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.

Discount Securities finally goes bust-Key issue is liquidity

DSL had the widest distribution network of the brokers in Kenya. In that respect, its a welcome relief that it didn't have some many customers as Nyaga. The pity is that some NSSF funds maybe lost in the process. Apparently dividends were manufactured to keep NSSF from asking too many questions.

This is the first real red mark against Stella since she was in the CEO job for almost a year before she moved to put Murungu & Son under some management restructuring.

A lot of this bother could have been avoided if she had listened to all those complaints against DSL and a myriad of other brokers.

So where do we go from here?

• Apart from setting minimum capital standards and the ownership limits, Stella should also consider making capital requirements correlate to amount of business a broker is doing.
• Ultimately, whether a broker is doing all the right things or not, what will make it collapse is lack of cash to settle up client sale needs. Hence, Stella should consider getting brokers to set aside additional capital as a liquidity buffer correlated to their volume of business.
• CMA should change the composition of the fee to increase the compensation fund. They are very few investors who hold less than Ksh50k.
• Faster action to weed out weak and rogue brokers. There still many other brokers involved in malfeasance and its important that we use this bearish period to rebuild a brokerage industry for Vision 2030

Brokerage business at the NSE should be a simple lucrative affair. If you have integrity.

PS: If you'd hvae a CDS account with DSL, you need to file a claim asap.

NSE weekly catch up: you know the drill

Another week, another push south... This week it was supported by global sell-off (FTSE closed down 8% on Monday's opening). Geithner needs to start walking or he'll mess up the script for Obama.

Why would you do a stock spilt at the start or middle of a bear market? Despite strong numbers, strong momentum going forward, Equity’s announcement of a stock spilt has had the opposite of the intended effect. Its arguably the 2nd faux pax after the about doing a 2nd ipo for the principal shareholders. Apparently BDA was told or thought the idea was to make Equity less expensive. Jeez, are we NSE investors that stoopid? 142 is just a number just like 1. It only gets a meaning when you put an EPS or DPS against it. I think we are seeing the first signal that NSE has drained all the speculative retail investors leaving battle-hardened experienced investors who ignore noise.

BBK released FY08. As did NIC. Excellent results given its constrained deposit gathering capacity. PAT was up 39% on 2007 driven by 56% rise in F&C. It will give a 1 for 10 bonus share for shareholders in its books on 19th March. I would have been interested to see how the various parts did and especially NIC Capital, but I guess that will wait until annual report is on its website. NIC is a steady 30-40% growth bank doing things quietly (bought into TZ's Savings & Finance and obviously got the broker licence in ’08). Won’t surprise me if it comes in with similar growth for 2009. In terms of its peers, I'd now pick DTB, NIC and CFC in that order only because NIC still lacks NSE visibility.
Sameer Africa also released. It sells tyres. Therefore ceteris paribus, if car population goes up, tyre demand will go up. But it has to import most of its tyres so fx comes into play. It still managed to increase EPS by 5% due to “other operating income”. More at coldtusker. EABL released interims. DPS is Ksh2.50 equating to 4% yield.
Cheserem for CMA chair? I won’t say much, but this dude destroyed the best chance of ever catching Pattni & Goldenberg…
Kibz came in when NSE was circa 1,000. Will he leave it there when he goes in 2012 given that’s he seems determined to do that with everything else? Waiting is a virtual…

NSE/CMA action: wrong and diversionary options- again

In Kenya, when we have a major problem, GoK responds in the following order;

1. Delaying tactic-hence all the commissions of enquiry
2. Diversionary tactic-don’t know who leaked the terror story, but you can see what I mean
3. Wrong option-mass grave for Molo victims
4. Right option-finally...
   

The crisis of confidence at the NSE is about the economy, brokers with sticky fingers, global credit crunched economy in that order. The number one solution is not Stella and CMA board, though it’s been led by a/an ….. (fill in as appropriate) in Ntalami. Waruinge wasn’t any better as Chair and allowed regulatory capture to happen far too easily.

The solution is not CDSC though there is some culpability.

The real underlying/overlying solution is dealing with the brokers and their thieving ways. Its the NSE brokers and their conflict of interests; political connections; lack of transparency (who knows how much any of the brokers made for 2007 never mind 2008?); front-running; circular trading and other oddities. Unless you create the institutional framework that supports a vibrant, transparent, integrity conscious, liquid NSE and the conducive macro economy environment, all the rest is pissing in the wind. Reconstituting/firing CMA board which already includes AG, PS at Treasury, CBK governor is the minimalist and wrong approach. Does that mean UK is proposing firing his PS, Ndung’u (please) and smiler? Is he going to force the NSE (a private entity) to allow more brokers?The clincher is that there is no timing on any of this...

