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...
4. 
   

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.

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."

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.

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?

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

Similarities:
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?

Differences:
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?

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.

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.

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.

Indispensability

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

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...

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

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.
OFS:
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.

Diverstiture:
Kenya Wines, hotels owned by KTDA

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.

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...

Happy 2009: some predictions

Investments
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

Economy

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

Politics
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.

2008 Blogging Highlights and others

2008 for us Kenyans started off nightmarishly and disappointingly us bloggers retreated into our tribal cocoons or kept quiet as our nation tore itself apart. So from a Kenyan blogging point of view, its difficult to pick any blogger.
It was the year bankers proved they were human and there was no better blogger at explaining how human than Robert Preston. This is a compelling read of the week the whole UK banking system was a hanging off a cliff.

Thank you to Koffi Annan (I am sure at the end he must have beeen thinking how do Kenyans cope with these guys?) and Kikwete for the peaceful solution.
And to ”our cousin” Obama for another positive.
There were also positives for Kenya in the sporting arena with Harambee and our runners at the Olympics.

From a personal pt of view, the 2nd half of 2008 was fairly challenging. I lost some close relas and a friend. My employer went bankrupt. I know many others went thru far far more challenging circumstances so as I look back on the full yr, I thank God for being in my corner kabisa and bringing us thru…

As a blogger, I am sure there are ways that I could improve the blog and I really welcome any suggestions/topics from readers...

2009 is shaping up excitingly for me

I want to wish you all a happy, prosperous & adventurous 2009.

2008 at the NSE: Contrasts

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.

Equity's large share trade today

A big Ksh2.5bn worth of Equity stake exchanged hands today. Based on mystocks live stream , it almost certainly looks like one of its foreign shareholders selling to a domestic shareholder. Helios I believe has a 3-5yr lock-down clause. So that leaves either Africap (which is no longer bound by the initial 2yr lock-down) or some others who were scooping up those shares sold in batches oif around 800k around the time of the August lock-down.
The transaction equates to 15m of Equity shares or 3.88% of its total shareholding which I believe falls under the 5% threshold upon which Equity is obliged to lay bear the details.
It'd however be of interest to the shareholders and I am sure the NSE at large, if the details of the transaction were to be made public. For the FTSE, I think the threshold is something like 1% before this information is revealed.

Several other shares also saw foreigners exit for what I believe are year-end book closure purposes.

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...

Merry Xmas

Enjoy your goat responsibly,,,

Why I blog about Africa

The nairobi banker has tagged me on why I blog about Africa...

I blog about Africa or more accurately Kenya, because despite living in the UK for 10+ yrs, I am the quintessential homebody. You can take me out of Kenya but you can't take Kenya out of me. So today I blog about Kenya and Africa because its one of the best cures for homesickness that I know.

I blog about Kenya and Africa because I want to strongly counter the negative vision of Africa that the West and its media likes feeding us. Some of it maybe true, but there is much more positive stuff that they could also report on, but don't have the gumption to.

• What about the Kenya/Africa that has produced Mpesa the first of its kind in the world?
• Or even Equity, a bank that has literally turned Kenyan banking upside down so that banks are now genuinely interested in the low working class?
• How about the upcoming fibre optic cable and consequent explosion in internet penetration?
• The rejuvented economies of Ug, Angola, Mozambique
• The peaceful, democractic and prosperous Botswana
• Or the fact that for every Kenya/Zim election fiasco, there is a Ghana/Zambia election pass?

I blog about Africa because it’s the future, most other places have already peaked and we are just building up...

I also blog as a way of networking with fellow Kenyans/Africans and specifically those interested in investing and growing our economies.

And now I pass the button to:
friend and fellow blogger, Ssembonge;
missing in action Pesa-tu/Realist;
And new comers Hatua and Huduma Bora

NSE Catch up: Pre CO-OP Listing

If you bought:
Centum on Monday-you'd have made 15%
Sasini (12%)
But
Rea Vipingo would have lost you 12%

Does this mean NSE recovery is underway? Well, maybe-ish (I know, i couldn't get more ambiguous than this). I have noticed a recent trend in IPOs that just before they are listed to trade, the NSE always goes up. Some of this upward trend might be circular trading which is meant to generate cash to allow investors to buy into the newly listed share. Fundamentals are also looking a bit more stable but only if we assume that recent gova moves of reducing banks cash reserve ratio and to contain inflation by lowering the cost of feeding on ugali and also lowering electricity costs will work meaning that investors can be a little bit more positive about 2009 earnings. Volumes remain patchy illustrating the fragile confidence of majority of investors.

