Kenyan Banks - Anchor Themes - Regionalisation and Mortgage Lending - BUY KCB - SELL Coop

March 17, 2011 African Markets
Sector View KENYAN BANKS

CONTRUCTIVE
Our anchor themes: Mortgage
lending and regionalisation
We add to our coverage on Kenyan banks; BUY KCB;
SELL Cooperative: We initiate coverage on Barclays Bank
Kenya [Barclays, HOLD]; Co-operative Bank of Kenya [Co-
operative, SELL]; Kenya Commercial Bank Group [KCB,
[BUY]; and Standard Chartered Bank of Kenya [StanChart,
HOLD]. We also follow up our coverage on Equity Bank
[BUY], bringing our coverage on Kenyan banks to 5, and
covering the 5 biggest banks. KCB is the only stock that
provides significant potential upside risk, in our view.
The industry is fragmented, but high liquidity level
could protect deposit margins in the short-term: The
Kenyan banking system has 44 registered commercial
banks. While it is moderately penetrated, with a banking
assets/GDP ratio of ~52%, we believe in the long-term
competition is going to reduce spreads materially. However,
sustained economic growth and current high liquidity levels
suggests higher loan yields and controllable competition on
deposits, thus cushioning banks from margin erosion, in the
short-term. The moral suasion from the Central Bank of
Kenya (CBK) for banks to reduce their lending rates remains
a consequential risk.
Anchor themes: Mortgage lending and regionalisation:
We believe the mortgage market is going to play a key role
in the system’s loan growth given the low penetration level.
Mortgage loans/GDP is a mere 2.48%. Banks are also
seeking exposure to regional demand and KCB and Equity
Bank already have regional footprints. The risk is that
execution risks may be under-played. For e.g., KCB is yet to
breakeven in most of the markets, while Equity bank
suffered a loss of Kes700mn in Uganda.
Stock catalysts: The bottom line is: making money
matters. Higher earnings growth supported by 1) a recovery
in government paper yields as most of the banks carry
significant government paper (i.e. lower LDR and higher
liquidity ratio); 2) strong loan growth, particularly mortgage
loans that still has material room for growth and 3)
improvements in efficiencies and exploitation of non-interest
income revenue streams should be key catalysts.
Key sector risks: 1) An adverse rain season always have a
Peter Mushangwe negative impact on a) loan growth from the agricultural
Lawrence Madzwara sector and b) credit risk as default risks increases; 2) We
+27 11 551 3675 also believe that political risks remain elevated,
peterm@legae.co.za notwithstanding the GNU. The political risks can manifest
themselves in poorer fiscal policies than expected; and 3) a
weaker than anticipated global economic environment
remains a major risk.
Table of Contents
1. Summary of conclusions 2
1.1 Valuations, recommendations & sensitivity analysis 2
1.2 ROE decomposition 8
1.3 CAMEL ratios analysis 9
1.4 Share price performances 11
2. Industry analysis 13
2.1 Overview: Fragmented; Locals gaining market share 13
2.2 Sizing up the Kenyan market: Future looks bright 18
2.3 Profitability: Resilience in face of global turmoil 22
2.4 System Liquidity: High liquidity, negative to margins 27
2.5 Asset quality: Our major source of vulnerability 30
2.6 Solvency: High capital; low capital management 33
2.7 Political risks: Strong GDP growth expectations 35
3. Companies 37
Initiating Barclays Bank, FY11 TP Kes62.8, HOLD 37
Initiating Cooperative Bank, FY11 TP Kes17.3, SELL 42
Initiating KCB Bank, FY11 TP Kes27.6, BUY 48
Initiating Standard Chartered, FY11 TP Kes265.8, HOLD 53
Follow up on Equity Bank, FY11 Kes27.9, Upgrade to BUY 59
Page 1 of 62
1. Summary of conclusions
1.1 Valuations, recommendations and sensitivity analysis
We initiate coverage on 4 more banks; now coverage

universe is Top 5 banks: We initiate coverage on Barclays Bank
Kenya (Barclays, HOLD); Co-operative Bank of Kenya (Co-
operative, SELL); Kenya Commercial Bank (KCB, BUY); and
Standard Chartered Bank Kenya (StanChart, HOLD). We follow up
on Equity Bank Limited (Equity, BUY (speculative), taking our
coverage universe to 5 of the biggest banks in Kenya. The
combined market value of our coverage is ~Kes398.4bn
(~US$4.8bn). This makes up ~35% of the market capitalisation.
We subject all the banks to the same valuation methodology
- the Justified Price/Book value ratio (PBVR) method. We
estimate the Justified PBVR of each of the banks under our
coverage using the equation: Justified PBVR = (ROE-CoE)/(CoE-g);
where ROE = return on equity; CoE = cost of equity/required
return and g is sustainable growth rate. We assign different CoE
and g for each bank as we seek to capture specific risks. On
average, g approximates expected nominal GDP growth. (~12%
i.e. ~6% real growth rate + ~6% inflation rates). Our FY11 target
price (TP) is a product of the Justified PBVR and our FY11 book
value per share (BVPS) estimate. In some instances, sum-of-the
parts method could be more appealing, but again at the core of
valuing the various business segments is the estimation of the fair
multiple anyway. (Price/Earnings ratio (PER) or PBVR in most
instances).
Growth rates - Theory vs. our assumptions: Our assumptions
of sustainable growth rates stay close to the expected nominal
GDP growth rate of ~12%. We subjectively adjust the growth rates
obtained using the classic sustainable growth rate formula of
Retention ratio times ROE in order to capture our expectations. 1)
Barclays’ theoretical growth rate is 8.6% but we increased it to
12% to capture growth that could be sustained by the high Capital
Adequacy Ratio (CAR) and liquidity ratio. This growth rate matches
the expected nominal GDP growth; 2) Cooperative’s theoretical
growth rate is 15.1%. We reduce it to 14.75% due to the minimal
regional exposure; 3) KCB’s theoretical growth rate is 11.3%. We
have enlarged the growth rate to 12.5% to capture regional
demand; 4) For Stanchart’s we use the theoretical sustainable
growth rate of 11.83%. This is lower than Barclays’ growth rate
(which we have assumed to grow at nominal GDP growth of 12%)
due to lower CAR hence asset growth could be benign. This is the
only bank which we apply a growth rate that is less than expected
nominal GDP growth; and 5) Equity’s theoretical growth rate of
14.6% is reduced to 13.5% in order to reflect our concerns with
further market share acquisition given the number of accounts the
bank already hold.
Page 2 of 62
Why BUY KCB? Valuation risk is important to consider in addition
to our anchor themes of regionalisation and mortgage financing.
With a trailing PER and PBVR of 9.1X (2010 EPS) and 1.7X
respectively, KCB is the “least expensive” in our coverage
universe. (note that excluding exceptional items, Barclays’ PER is
11.5X). The share has also underperformed its peers (see section
1.3). But it does not end there. We do not see major risks to
earnings growth, and we expect them to grow by 43% (vs. +77%
for FY10) and a forward dividend yield of 7.8% for FY11. The
CAMEL ratios are also strong. The bank has managed to grow its
deposits by a compounded annual growth rate (CAGR) (07-10) of
28% (second highest to Equity Bank) while loans registered a
growth rate of 32%. Non-interest income CAGR over the same
period is an acceptable 25%. With a CAR of 14.9% (vs. statutory
requirement of 12%) and a liquidity ratio of 28% (vs. statutory
requirement of 20%), we believe the bank has room to grow its
risk-weighted assets (RWAs), benefiting particularly from its
regional penetration. Being the largest bank in terms of deposits
with ~13.7% of system deposits enables it to create significant
scale in different consumer products.
Why BUY Equity? For Equity Bank, our recommendation carries
less conviction than before. We have a fair value of Kes25.1 using
the Discounted Future Earnings model, and a FY11 TP of Kes27.9
using the Justified PBVR which we have applied in valuation of all
the banks under our coverage. Our upgrade (from our previous
HOLD recommendation) is pivoted on the recent share price
decline which has taken our potential total return into a BUY
territory (i.e. >15%). The share price has lost 7.5% on a Year-to-
Date (YTD) basis. Considering that the share has ascended by
58.7% in the past 12 months, we are speculative BUYers. At the
risk of sounding like a technical analyst, we believe the share price
is susceptible to profit taking in the face of a negative market
sentiment. But investors should never sell a good company!
Why SELL Cooperative? We like the diversified deposits base of
the bank, and in our view, the CAMEL ratios are not significantly
worse than peers. However, we believe a 5-year average ROE of
<20% and a PBVR of 3.1X indicates meaningful disconnect
between valuation and fundamentals. Our Justified PBVR is 2.3X.
Our forward PER is 10.2X. We fail to identify the reason(s) for this
premium valuation. The bank does not fare highly on our anchor
themes – regional exposure yet to take off and a relatively small
mortgage loan book. Its mortgage business is still small (market
share 0.4%) that even an aggressive growth of the mortgage loan
book should not make meaningful contribution in the short-term.
The CAR is only better than StanChart’s. The bank carries the most
NPL overhang risk given that provisions have only grown by a
CAGR of 4.4% vs. loan growth of 31% between CY07 and CY10.
Provisions/loan ratio averaged 1.1% between CY07 and CY10 vs.
an average of 1.4% for the Top 5 banks. Structurally, we think
Cooperative bank is inferior to peers as indicated by 1) higher cost
Page 3 of 62
of liabilities 2) relative low asset rotation and ROA and 3) relative
higher leverage yet ROE remains average. (see section 1.2 – ROE
decomposition for more detail). The share price has appreciated by
83.4% in the past 12 months and we do not see upside risk at the
current valuation level and the risk of a pull-back is high.
Why HOLD Barclays and StanChart? For these two, regional
play is out of question as we do not see them expanding outside
Kenya. They have also been losing their market shares. (see
section 2.1 and section 2.3). Deposits and asset growth has been
highly constrained between CY07 and CY10. Barclays’ loan and
advances CAGR is -6%; StanChart is 15% vs. 45% for ‘local
banks’. (see Fig 2). The banks’ (Barclays and Stanchart) strategy
of lower but quality credit growth is not necessarily bad as lost
asset growth could be recovered with improving economy, but we
doubt the willingness of these banks to play more in the less
penetrated mass/consumer market. Banks with higher market
shares benefit from scale and enjoy relative higher ROAs and
ROEs, (see Fig 3). For both banks higher ROEs seem to have been
more a result of capital management (i.e. higher dividend payout
ratio (average of 78% for StanChart; Barclays increased its payout
ratio to ~70% in FY10 from 55% in FY09. However, despite the
higher valuation risks, we like 1) the higher ROA that are reflective
of efficiency. The banks enjoy lower cost of liabilities at 1% for
Barclays and 1.2% for StanChart (average for the other 3 banks is
1.8%). 2) the superior return/risk weighted assets – 7.3% and
6.6% (Barclays and StanChart in that order) which indicates
efficient use of capital; and 3) the low expense ratio and
cost/income ratio for StanChart.
We value Barclays at Kes62.8, (FY11 TP; Justified PBVR 3.2X using
a CoE of 17.3%) and thus providing a potential total return of a
meagre 1%. The share price is susceptible to a 5.5% decline,
going by our valuation. However, the key attraction we indentify
from Barclays is its ability to engage in active capital management
through either share buy-backs or dividend hikes given the high
level of capital. This already happened in CY10 where the payout
ratio ascended to 69% from 55% in CY09. We maintain a payout
ratio of 70% and our forward dividend yield of 6.6% is attractive.
For StanChart, our FY11 TP is Kes265.8, (Justified PBVR 3.9X; CoE
of 17.5%) giving a potential total return of 7.9%. While StanChart
continues to maintain a high payout ratio, the low CAR could
hinder it going forward as the bank could choose to retain capital.
Nonetheless we model a dividend payout ratio of 70%. (vs.
average of 79% between FY05 and FY10).
Why we use the PBVR and Sensitivity analysis: The PBVR
method is often preferred in valuation of finance companies and
banks. There is also strong empirical evidence that differences in
PBVR captures differences in the long-run returns of companies.
For Kenya, we note that the Top 30 companies’ PBVRs display a
positive relationship with returns (see Fig 5). We subject our CoE
and the ROE to sensitivity analysis. (see Fig 6). There is no easy
Page 4 of 62
upside on Barclays and StanChart. KCB and Cooperative shares
would benefit from an uptick in ROEs. It important to note that
despite our SELL recommendation on Cooperative bank, we are
not exceptionally critical of the business model, which we believe,
should benefit from its consumer segment but we are concerned
by the valuation risks.
Fig 1: Salient valuation metrics and our recommendations; BUY KCB, SELL Coop
Standard
Barclays Cooperative Equity KCB Chartered
Current price 66.50 18.25 24.75 22.25 262.00
FY11 target price 62.80 17.34 27.94 27.63 265.80
Shares in issues 1,357,884.0 3,492,369.9 3,702,772.0 2,950,169.1 287,077.1
Market cap (Kes,000) 90,299,286 63,735,751 91,643,607 65,641,263 75,214,209
Current market value (US$, 1,078,845 761,479 1,094,906 784,244 898,617
Trailing PER (2010 EPS) 8.5 13.9 12.9 9.1 14.0
Forward PER (Legae est.) 10.7 10.2 8.0 6.4 10.8
Trailing PBVR 2.9 3.1 3.4 1.7 3.7
Forward PBVR 3.4 2.4 2.3 1.4 3.8
Forward Div. Yield 6.6% 2.0% 5.0% 7.8% 6.5%
Growth rate (RR times ROE) 10.1% 15.1% 14.6% 11.3% 11.8%
ROA (2010) 6.1% 3.0% 5.0% 2.9% 3.8%
Return on RWA 7.3% 4.1% 7.9% 4.7% 6.6%
ROE (2010) 33.7% 22.4% 26.2% 18.4% 26.4%
Cost/Income (2010) 54.0% 58.9% 59.6% 61.0% 42.6%
Trailing 12‐month price cha 29.1% 83.4% 58.7% 4.4% 42.2%
Potential upside 1.0% ‐3.0% 17.9% 32.0% 7.9%
Recommendation HOLD SELL BUY BUY HOLD
Source: Company reports, Bloomberg, Legae Securities, prices cob 11/03/11
Fig 2: Growth rates: Strong for local banks; Coop’s provisions growth lags loans.
Standard
Barclays Cooperative Equity KCB
Chartered
Key growth rates (CAGR 07‐10)
Deposits 4% 31% 49% 28% 11%
Loan and advances ‐6% 31% 53% 32% 15%
Net Interest income 11% 27% 62% 32% 15%
Non‐interest income 11% 20% 50% 25% 12%
Pre‐provision earnings 11% 24% 56% 29% 14%
Provisions 20% 4% 322% 42% 29%
Earnings 29% 34% 56% 34% 16%
Source: Company reports, Legae Securities
Page 5 of 62
Fig 3: ROA vs. market share: Higher market share beneficial to ROAs and ROEs
8.0% 80%
ROA Market share vs. ROA ROE Market share vs. ROE
6.0% 60%
4.0%
40%
2.0%
20%
0.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 0%
‐2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
‐20%
‐4.0%
‐40%
‐6.0%
‐8.0% market share ‐60% market share
Source: CBK, Legae Securities
Fig 4: Salient income statement and balance sheet items growth rates and LDR
2009A 2010A 2011F 2012F 2013F