The right options would have been:

• Yesterday-adopt the CMA rule on disclosure. All brokers to publish their accounts for 2007 and 2008 within the next month.
• Today-compensate Nyaga investors
• By end of June- adopt the remainder of those CMA rules into law and then if CMA can’t deliver with a stronger mandate, get rid off it altogether and create a financial sector regulator in its place to oversee not just brokers, but bankers and insurers. However, note that you can’t at the end of the day regulate anybody that doesn’t think regulation is good for them. But you can close them down.

In a related development, D&B’s CEO has resigned. The guy has been involved in all the IPOs since 2006 so to a certain extent can be applauded for a giving NSE some increased volumes and be blamed for introduction of the matatu syndrome into the NSE. One is not going to speculate about his reasons for departure. Timing is interesting though. I am sure you won’t want to be the guy who presided over a sinking ship now would you?

Is the falling NSE a blessing in disguise?

You either make the change, get ready for change or change will sweep you away. For years now, investors have agitated change at the NSE that brings about:

• integrity in transactions
• dynamism in reacting and adapting to changing technology
• customer service
• liquid bourse
• strong institutions either controlling or regulating the bourse
• no conflicts of interest
• no political-business affliations
• a decent economic thermometer...
• leading to strong brokers, investment banks
• informed investors
• and a viable saving and investment vehicle

But wapi? We seem to be stuck in a timewarp where we go forward two steps and slowly go back to step one again. Strong measures such as those on disclosure, capitalisation and ownership are only adapted under extreme duress.

We motored between 2002 and 6, but within that period, managed to sow some destructive seeds that we've been harvesting ever since.

Its notable that every time we've had a dip, one or two brokers have said sayonara. FT went out after the Feb '07 dip, Nyaga survived but hobbled throughout 2007 by Mumias' 2nd IPO but succumbed when money ran out after the clashes in early 2008. 2007 also accounted for Solid Investment.

The 2008 bear has accounted for Discount, Crossfields and possibly Suntra. I believe this is the tip of the iceberg. If we went to 2,000, I think we would probably bring Reliable, Sterling, AIB, Ngenye into the net.

Most of these have one or two of the following in common; malpractices, leveraged business model, or operational risks galore. And unlike in some markets where firms react to worries about their "going concern" status by opening their accounts, at the NSE all you hear is typical "deny deny everything".

We need to sweep away the deadwood and hopefully come out of the otherside with strongly anchored brokers either via strong shareholding and governance structures or by being absorbed banks...

Nyaga Audit-wonder who was minding the shop

Ksh1.3bn flushed down.
Audit report received in November but still to be dealt with. Cleary Stella didn't lose any money.

• Ntalami knew of the Nyaga issues since 2003, but was either (a) illiterate i.e. couldn't read (b) paid to look away (c) incompetent. This shows the folly of appointing somebody because they are well-known to you and or have some knowledge of the industry. Ntalami has history of straight dealings at the NSE. Not...Peterson Mwangi was appointed under the same system.
• Senior NSE manager used Nyaga to trade illictly. Conflict of interests anyone?
• Several banks helped Nyaga cash client cheques. Again it explains how a significant proportion of customers only ever get their cash when the broker decides its time to do so.
• CDSC employees helped Nyaga trade with clients accounts. I've long feared that this was missing jigsaw in the puzzle of how broker employees have been able to trade with client's accounts. Many a time I've had to get sales or purchases reversed because they were done without my say so.
• Finally, SIB's chairman talking about its precarious financials said “Right now business is so low that we are forced to eat into our own funds,”.

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.

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?

Discount Securities Ltd was naked

Just over 2 months ago, I did a little post looking at how leveraged NSE brokers were. DSL stood because as at the end of 2007, it had done 300 times as much business as it had capital which was just asking for trouble.

Lo and behold, today "its under management of KPMG" an euphism for being under receivership. I still worry about Apex because of its leverage and AIB because things are not good.

Seeing many say its good to diversify, moving brokers or having more than one broker at a time is not a bad strategy.


The title alludes to WB's famous saying about only being able to tell who was swimming naked when the tide goes out i.e. when markets fall.

Thursday shorts

I guess the fact that she has been doing the job fairly competently (and anybody would be compared to Ntamani) should have and has given her a head start for the real position. Insiders will be happy because they are familiar with Stella Kilonzo, but for us investors, I think the preference would have been for an unconnected but knowledgeable individual to guide the markets to the next stage. In anycase, its good to have a lady at the top and I hope she positively surprises...

I thought KQ would tank in its full year PAT given the problems its had (accident, customer service, Virgin), higher oil prices and so forth. Lakini, I think the stronger shilling in the 2nd half of the its financial year helped (I believe KQ normally hedges against a weakening shilling) as did its oil-hedging (fuel expenditure was flat yoy). If you take into account 30% flight occupancy for the Jan and some of Feb, the numbers are very good.