Sasini posted very "good" numbers. Until you took a closer look and notice the biological assets pick-me-up. One of the reasons that many financials were/are against IAS39 is because by forcing them to mark to market various assets, your P&L goes up and down like yo-yo especially in the transition year from boom to bust as 2008 has done for Sasini. IAS41 which governs agriculture companies has a similar effect. The best solution would be to do the mark to market but put the appreciation in their revaluation account which has the same impact on capital anyway. Something in your financials has to reflect what you did for a given period and an asset revaluation doesn't.

Isn't it time KenGen stopped its annual whining about its ksh75m AGM costs and just emailed investors the annual reports?

Still don't understand why the Mpesa audit and court is happening now?

Co-op: Lands on Monday. Recalling Everready pre-Xmas IPO two years ago, I don't expect violent movements either way though sellers may try to force the issue. The interesting play will be when class B shareholders can immobilise their shares and start profit-taking in earnest...

Joint venture opportunity: I am looking for somebody with knowledge or working experience of doing credit ratings or credit scoring to work with on a joint venture. And you are currently based in East Africa.

So was Goldman Sachs wrong on oil?

Earlier this yr, Arjun Murti an oil analyst at GS was said to be as a strong driver of oil prices as OPEC's Secretary General mainly because GS had a very strong commodities business but specifically strong reputation in oil futures and derivatives. So when he predicted oil prices rising to $150-200 when they were $100 in March, what did investors do? Dived in and by May, GS was comfortable to put a duration on its prediction i.e. between 6months-2 years. The net effect was that oil prices did gallop on their way towards $200 as speculators now threw themselves in in order to pick up $40/50 lost in equities.

In June, everybody recognised that the credit crunch was real and here to stay. Suddenly some of the fundamentals that underpinned the initial rise in the price didn't look so strong. These were BRIC's growing middleclass and possible Middle East escalations. Then the speculators starting having to find funds to support capital requirements for losses elsewhere and of a sudden we had a drop off the cliff.


However, what does the future hold for oil prices? The price direction will in my opinion depend on the following:

i) Substitutes (ii)Reserves (iii) New oil fields (iv) Drilling technology
(v) Political dynamics in the ever exciting ME (vi) expectations of BRIC recovery
(vii) OPEC production decision

Bottomline: The current price is below the equilibrium if you look at the average price in the last couple of years (I believe the prices prior to April 2007 accurately reflected fundamentals). As such, I'd expect prices to go back upto to $60+ by Q1 of 2009.

Acting GM confirmed as CEO at EA Cables

George Mwangi has been confirmed as the CEO to replace (the irreplacable?) Mugo Kibati. One thing at least he has some experience of EA Cables and of the seat having been in acting capacity for a while. I wondered why the share has been gaining in recent days... Copper prices have improved of late, so I expect better Q4 than earlier quarters where EA Cables was rescued by it regional reach.

Pyramid scheme: Wall Street style

When they caught the owner of this company he didn't even deny it wasn't a Ponzi. He had been promising a guaranteed return of 11% per year which in itself should have raised a nonsense alarm bell because you can't guarantee gains in a stock market.

Appropriately for his name, he has really Mad (e)off with his clients money. The list of his victims reads like the who is who in banking:

• Santander-one of the few strong European banks, has been buying up falling UK banks on the cheap
• BNP Paribas
• HSBC-May yet have to do rights issue if this carries on
• RBS- now knowns as UK National Bank
• Unicredit-Italian bank
• Nomura-now known variously as Lemura or Nohman after buying half of Lehman Brothers
• Man-One of the largest futures brokers and investment managers in the world
• Reichmuth & Co-Among other Swiss private banks that gave Madoff $4bn+
• Any self-respecting new yorker who was filthy rich and wanted hedge fund blagging rights

Its been the kinda of year that would make any self-respecting banker keep schtum about how he earns a living. The key learning for any stock market investor in anything apart from govt paper. Avoid anything you don't understand. If it looks like gold, glitters like gold-its still not gold...

