NSE Banks: Q1 2009 Results

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

Good outliers:

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

Bad Outliers:

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

Q1 results for NSE Banks

Q1 results will shortly be upon us. In bullish times, you tend to get pretty much every MIMS listed firm releasing some form of quarterly update. However, the opposite applies during these times of the bear. With the exception of banks which have to do so due to their mandate, I expect to see very few quarterly updates. In any case, for the banks, I am predicting near flat results of several banks with the usual exceptions. Loan defaults will be a feature of every earnings release this year from any bank and one should expect nasty surprises on the P&L depending on how well the particular bank has provided for npls so far.

Equity up 40% on Q1 2008 just because it has a bigger loan book compared to last year. I think its Waterloo moment will be Q2 when I can’t see it going higher than its Safaricom quarter of last year. Will start benefit of push in Ug by Q3 and beyond
KCB up 20% though I am expecting it to surprise in a positive way given its larger book vs q1 2008.
NIC, DTB 20% and 40% up respectively.
CFC down on Q1 due to the insurance business. Think link to NSE via its broker as well insurance arm.
BBK and Stanchart-I am expecting one of these to be down on Q1. Only, slightly but down nevertheless.

Kenya Listed Banks: Comparison of 2008 Results

• An almost positive correlation between low cost/income ratio and high EPS.
• Return on capital is a bit of a misnomer as it sometimes represents unspent capital e.g. Equity and thin capitalisation (StanChart and BBK).
• Tell me how BBK and Equity have similar proportions of NPL to loans and such a difference in terms of LLPs for 2008. Wonder what Co-op is upto- it actually reduced its loan loss porivision in 2008, yet it has the highest proprtion of bad loans. I am assuming some of this is historic...
• Some banks lent out a lot in 2008-a proportion of these loans may turn bad if economy doesn't recover in '09.
  
• Fwd P/E of 6.3 shows Equity has among the cheapest bank stocks at the NSE today. Will wait for it to drop once spilt is effected. And KCB and DKB are cheaper too.

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…

Results season: Things to look out for

Most of the full year results will be released within this month and next. With this in mind, I'll be looking at for following in addition to the usual yoy growth in PBT, cash flow, debt.

Banks:

• Growth in other income: As long as CBK is determined to keep interest rates low and interest margins remain under pressure, banks need to diversify their income. Equity, KCB, StanChart and to some extent, NIC should see a very good year given entry into custody business by Equity and fx volatility for the other 3.
• Loan loss provision-most banks grew loans hugely in 2007 compared to 2006. Then the economy ground to a halt in 2008 and has since not really resurrected. My expectation is that loan loss provision which in ordinary times accounts for an average of 1% of the listed banks total loans will account for around 3% of the additional loans that were given in 2007 vs 2006.
• Risk management- given CBK's intentions on Basel 2and the world we are in now, this one will be of particular interest to me. Banks need to be clear about the risks they face and the contingency plans in place.
• About time HFCK showed some positive momentum.

Of the other financials, PanAfric will have benefitted from its associate's strong showing in Q3.

Industrials:

Impact of higher oil, electricity prices and a weaker Ksh/$ rate, makes it harder to call this sector. ARM is of particular interest especially keen to know if its gaining cement market share against the two. EA Cable's 2nd half should much be improved given copper prices have gone through the floor.

Commercial and Services:

With the exception of TPS (will have a horrible yr given its start), the rest should as minimum not see lower than 10% growth compared to 2007. CMC and Car & General have already come through very strongly and it shouldn't be different for the others. AK is of particular interest as it needs to show momentum ahead of the fibre optic arrival in Q2-it will also be interesting to see how its residential business is doing.

Forward looking statements:

NSE shares rarely do this, but it would be good if counters gave a view on 2009.

2008 Investing Highlights

This was me end of June, this is me today:

Kenya
Sold: In the money (NMG, TPS, ARM, NIC) & Out of the money (BBK, EA Cables)

Reduced: KCB

Switched to: Equity, Cash

Hold: Equity, AK, miniscule KCB (2,500 shares) & Safcom & Cash

TZ
Bought: Dar es salaam Community Bank

Zambia
Bought: Pamodzi Hotel

Theme has been to move from diversification of risk to concentration of gains. Has it worked? Yes and would have been even more fruitful if I had kept to one of my golden rules of never adding more shares unless the price of the said stock is lower than my average cost so far. I got punished for buying AK at Ksh33.50 thus driving my average for it to early 20s and Equity at Ksh301 and Ksh250 thus driving average to mid 120s.