Barclays
Deposits (growth) ‐0.4% ‐1.6% 10.0% 9.5% 7.5%
LDR 74.3% 70.4% 75.0% 75.0% 80.0%
Loans and advances (growth) ‐13.5% ‐6.8% 17.2% 9.5% 14.7%
Earnings (growth) 10% 74% ‐20% 4% 4%
Cooperative
Deposits (growth) 39.0% 35.4% 25.0% 20.0% 15.0%
LDR 68.0% 69.9% 75.0% 75.0% 75.0%
Loans and advances (growth) 17.7% 39.1% 34.1% 20.0% 15.0%
Earnings (growth) 25.0% 54.3% 36.7% 15.2% 27.8%
Equity
Deposits (growth) 38.8% 49.5% 20.0% 25.0% 15.0%
LDR 90.7% 75.0% 80.0% 80.0% 80.0%
Earnings (growth) 8.3% 68.4% 61.4% 11.9% 9.0%
KCB
Deposits (growth) 28.7% 20.8% 25.0% 15.0% 10.0%
LDR 75.2% 75.2% 80.0% 80.0% 80.0%
Earnings (growth) ‐2.5% 76.5% 42.5% 12.7% 20.6%
StanChart
Deposits (growth) 13% 16% 15% 15% 15%
LDR 65% 60% 65% 70% 75%
Loans and advances (growth) 31% 6% 25% 24% 23%
Earnings (growth) 46% 14% 30% 10% 5%
Page 6 of 62
Fig 5: PBVRs vs. ROE and PERs vs. ROE of the Top 30 NSE companies
80.0
7 PBVR vs ROE PER PER vs ROE
PBVR
70.0
6
60.0
5
50.0
4
40.0
3 30.0
20.0
2
10.0
1
‐
0 ‐10% 0% 10% 20% 30% 40% 50%
‐10% 0% 10% 20% 30% 40% 50% ‐10.0
ROE
ROE
Source: Legae Securities, PBVRs, PERs and ROEs supplied by Kestrel Capital
Fig 6: Sensitivity analysis; No easy upside for StanChart and Barclays.
Barclays Cooperative
ROE ROE
CoE 15.00% 20.00% 28.80% 35.00% CoE 15.00% 23.20% 25.00% 35.00%
15.00% 19.8 52.8 111 151.7 16.00% 1.5 52.0 63.0 124.0
17.30% 11.2 29.9 62.8 85.9 18.50% 0.5 17.3 21.0 41.5
20.00% 7.4 19.78 41.6 56.9 20.00% 0.4 12.4 15.0 29.6
22.50% 5.7 15.1 31.7 43.3 22.50% 0.2 8.4 10.2 20.1
KCB StanChart
ROE ROE
CoE 15.0% 22.5% 30.0% 35.0% CoE 20.0% 25.0% 33.8% 37.5%
15.00% 15.6 67.5 119.4 154.0 15.00% 111.5 178.4 475.4 891.9
18.25% 6.4 27.6 48.8 63.0 17.75% 83 123.9 265.8 361.6
20.00% 4.8 21.0 37.1 47.8 20.00% 68.6 99.1 184.5 243.2
22.50% 3.6 15.6 27.6 35.5 22.50% 57.5 87.1 141.3 178.4
Source: Legae Securities
Page 7 of 62
1.2 ROE decomposition
ROE decompositions: Below we decompose the 2010 ROEs of the

banks under our coverage (see Fig 7). The notable features are:
1) Barclays and StanChart enjoy the lowest cost of liabilities with
interest expense/liabilities ratio of 1% and 1.2% respectively. This
highlights their superior deposit franchises. While Cooperative has
a diversified deposits base (lower deposit concentration risk), its
liabilities cost is highest at 2%; 2) Cooperative bank has the
highest volume of interest bearing liabilities at 85% of total assets;
3) Cooperative bank has the highest interest expense ratio at
1.7%, Barclays has the least at 0.8% and StanChart is 1.1%; 4)
Equity has the highest expense ratio at 10.7% while StanChart has
the least at 5.6%. Barclays’ expense ratio is also high at 9.7%.
Given Barclays’ low interest expense ratio (low cost of
deposits/liabilities), the bank’s efficiency is inferior, probably a
residual/legacy of the expansion strategy in the previous years. 5)
Equity has the highest asset rotation ratio at 16.9% while
StanChart has the least at 11%. Equity’s high asset rotation is
indicative of the strength of its target/mass market as well as
technological capabilities; 6) Equity possesses the highest ROA
while Cooperative and KCB have the least at 2.9%; and 7)
Cooperative bank’s leverage is the highest at 7.5X while Equity
bank has the least at 5.3X.
In general, the ROEs are pleasing: Barclays and Equity Bank,
with lower leverage ratios relative to peers have better
opportunities to lever their ROEs, especially given the fact that
they also boast of higher CAR.
Fig 7: 2010 ROE decomposition; Cooperative ROE is structurally weaker
Barclays Cooperative Equity KCB StanChart

Cost of liabilities : int. exp/liabilities ‐1.0% ‐2.0% ‐1.8% ‐1.6% ‐1.2%
Composition of liabilities: liab./TA 0.82 0.87 0.81 0.84 0.86
Volume of int. bearing liabilities: IAL/TA 0.72 0.85 0.79 0.82 0.73
Interest expense/Total assets ‐0.8% ‐1.7% ‐1.4% ‐1.4% ‐1.1%
Non interest expense/Total assets ‐8.1% ‐6.0% ‐7.9% ‐7.4% ‐4.2%
Provisions/Total Assets ‐0.7% ‐0.5% ‐1.3% ‐0.9% ‐0.3%
Expense ratio: Expense/Total assets ‐9.7% ‐8.2% ‐10.7% ‐9.7% ‐5.6%
Income tax/Total assets ‐1.7% ‐0.8% ‐1.3% ‐1.0% ‐1.6%
Interest income/Total assets 9.9% 7.7% 9.6% 9.2% 6.9%
Noninterest income/Total assets 6.0% 4.2% 7.3% 4.4% 4.0%
Asset rotation: Revenue/Total assets 15.9% 11.9% 16.9% 13.6% 11.0%
Return on Assets 4.5% 2.9% 4.9% 2.9% 3.8%
Leverage 5.5 7.5 5.3 6.4 7.0
Return on Equity (exc. exceptional items) 24.9% 21.7% 25.9% 18.4% 26.4%
Return on Equity (inc. exceptional items) 33.7% 22.4% 26.2% 18.4% 26.4%
Page 8 of 62
1.3 CAMEL Analysis
We believe the CAMEL ratios look strong in general. We discuss the