James Mworia, youngest CEO of a listed NSE firm

At 30, he has achieved what many dream of achieving in a lifetime. He starts today at Centum at a time of great uncertainity in the economy/NSE. Kenya's economy will either enter a period of sustained growth driven by technology, our strong human resource base and good leadership or remain mired in mediocrity. Should it take the former route, companies like Centum and the NSE generally, will do well. Or vice versa.

Centum does (in my humble opinion), need to reduce its NSE holding and diversify to the rest of the East Africa region.

Wishing him all the best in his new role.

Is this 1980s in Kenya or 2008?

Picture courtesy of Daily Nation

Are we regressing? Again

• This is wrong. Next we'll get arrested for wearing t-shirts saying we can't stand Kibaki and internet sites will be banned.
• Media bill: GoK has tried to bring in this for a few years and its finally had it passed in bunge by 27 mps this week. Std raids and the like will now become common under guise of national security (which incidentally is the words Michuki used in 2006). Hidden under there is a piece allowing Posta to open your letters.
• No tax paying MPs: Ksh 600m generated from this tax revenue could now have been used to fund the so called "ugali" subsidy. Yes they've not been paying taxes for eons, but given the credit crunch, they can for once be like common wananchi. And please, don't tell us about how they've invested to get to Parliament. Parliament should be about serving the people who elected you not getting a return on your outlay.
• 42 cabinent ministers: And we are surprised we have a budget deficit?
• "Ugali" subsidy: Who will willingly pay ksh72 when they could pay Ksh52 for the same packet of ugali? I haven't seen a worse "bandage" fix.
• Mau: Very sad that this has even become a point of contention.

NSE catch up

Slight recovery this week or taking of positions before Co-op is downloaded on 22nd? Unless investors are reacting to the lowering of cash ratios and anticipated drop in inflation, its hard to see where a recovery is coming from. The other reason could be investors buying early before the expected rise in the March results season.
Other themes:

• Brokers in trouble: This is not breaking news but lower volumes are now manifesting themselves in brokers laying off staff and being massively in the red. Licence renewals are due shortly so lets wait and see how many Stella Kalonzo witholds.
• Everready not ready: Profits down by 118% due to lower sales. Cash flow looks better though still positive and it'll be helped by lower Zinc prices. Why doesn't just sign an agreement to do distribution of Chinese batteries? Centum still has a stake...
• Kenya Pipeline is finally contemplating listing. Good news... Though the 2008 numbers aren't making good reading, the dividend is something else.

Macro thoughts: I was puzzled by CBK's move last week given its rosy pictures and also current inflation levels. Jimnah's widely publicised article now makes the CBK action add up. The economy as I've intimated is in trouble. Some of his ideas make sense (expansion of public works), others are just self-serving and hypocritical (he was lead broker/advisor et al on Safcom IPO) and others don't make sense (controls on offshore investing). Bottomline, gova is broke so opening t-bills to a wider audience makes sense. Inflation remains a concern because there is no real evidence that agricultural supplies are improving and oil prices do remain sticky. I expect the economy in 2009 to grow at a similar to this year.

Happy 45th B'day Kenya:

Not much to cheer about this year, but we thank God we still have a nation called Kenya. Better times to look forward to hopefully.

Credit Bureau regulation to grow credit in Kenya

The passing of the Credit Reference Bureau regulations earlier this year went largely unnoticed for some inextricable reason. When it comes into force from Feb 2009, it'll allow the setting up and licensing of credit bureaus as well as formalising the mandatory requirement for all credit (loans and overdrafts to you and me) providers in Kenya to share information on borrowers. If used to its full effect, it will help weed out serial borrowers and defaulters i.e. those who borrow from B to pay A and from C to pay B and A. It'll also make it easier for banks to distinguish or classify borrowers via their credit profile and therefore hopefully make competitively loan pricing a reality in Kenya. The end game will be if you as a borrower don't have a credit profile, you'll be charged higher interest rate.

As of now, I am only aware of one strong credit bureau (CRB Africa) which seems to already have been accepted by banks and has had a foothold in Kenya and several other African countries. Ug recently kicked off the process but given its banking industry is some years behind Kenya's, it remains to be seen how useful it'll be.
The other important service which will hopefully grow out of this regulation is credit rating of potentially-listing companies, saccos, local councils and important but not listing companies e.g. Uchumi, RVR, Kenya Pipeline etc.

