Does universal banking have a future in Kenya?

Universal banking is the term used to define banks that are one a stop shop for any combination of depositors, lenders and or investors and insurance seekers. Globally, Citi, UBS Bank of Tokyo Mitsubishi and the newly formatted BofA are typical egs of universal banks. In Kenya, we have 2009 Equity and CFC Stanbic.

The key driver for this type of banking has always been the economies of scale in costs and knowledge and products. That is the upside...

The downside which has rarely been priced in the past is that the management matrix and knowhow required to centrally manage such businesses has been huge and as yet, there are few successes. The outcome of this is that management is delegated by default to those knowledgeable in the various facets e.g. an investment banker is given the remit of running the show on the ib part of the business and ditto for the insurance part of the business. This has then lend to a situation where its difficult for the ultimate bank ceo to get a handle on a daily basis what his/her value at risk from the universal bank. Cue the sort of big issues we've seen with these types of banks in the current crisis.

Given the embryonic state of banking regulation in Kenya (is no where near adapting Basel 2 type of capital/ liquidity requirements), it currently is prudent to encourage universal banking without either very targeted regulation of the various parts of such a bank.

NSE weekly catch-up

NSE saw a mild week with index slightly down on Monday's opening. I suspect we've seen the best of this rally and may even head south for a spell. There was also opportunity to shoot itself in the foot via usual funny price plays.

Results:

CFC Stanbic disappointed (down 8.5% in PAT and won't be the last time, even the old CFC used to frustrate because its universal banking model seems to be just a cover for a weak insurance associate). Universal banking has defeated even banking giants (UBS and Citi recorded the highest credit-crunch related writedowns) and the only successful that I know of today is Barclays Plc. The reason? Varley the CEO is an ultra-cautious accountant who can handle retail banking and insurance while Bob Diamond the head of Barcap is an alpha-ib type banker. This means both businesses perform well. Equity's supposed hire of Maina Mwangi of Rencap should be seen thru this lens.

Jubilee performed credibly 9up 3% on prior yr), especially compared with volatile listed counterparty, Pan Africa.

Corporate actions, announcements and wonders:

Following Kenol's results announcement, the 10% allowed what looks like a circular trade to be carried out leading to a 33% drop in price which nobody will sell at. CMA waited a couple of days then opened the 10% rule hoping to push guys upwards. This nonsense has gone on since the Stanley Hotel days and awaits the injection of new blood into the bourse.

Equity got suspended and suspension was revoked the same day apparently because it owed CDSC Ksh47m from the Safcom IPO and other levies. CMA revoked the suspension as unprocedural. Sounds, looks and smells like the old "patel" file over again. Apparently, even though Equity has a custody licence it somehow earns more of the 2% transaction fee that the brokers. At a time like this with anaemic volumes, brokers are naturally aggrieved. Equity now has to factor in reputational and operation risks. Brokers need to look for other jobs. Its a plain vanilla bourse that shouldn't be seeing the kind of stuff investors have put up with for so long from brokers.

More changes at TC where it seems all the guys who came in with Tony Wainaina have now moved on. Group possibly took hits from the RVR-debacle and the bear in the NSE, EA Cables its prime estate had a high of Ksh104 in October 2006, but closed Ksh24 today.

NSE catch up: ATS hitch defies orthodoxy, new IPO, macro changes

Unlike most recent ATS hitches, the one this week hasn't led to the NSE shooting up immediately. However several shares that normally rise after such an event did so, saw I do expect a little rise in the earlier part of next week.
DPL Festive (yes, same question I asked) plans to do a small ksh500m IPO in Q1 of 2009. The bakery firm is planning to use the proceeds to expand and apparently posted 40% rise in profit before tax for its last financial year. One of WB's rules is that you should at least have sampled or know the products of the share you are about to buy... And read the prospectus when it comes out.

Mumias did its usual song and dance excuses after profits fell again. I am sure its an excellent share with great potential, but I'll change my mind about it when I at least see lower costs.

9 month CFC Stanbic results are now available and shows PBT at Ksh746m. Apparently, it was very difficult to get the separate 9 months numbers for CFC and Stanbic and add them together to give us the comparative year on year piece.
Olympia saw PBT fall as it moves to re-position itself. Yet again.

Macro view: Several developments this. Inflation is now upto 29.4%. Despite this, CBK lowered banks' reserve ratio (to effectively give banks room to lend more to the wider economy) earlier in week! If you recall, inflation was running at allowed 12% in 2007 and at that time the issue was money supply. The only reason I can think of CBK doing this is it anticipates inflation dropping drastically in 2009...Oil prices are down and so is electricity and food, but will inflation drop that quickly especially now more money will be circulating in the economy?

NSE Update: CEO musical chairs

NSE continues the gentle journey south. There is nothing to suggest any upward movement until Co-op is listed and its volumes settle down. And of course, the usual upswing prior to full year results in March.