Overall for the year: average i.e. below 30% gain. Had to rush out of BRIC nations just to stay in the money and NSE has been so-so but thankfully my offloads were all in July/Aug time.

Other investment decisions:
Good ones: Missed out on SIB’s private placement. Having opened a trading account and just about to send the funds to buy some shares at Ksh120, I once more request ed a copy of its accounts. Still not received even today. In the meantime, I now hear that the initial placement failed and subsequently the shares were retailing at ksh30!
Tough ones: After sweating to set up the investment club, I decided to move on because of strategic differences. So why I my still blogging as KCIG? Investment club changed its name.
Bad ones: Hesitated when was Equity was Ksh116…

Investing resource: Thanks Aly Khan for the live prices streaming. Some of my last minute price adjustments relied on the live feed.

Key learnings: Self-discipline, early bird mentality and thereafter liquidity and investors confidence are the key ingredients that turn good company/market fundamentals into investor bounty.

NSE catch up: Co-op lands makes a splutter

A mild short week at the bourse with all eyes now on Feb/March results season. It was thus a good time for Co-op to list. Funny games as always. The stock was under-subscribed and the minute it lands, you have investors buying Ksh11, 10 i.e. above the Ksh9.50 price. Does it make sense? As mentioned last week, real price will be discovered in the next two months as the immobilised (exchanged from certificates) shares find their way into the market. Most were bought or valued at the equivalent of Ksh1.10 earlier this year...

In other news, NIC is going into TZ. It has put in a bid to acquire 51% of Savings & Finance, a medium sized bank in TZ. A word about TZ banks. Most tend to belong either to community groups or certain locales. They therefore rarely have the extensive branch network that one will see with Kenyan banks (only three have more than 10 branches). S&F only has 3 branches but these are in the main towns. NIC becomes the 3rd Kenyan bank to step into TZ after DTB and KCB.

The battle for the Mutomo coal deposits continues. Why do investments such as these which will provide much-needed employment take so long to get off the ground?

And finally: Xmas away from Kenya tends to be a fairly downbeat affair especially when as I did I spoke to relas back home who were just finishing some mutura. So its just as well that Mr & Mrs Muiru have made sure Kenyans can at least get some of their favourite foodstuffs locally via their Wahu Foods shop. Wishing them much success...

NSE shares I am looking to buy

A general comment. The NSE may fall a bit more, but I don't think the trend will last another month. Unless Co-op comes in and inflation stays flat at 27.6% or goes higher. Its therefore time to start looking at what are the good shares in the market:

1. KCB-Its annualised P/E for 2008 is around 15. The bank will start benefiting from its regional growth from 2009 and beyond. The only spoiler (which will impact the sector anyway), would be if the economy turned negative because of inflation thus increasing non performing loans.
2. AK- Fibre optic cable will be with us in 2009 in one shape or form. AK is an established player in the market already and in the first lane to take advantage of the faster, cheaper internet network. If it can't, somebody will buy a stake in a similar vein to ScanGroup.
3. Equity- The share has been good to me and remains my favourite despite the taking a turn since that announcement. Its annualised P/E still looks high but the bank has 3 more years of 60%+ growth to come all at a lower tax point and it would be churlish to ignore the opportunity.
4. DTB- Has some of the KCB ingredients (strong and aggressive regional franchise) though not the same balance sheet or branch network. Its slowly standing out in the mid-tier because its able to source funds in different ways from say NIC which doesn't have the branch network or the international connections.
5. TPS- Having logged out, I might be tempted to get back in should the price go below ksh58 (which would be its lowest for this year). Great hotel business and a bellweather company for its industry.
6. EABL/NMG- These two are back ups in case the NSE confounds my expectations and continues to go downhill beyond 4,000.
7. Industrial- Not touching especially those with a high energy cost component (whether fuel or electricity). Electricity price rises will burn margins.

Kenya Listed Banks: First Half 2008

Update from this and this. I've removed CFC Stnabic because their numbers don't make sense i.e. no restatements as required.

Some stocks are very cheap. Notice KCB's PE is half that of Equity and then think where both will be at the end of 2009...Supply, number and calibre of investors who hold either stocks may have played a role, but fundamentals have also influenced.

Although I normally invest on fundamentals, this article reflects some of the thinking around some of the stuff I've done so far in this 2nd half of 2008. The world of investing is changing...

NIC so-so, KRe good upside for H1'08

In a way its good because those that disappoint are being compensated by those that surprise. NIC disappointed because KCB had a very good half (I tend to look at the base from which the company has coming from). Lakini when you look at the recent steps, you realise that a smaller branch network will hurt a bank when there is a liquidity crunch.