CAMEL ratios for our coverage below:
Capital: Capital levels are generally strong with Barclays leading
the pack with a Core CAR of 26.6% vs. a statutory requirement of
8%. A decline in Barclays’ RWAs (-8% in FY10) aided in
strengthening the capital position. StanChart has a relatively weak
capital position with a Total CAR that is only 2pps above the
minimum required at 14%, otherwise all other banks under our
coverage have meaningful buffers. Leverage is also very low with
all banks enjoying leverage ratios of <8%. An average leverage
ratio of 10X for example, would amplify ROEs to ~35%. The banks
under our coverage are all strongly capitalised.
Asset quality: Relative to history, asset quality continues to
improve. StanChart enjoy the least provision/loans ratio at 0.7%
while Equity has the highest at 2.4%. Barclays boast the highest
NPLs coverage ratio at 83%, thus significantly reduce the risk of
NPL overhang as well as implying greater flexibility to cover future
losses. Equity bank has the least coverage ratio at 49%. Industry-
wise, the coverage ratio is a source of concern to us having
declined from 65% in CY06 to 53% in CY09. Despite the
diversification, banks exposed to the mass market and SMEs
indicates higher credit risks, and continued strong asset growth
could elevate risks.
Management: We use the cost/income ratio and the multiple of
net interest income/total operating income to measure
management quality. On a cost/income ratio basis, StanChart and
Equity bank indicate management efficiency with ratios of <50%.
KCB has the highest ratio at ~60% although we believe there is
room for improvement. Looking at the ability of banks to produce
non-interest income, all the banks under our coverage have ~40%
of their operating income in form of fees and commissions. We
believe this is a fair ratio although it can be enhanced. We also
note that on a profits/deposits ratio basis, Barclays shows
efficiency in using customer deposits with a high ratio of 8.6%
while Cooperative and KCB show the least at 3.7%.
Earnings: We take the ROA as the main indicator of banking
profitability. Unadjusted, Barclays enjoyed the highest ROA in
CY10 at 6.1%, but after adjusting for a once-off item (the disposal
of the custody business), the ROA declined to 4.5%. Overall, the
ROA is strong at an average of 3.6%. Adjusting for capital,
Barclays has the highest return with a return on RWAs of 7.3%
while Cooperative has the least at 4.1%. These returns are
nonetheless still satisfying and are supported by strong interest
spreads and NIM. The average NIM for our covered banks is 10%
and the ROE is 23.4%. We believe banks still have ample room to
leverage their balance sheets and sustain ROEs. The average
leverage ratio is 6.3X.
Page 9 of 62
Liquidity: The banks show high levels of liquidity with an average
LDR of 70%. KCB has the highest LDR at 75.2% while Stanchart
has the least at 60%. For StanChart, ability to carry more RWAs
could be compromised by the thinner capital buffer than others.
Barclays has the highest liquidity ratio at 55.8%, and with its high
level of capital it is well positioned to grow RWAs. Equity bank’s
high liquidity ratio and CAR also allows it expand its loan book
significantly (relative to peers). KCB has the highest LDR at
75.2% and the least liquidity ratio at 28.1%. Overall, we do not
see material liquidity risks for the banks under our coverage.
Conclusion: To be fair, on an absolute basis all the banks show
strong CAMEL ratios; hence our anchor themes
(regionalisation/mortgage lending) and valuation play a
fundamental role in identifying the likely winners. (see Fig 8).
Fig 8: CAMEL ratios: Generally strong for our universe
Standard
2010 CAMEL ratios Barclays Cooperative Equity KCB Chartered
C: Core CAR 26.6% 16.2% 22.0% 23.1% 14.0%
C: Total CAR 31.2% 16.5% 28.0% 23.2% 14.0%
C: Leverage ratio 5.5 7.5 5.3 6.4 7.0
A: Provision/loans 1.4% 0.9% 2.4% 1.4% 0.7%
A: Coverage ratio 82.9% 61.4% 48.8% 53.4% 56.4%
M: NII/Op. income 60.2% 58.6% 59.6% 64.0% 59.2%
M: Cost/income 54.0% 58.9% 47.1% 61.0% 42.6%
M: Profit/Deposits 8.6% 3.7% 6.8% 3.7% 5.3%
E: NIM 10.9% 9.3% 12.7% 10.3% 7.0%
E:ROA 6.1% 3.0% 5.0% 2.9% 3.8%
E: Return on RWA 7.3% 4.1% 7.9% 4.7% 6.6%
E: ROE 33.7% 22.4% 26.2% 18.4% 26.4%
L: LDR 70.4% 69.9% 75.0% 75.2% 60.0%
L: Liquidity ratio 55.8% 39.4% 40.0% 28.1% 55.0%
Source: Company reports, Legae Securities. ROAs include exceptional items
Page 10 of 62
1.4 Share price performances
Cooperative Bank has strongly outperformed peers; KCB is

the laggard: Indexed to January 2010, Cooperative bank has
outperformed its peers (only covered stocks considered) while KCB
lagged the peers and the NSE20 materially. As we mentioned
already, over the past 12 month, Cooperative share price has
appreciated by 83.4%; Equity bank by 58.7%; and StanChart by
42.2% - all enormous movements by any measure. Barclays
returned a rather muted 29.1% while KCB’s return of 4.4% was
not just out of synch with peers but offered nothing material when
adjusted for inflation, if at all.
YTD performance is mixed: On a YTD basis, Equity Bank is the
worst performer with a negative return of 7.5%. Barclays is the
best performer with a capital gain of 6.4%. KCB’s share price has
appreciated by 2.3% only while Cooperative bank is down 3.9%
and StanChart is marginally up at 1.6%. (see Fig 9 to Fig 10).
KCB continue to trade at a discount to peers: We note that
KCB has been trading at a discount to the peers from around May
2010. We would think the discount is warranted if we carry
earnings production concerns but given our bullish view on asset
growth and earnings, we expect this discount to narrow at worst
and disappear at best. The two key consequences are 1) KCB’s
share price outperform in case of a bullish market; or 2) KCB’s
share price lag others (downward) in case of a bearish market.
Both are positive to the investor. (see Fig 11).
Fig 9: Share price performance: Coop share price strongly outperformed NSE20; KCB
underperformed
2.5
Barclays Coop StanChart Equity KCB KEN20
2.3
2.22
2.1
1.9 1.91
1.79
1.7
1.5 1.49
1.3 1.28
1.18
1.1
0.9
0.7
0.5
Apr‐10
Apr‐10
Feb‐10
Feb‐10
Sep‐10
Sep‐10
Feb‐11
Feb‐11
Jun‐10
Jun‐10
Jul‐10
Jul‐10
Mar‐10
Mar‐10
Mar‐10
Dec‐10
Dec‐10
Aug‐10
Aug‐10
Aug‐10
Oct‐10
Oct‐10
Jan‐10
Jan‐10
Nov‐10
Nov‐10
Jan‐11
Jan‐11
Jan‐11
May‐10
May‐10
Source: Bloomberg, Legae Securities
Page 11 of 62
Fig 10: Share price performance: Coop outperformed peers on a 12-month basis
12‐month YTD
KCB
Barclays
Barclays
KCB
StanChart
StanChart
Equity
Coop
Coop
Equity
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

‐10.0% ‐8.0% ‐6.0% ‐4.0% ‐2.0% 0.0% 2.0% 4.0% 6.0% 8.0%
Source: Bloomberg, Legae Securities, cob 11/3/11
Fig 11: Valuation: Coop PER diverged from peers, KCB’s PBVR continue to attract a discount
30 7
PER PBVR Barclays Coop Equity KCB StanChart
Barclays Coop Equity KCB StanChart
25 6
5
20
4
15
10
2
5
1
0 0
Sep‐09
Sep‐10
Mar‐09
Jul‐09
Mar‐10
Jul‐10
Mar‐11
Jan‐09
May‐09
Sep‐09
Nov‐09
Jan‐10
May‐10
Sep‐10
Nov‐10
Jan‐11
Mar‐09
Jul‐09
Mar‐10
Jul‐10
Mar‐11
Jan‐09
May‐09
Nov‐09
Jan‐10
May‐10
Nov‐10
Jan‐11
Page 12 of 62
2. Industry analysis
2.1 Industry Overview: The market is highly fragmented,

‘local banks’ gaining market share.
System assets and liabilities growth: The private sector credit

has expanded by a CAGR of 9.9% between CY00 and CY10. The
system’s total liabilities have grown by a CAGR of 10.6% to
Kes1.073trn by end of CY09. The total liabilities expanded to
Kes1.263trn by 3Q10. (see Fig 12). In our view, the asset side of
the system’s balance sheet is going to benefit from low mortgage
penetration, and we believe this is an anchoring theme for the
Kenyan banking system going forward. The Small-Medium
Enterprises (SMEs) and the mass markets are also crucial to the
system in our opinion. Under normal economic circumstances, the
SME and mass market provides diversification benefits. We also
believe these sectors are important not just from a lending
perspective but also from a transactional view point.
Fig 12: The system enjoyed stronger private sector credit growth since CY04
1,400 30%
Credit to private sector Private credit
Total banks liabilities
1,200 Total banks liabilities
25%
1,000
20%
800
15%
600
10%
400
200 5%
‐
0%
1H10
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1H10
2000
2001
2002
2003
2004
2005
2006
2007
2008
‐5% 2009
The industry is highly fragmented..: The system has 44

registered commercial banks. In our view, the system is highly
fragmented. The top 5 banks enjoy combined market shares of
51% and 50% on loans and advances and deposits respectively.
The 10 biggest banks carve up a market share of ~75% on both
deposits and loans and advances. (see Fig 13). This high level of
industry fragmentation is detrimental to long-term profitability of
the system. Competition on both assets, especially loan and
advances and liabilities, particularly deposits would be harmful to
interest spreads in the long-term. Interest spreads are likely to
Page 13 of 62
narrow as competition intensifies (lower/declining asset yields and
rising cost of deposits) and penetration expands. In the short-
term, the market leaders are likely to continue to take leadership
in pricing, hence market share is important.
...but the new minimum capital requirement of Kes2bn to
come into effect in CY12 could catalyse consolidation: We
believe consolidation will be positive for the industry as there are
many banks with market shares <1%. While regulators have not
publicly indicated/signalled their intention to see a more
concentrated system, the increase in new minimum capital to
Kes2bn (~US$23.5mn) could be a catalyst for consolidation. Banks
are expected to meet this new requirement by end of CY12. Fig 14
shows that only 19 banks would meet the new requirement (using
CY09 capital and reserve positions). The remaining banks have
combined capital and reserve position of Kes21.77bn which is less
than the individual capital positions of three premier capitalised
banks in shilling-terms, namely Barclays, Equity and KCB. This
indicates the low level of scope for the lower tier banks. A more
concentrated system than now could provide scope for scale, in
our opinion.
Fig 13: Top 5 banks enjoy ~50% market share on both loans and deposits
1.8% Advances market shares, Top 10 Deposits market shares, Top 10