CBK lowers t-bill minimum:another investment option

CBK has decided to join other financial entities and mass-target the lower pyramid levels in our society. Its decision to lower the minimum amount required for investing int-bills from ksh1m to Ksh100k will give access to the likes of you and me. It is an excellent savings mobilisation idea but will impact:

• Banks:who offer next to nothing for fixed deposit accounts.
• NSE: With a guaranteed 7% per year, some investors might run away from the choppy waters of the NSE
• Real estate: Possibly especially when one takes into account initial outlay

However, its not an investment option for those wanting to grow their funds aggressively but only for safety purposes.

You'll need to open a CDSC account with CBK , you can buy t-bills once a week (I think its every Thursday) and you get interest paid every 3 months.

Want to know more? Go here...

Food security: some ideas

The second part of this post looks at some ideas on bringing about food security. And their pros and cons:

1. Paying farmers market prices or improved prices: The two are not necessarily the same but, we can't expect that farmers will farm at a loss for even 2 or 3 years in a row without abandoning the whole thing altogether and joining their brethren in the slums. In particular, young generation who are naturally drawn to lights will have fewer reasons to choose agriculture over urban setting if the industry doesn't pay. The milk industry wasn't revived by writing off debt, but by paying famers for their milk on time and decent prices. From getting ksh9 per litre every 3/4 months, they now regularly get late teens or early 20s per litre paid at the end of the month.
2. Encourage the growth/stabilisation of co-operatives: 3 words. Economies of scale.
3. Commodities exchange: There is nothing special about a tea/coffee exchange/auction market. We should also have one for any other agriculture commodities that we deem important for our economy. Starting with maize...Probably not useful for perishable goods but can be captured as a signal. Would be useful in meat/milk sectors.
4. Streamline the industry: the mushrooming middlemen phenomena will lead to a fragmented agriculture sector. Economies of scale is no respecter of industry. If farmers can't or don't want to grow together, they will be brought down separately.
5. Growth of traditional foods: knowhow of how and when to grow is still there. However, there are reasons they've been abandoned. As an example, growing up, sweet potatoes and arrows roots were in abundance. No so today because arrowroots for example perform best in near swampy conditions which have dried up. Cash has also played a role. So why not create an active market for these crops. I've never seen Uchumi, Nakummat stock traditional foods (millet, sorghum, ndengu (until recently), arrow roots, cassava). This despite the fact that so many like these foods as shown by their love of traditional (tribe) nights at Pan Afric and elsewhere.
6. Promote Kenyan crops: cookery programmes that show peeps how to cook certain crops will encourage their consumption
7. R&D: Kenya has 20% of land that is arable i.e. farmable without significant intervention in form of irrigation and the like. To feed Kenyans, we must produce more per acre at a rate that keeps up with our population growth. We are not doing that. We are doing the opposite in fact. KARI was setup in recognition of the role of agriculture in our nation. Who evaluates KARI? What it its success rate in developing and disseminating the following to farmers:
   -drought resistant crops and animals
   -higher yielding crops that require less fertiliser
   -fast growing trees that don't require the water uptake of such trees as blue gum, but give the country the same resource i.e. rain capture, usage potential
   -all year round crops that feed the nation. Maize can't be grown unless in the rain season or harvested unless its hot. Any way of reversing this?
   -popularising traditional crops
   You'd be surprised that a lot of the above are in its targets, but I didn't see the corresponding side i.e. what has been delivered?
   

Safaricom brings Mpesa to the UK: but thru Western Union

After almost 18 months, Safcom has presumably given up going its own and will now deliver the service via the rather expensive Western Union service. We can currently send money via Western Union to its various partners and agents in Kenya. Now we'll be able to send cash to our relas’ mophos direct.

For experimental purposes, once the service comes to London (I've no idea why they chose some elementary place like Reading), I'll send some chumus to somebody huko mashinani to see how well it works.

I believe, the direct route was opposed by banks who know they can't compete. Most charge no less than £18 per transaction (Western Union even more e.g. £21 for £200!) forcing many of us to find ingenious ways of getting remittances home. My favourite is opening an account I don't need for a rela home and giving them the card. Exchange rate is lousy but otherwise its free!

Presumably Safcom will get a cut of the fees, with majority being shared between WU and Vodafone.