KRe, I expected worse results because of having to cover-off Jan/Feb claims, but it looks like its come away unscathed. Fundamentally, it looks like a business that was just looking for solid management. At current price, the share is clearly good value.

Classic Dilemna: Diamond Trust or NIC?

Both mid-tier banks with niche markets, but are now gearing up to generate revenue from areas they previously didn’t do. DTB from East Africa coverage, NIC from brokerage.
Both with almost matching P/Es and dividend yields.
Both medium-level performers i.e. neither bullet-train performers like Equity nor duds like BBBK.

Bottom-line: it’ll come down to:

1. First quarter (2008) performances-i.e. survival rate against significant external environment “ishoos”: NIC 31% YoY; DTB 60%
2. My expectations of rest of year: NIC will book significant upside from Safaricom IPO and NSE consequent volatility in stock-trading; DTB will reap from is expansion into EA.
3. My expectations for the duration of the presidential cycle: NIC- I like the online banking venture (yes it’s limited by internet penetration, but think post-fibre optic). Also, possible close association with ICEA. DTB-I like the expansion into Burundi, proceeding TZ (where DTB is majority shareholder of subsidiary); Ug (holds 27%). Both are expanding branch network so as to increase deposits.
   I normally prefer investing the capital in the stock with bigger prospects, but on these two, I may just have to spilt the capital.

Hmmm. Interesting minister we have for National Heritage

NSE Stock Portfolio: 6 months into 2008

Generally, I haven't traded much this yr, not because of lacking opportunities, more because of a busy schedule elsewhere and an evolving strategy. From buying and holding for the whole presidential cycle, I am now more inclined to buy, and hold as long as the stocks are meeting the short-term mini-goals i.e. FY profits etc.

Bought:

1. During the January clashes: Equity@125, TPS@58 and Barclays@65
2. Nation Media Group@326 just before it announced its results
3. A few Safaricom during the IPO

Switched: after its Q1 results, sold-off my whole Barclays portfolio and switched into Equity@250 and Access Kenya@33.50

Overall Portfolio: Also includes ARM, KCB, NIC and EA Cables.
Overall trading from H1 2008: Very good returns....

Running the ruler over:

• Nation Bank of Kenya
• Safaricom while waiting to see if it'll get cheaper than ksh7.40.

PS: The above is my own personal stock-trading account. For KCIG, we outperformed the NSE for H1 2008

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.

Monday Shorts

Interview with stockskenya's fellows. Its a pity the interview is a bit on the short side and looks like the interviewer wasn't really sure what they did. Kudos to Mugambi and co for their work.

UBS is in fresh funk having now had to write-off an additional $10bn of those lousy home loans. This is equivalent to its 2006 profits and may mean it won't be making
 a penny this yr neither. Luckily for it, those cash hoarders in Middle and Far East will inject some 
of their easy oil money for a 12% stake. To the Americans and other western fascists, thank God for the
foreigners eh? Despite being the world's largest wealth manager with around £75bn in assets, UBS has never cut it in the investment bank world. The Russia/LTCM crisis, UBS had to write-off some serious bn, the hedge fund mess, UBS shut down its proprietary hedge business and now the credit 
crunch mess finds at the top of those writing off. Stick to wealth management.

One of amazing things about the UK-ians is their total lack of context. In the last couple of weeks, you'd have
thought Ricky Hatton was going to fight a jailbird or a complete novice in Floyd "Money May" Mayweather jnr.
The dude has always been rated among the Thomas Hearns and Sugar Ray Leonard's of this world so to
disrespect him as much as the media did here lacked context. Anyway, most papers today were eating massive amounts of humble pie led by Ricky Hatton himself who henceforth will use the words clever and Floyd Mayweather interchangeably.

NIC completes its entry into the NSE. Now let the fun and games begin seeing as these guys already have distribution.

Bring Safaricom already! Cash is awaiting its target.

Is NSE getting tired of retail investors?

• A restricted portion of IPOs being reserved for retail investors and subsequent minuscule allocations.
• Strange allocations for rights issues (NIC had 49% oversubscription thus investors would have expected to get around half of their order, yet anecdotal evidence suggests that most retail investors only got around10% of their order).