Centum saw PAT down 17% for its half year to September vs.. prior year, not too bad given NSE was down. If CEO was still the same, it might have been worth buying at around ksh12, but now its worth waiting to see where it goes. Notice the very negative cash position. It bought Longhorn, but also made some disposals. Still, I now understand why the dividend was postponed to January. James Mworia who takes over in two weeks time clearly has his work cut out especially given Mwangi left due to strategic disagreements and we are stuck into sub-4000 levels for 2009 at least.Its a buy for me if below ksh10, though there are probably better prospects in the medium term.
KRA came up tramps to make Total look good ahead of its expected purchase of Caltex .
Chris Mwebesa was appointed CFC FS CEO (I wondered why the share has been tanking-apart from the interesting 9 month results which I haven't seen). Bamburi's CEO has also left . Looks like its that time of the yr.
Macro-view: Water rates go up in the new year, maize (our staple food) prices seems to have broken the gate and are on an upward stampede and oil prices remain sticky. So looks like the only way inflation will go below 20% in the first half of 2009 is if its revised (I sense it already has) and some items are removed from the basket. We are walking into economic problems with our eyes wide open. 4 key words for 2009. Food policy. Policy dynamism.

Food Policy: There is a great opportunity to start on a new blank canvas. Just copy and paste the polciy on milk.
Policy dynamism: We nrks are often accused of westernism, but if gova could just react a bit quicker for example on the budget deficit (rather than stealth rise in interest rates) or inflation (was already high last yr), we won't be in this tight situation.

NSE Update

KenGen continues to disappoint. 2 years after its listing ushered a new era at the NSE, the company looks like its at a standstill. Note that even if you take off the depreciation hit it took for interim 2007/8, you'd end up with flat y-o-y growth. And I don't it has much by way of pipeline projects that will increase power output.

Merali companies, of which there are 3 at the NSE are notoriuos for under-delivering. As Everready heads to Ksh1, Sameer also has issues. Its blaming likely lower profit on events in Jan-Feb. Does that mean 1 quarter makes up its whole year? Sassini also saw lower interim profits despite only a small fall in turnover. I guess there goes Merali's plan to list one company per year...

When the CFC-Stanbic merger was announced yester-yr, there were some including me who were very excited. Over the last yr however, I've been re-examining the group and can see it has issues. The CFC Life business is seriuos drag on the it and the bank is not excitely firing on all cylinders. For Q1, group saw a 10% fall in PAT, due I suspect the fact that CFC Life continues to get hit by over-reliance on the NSE. The bank with a 10% rise, also underpeformed relative to peers.

Is it to take another look at StanChart? Notice FY saw 32% rise in PAT, comfortably above peer BBK and almost on a similar level to KCB. Then Q1 saw another jaunty 25% rise primarily driven by FX fee growth. But is it sustainable? I reckon I might just get some shares so I can find out at close quarters... After all, most other banks have seen furiuos balance sheet growth over the last yr and if the economy comes off the track, NPLs won't be far behind.
DTB is ofcourse a favourite bank share, 28% growth in Q1 is respectable.

Banks Results for 2007

In the context of 2007, every bank should have seen at least 10% growth owing to an economic growth rate of 7%. And that is to stand still. BBK and KCB show the advantages and disadavantages of being huge. Being huge, you can lend big, but then in Kenya you need to lend small in order to generate the volumes that we'll give above average profit growth. The other issue is that it takes a revoluntary leap for you to see the profit growth that 
would make shareholders flock to your shares.  BBK is a worry in this respect. A 24% increase in net interest income from higher lending was wiped by the costs required to get it that growth. Could that be KCB several yrs down the road? It has to grow aggressively outside Kenya.

Apart from Equity, the other stand out banks in the above list are CFC and NIC and DTK. CFC is of course presently the only universal bank in Kenya, but seems to be suffering from because its banking division was actually profitable in 2007 but it made a loss on group basis because of its life business. Both DTK and NIC are building themselves niches and doing so profitably. The  branch expansion to increase customers and geographic reach will mean that they can both continue to 
see profit growth over the coming years.

KQ, minted stockbrockers, REITS

It doesn't rain, it pours is apparently KQ's new mission statement. OK, things have been tough because of the political quagmire, lakini, its managed to lose practically its top management with no CFO; HR director(i hear there was a change); commercial director; no flights manager; no technical director. Do they all know something that we don't? Now even Paris flights are a
are likely losing it money. I have posted before on its pre-crisis issues. I passionately believe in KQ, but we now need a change of leadership, because that is where
the buck stops. Let it get someone who can steer it through the next year operationally so it'll be ready as the economy takes off.
For every Francis Thuo and Nyaga stockbrokers, there is a D&B and CFC, two brokers that though not on the straight and narrow take home some serious revenue from buying and selling yours and my shares. Stockbroking should be the one business in Kenya that should bankable year on year if you don't do anything stupid. Truly, IF is a big word.
It’s pleasantly surprising to see that Rutleys still plans to go ahead with its property fund and may even list as a REIT
if and when CMA wakes up from its slumber and decides to allow them. Bora Capital another property fund venture has gone quite despite interest from
many including in the Diaspora.

