mountain and walk across to the top of the Aberdare Ranges, that would give you perfect feel for how most stockmarkets will move to 2010. Assuming Q2 2007 to be the Lenana peak, I expect:
NSE- will not go beyond 4,500 weighed down by economy morass and newish listings (KPC, KenGen, NSE, Nakumatt, DPL Festive)
Access Kenya, Safaricom, Equity in that order will be top performing NSE shares in 2009
FX: $/Ksh will close below Ksh70; £/Ksh will close at Ksh115-20 both driven to the floor by arbitrage
LUSE: Has lost almost 30% this yr primairily driven by foreigners exiting but will stablise in 2009
FTSE: Will not go beyond 5,000 as unemployment, company defaults, housing depression continue to depress


Inflation: Will be re-calculated but reality is that it'll remain very high unless rains are very good
Economy: 4.5% growth will be recorded for 2009 i.e broadly similar to this yr, the result of lower international receipts, inflation espicially fuel an electricity.
KRA: will miss it target for yr.

BoE rate: will close at 1%
UK unemployment will rise to 3m

Different yr, same BS
  • The local tribunal will get bogged down from the start. The investigations will clear most of the "10" for lack of sufficient evidence.
  • Constitution review will get stuck on the same two issues namely parliamentary/presidential system (excellent explaination of the diffs) and devolution (or is it ujimbo/ugatuzi/ukabila/upuzi?)
And finally, Liverpool FC will win the Premier League in May.