Safaricom continues to find its way downwards. A strong case of not letting in FFIs who think 20% in three months is excellent return and bolt as soon as they get it. I still haven't taken a position. I check bids/offers courtesy of rich.co.ke and they still don't make pretty reading. The price will get to a stage I just have to go in. Safcom has much better fundamentals than a whole slew of other counters. I still recall the fears many had about AK last year.

Fascinating story brewing here. ARM is the young soldier, the pick of the 3 cement counters. But Bamburi is the aging gorilla with 15% stake.

Stockmarket Governance

Although CMA is nominally in charge of the stock market, we must admit that they way it currently operates is almost certain to continue causing us problems as investors at the NSE. Right now we have three issues that I am trying to figure out. One is the issue of refunds which has been a pain since KenGen IPO. One can understand that CBK wants to start doing its job of inflation-control and can't do so until it has a realistic picture of the money supply issue.

But changing the rules of the game on the 80th minutes is a no-no on a football pitch as it should be on the stockmarket. We now have a backlog of cheques and refund issues that will probably take KenGen-type of periods to resolve. 2ndly, you can't have a situation where the institution whose importance to the stockmarket is almost on par with the CBK in its area operating in complete darkness. Why pray doesn't CDSC have internet or email contacts?

Dividends

Does the NSE or CMA have a policy on payment of dividends especially around:

• within what period dividends should be paid?
• how they should be paid i.e. in this day and age they should be done via EFT?
• escalation steps when they don't get paid by the company
• when they don't get paid by the broker into the investor's account
• do they ever enforce it?

The answer is no.

Lakini, looking at the way firms are dealing with dividends and given that the NSE is a fairly ineffecient market anyway (i.e. in most developed markets, dividend p;olicy does impact share price perfomance over the long-term as opposed to the NSE where investors may trade speculatively to pick up divs before taking off), the NSEshould now come up with clear policy around the issues above. Otherwise we have a situation where KRe announced a div on 29th of April appaertaining to 2007 that will be paid in September!

Hongera Adan

While BBK's financial perfomance is nothing to write home about, Adan's actions in helping net one of the NSE's large criminals is nothing but commendable. Gavakiah was probably trying to be too clever by moving customer's money into his own account. He forgets that in countries with strong money-laundering and know-your-customer laws, a bank can become liable if it has not taken appropriate action against such occurrences. The case will hopefully prove that you can eat, but not at NSE investors' expense.

So far, Stella Kilonzo looks to be doing a good enough job and it'd be disappointing if Kimunya didn't for once do the right thing and appoint her to the job fully.

CMA's proposed revolution @ the NSE

1. Capitalisation- Good idea
2. Regular reporting- Interim and annual accounts should be audited. NSE has Kenyans abroad who invest there, hence quarterly, interim and annual reports should also be published online on the broker’s websites.
3. Separation of ownership from day to day business operations: Not sure how this is going to work in practice because without day surveillance, its possible for the CEO to act as a messenger for the owners.
4. Limiting ownership to 25% for each broker/ibank: How will you be able to ensure that proxies don't hold ownership on behalf of original owners?
5. Fitness and propriety: How come there is no mention of required standards for staff working for the brokers/ibanks? For example, there should be minimum qualifications for dealers etc.
6. Tied agents: The requirement that an agent can only act for one stockbroker is retrogressive especially if we are moving to a situation where retail investors will be unable to access the brokers directly
7. Insurance indemnity: Good idea.
8. OTC for shares: When if ever do you intend to introduce over-the-counter trading in SME shares? Kenyans want to invest in shares and as Safaricom IPO shows, the apetite is there. Why not introduce OTC for companies such as CooP, KPA KPL, New KCC, NSE, TC and others that intend to come to the market at some point?
9. Commodities: Again why no introduction or clear regulations of this market?
10. REITS: Kenya needs REITS like a man in a desert. Why know basic guidelines?

What is so difficult about doing CMA's job?

This is a post that I've been meaning to do for a while but I think the timing is apt. I actually thought that Nyaga Stockbrokers was the one that was bankrupt when rumours started last yr about a broker having liquidity issues. Its problems with itchy fingers have been well-known since 2006.

A few things would make sure that brokers/listed stocks never fail. We now have a CDSC and a WAN network which means data gathering is an easy IT affair as it should be. With this in mind, CMA should base its most of its broker monitoring around daily returns from each broker of:

1. Trades done by volume, stock, value.
2. Trades for a 1,000 or more shares or Ksh50,000+ in value
3. Cash balances in and out
4. Settled and unsettled trades
5. New accounts opened and closed

For stocks,

• quarterly earnings update must be adhered to
• firms must give a rough estimate of their forecast earnings for the forthcoming yr
• earnings warnings update must be done if a stock is going to see a 10%+ downward deviation from its earnings forecast
• a quarterly update of any changes in its principal shareholders must be done
• persistent downward fall in share price (10% in two days) must also be explained.