3.3%
3.0% 3.6%
4.2% NBK 13.7%
13.4% 4.2% NBK
Citibank Citibank
4.3%
Comm. BoA 4.4% Comm. BoA
Diamond Trust Diamond Trust
6.2%
CFC Stanbic 5.6% CFC Stanbic
13.0% Stanchart 12.5% Stanchart
Equity Equity
7.9%
Co‐op Bank 6.5% Co‐op Bank
Barclays Barclays
8.6% 8.3% KCB 9.1% KCB
8.6%
Page 14 of 62
Fig 14: Minimum capital requirements: As at end of CY09, many would not meet the new
capital requirement of KES2bn
25.0
Excess/(Deficit)
20.0
15.0
10.0
5.0
‐5.0
Develop. Bank of Ke
Dubai bank
KCB
Bank of Africa
Guardian bank
Equity bank
Prime Bank
Ecobank
UBA Kenya
Middle East Bank
City finance
Charter House bank
Citi
I&M
Commercial BoA
Chase bank
Victorira Comm. bank
Habibi bank ltd
Southern Credit
CFC stanbic
Fina bank
ABC
Oriental
Coop
Diamond Trust
Imperial bank
Habibi bank
Credit bank
Barclays
Bank of Baroda
Bank of India
Gulf Africa bank
Consolidated bank
Giro bank
Paramount
NBK
Family bank
K‐rep bank
Fidelity Comm. bank
NIC
StanChart
Equatorial
First Community
Transnational
‘Local banks’, especially Equity bank and KCB have been

acquiring market share; Barclays and StanChart have been
losing market share: We note that ‘local’ banks have been
growing market shares on both assets and deposits while the
‘international banks’, namely Barclays, StanChart and Citibank
have been losing market shares. Relative high capital levels
maintained by the ‘local banks’ allowed them to grow RWAs faster
(see Fig 15). While some management teams accredit it to
marketing strategies, others (competitor banks) seem to believe
that some of the international banks were deliberately reducing
their market shares. (and gleefully think they (international banks)
misread the market). (see Fig 16). The salient features we note
about the dynamics of market shares in the Kenyan system are:
Barclays banks, which was #1 bank on both assets and

deposits market shares in CY05 and CY07 now ranks #2
to KCB. Barclays’ assets market share has declined to 12.2% in
CY09 from 17% in CY05. Meanwhile, KCB’s asset market share
has increased to 12.7% in CY09 from 12.1% in CY05. In terms
of loans, Barclays owns 13% markets share, just below KCB’s
13.4%. This is in contrast to Barclays’ 20.2% market share in
CY05. On the deposit side, KCB now leads with a market share
of 13.7% vs. Barclays’ 12.5% (down from 16.7% in CY05)
Page 15 of 62
Other international banks have also lost significant
market shares. While StandChart has remained #3 on both
asset and deposit market share rankings, its market share has
contracted from 11.8% in CY05 to 9.2% in CY09 on the asset
side. On the deposits side, the bank’s market share has shrunk
to 8.6% from 11.9% in CY05. But it is the loan and advances
market share that has reduced worst with the bank now #5.
Citibank now ranks #11 on the deposits side with a market
share of 3.3% from 4.7%. The bank ranked #7 in CY05. On the
assets side, Citibank ranks #9 with a market share of 3.8%,
1.2pp down from 5% in CY05.
Equity bank has gained the most market share in the
period; Cooperative lost marginal market share on the
asset side: Equity bank’s market share on the asset side has
increased to 7.1% from just 1.9% in CY05. On the deposit side
growth has also been phenomenal, with the market share
increasing to 6.5% in CY09 from 1.8% in CY05. Equity bank
now holds a respectable 8.6% market share of system loans
and advances, (and ranked #4) a massive leap from 1.7% (and
#10) in CY05. Cooperative bank’s market share on both asset
and deposit side has remained rather stable. The market share
on the asset side has declined marginally to 8.2% from 8.4% in
CY05, while on the deposit side the bank has gained trivial
market share from 8.7% in CY05 to 9.1% in CY09.
Fig 15: Capital: KCB and Equity bank maintained relative higher CAR, allowing growth of RWAs
Total Capital,Kesmn Growth Total Capital/RWAs Change (05 -09)

2005 2007 2009 2005 2007 2009
KCB 9,801.7 10,046.0 17,674.0 16% 18.4% 13.6% 14.8% ‐3.6%
Barclays 11,433.0 18,280.0 27,619.0 25% 13.9% 13.0% 19.2% 5.3%
StanChart 8,473.8 9,199.0 10,915.0 7% 14.6% 16.3% 14.1% ‐0.5%
Cooperative 5,601.0 6,004.0 15,319.0 29% 17.7% 14.2% 20.3% 2.7%
CFCStanbic n/a n/a 10,539.0 n/m n/m n/a 10.3% n/m
Equity 1,413.0 17,625.0 22,488.0 100% 19.8% 45.7% 23.6% 3.8%
Comm.BoA 2,228.0 3,622.0 4,821.0 21% 12.9% 13.5% 12.1% ‐0.7%
NBK 2,854.8 859.0 7,396.0 27% 10.0% 37.2% 40.9% 30.8%
Citibank 5,284.7 7,247.0 11,007.0 20% 17.0% 28.5% 29.0% 12.0%
Diamond Trust 1,710.6 4,287.0 6,512.0 40% 14.2% 19.1% 15.4% 1.1%
Page 16 of 62
Fig 16: Summary of asset and deposit market shares in Kenya for the Top 11 banks (2009)
Institution Assets Market share Rank
2005 2007 2009 2005 2007 2009
KCB 12.1% 11.8% 12.7% 2 2 1
Barclays 17.0% 16.6% 12.2% 1 1 2
KCB has overtaken Barclays as
StanChart 11.8% 9.6% 9.2% 3 3 3 the biggest bank by asset.
Cooperative 8.4% 6.9% 8.2% 4 4 4 StanChart rem ain the #3
biggest bank; Equity has
CFCStanbic n/a n/a 7.2% n/a n/a 5
m oved up from #10 in CY05 to
Equity Bank 1.9% 5.6% 7.1% 10 5 6 #5 while Citibank lost its
Comm. Bank of Africa 4.8% 4.2% 4.3% 4 8 7 m arket position to #9...
NBK 5.3% 4.4% 3.8% 5 7 8
Citibank 5.0% 5.0% 3.8% 6 6 9
Diamond Trust 2.6% 3.2% 3.5% 9 10 10
NIC 3.4% 3.3% 3.3% 8 9 11
Total 72.3% 70.5% 75.2%
Institution Advances markets share Rank
2005 2007 2009 2005 2007 2009
KCB 10.0% 11.4% 13.4% 3 2 1
Barclays 20.2% 21.3% 13.0% 1 1 2
Cooperative 8.9% 7.8% 8.6% 4 4 3 ...KCB has also taken the lead
Equity Bank 1.7% 4.4% 8.3% 10 6 4 in loans and advances m arket
share. Again Barclays and
StanChart 10.4% 8.0% 7.9% 2 3 5 StanChart have lost huge
CFCStanbic n/a n/a 6.2% n/a n/a 6 am ounts of the m arket.
NIC 4.34'% 4.5% 4.3% 6 5 7 StanChart now #5 from #2...
Diamond Trust 3.2% 4.0% 4.3% 8 7 8
Comm.Bank of Africa 3.6% 3.2% 4.2% 7 8 9
Citibank 3.1% 2.6% 3.0% 9 9 10
NBK 7.4% 1.6% 1.8% 5 10 11
Total 68.5% 68.6% 74.9%
Institution Deposits market share Rank
2005 2007 2009 2005 2007 2009
KCB 12.1% 12.1% 13.7% 2 2 1
Barclays 16.7% 15.4% 12.5% 1 1 2
Cooperative 8.7% 7.7% 9.1% 4 4 3
StanChart 11.9% 10.4% 8.6% 3 3 4 ...again KCB now dom inate the
Equity Bank 1.8% 4.4% 6.5% 10 7 5 deposits m arket after
displacing Barclays. Top 5
CFCStanbic n/a n/a 5.6% n/a n/a 6 banks owns ~50% of the
Comm. Bank of Africa 5.3% 4.7% 4.4% 6 6 7 m arket. Equity shows strongest
growth
NBK 5.4% 4.9% 4.2% 5 5 8
NIC 3.4% 3.5% 3.7% 8 9 9
Diamond Trust 2.7% 3.4% 3.6% 9 10 10
Citibank 4.7% 4.2% 3.3% 7 8 11
Total 72.6% 70.7% 75.2%
Page 17 of 62
2.2 Sizing up the system: The future looks bright
Per capita incomes, level of penetration and population

growth are the most important indicators of structural
growth: The long-term opportunities in a system depend on
volumes. Banking assets growth, which largely influence the
structural profitability of a system depends on 1) Wealth levels
which we measure using the per capita income. Wealth determines
the level of credit demand and system liquidity. 2) The level of
penetration as measured by the banking assets/GDP ratio.
Systems with low levels of banking assets/GDP ratio show lower
intermediation, or to an extent the impact of shadow banking
industry, which is not good for banking systems. Nonetheless it
provides opportunities. As intermediation increases, banking
assets rise; and 3) Population growth. Population is crucial for
volume growth in the system. However, we believe that while
population plays a critical role it remains a long-term theme.
Fig 17 below shows that the growth in system banking assets is a

product of per capita income, (trend and growth) penetration
(trend and growth) and population (growth).
Fig 17: How we identified the key factors to banking assets growth
Banking assets = GDP X Banking assets X C apita

capita GDP
= per capita penetration population

income
Source: Legae Securities
Per capita income is expected to rise...: Compared to other

Sub-Sahara systems, Kenya’s per capita income is expected to
remain below peer countries like Angola, Botswana and Nigeria.
However, Kenya’s per capita income is expected to register the
highest growth rate between now and CY15, with a CAGR of
10.8%. Kenya’s per capita income is increasing and is expected to
increase to US$1,483 by CY15, according to the IMF WEO. (see Fig
18). This is beneficial to banking assets growth.
Page 18 of 62
Fig 18: Per capita income: Kenya is growing and expected to outperform
9,000
8,437
per capita income
7,389
Kenya 10.8%
8,000
Ghana 10.3%
6,412
7,000
2013 Angola 9.0%
6,000
2014 Zimbabwe 8.9%
5,000 2015 Mozambique 8.1%
4,000 Zambia 7.6%
Tanzania
1,856
3,000 6.7%
1,801
1,483
1,244
2,000 Nigeria 6.3%
751
727
699
577
DRC 5.2%
244
1,000
Botswana 4.4% 2010‐2015 CAGR
‐
DRC
Nigeria
Ghana
Kenya
Uganda
Mozambique
Angola
Zambia
Tanzania
Zimbabwe
Namibia
Namibia
Botswana
3.3%
Uganda 2.7%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
Source: IMF, Legae Securities
...but penetration is rising...: Penetration as indicted by the

banking assets/GDP ratio has increased materially between CY04
and CY09. Banking assets growth rate outpaced nominal GDP
growth rate over the period despite a decline in CY09 due to the
financial crisis. (see Fig 19). Despite the drag on the growth rate
as a result of the financial crisis, penetration in Kenya still
remained high relative to other East African countries. (see Fig
20). This also supports our regionalisation theme as Kenyan banks
could benefit from low penetration in the regional markets.
Fig 19: Penetration: Rising, banking assets outpaced nominal GDP growth (CY00-CY09)
2500 65% 30%

GDP,bn Nominal GDP growth
Banking assets,bn 60% 25%
Banking assets growth
2000 Banking assets/GDP; %
55% 20%
1500 15%
50%
10%
45%
1000
5%
40%
500 0%
35%
‐5%
0 30%
‐10%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1H10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10
Source: IMF, Legae Securities
Page 19 of 62
Fig 20: Penetration: Rising but still provides opportunities at a moderate level of ~52% ...
GDP US$mn Banking assets,US$mn Banking Assets/GDP

Tanzania 22,434 2,693 12%
DRC 12,600 1,956 16%
Uganda 17,121 3,998 23%
Zambia 15,691 4,117 26%
Mozambique 10,212 3,718 36%
Kenya 32,417 16,919 52%
Angola 74,474 39,450 53%
Ghana 18,058 10,776 60%
Nigeria 206,664 204,323 99%
Source: IMF, Central banks, Legae Securities. Estimates in US$.
...and system accounts are now more than 30% of the

country’s population..: The number of accounts in the system
has continued to increase, reaching 11.142mn by the end of 3Q10.
This is about 31% of the country’s estimated population, and ~4X
Ugandan system accounts despite a difference of <4mn in
population. The argument, which is plausible to a large extent, is
that the number for bank customers (not accounts) is <5mn
persons only, hence there is still a reasonable unbanked population
given estimates of a bankable population of ~20mn. We believe
there is a reasonable number of inactive persons in the bankable
population estimate. The anchor to the increasing number in
system accounts has been the banks’ expansions in branch
network. The system’s branch network has expanded to 1,030 by
3Q10 from 575 branches in CY06. (see Fig 21). Telephones
banking, which has been highly successful in Kenya means that
penetration is increasing much faster.
Fig 21: ...as system accounts and branch network has increased.
12 1100
System accounts,mn 11.142 Branch network 1030
996
1000
10
887
8.45 900
8
800
6.45 740
6 700
4.12 600 575