The economy & married life

Apart from the obvious and expected adverse economic impacts, a recession or even a credit crunch has adverse impacts on families. For example, it’s generally acknowledged that the downtimes in our Kenyan economy especially in the 1990a really messed up families with either spouses have to emigrate to greener pastures. Likewise in the UK, marital counsellors are saying they've seen numbers go up by 50% since last year. Although there might be other reasons for this, the most likely reason will be the credit crunch followed by the current recession. Job losses and reduced financial flexibility do put pressure on all of us, but for families this can be augmented by the fact that one also has children to take into account. They rarely understand downtimes! Saw what are some good practices to reduce such stress:

• Financial lifeline: Where possible look to save/invest 6 months worth of salary when employed. This should be over and above regular savings and investments. This applies to anybody that is dependant on employment for 95% of their income so not just families. Having such financial back up will cushion the shock of suddenly losing your job or even having your breadwinner pass away.
• Practice financial transparency: Many of us know of families where the passing away of the breadwinner has lead to financial hardship because the said breadwinner kept financial dealings secret from his/her spouse. What about cases where one of the spouses is suddenly discovered to have amassed debts running into millions or thousand of pounds? It also lightens the decision-making when situations are critical i.e. job loss or death if whole financial situation is known.
• Insure big ticket items: Big ticket items is an Americanism that means items that take up a high proportion of your monthly/annual income. For us Kenyans, medical expenses can turn out to be a huge expense. Insure your family and your parents if you can afford. In the UK/US, building stuff can turn out to be expensive e.g. heating systems, building repairs. One should also vet insurers wisely to avoid lengthy claim period.
• Make a will: It may never happen, but we all know of cases where somebody has passed away very unexpectedly and leaves a financial mess because coupled with financial (or other) secrets, he/she didn't assign beneficiaries to her/his financial estate. It does not have to be detailed, just name the beneficiaries.
• Long-term financial plan: Having some goals for the next 10/20/30 years e.g. type of house, education, leisure activities, work/life balance will help you as family figure out how much and when to invest/save. It reduces the impact of the unexpected on your financial life.
• Loans: For consumption are to be avoided. I'd go as far saying that loans for anything apart from your home are to be avoided. Unless the margin is guaranteed.
• Save aggressively in good times: Bears repeating, but if you are aiming for (1), you will have to.
• Financial knowledge: You don't have to know eps, p/e, but it would help if you knew the implications of a cut in interest/mortgage rates on your financial situation.
• Record your expenses: And Income: If you've ever gone to a decent/good bank for any form of credit, it'll ask you to provide income and expense summary. The reason is simple. Knowledge is power.
• Live within your means: Goes without saying it, but if you are used to dressing in Burberry, Calvin Klein funded by your 15 credit cards when times are good, things will be very thick for you when the economy heads downhill. Saving well means you are living within your means by default.
• Additional sources of income: if you are employed, look for consultancy work or start your own business. If you are in business, diversify.

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?

BoE rate cut: Economy welcomes it

With interest rates down to 2% and assuming banks pass some of the rate cut down especially to mortgage holders, this might well slow down the UK's slide into the economic abyss.

Its unlikely that banks will pass the whole cut because of concerns about

• margins
• the need to attract savers to offset the freeze in the wholesale market

but if they can pass even half of the two recent rate cuts (i.e. 125 basis points), that would still be of sopme benefit to the economy.

Those who are likely to benefit from the rate cut are

1. Businesses with variable rate loans whose cost will be reduced therefore easing the pressure on profitability from lower sales
2. Homeowners whose mortgages have interest rates that are variable, discount variable, and those that track BoE rate. Average house prices are just £200k, so somebody may save around £200 per month. Some of this will go into consumption.
3. Business mortgage holders. Ditto
4. Credit card holders. Uk gova is already mouthing off about many credit card providers who have been increasing APR despite interest rates going the other way. Any cut here will again feed through into consumption
5. Weaker £ will help exporters.

Thank you BoE. It feels like a pay rise. For maybe 1 yr?

Electricity: Time to utilise HEP for businesses only

Unless we suddenly discover oil, we are headed for crunch time in electricity consumption. We've so far muddled along on the believe that just keeping ahead of the demand for electricity will do us good. Hydro-electricity power has so far been our largest source of electricity (60%) but its not looking promising given changing weather patterns and our inclination to burn charcoal from every piece of forestry. And its dependency on oil for production.