If CMA can't do the above, lets dissolve it and have its duties moved to a single financial services regulator.

Earnings Update

I know neither this govt nor any other has been known for their transparency, but one of the first tasks of a new CMA CEO should be to issue new guidelines on company reporting and relatedly-insider trading. After the credit crunch starting biting last yr, most investment banks and then more conventional banks did an earnings update that confirmed the impact the credit crunch was likely to have on their earnings. This is because it’s a requirement that any material change in earnings must be publicly flagged by all listed companies. Similarly, after a Xmas period that saw weak retail sales, many of the stocks in that sector have done earnings update where their figures will be different from those previously projected.

Post general-election violence and continued nonsensical rallies will affect many sectors. So far only Unilever and CMC have formally announced likely adverse impacts on their earnings. The absence of news from the rest has given way to rumors about the possible adverse impacts within TPS Serena seeing almost 10% shaved off its share price, while others maybe seeing erroneous rises. Some of the falls will be because there is insider knowledge about say the number of bookings that have been cancelled; number of loans defaulting etc.

On the contrary, being transparent about adverse impacts, means investors actually price this in early enough such that the eventual recovery in price will be much earlier than where they until the results are formally announced.

Commodities futures in Kenya

This is a type of product that allows you to leverage your knowledge of agriculture globally or locally to earn some coins by taking a bet on supply-side impact on the price of a given commodity.
EMAC are trying to encourage greater usage of the product and may have something in place soon according to this article...

One problem is that CMA (not for the 1st time), is behind the times. Its next CEO needs to be somebody who either has some solid regulatory experience (CBK) or investment banking experience (preferably outside our motherland), so they can be proactive rather reactive to operational risk ala Francis Thuo or product development e.g. corporate bonds, cds, realtime trading, abs, various types of futures, forwards et al.

CMA: Some good news at last...

I can't recall ever reading anything positive about Edward Ntalami's stint as CEO of the investment regulator. Hopefully, GoK will think long and hard about the man/woman who will steer us forward for the next 4 years. My suggestion would be to go for somebody from CBK who has a lot of experience or more radically, use this opportunity to launch the touted FSA that will regulate the whole financial industry.

Credit Default Swaps

CDS as they are more popularly known is basically a form of insurance that cushions your losses should your borrowers default. Default can be
they stop repayments, they go bankrupt or even companies restructuring
e.g. Uchumi getting a strategic investor.
In return for the protection, the CDS buyer will pay a periodical premium for an agreed period or until the credit event occurs.
Its a useful financial instrument because it in effect creates collateral on a loan that you may learnt. The main buyers tend to be regular lenders
such as banks who may want to reduce required regulatory capital against a borrower
and thus be able to lend more. For the CDS seller typically another bank, but also (lately hedge funds, insurance companies, any sucker coming late to the party) will receive the premiums and in most cases will not have to payout.
The above is a plain vanilla CDS aka single-name CDS, so-called because the reference borrower will be one known company or even govt bond. Today there also multi-name or default baskets which are basically a CDS composed of different corporate bonds (ranging from 5 to 125+ in a CDS index) on which you as protection buyer would take a bet on whether there will be a default within the group or not. A special variation of this type of CDS is the nth to default CDS. Here as a seller of the CDS, you get an opportunity to choose after which number of defaults you'll have to payout. The difference with the multi-name is that your payout for the nth to default is unlimited to the actual name that defaults.

The product should have an appeal to the fast-lending Kenyan banks and especially those who lend to corporates, the only downside being the usual trust issues.

Reading accounts getting easier

Doing accounts for UK companies with a US listing must have been a nightmare over the last few years. In addition to reporting under the new IFRS reporting standards and on US GAAP (generally accepted accounting principles), some also had to do UK GAAP if the CFOs were the pedantic type. So 3 three accounts for one company.

Sense seems to have prevailed and the SEC will now allow UK companies and others to file their US accounts under IFRS. This is primarily driven by the fact that London is now more attractive for IPO listings than ever.
Its also good because, this will really help speed the acceptance of IFRS worldwide which should in turn mean that we as investors can now be able to compare companies across countries seamlessly.

I believe some Kenyan companies are already reporting to IFRS.  Jimnah was recently complaining about the lack of foreign buyers at the NSE.

Having all listed firms do IFRS is one way of attracting these buyers. Over to you Jimnah/CMA/KRA...