NSE roundup

KCB saw 41% y-o-y increase in PAT for quarter 3, largely driven by growth in interest income of 32% and slower growth in expense of 17%. However the time to check Odour's progress as CEO should be Q1 2008's results. I have no doubt he'll perform though.

StanChart, the laggard among the large banks saw flat PAT yoy growth. For your reference, a bank should always be making at least double the economy's growth rate. The pity of it is that this is happening under the watch of its first Kenyan CEO Etemesi.

NBK started seeing the benefits of the bond interest payments from GoK paying off its debt.

Mumias crystallised some of its plans to generate-revenue from power by signing a contract with KPLC. MSC also closed the offer period on its 2 for 1 bonus share issue. For my money, its
 best purchase price given recent share price history would be under Ksh10, that is unless COMESA extension happens first.
TC announced a private placement. The interesting question is why they are doing it so close to an election.
Finally CFC-Stanbic merger is all but a reality as it enters its final stage. StanChart, your days are numbered.

Banking Sector Marches On

CFC Stanbic is now a reality. Watch out BBK and Stanchart, these guys will soon be competing for corporate clients with a very portent offering of banking, insurance and investment products.

NIC are in the midst of their right issue-priced at very good Ksh70 with an additional bonus share to come once they are through with the rights issue. NIC are an innovative bank who potentially have a very bright future ahead but need a partner , not necessarily another bank but another financial institution, on whom they can leverage distribution.

DTK are also shortly starting their rights issue again at a discounted Ksh70. This is not as attractive as the NIC and DTB's future lies in two things happening. One, the finance minister doing away with these you stick- to- insurance and you-to-banking kind of divisions so that a bank can
 offer insurance and investment products across the counter. And secondly, their being able to integrate successfully with Jubilee and Habib Bank.
In other news, Equity continue their expansion (how are they doing it?) with opening of branches in Kisumu and likely partnerships as far as Zimbabwe. And as a clincher, have now 
been allowed to take a bite of HFCK heralding the much anticipated Equity-HFCK-Britak
financial institution (possibly buying into some of the smaller brokers?).

And to read any blog you'd think Kenyans ate and slept politics!

Banks H1 -Updated

Update of this post. DTK either has very high quality loans or more plausibly, needs to increase its loan loss provisioning. CFC has the highest proportion of its income from Fees & Commission (perhaps from CFC Financial Services?), and the 2nd highest insider loan proportion after the govt-owned KCB.

Thursday's Budget & the NSE

As always, Kimunya's presentation was Raila-like, populist but please read the detail. Some of the bits that will likely impact the NSE in the coming year/s are: Govt direct participation in the NSE per paragraph 38. Following its failed OFD for 19% of KenGen and the fiasco that was Mumias (for the shareholders at least), GoK wants to be able to sell its stakes in various NSE listed shares in small blocks as opposed to doing a large block at a go. Sounds good in theory, but in an illiquid market like NSE, this will only be doable if its targeted i.e. the block is partially offered to institutional investors. The issue that is causing concern is where GoK may try to shore up a share price. Opinion here is that the first is ok with safeguards, but the 2nd is a no no. Repayment of NBK's npls owed by parastatals over the next 20 years. No doubt, this will increase its liquidity and allow it to lend more. The question here is the interest repayments. NBK has been accounting for interest on npl in its P&L, in which case any subsequent repayments would not go through the P&L, but this is only if it has done this for all its npls. Another ksh13bn remains to be cleared. GoK also announced that it will be selling more its stake in NBK. Increased recapitalisation requirements for financial institutions over the next 3 years: There are currently several banks that fall under the ksh1bn that will be required. CFC-but they are already in advanced merger talks with Stanbic-for 6 months? DTK-despite doing a rights issue in December, they may need to complete their merger with Habib Bank HFCK-they are in the midst of a rights issue to sort this out NIC- they announced a rights issue on Friday Within the unlisted banking sector, there is quite a few that again will most likely merge or seek help from their shareholders. More importantly, the insurance sector is also being required to recapitalise. Sin taxes were in effect again, but one suspects that the demand inelasticity for these products is such that only a big rise in the duty would dent the profitability of EABL and BAT. Construction-related stocks will benefit from allowances on low cost housing. Finally, happy papa's day to all the fathers out there!