There are legit reasons for wanting fewer shareholders;

1.  Less price volatility-apparently QII are long-term investors
2. Less admin costs in terms of annual reports, AGMs

Yet, its no coincident that most of the global companies encourage ownership of their shares. The reasons are numerous but here is a few:

•  Marketing of the brand: if you own Barclays shares, and they are performing, it will be one of the names that resonates when you are looking for banking, employment. Yani its part of your marketing the company
•  Share liquidity: if a share is not regularly traded, its difficult to see how it will rise
• Corporate image: being seen to have many stakeholders is good for business especially where it involves mass retail as most do in Kenya

For the brokerage business, high transactions mean more fees so encouraging growth of retail investors is a no-brainer. Yet many have customer services straight out of the civil service.
For GoK, encouraging share ownership is a surefire vote winner. With the proviso,that you know what you are doing in the economy arena.

Bottomline: NSE, encourage Kenyans to the bourse by having preferential treatment of your repeat customers tomorrow and the day after namely the retailer. The NSE and by extension our economy will grow because more of us have a stake in the growth of both. And please define what is a QII (fund managers
pension funds and insurance companies are the ones I have seen so does that mean that Baraka fund  who I know are just an investment group (albeit very moneyd one) compete for the same shares as Otieno or Kamau?)

More Q3 results

Athi River recorded 85% growth in PAT, aided by with T/O growing at 55%. Note that ARM is now benefiting from increased cement capacity its new plant. Secondly that it also generates  significant chunk of its revenue from building-related materials rather than cement. Its cash flow has improved immensely from prior yr when it was financing its new Clinker and servicing borrowing. Adding to this momentum is the deal in Kitui for coal and limestone. A good growth 
outside of the banking sector.

BBK saw 12% yoy growth for 9 months of 2007 with income growth being matched by expenses.. Hopefully at some point we'll start seeing the impact of its loan hawking activities on its P&L (an worryingly, on its loan loss provisioning). A nice defensive stock if bought under Ksh75.

NIC (one of my four long-term bets in banking sector), saw 44% growth. int Its income breakdown between interest income andF&C remains a puzzle to me. Compared to its half year results, where its income was primarily derived from NII, the 9 month numbers would almost suggest that it made a loss on interest income. I guess there must a lot of latitude on income claissifcation in Kenya. 18% income growth of was strongly supported by flat expenses. With funds in the bank (I expect the rights to have been massively oversubscribed because of the 2:1 bonus issue) and revenue augmenting moves, NIC is a must buy.

DTK, (my other bet for long-term in the banking sector) saw 67% growth with 71% growth in loans and advances generating 57% interest income growth. DTK was in the market again to raise funds (will just about get full subscription because of compe from NIC) as it looks to expand. Another bank that is shedding its traditional image in its hunt for customers and growth.

Kenyan Banking: Even more deals...

The next stage in the evolution of our banking industry is definitely on with bank after bank either recapitalising, chasing new ventures or markets or looking for partners to take them to the next level.
In a major/ surprise/shock/disappointing move, Equity will seek capital help from an outside firm. The move is puzzling because I think the NSE has a lot of liquidity if that was what Equity needed if not just now , next year. My guess is that its partly political insurance and partly a reaction to BBK's
move last week.
NIC has also confirmed the rumoured move for Solid Investment one of the smaller brokers at the NSE. Following its failure to get the Francis Thuo seat, I think this move even more than that of Renaissance will really shake up competition at the NSE at least in the next 6 months or so before demutualisation.

Sasini joined BBK with its own Ksh600m bond. At this rate, Safcon may end up being undersubscribed...not.

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.

Week 36 @ the NSE

NSE went up 200pts in the week driven apparently by peeps who got their refunds and decided to splash out on the rest of the counters including KRe-that was clever move to announce the results just after listing. Some of the counters are now showing signs of the exuberance that was there about this time last yr. Exuberance can be another word for manipulation or good tidings being expected. The following have puzzled and made sense:

NIC-had already gone up by almost 70% from the price on July 25th confirmed plans to do rights followed by a bonus. What I don't understand is why if they are going to be selling the rights shares@Ksh70, peeps are running around trying to get some at Ksh180. Why not just wait post-bonus. Not complaining though...
DTK-in contrast, guys haven't really chased its shares despite it being a better prospect in my humble opinion
EABL-This tends to be a fairly dull share, capital gain-wise but this week has moved up after announcing a bonus issue and a tasty dividend. With the amount shares it trades, watch it go back to its customary 2 pts up 2 pts down post this little excitement
AK-one can appreciate the excitement about its recently acquisitions (Today Online and Open View), one should however also prepare to exit as soon as Telkom announces its strategic partner and or the cabling projects start giving firm dates of arrival on our shores.
KPLC-no comment, except look at preference shares (debt), transmission losses, GoK vote-buying tactics et al. If GoK wants the share to be more tradeable for wananchi, let it offload its equity so two birds in one go because it will remove the political risk attached to KPLC's share performance.