4 3.33
500
2
400
0 300
2006 2007 2008 2009 3Q10 2006 2007 2008 2009 3Q10
Page 20 of 62
...yet population, although a long-term theme, is not very
encouraging: Kenya’s population growth profile is weaker when
compared to neighbours, namely Tanzania and Uganda who are
expected to outstrip Kenya’s population by CY50. In our view, this
is one of Kenya’s macro-weaknesses. Kenya’s population is
expected to increase to 56.5mn by CY25 and to 83.5mn by CY50.
This is slow growth when compared to Uganda, for example,
whose population is expected to rise to 51.8mn by CY25 and
overtake Kenya’s by CY50 at 96.4mn. (see Fig 22).
Fig 22: Population: Growth is weaker and will lag Uganda and Tanzania by CY50
300
2025,mn 2050,mn
250
200
150
100
50
Kenya
Angola
M'mbique
DRC
Nigeria
Botswana
Ghana
Uganda
Zambia
Zimbabw
Tanzania
e
Source: Population Datasheet 2010, Legae Securities
Page 21 of 62
2.3 Profitability and efficiency: Resilience in the face of
global turmoil
Industry profitability rising, noninterest income/operating

income declining: The industry profitability has been strong,
growing by a CAGR of 26.4% between CY04 and CY09. Profitability
is underpinned by strong net interest income (NII) which grew by
22.2% CAGR over the same period. The non-interest income/total
operating income, however, declined to 38.2%, the lowest level
since CY04 (see Fig 23). Non-interest income grew by a lower rate
of 17.1%. Industry profitability jumped to Kes62.6bn in 3Q10.
Superior ROA is supported by high interest spread: The
industry enjoy relative high ROA, supported by stronger interest
rate spreads. The industry interest spread is as high as 9.5%. (see
Fig 24). While we believe there is downward pressure on interest
spreads as competition and penetration increases, we believe in
the medium term the spreads will support relatively stronger ROA.
The high liquidity ratio means that 1) banks have room to change
their asset mix in pursuit of higher yields/ROA; 2) depending on
duration mismatches, high liquidity could allow banks to pick up
government paper at higher yields as the probability of further
reduction in interest rates look minimal. However, there is moral
suasion from the CBK for banks to reduce their lending rates. This
puts pressure on spreads. The pressure from the CBK for banks to
adjust their lending rates in unison with changes to the policy rate
could be a risk should the regulator determine an ‘optimal’ spread
for banks.
System ROA and ROE compares favourably against our
select systems: The Kenyan system shows superior ROA against
our select systems, with only the Ghanaian system showing higher
ROA. (see Fig 25). The superior ROE is even amplified when one
pinpoints to the low leverage. We expect pressure on ROA in the
long-run (competition on both assets and liability sides of balance
sheets, rising penetration that naturally comes with declining
spreads), but we expect ROA to display considerable strength in
the next 3 years.
Page 22 of 62
Fig 23: Profitability: Satisfying growth in profit, system’s NIR declined
70.0 60% 44.0%

Pre‐tax profit,bn NIR/Total income
62.6
Growth rate,RHS 43.0%
60.0
50%
42.0%
50.0 47.6
42.6 40% 41.0%
40.0 40.0%
35.1
30%
39.0%
30.0 26.4
20% 38.0%
18.9
20.0
14.7
37.0%
10%
10.0 36.0%
‐ 0% 35.0%
2004 2005 2006 2007 2008 2009 3Q10 2004 2005 2006 2007 2008 2009
Fig 24: Profitability: The ROA relatively high, supported by strong interest rate spread.
14.0%
30.0% 2.9%
ROE
28.0% 12.0%
ROA, RHS 2.7% 2.7%
26.0% 2.6% 2.6%
2.5% 10.0%
24.0% 9.7% 9.5%
9.2%
2.4% 2.4% 8.8%
22.0% 8.4%
2.3% 8.0%
2.1% 7.5%
20.0%
Yield on assets
28.3% 28.0% 26.6% 25.0% 2.1% 6.0%
18.0% 22.5% 23.9% Cost of deposits
Spread
16.0% 1.9% 4.0%
14.0%
1.7% 2.0%
12.0%
10.0% 1.5% 0.0%

2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009
Page 23 of 62
Fig 25: Profitability: The system boasts superior ROA and ROE relative to selected systems
5% 35%
ROA ROE
4%
30%
4%
25%
3%
3% 20%
2% 15%
2%
10%
1%
5%
1%
0% 0%
Mexico
USA
Chile
Turkey
RSA
Kenya
Argentina
Ghana
Uganda
Brazil
Australia
Russia
Malaysia
Canada
Mexico
USA
Chile
Turkey
Kenya
RSA
Argentina
Ghana
Uganda
Brazil
Australia
Russia
Canada
Source: IMF Financial Stability report, Legae Securities
Mortgages to support industry loan growth and profitability:

As penetration increases, we believe mortgages lending will be key
in supporting growth and profitability. 1) the penetration is still
very low as indicated by the mortgage loans/GDP ratio which is
only 2.48%. (see Fig 26). Despite Kenya enjoying a relative higher
penetration when compared to Uganda and Tanzania, (1% and
0.2% respectively), the 2.5% is not comparable to >40% that is
obtained in relatively mature systems like South Africa and over
50% for the developed world. Mortgage loans make only ~6% of
the system’s loan-book. Mortgage loan demand has mainly been
dominated by high-income clients and Diasporans. Generally, basic
pick-up in housing demand is driven by increasing populace
seeking owner-occupation. As per capita increases, the population
seeking owner-occupation will increase correspondingly. 2) the
mortgage lending rate has been fairly stable over business cycles
when compared to other asset classes, namely government bonds,
loans and advances and interbank loans. (see Fig 27). This should
support margins for banks that enjoy advantageous market
shares, particularly in periods when government bonds and
interbank rates decline. The mortgage rate ranges from 12.5% to
16.5%.
Liquidity and duration matching concerns could reduce
competition in the mortgage segment: We also believe that
competition in the mortgage segment is less intense; hence banks
that are strong in this market segment can enjoy pricing power
benefits. Smaller banks are unlikely to be able to compete in
assuming relatively higher liquidity and asset/liability mismatches.
According to the Central Bank of Kenya, (ref Mortgage Finance in
Kenya: Survey Analysis, dated November 2010) the mortgage
market is dominated by the large banks (90% of the outstanding
loans) and the top 5 lenders represent over 80% of total mortgage
portfolio. In the same report, the major constraint to mortgage
lending indicated by banks is inability to access long-term funds.
Page 24 of 62
Banks that can raise long-term funding (i.e. to include capacity to
exploit Tier 2 capital) stand at an advantage. Stronger deposit
franchises are also key as banks are allowed to extend mortgage
loans to a maximum of 40% of their total deposits.
Credit risk fears in the mortgage sector heighted by high
property prices: The Kenyan property market has performed
strongly in the past 3 years, and there are fears that it could be
overheating, particularly in the middle- and top-income groups.
We note that on average banks impose a Loan/value (LTV) ratio of
90%. Several management teams indicated that they reduce the
LTV ratio to around between 70% and 75% for mortgage loans in
areas they deem overvalued or expensive.
Housing Finance Company of Kenya (HFCK), Barclays and
Stanchart are losing market share though: HFCK expectedly
dominates the mortgage market. Cooperative bank and Equity
bank have the least market shares but they have registered strong
growth rates in mortgage loans in 1H10 – >300% for Cooperative
bank but from a low base of only Kes55.5nm; and 25% for Equity
Bank from a reasonable base of Kes229.3mn in FY09 to
Kes673.3mn by 1H10. KCB has continued to build its mortgage
business, despite a relatively higher base. Between FY09 and
1H10, KCB’s mortgages loans went up by 14.7% (to
Kes17.974bn). Stanchart and Barclays grew their mortgage loans
by 1.3% and 4.9% respectively (to Kes4.960bn and Kes3.055bn in
that order). HFCK, Barclays, and StanChart have been losing
market shares since CY06. (see Fig 28).
Fig 26: Mortgage market: Penetration is low in both Kenya and the region
70 3.0%
Mortgage loans, Kesbn Mortgage loans/GDP
61.4
2.48%
60 2.5%
53.8
50
2.0%
39
40
1.5%
30 26.6
1%
1.0%
19.5
20
0.5%
10 0.20%
0.0%
0
Kenya Uganda Tanzania
2006 2007 2008 2009 1H10 est.
Page 25 of 62
Fig 27: Mortgage market: Lending rates are less responsive to business cycles
25.0% 14%
Mortgages 91‐TB rate
Interbank
Loans and davnces 12%
20.0%
10%
15.0%
8%
6%
10.0%
4%
5.0%
2%
0.0% 0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10
Fig 28: Mortgage market: HFCK, StanChart and Barclays losing market shares
45.0% Market shares of Top 5 banks and HFCK 60.0% CAGR (06‐09) 57%
40.0%
50.0%
35.0% 44% 45%
30.0% 28.8% 40.0%

27.1%
25.0% 2006
30.0%
2007
20.0% 22%
2008 19%
20.0%
15.0% 2009
10.0% 1H10
7.9% 10.0%
4.9%
5.0% NM NM
0.4% 1.1% 0.0%
0.0% Coop. Bank Equity StanChart HFCK Barclays Total KCB
Coop. Bank Equity Bank Barclays Bank StanChart HFCK KCB Limited Bank Bank Bank Limited
Bank
Page 26 of 62
2.4 System Liquidity risks: Low LDR provides scope but
compresses margins in the short-term
System carry ample liquidity, the 20% Statutory liquidity