Stocks View

Accumulate/Buy:
Equity: Has now become a byword for perennial overachiever. Both income streams (NII and Commissions and Fees) looked strong from Q1 07. More than ever, the bank is eyeing the saccos market share and engaging it intelligently. One may get queasy about resultant non performing loans, but that depends on term over which you will hold onto the share and 2ndly, Equity has a more conservative definition of non-performing loans than required thus is able to pick up problem loans earlier-in theory. P/E may look too rich at around 32, but would only be around 20 if one was extrapolate the Q1 results to the full year. Downsides: How many of its principal shareholders will divest some of their holding come next July/Aug when the 2-year holding period ends?
NMG: Is now an East African media house in all but name tetchy govts notwithstanding. The Business Daily has been received far better than initial scepticism suggested. In saying that, I still think that it’s missing a vital constituency-namely, the NSE investors. Why not for example do monthly profiles of each of the 51/2 listed companies; interviews of key players in our economy-this is the only reason I read the Financial Post and I am sure there are others who would want to know more? NMG has a fat DPS; note that its P/E is far more sensible than that of Standard and one can feel a bonus share issue coming from next year. Downside: M7 is not Kibaki and will willingly crackdown on any perceived negativism, ditto TZ.
TPS: Yes another Aga Khan company. Tourism boom is now on and TPS are recapitalising, going regional and refreshing the brand and their hotels in earnest. Downside: usual terrorism/security advices are the main one.
Hold or Upgrade to Accumulate/Buy…
CFC: The universal banking concept means that it will continue to do well as a standalone entity albeit in need of rejig-a bank with no online proposition today needs searching questions about age and strategic aims of its management. As a standalone entity, one can hold onto its shares for the mid-long-term. However, with Stanbic on board, I believe the new entity will be the corporate bank of choice for East Africa and as such investors need to get on board.
KCB: The bad times should be behind it…Q1 was solid if unexciting though it’s getting higher fees now from increased lending. It’s another one expanding its reach beyond Kenya and successfully at that. The hold is to wait for the demobilisation of the share spilt. Downsides: Is GoK non-interference behind us (i.e. this is a politically sensitive stock in mind and thus 2007 elections represent t some uncertainty)?

Underweight/Sell:
KenGen: Once you get GoK 's incompetence being played out publicly as some kind of experiment, you know you shouldn't touch that share until govt stake is reduced. You can't commit legally to something that you can't or shouldn't do and then seek to dress as some kind of intelligent and well thought-out rescue from fiasco.

KPLC: Whole host of problems:

1. Bad debts,
2. Probably too wide a remit (I think rural electrification needs to go a smaller company with none of KPLC’s history);
3. Leakages-25% of its electricity wasted this way
4. A large unionised workforce (apparently some are paid more than their line managers)…
5. and finally the ropey margins.

Upsides: Demand for electricity will get insatiable in at current or higher economic growth rates.
Mumias: Please see previous post and comments…nothing has/will change

RVR deal goes off the rails, NMG, CFC excite

When the Rift Valley Railway deal was announced, I said that i thought that a 25 year term was economically suicidal. Rail if handled as a business, could be a cornerstone of our economy's regeneration helping generate revenues and support the growth of the our landlocked neighbours, our productive Western and Rift Valley provinces that don't have roads to match their productivity and help ease the wear and tear rote on the Mombasa-Nairobi road by HGVs. To surrender the business away to entities some with dubious history and others that are entangled in messy legal entities for 25 years without any back-out clauses smacks of desperation and will cost us in the next few years. Already, the first results show that under the new RVR tutelage, KR is underperforming in various areas with KPA having to publicly complain about yet-uncollected rail cargo, RVR are still in court with their former partners and they off course haven't paid all the fees to GoK. It is messy and I forecast that the whole deal will have to be reviewed in the next 18 months. The other point to make is that there are very few of the big tenders in any sector that this govt has done well in and I wonder whether we need to call on our "partners" World Bank/IMF to help streamline the way we evaluate these deals so that we get the right candidates.
While I was away, various companies rushed in their results to comply with the end of March rule. Several stood out. NMG with a k12 dps was awesome and those wise enough to look at price growth potential as well as dps will have NMG's shares. For me, this is the only media company worth holding over the long-term given its expansion goals. CFC is one I expect to hear more of. The 06 results show that it can do well on a standalone basis; PAT grew by 68% driven by growth in customer loan book (30%), govt securities and fees and comms. As the only universal bank in Kenya today, CFC will show momentum in the 3-4 years as it streamlines its ops. Its likely merger with Stanbic to create a top 5 bank will be the icing on the cake for its shareholders. Finally, there are rumours that Express is eyeing an strategic international partner presumably to give it capital assistance that will expand its reach. From being a loss maker 3 years ago to an international business is quite some turnaround. ARM, ScanGroup are others that announced FY06.