Let us be honest about geothermal electricity. This has been talked about for a decade now. The reason for non-implementation is largely due to the large initial capital outlay that is required. Given competing priorities for bond funding, KenGen may struggle to raise well-priced sufficient funds via this route.

KenGen says it has around 18% spare capacity at any given time. The spare capacity is the gap between its generated units and those bought by KPLC. Lets agree two things:

-electricity demand won't fall, rather it'll rise as economy, households grow

-but supply may fall if rains fail

Other sources being explored are:

- from neighbours one being an EAC agreement so we can source from Tororo (but note Ug had rationing issues this year) and the other from Ethiopia. Not security issues given their being prone to instability

-the expensive Ibeafrica option

Without industry, we can't grow. My proposition is that given 65% consumption of the electricity is by industry (as per chart), let gova pass a law that every house (new or old) will need to source all its electricity requirements from solar power. I am aware that this will be difficult especially for apartment dwellers, but this is not a green exercise. Its a needs-be exercise. For the rural areas, it removes the constraint on consumerism (even a lower middle class), taking off due to dependency on RE programme. Downside is the initial cost, but note every household currently pays Ksh35k connection fee to KPLC for an interment product

PS:

The impact on KPLC's bottom-line might actually be negligible. Although this it’s fastest growing customer sector, its probably the most expensive to administer.

Another day, another "ATS" hitch @ the NSE

It'd be to easy for the cynic in me to say “plus ca change, plus ce la meme chose”. Or new CEO, same old NSE bs. In any case, I've confidentially been informed that the ATS has a trigger mechanism that refuses any share orders that lead to the NSE falling below 3,100 (joke).
As an investor, you need to be aware of this important buying point. Yes there was a power cut, but this is a Ksh0.8trn business so there is no excuse. It should have a business continuity plan that among other contingencies, takes into account what happens when there is a black-out, terrorist attack, floods etc. It may never happen, but it can happen and if value your business you need to plan for those once-yr/decade events.

The other broader issue, is that it seems that ATS never underwent a robust user testing. Because its a processing system, you'd expect it to have been tested for huge volumes (such as Safaricom which led to a break), low volumes, certain NSE levels, certain price inputs (this would void the almost monthly price "funnies").

Unusually, the hitch didn't result in a hike in the NSE so maybe the previous coding that breaks the ATS at NSE levels below 3,100 has now been fixed.

PS: Like I said here, the NSE is very straight forward business. Its a a bit like our tourism, be supportive of it and peeps see the potential and attractions. Mess it around and all over sudden it becomes a curiosity rather than Kenyans' calling point for their investments and savings.

Food security policy: Should it be a priority?

It's said that no nation that can't feed its people will ever develop. Singapore (and Japan to some extent), maybe exceptions to this, but fundamentally, without food security, Kenya will be even slower to develop.

Food security is simply a state where food is easily and adequately available and there is no fear of hunger or starvation at any time.

Why is having food security policy important?

• If we produce more food, food prices will go down and Kenyans will be able to spend a lower proportion of their income on food. This will in turn mean more disposable income for among other things investing in businesses and stock markets; setting aside savings which banks can tap to loan and grow the economy. As consumers, we'll also move to higher value goods again growing the economy.
• Livelihood. In this post I mentioned that one of the rural push factors was farming poverty i.e. a state where farming can't progress you. As a farmer you therefore move to urban areas to earn a living. Its clear that even with only 35% of Kenyans in urban areas, we can't cope going by the proportion that is residing in slums. If Kenyan farmers can make a living from farming, it'll slow down urban migration giving the economy time to provide adequate housing and utilities for the urban population.
• Economy motor: There are countless examples where agriculture has become an important motor of economic growth.
• Gova expenditure: A large portion of contigency funding is now going towards buying imported maize and other foods. This could be spent on development projects in a scenario where we had food security.
• Balance of payments and foreign exchange. If we have to spend our fx earnings on food imports, that adds further pressure on shilling which has impact on imports as an example. The opposite and more compelling would be where we had grown enough to export. Note that given the state of our neighbours, we can easily be providers of the aid food.

In another post, I'll talk about some of the ideas that could form our food security policy.