ratio mean an implied cap on the LDR of 80%: Generally, the
system carries ample liquidity. The LDR has declined to 69%
(excluding non-residence deposits) while the funding gap continue
to build up, breaching the Kes200bn by 1H10. (see Fig 29). The
regulatory requirement of 20% liquid assets (vs. customer
deposits) means that for all intends and purposes the LDR is
capped at 80%. Banks that have a liquidity ratio closer to 20%
would have to fund RWAs through borrowed funds or other debt
instruments than deposits. Such alternatives could be more
expensive and unconstructive to the interest spread. However,
with the LDR 11pps below the maximum required, it is fair to say
the system is liquid and carries enormous capacity to grow RWAs.
The excess liquid assets (i.e. liquid assets less the minimum
required) has also been building up since CY02. As a ratio of
deposits, the excess liquid assets held by banks have increased to
~25%. (see Fig 30). The system holds more than double the liquid
assets required. The high level of liquid assets allows banks to re-
price their assets (loans) yields (hopefully upwards) without
necessarily re-pricing their deposits rates. (in order to maintain
internal funding).
The nature of system deposits is also important in liquidity
analysis. Demand deposits have been growing faster than time and
savings deposits. By 1H10, demand deposits made up ~32% of
system deposits (from ~17% in CY00) while time and savings
deposits contribution declined slightly to 40% (from ~45% in
CY00). (see Fig 31). While demand and savings deposits tend to
be cheaper and less mobile, time deposits can be mobile and more
expensive. The cost of savings deposits is ~1.75% while time
deposits attracted ~4.5% as at 1H10, according to the CBK.
While the system’s liquidity position is impressive, the high level of
liquid assets generally has a depressive impact to system NIM, and
consequently the system ROA. This is compounded by the low
levels of yields on government securities (90-day TB rate has
declined to 2.9% by 1H10 from 8.5% in 1Q09). However, it is
important to note that these liquid assets consume less capital. As
long as the system maintain the interest spreads high as is the
case currently, banks still have opportunities to improve NIMs by
increasing the ratio of interest bearing assets. In fact the system’s
resilient interest spread meant that profits continued to rise
despite increasing funding gap. The profit/funding gap ratio has
increased from 14% in CY02 to 31%. (see Fig 32). However, in
CY09, the profit/funding gap ratio declined by 2pps from 33%.
Page 27 of 62
Fig 29: Liquidity: LDR is low and the funding gap is positive and growing
95% 250
LDR (Deposits excl. non residence) Funding gap KESbn (private deposits less private advances)
90% 90%
89%
200
85%
83% 83%
80% 150
80%
77% 77%
75%
73% 73% 100
71%
70%
69%
65% 50
60%
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1H1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10
Fig 30: Liquidity: The excess liquidity (to statutory) increased in CY09 and 1H10
35%
350 Excess liquid assets KESbn (Liquid assets less required LA) Excess as % of deposits
300 30%
250
25%
200
20%
150
15%
100
50 10%
0 5%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10
Fig 31: Liquidity: More system deposits are on demand
1400 50.0%
Demand 45.3%
45.0%
1200 Time and savings
40.1%
Total 40.0%
1000
35.0%
31.6%
800 30.0%
25.0%
600
20.0%
16.5%
400 15.0% Demand
Time and savings
10.0% Other
200
5.0%
0 0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10
Page 28 of 62
Fig 32: Liquidity: Profitability continue despite high funding gap
50%
Profit/Funding gap
45%
43%
40%
35% 33%
31%
30% 30% 30%
27%
25%
24%
20%
15% 14%
10%
5%
0%
2002 2003 2004 2005 2006 2007 2008 2009
Page 29 of 62
2.5 Credit risks: The major source of vulnerability
System credit risks have improved but the coverage ratio

has worsened: The system credit risks have vastly improved with
the NPL/loan ratio having declined from >10% pre-2006 to ~5%.
Given that the stock of industry NPLs continue to show
stubbornness, increasing by Kes6.5bn in CY08 and reaching
Kes61.2bn by end of 3Q10, we hold some concerns with the falling
coverage ratio. The coverage ratio has reduced from a satisfying
65% in CY06 to a contentious 53% in CY09. (see Fig 33);
Comparing the NPL/loans and provision/loans ratios against other
systems, we note that Kenya depicts a sub-optimal situation where
the former is relatively higher while the latter is lower. (see Fig
33). In our view, the stock of provisions should increase faster
than NPL in order to raise coverage levels, creating headwinds to
earnings growth.
Personal credit remains the highest credit exposure: The
system’s highest credit exposure is personal/household loans.
They make up 28.3% of the system loan book (as at 3Q10). With
our expectation of rising mortgage lending, household lending
should continue to drive loan growth in the medium term.
Agriculture, which is often cited by bank management as a key
sector of the economy (and demand for loans) makes up 5.1% of
the system loan book as at end of 3Q10 (see Fig 34). Banks that
bank on trade, particularly the ability to finance regional trade
and/or trade across the region should benefit as this is the second
biggest credit exposure.
Tourism and agriculture sector carry highest credit risks
although system exposure is minimal: Tourism and agriculture
sectors carry the highest credit risks with NPLs/Loans ratio for
these sectors at >10%. However, the two sectors makes up <10%
of the system loan-book. Nonetheless, banks with higher exposure
to these sectors face higher levels of credit risks. Personal credit,
which carries the highest exposure, has a NPLs/loans ratio of
7.7%. (see Fig 35).
Page 30 of 62
Fig 33: Credit risks: Improved vastly but we are concerned by worsening coverage ratios
25% 70%
NPL coverage
Total provisions/Loans
65%
20% NPL/Loans 65% 63%
60% 59%
15% 57%
55% 54% 53%

10%
50%
5%
45%
0% 40%
2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009
Fig 34: Credit risks: Relatively higher NPL/Loans and lower coverage ratios
10.0% 200%
NPL/Loans Provisions/NPL
9.0% 180%
8.0% 160%
7.0% 140%
6.0% 120%
5.0% 100%
4.0% 80%
3.0%
60%
2.0%
40%
1.0%
20%
0.0%
0%
Chile
Turkey
Argentina
RSA
Kenya
Mexico
Australia
Brazil
Canada
Russia
USA
Uganda
Malaysia
Mexico
USA
Turkey
Chile
Argentin
Kenya
Uganda
Malaysia
Brazil
Australia
Russia
Canada
a
Fig 35: Credit risk: Personal loans and trade related loans dominate the system’s credit risk...
300
Credit risk exposure, Kes bn 1.3%
248.4 2.3% Credit exposure by sector,%
250 2.7%
3.3%
5.1% Mining &Quarrying
200
162.9 28.3%
Tourism
150 5.2%
122.3 Construction
100.4 Energy
100
68.9 7.9% Agriculture
44.6 45.4
50 29.1 Financial services
19.8 23.6
11.2
Transport & Comm.
0
11.5% Real Estate
Financial services
Agriculture
Personal
Energy
Trade
Mining &Quarrying
Construction
Tourism
Manufacturing
Transport & Comm.
Real Estate
Manufacturing
18.6%
Trade
Personal
14.0%
Page 31 of 62
Fig 36: ...but the most risk sectors are tourism and agriculture
Personal
Tourism & rest.
Trade
Agriculture
Manufacturing Trade
Real estate Personal
Transport & … Real estate
Agriculture Building & cons.
Financial … Manufacturing
NPL,Kesbn
Energy & Water Transport & … NPL/Loans
Loans, Kesbn
Building & cons. Financial services
Tourism & rest. Energy & Water
Mining & Qua.
Mining & Qua.
0% 5% 10% 15%
‐ 50.0 100.0 150.0 200.0 250.0
Page 32 of 62
2.6 Solvency risks: High capital levels; no pick-up in
capital management anticipated for ‘local banks’
System capital level is high but we do not see ‘local banks’

“giving back” capital to shareholder due to regionalisation:
The system’s level of capitalisation is high, with a core capital/RWA
and total capital/RWAs ratios of 18% and 21% respectively.
Leverage is low at <10X. (see Fig 37). We believe the system is
well placed to increase capital levels through earnings retention
(given the high levels of profitability) than dilutive capital raising.
However, capital raising could be required to support growth of
RWAs in the medium term. We also note that most of the banks in
the system have not yet full exploited their Tier 2 capital (e.g. use
of bonds and hybrid capital is limited).
As a result, we do not anticipate aggressive capital management,
by local banks. In fact, the system still enjoy relatively higher level
of ROE and we believe banks management are going to continue
to maintain capital buffers as they expand into the region. Higher
regional asset growth means that no capital could possibly be paid
back to shareholders.
The system ranks among the best capitalised...: Comparing
Kenya to our select systems, Kenya is one of the best capitalised.
(see Fig 38). Of course this could also be a result of elevated credit
risks hence regulators and banks are happy to maintain higher
levels of capital and maintain reasonable buffers.
...but the low coverage ratio is a risk to capital, especially if
provision policies change: Given our concerns with system’s
low provision/NPL ratio, should provision policies change with a
view to increases the coverage ratio, this could be a risk to the
current excess capital position.
Basel 3 is not an issue: We do not think the Basel 3 will have an
impact to banks operations in Kenya. Currently Basel 2 is not fully
implemented although some banks apply it for internal
objectives/purposes. Nevertheless, there could be other regulatory
risks whose mitigants we are unable to identify at this point, to
include regulations related to cell-phone banking and continual
metamorphosis of regulatory framework related to deposit taking
micro-finance institutions. Regulators are also likely to be tougher
and to seek tougher standards than was the case pre-crisis.
Page 33 of 62
Fig 37: Solvency: Strong buffer to minimum capital required; Leverage low
23% Core capital/RWA 9.0
Leverage
Total capital/RWA
21% Core Min.
Total min.
8.0
19%
17%
7.0
15%
13%
6.0
11%
9% 5.0
7%
5% 4.0
2004 2005 2006 2007 2008 2009 3Q10 2004 2005 2006 2007 2008 2009 3Q10
Fig 38: Solvency: The Kenyan system compares favourably against other systems
25%
Capital/RWA
23%
21%
19%
17%
15%
13%
11%
9%
7%
5%
Mexico
USA
Chile
Turkey
Kenya
RSA
Argentina
Ghana
Brazil
Uganda
Australia
Malaysia
Russia
Canada
Source: IMF Financial stability report, Legae Securities
Page 34 of 62
2.7 Political risks: Still high but high GDP growth
expectations nonetheless.
The political risk remains elevated in our view; real GDP

growth expected to average 6.3% for the next 5 years: We
believe that the political risks in Kenya are still significant despite
the conciliatory tone between the two parties of the GNU. Issues of
corruption remain distasteful. Political risks often manifest in
poorer fiscal policies. The Kenyan shilling, which generally is a
measure of confidence or lack of it, is depreciating. (see Fig 39).
The negative impact to the inflation rate often leads to inflated
risks to the banking system in both 1) low demand for credit if
rates are high to maintain positive real interest rates; and 2)
increased default risks. However, GDP growth is expected to
average a rewarding 6.3% between CY11 and CY15. (see Fig 39).
This is supportive to banking through the credit multiplier as well
as the positive effect to NPL formation.
Fig 39: The shillings is under pressure; GDP growth expected to remain strong at av. 6.3%
8 GDP growth,%
90
KES/US$
6.9
7
6.5 6.6 6.6
85 6.3 6.3
6.0
6 5.8
80
5 4.7 4.6
4.1
75 4
3 2.8
70 2.4
2
65 1.3
1 0.6
0.3
60
0
Oct‐05
Oct‐06
Oct‐07
Oct‐08
Oct‐09
Oct‐10
Apr‐05
Apr‐06
Apr‐07
Apr‐08
Apr‐09
Apr‐10
Jan‐05
Jan‐06
Jan‐07
Jan‐08
Jan‐09
Jan‐10
Jan‐11
Jul‐05
Jul‐06
Jul‐07
Jul‐08
Jul‐09
Jul‐10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
Source: Bloomberg, IMF, Legae Securities 2015F
Page 35 of 62
Company analysis/profiles
Anchor themes: Mortgage lending and regionalisation
Valuation: No easy upside for Barclays and StanChart; BUY KCB

and Equity bank; SELL Cooperative; HOLD StanChart and
Barclays
Page 36 of 62
Initiation: Barclays Bank Kenya - HOLD
Risk averse but able to engage in active capital
management; FY11 Target Price Kes62.8; HOLD
Business and company brief: Barclays Bank Kenya has had

presence in Kenya since 1925. The bank has a network of 113
branches. The main business segments are 1) retail banking
which offers personal banking services to individuals and
corporates. Main products are transactional accounts, loans,
mortgages and asset finance; 2) Premier banking that
concentrates on preferential banking services to eligible
customers, mainly on the high-end; 3) corporate banking which
offers business services to include trade finance; and 4)
Barclaycard which offers a range of international credit card
facilities. Barclays is the #2 bank in Kenya by assets, loans and
deposits.
Key differentiating factor(s): In our opinion, the major
differentiating factor for Barclays bank is its strong brand, and the
support from its international parent. We believe the bank has also
managed to curve itself a niche in its premier banking and it could
enjoy relatively higher margins (fees). The low exposure to SME
and mass market is constructive to its credit risk profile.
Valuation and risks: Our FY11 target is Kes62.8. We establish a
Justified PBVR of 3.2X using a CoE of 17.3% (slightly lower than
most ‘local banks’ on brand strength; lower credit risks i.e. lower
NPL overhang risk due to high coverage ratio; and higher CAR); a
growth rate of 12% i.e. expected nominal GDP growth (lower than
most peers on concentration to corporate banking and no regional
play; theoretical sustainable growth rate is 8.6%); and an ROE of
28.8%. Our FY11 dividend yield is 6.6%, assuming a 70% dividend
payout ratio. The potential total return is a minute 1%, with the
potential capital loss of 5.5% being fully compensated for by the
dividend yield. The current PER ratio (FY10 EPS) at 8.5X is below
average PER since CY05 of 15.8X, and outside the volatility range.
Even our forward PER of 10.7X is outside this range. It looks like
investors are now expecting continued muted growth from
Barclays (understandably so given the performance of the last
three years) and taking the low PER (relative to history) as
undervaluation could be misleading. The high dividend yield
remains an attractive incentive though.
The primary risks to our valuation includes 1) slower earning
growth than anticipated due to heightened competition in the
Kenyan market, particularly as the bank is not extensively playing
the consumer mass market where penetration is significantly
lower; 2) continued stress on corporate Kenya and thus
maintenance of elevated provisions.
Share price catalyst(s): We have an in-line performance outlook.
However, the bank has ample room to engage in active capital
management. With a Core CAR of 26.6% and a Total CAR of
Page 37 of 62
31.2% the bank is well positioned to return capital to investors
either through a share-buyback or a dividend hike. Already in
FY10, the bank increased its payout ratio from 55% in the previous
year to 69%. We note that capital management is an important
catalyst for this share. A more risk tolerant strategy than the
current one which would increase the probability of earnings
growth could also be an important catalyst.
CAMEL Analysis: Like most of the banks in the system, the
CAMEL ratios are strong. 1) Capital: The bank has a very high
CAR of 31.2%. Except in the change of strategy (apparent risk
aversion and avoidance of the mass market and highly selective
SME lending), we do not see a material increase in the RWAs in
our forecast period. As a result, capital level is likely to remain
high. We expect the equity/loans ratio to average 27% in the next
3 years. We expect leverage to remain muted too; 2) Asset
quality: We anticipate a down-trending impairment costs/loans
ratio. As we mentioned already, Barclays is pursuing a low but
quality credit growth, and this is not necessarily a wrong decision
given the economic weaknesses in the past 3 years. We also
treasure the high NPLs coverage ratio which significantly reduced
the NPLs overhang risk to earnings; 3) Management: We
continue to see the bulk of operating income coming from interest
income – contributing an average of 62% in our forecast period.
Nonetheless, new products in telephone and internet baking should
continue to provide a fillip to non-interest income; 4) Earnings:
We expect an increase in NIM with a strong impetus coming from
rising interest rates in our forecast period, thus expanding interest
spreads. We also increased the bank’s RWAs by increasing the LDR
to 75% for FY11 and FY12 and 80% for FY13. The ROA excluding
exceptional items increases to 4.7% from 4.5%; 5) Liquidity: In
the face of lower growth in RWAs (relative to peers) we continue to
see high levels of liquidity, with an average liquidity ratio of 40.7%
in the next 3 years. Should the bank grow its loan book in a
significant way, we believe the deposits franchise is still strong to
support asset growth. The comparative low cost of liabilities would
create headroom for the bank to price away deposits from
competitors.
ROE decomposition: We forecast an average ROE of 28.8% for
the next three year. We expect asset yield and margin to decline
slightly but leverage should pick up despite remaining at <10X.
Major assumptions: Our key assumptions are 1) Balance sheet
related: We modelled an average deposit growth rate of 9% (vs.
a 4.6% growth in the past 3 years) and a LDR of 75% for FY11
and FY12 and 80% for FY13; 2) Income statement related: We
increased the interest/interest earning assets to 12.5% (vs. 12%
for FY10) on expectation of an upward trend in interest rates. We
reduce the interest expense/interest bearing liabilities due to the
bank’s high level of liquidity. We reduce the non-interest
income/total assets ratio to 4% (vs. 4.5% for FY10). We decrease
the impairments costs/loans ratio to 1% (vs. 1.4% for FY10) as we
Page 38 of 62
expect profitability and credit improvements as the economy gains
traction. We reduce this ratio to 0.9% for FY12 and FY13. We grow
operating expenses by an average of 6.3% over the period
(estimate of average inflation rate). Overall, our assumptions
crystallise to a pre-exceptional items earning increase of 12.1% for
FY11.
Fig 39: Valuation: Justified Price/Book valuation model
Sustainable ROE 28.82%
Sustainable growth rate 12.00%
ROE less growth rate 16.82%
CoE less growth rate 5.30%
Justified PBVR 3.2
FY11 BVPS 19.78
FY11 Target price 62.8
Current price 66.5
Potential capital gain ‐5.56%
FY11 forecast Div Yield 6.55%
Potential total return 0.99%
Trailing PER 8.5
Forward PER 10.7
Source: Bloomberg, Legae Securities, price as at c.o.b 11/3/11
Fig 40: Share price performance: Acceptable return in the past 12m; PER within history
100 35
PER Average +1STD ‐1STD
Price
90
30
80
25
70
60 20
50
15
40
30 10
20
5
10
0 0
Oct‐05
Oct‐06
Oct‐07
Oct‐08
Oct‐09
Oct‐10
Apr‐05
Apr‐06
Apr‐07
Apr‐08
Apr‐09
Apr‐10
Jan‐05
Jan‐06
Jan‐07
Jan‐08
Jan‐09
Jan‐10
Jan‐11
Jul‐05
Jul‐06
Jul‐07
Jul‐08
Jul‐09
Jul‐10
Jan‐05
May‐05
Sep‐05
Jan‐06
May‐06
Sep‐06
Jan‐07
May‐07
Sep‐07
Jan‐08
May‐08
Sep‐08
Jan‐09
May‐09
Sep‐09
Jan‐10
May‐10
Sep‐10
Jan‐11
Page 39 of 62
Fig 41: CAMEL ratio: Strong in absolute terms
2007 2008 2009 2010 2011F 2012F 2013F

C: Equity/Loans 16.7% 18.9% 25.9% 36.1% 26.3% 27.5% 27.3%
C: Leverage ratio 9.0 8.2 6.8 5.5 6.7 6.5 6.4
A: Impairement costs/Loans ‐0.7% ‐1.2% ‐0.5% ‐1.4% ‐1.0% ‐0.9% ‐0.9%
M: NII/Op. income 60.3% 59.3% 63.1% 60.2% 63.6% 63.4% 60.2%
M: Cost/income ‐58.8% ‐60.6% ‐59.3% ‐54.0% ‐50.9% ‐53.8% ‐53.9%
E: NIM 8.5% 10.1% 10.7% 10.9% 11.1% 11.1% 9.8%
E: ROA 3.1% 3.3% 3.7% 6.1% 4.7% 4.4% 4.1%
L: Loans/Deposits 96.6% 85.5% 74.3% 70.4% 75.0% 75.0% 80.0%
L: Liquid assets/depoists 33.5% 33.2% 42.6% 55.8% 38.4% 39.2% 44.6%
Source: Company reports, Legae Securities; ROA includes exceptional items.
Fig 42: Profitability: ROA strong; Leverage decline but we expect a rebound
2007 2008 2009 2010 2011F 2012F 2013F

Asset yield: Revenue/Assets 12.0% 14.0% 14.2% 15.1% 14.7% 14.7% 13.9%
Margin: Profit/Revenue 26.0% 23.4% 26.0% 40.7% 31.7% 30.0% 29.6%
ROA 3.1% 3.3% 3.7% 6.1% 4.7% 4.4% 4.1%
Leverage 9.0 8.2 6.8 5.5 6.7 6.5 6.4
ROE 28.0% 27.0% 25.2% 33.7% 31.5% 28.7% 26.3%
Source: Company reports, Legae Securities; ROA includes exceptional items
Fig 43: Assumptions: No materially deviation from history
2007 2008 2009 2010 2011F 2012F 2013F

Balance sheet model
Deposit growth 16.3% 15.9% ‐0.4% ‐1.6% 10.0% 9.5% 7.5%
LDR 97% 86% 74% 70% 75% 75% 80%
Income statement model
Interest income/IEAs 10.2% 12.9% 12.7% 12.0% 12.5% 12.5% 12.0%
Interest expense/IPL ‐2.0% ‐2.9% ‐2.1% ‐1.2% ‐1.5% ‐1.5% ‐2.5%
Fees and commission income/TA 0.0% 4.2% 4.1% 4.3% 4.0% 4.2% 4.1%
Fees and commission expense/TA 0.0% ‐0.2% ‐0.3% 0.0% ‐0.5% ‐0.5% ‐0.3%
Net fee and commission income/TA 3.8% 3.9% 3.8% 4.3% 4.5% 4.1% 4.1%
Foreign exchange income/TA 0.9% 1.5% 1.3% 1.4% 1.7% 1.5% 1.5%
Other operating income/TA 0.0% 0.3% 0.1% 0.4% 0.2% 0.2% 0.2%
Impairments/Loans ‐0.7% ‐1.2% ‐0.5% ‐1.4% ‐1.0% ‐0.9% ‐0.9%
Operating expenses/TA ‐7.0% ‐8.5% ‐8.4% ‐8.1% ‐7.5% ‐7.9% ‐7.5%
Taxation/PBT ‐30.6% ‐31.1% ‐32.3% ‐27.4% ‐30.0% ‐30.0% ‐30.0%
Page 40 of 62
Fig 44: Earnings model
2007 2008 2009 2010 2011F 2012F 2013F

Interest income 13,634 17,821 17,517 17,130.6 19,180.9 21,119.8 22,852.2
Interest expense ‐2,253 ‐3,811 ‐2,747 ‐1,457.1 ‐2,218.7 ‐2,423.6 ‐4,179.1
Net interest income 11,381 14,010 14,770 15,673.4 16,962.2 18,696.2 18,673.1
Fees and commission income 6,996 6,705 7,374.6 7,241.3 8,404.1 9,240.3
Fees and commission expense ‐412 ‐450 ‐ ‐905.2 ‐1,000.5 ‐677.5
Net fee and commission incom 5,984 6,584 6,255 7,374.6 6,336.2 7,403.6 8,562.8
Foreign exchange income 1,478 2,567 2,193 2,345.9 3,077.6 3,001.5 3,310.3
Other operating income 17 466 179 629.8 299.3 370.8 491.6
Total non‐interest income 7,479 9,617 8,627 10,350.3 9,713.0 10,775.9 12,364.6
Operating income 18,860 23,627 23,397 26,023.7 26,675.2 29,472.1 31,037.7
Impairment on loans and advan ‐687 ‐1,282 ‐513 ‐1,199.7 ‐1,021.6 ‐1,006.8 ‐1,154.4
Operating expenses ‐11,095 ‐14,329 ‐13,882 ‐14,048.6 ‐13,577.5 ‐15,851.2 ‐16,743.2
Profit before exceptional item 7,078 8,016 9,002 10,775.4 12,076.1 12,614.1 13,140.1
Exception Items 2,777.3 ‐ ‐ ‐
Profit before tax 7,078 8,016 9,002 13,553 12,076 12,614 13,140
Taxation ‐2,168 ‐2,491 ‐2,911 ‐2,953.7 ‐3,622.8 ‐3,784.2 ‐3,942.0
Profit /loss for the year 4,910 5,525 6,091 10,599 8,453 8,830 9,198
EPS 3.60 4.10 4.50 7.81 6.23 6.50 6.77
Source: company reports, Legae Securities
Fig 45: Abridged Balance Sheet model
2007 2008 2009 2010 2011F 2012F 2013F

Cash and balances with CBK 10,774 13,695 9,751 13,131 12,153 13,487 15,935
Government securities 25,721 28,307 43,861 55,996 40,092 44,967 55,611
Loans and advances 105,346 108,086 93,543 87,147 102,157 111,862 128,268
Total assets 157,656 168,510 164,876 172,415 181,034 200,099 223,242
Customer deposits 109,097 126,408 125,869 123,826 136,209 149,149 160,335

Total liabilities 140,092 148,047 140,666 140,950 154,169 169,330 188,282
Total shareholders' equity 17,564 20,463 24,210 31,465 26,865 30,769 34,961
Liabilities + Equity 157,656 168,510 164,876 172,415 181,034 200,099 223,242
Page 41 of 62
Initiation: Cooperative Bank - SELL
A strong deposit franchise provides scope for growth but
valuation risks are high; FY11 Target Price Kes17.3; SELL
Company and business brief: The history of Cooperative bank

dates back to 1965 when it was registered under the Cooperative
Societies Act. In 2008, the bank was incorporated under the
Companies Act and listed on the NSE in December of the same
year. The major shareholder, CoopHoldings Co-operative Society
Limited owns 64.56% of the Group. In addition to retail banking,
the group runs three subsidiaries, namely 1) Kingdom Securities
Limited which provides stock-broking services (shareholding 60%);
2) Co-op Trust Investment Services Limited which is a fund
management subsidiary and is wholly owned by the bank; and 3)
Co-operative Consultancy Services (K) Limited which provides
advisory and corporate finance services and is wholly owned by
the bank. The bank has 88 branches. The Group has a 25.5%
ownership in Cooperative insurance Company Limited. Cooperative
is the #4 biggest bank by assets, and #3 by loans and deposits.
Key differentiating factor(s): The ability to mine cooperatives
(Savings and credit cooperatives (SACCOs) who have developed
capacity be a source of deposits and loan demand is a primary
differentiating factor for Cooperative bank, in our view. The bank is
well-placed to wring-fence the business of SACCOs to a very large
extent, and given the size of the informal market is Kenya,
SACCOs play an important role. Knowledge banking could enable
Cooperative bank to develop domain expertise which would help to
understand the captive market of the SACCOs that is estimated to
have a membership of ~7mn people.
Valuation and risks: Our FY11 TP is Kes17.3. Our Justified PBVR
is 2.3X, obtained by applying a CoE of 18.5%, a sustainable
growth rate of 14.75% (theoretical sustainable growth rate is
15.1% using a payout ratio of 35%; but we discount it to capture
no exposure to regional markets yet and peer inferior CAR); and
an ROE of 23.2%. The trailing PER of 13.9X (2010 EPS) is lower
than the average of 14.8X, although we caution the risk of
subjectively using the average PER as the share’s trading history is
short (listed in 3Q08). A forward PER of 10.2X (Legae EPS
estimate) is not attractive when compared to KCB and Equity.
Why we are sceptical on Cooperative: There are 4 primary
reasons that make us agnostic on Cooperative. 1) The PER is high
relative to peers and doesn’t provide reasonable a ‘safety margin’
when compared to history. After a strong rally in the past 12-
months (relative to peers), the trailing PER shot beyond 20X
before a retreat in recent times. The trailing PER using the recently
announced FY10 results of 13.9X which is the highest vs. peers
except StanChart. We think in case of disappointments, (earnings,
economics, politics etc), Cooperative faces higher downside risks
than peers; 2) a peer inferior CAR on the face of regionalisation
Page 42 of 62
and mortgage lending growth is not appealing. While the CAR is
high on a stand-alone basis, Cooperative’s CAR of 16.2% is only
better than StanChart. This means its peers posses the ability to
expand their RWAs at a higher rate. Taking into consideration that
the bank has established a subsidiary in Southern Sudan (70%
stake, remainder owned by Government of Southern Sudan), the
capital buffer could run thin should the loan book expand.
Nevertheless, we applaud the decision to establish partnerships
with incumbent banks in various East African countries rather than
establishing subsidiaries as that could allow the bank to access
these markets at a lower cost; 3) lower efficiency as indicated by
the poorer profits/deposits ratio and lower return on RWAs. The
bank’s profits/deposits at is 3.7%. (lowest alongside KCB) and
Cooperative has the highest liabilities cost as well as the highest
interest expense. Asset rotation is low at 11.9% (only better than
StanChart) hence and poorer ROA. Capital-risk adjusted return of
4.1% is the least among the peers. To us, a combination of
relatively more expensive liabilities and low asset rotation are
structural issues that could impair future profitability.
Nevertheless, we highlight that the bank’s pre-exceptional items
profitability has been very consistent. (CAGR of 45.6%); and 4)
the low provision growth rates vs. loans and advances that could
create risks to earnings in future. Cooperative’s provisions have
significantly lagged loan growth at 4.4% vs. loan growth of 31%
between CY07 and CY10.
CAMEL analysis: That is the dilemma we face. On a standalone
basis, CAMEL indicators for the Top 5 banks are strong. However
we note the following: 1) Capital: Cooperative bank’s 16.2%
Total CAR and a Core CAR of 16.2% are not mean measures at all.
However, as we have indicated above, the CARs are lower than
most of it peers except StanChart. It is important however, to
indicate that in relation to solvency risk, the bank is well buffered.
We have forecast an average equity/loans ratio of 23.5% for the
next 3 years. We expect the leverage to remain below 8X; 2)
Asset quality: We should indicate that we are impressed by the
coverage ratio for Cooperative bank that rose to 61% from 46% in
FY09. The provisions/loans ratio also declined to 0.9% from 1% in
the previous year. Coming from 1.8% in FY07, we believe the ratio
has normalised and we model an average ratio of 1% for the next
3 years; 3) Management: The cost/income ratio is still high at
~60%. Management indicated that they rationalised their
headcount, and about 300 positions (people) where retrenched in
order to reign in on costs, but we maintain the ratio ~60% on
expansion (Southern Sudan and branch network costs). We admit
this could be a key catalyst to the bottom line should the bank
become more efficient; 4) Earnings: We expect a minor rebound
in NIM on the back of expanding spreads. The impact is a small
improvement in the ROA from 3% in FY10 to 3.2%. Leverage
should however, decrease slightly on capitalisation of the Southern
Sudan subsidiary; and 5) Liquidity: Like most of the indicators,
on a standalone basis they ratios are strong. The bank’s LDR of
Page 43 of 62
~70% and a liquidity ratio of 39.4% (we calculate it at 35.8%)
provides significant room for changes in asset mix. Given the
bank’s captive deposit market, we do not see material risks to
liquidity.
Major assumptions: Our primary assumptions are: 1) Balance
sheet: We have assumed a deposit growth rate of 25% for FY11
(vs. average 27% since FY07) before subsequently reducing it to
20% and 15% for FY12 and FY13. We increased the LDR to 75%
throughout our forecast period; 2) Income statement: We
increased the interest/interest earning assets to 8.7% (vs. 8% for
FY10; 8.7% is also the average yield since FY07). We increased
the interest expense/interest bearing liabilities to 2.2% (vs. 2.0%
for FY10) on increasing competition; particularly should there be
consolidation that could give merged entities scale. We also raised
the provisions/loans ratio to 1% (vs. 0.9% for FY10)
Page 44 of 62
Fig 46: Valuation: The Justified Price/Book valuation model
Average ROE 23.2%
Cost of Equity 18.5%

Justified Price/Book Value ratio 2.3
FY11 Book Value 7.7
Current price 18.25
Potential capital gain ‐5.0%
Dividend yield 2.0%
Potential total return ‐3.0%
Trailing PER 13.9
Forward PER 10.2
Source: Bloomberg, Legae Securities, prices as at c.o.b 11/3/11
Fig 47: Share price performance: High PER on expectations of robustly earnings growth
25 30 PER
Price
average
25
20
20
15
15
10
10
5
5
0
0
Apr‐09
Apr‐10
Feb‐09
Feb‐10
Feb‐11
Jun‐09
Jun‐10
Dec‐08
Dec‐09
Dec‐10
Aug‐09
Oct‐09
Aug‐10
Oct‐10
Apr‐09
Apr‐10
Feb‐09
Feb‐10
Feb‐11
Dec‐08
Jun‐09
Dec‐09
Jun‐10
Dec‐10
Aug‐09
Oct‐09
Aug‐10
Oct‐10
Page 45 of 62
Fig 48: CAMEL ratios: Strong on a stand-alone basis.
2006 2007 2008 2009 2010 2011F 2012F 2013F

C: Equity/Loans 18.4% 17.8% 25.7% 26.0% 23.6% 23.1% 22.9% 24.3%
C: Leverage ratio 11.12 9.58 6.13 6.84 7.54 7.25 7.28 6.94
A: Provision/Loans 5.0% 1.8% 0.8% 1.0% 0.9% 1.0% 0.9% 1.0%
M: NII/Op. income 48.3% 54.6% 59.0% 57.8% 58.6% 59.9% 58.9% 60.9%
M: Cost/Income 61.2% 63.5% 61.0% 62.8% 58.9% 58.7% 59.3% 56.9%
E: NIM 9.4% 10.4% 10.8% 9.7% 9.3% 10.9% 10.5% 10.8%
E: ROA 1.5% 2.4% 2.8% 2.7% 3.0% 3.2% 3.1% 3.4%
L: Loans/Deposits 59.0% 70.2% 80.3% 68.0% 69.9% 75.0% 75.0% 75.0%
L: Liquid asssets/Deposits 38.5% 28.6% 23.8% 33.5% 35.8% 32.0% 32.4% 34.9%
Fig 49: ROE decomposition: We expect asset rotation to increase and boast ROA
2006 2007 2008 2009 2010 2011F 2012F 2013F

Asset yield: Revenue/Asse 11.9% 12.6% 11.6% 10.6% 10.2% 11.8% 11.3% 11.5%
Margin: Profit/Revenue 12.5% 18.7% 24.6% 25.3% 29.2% 27.4% 27.4% 29.8%
ROA 1.5% 2.4% 2.8% 2.7% 3.0% 3.2% 3.1% 3.4%
Leverage 11.1 9.6 6.1 6.8 7.5 7.2 7.3 6.9
ROE 16.6% 22.6% 17.4% 18.3% 22.4% 23.4% 22.6% 23.7%
Direct ROE 16.6% 22.6% 17.4% 18.3% 22.4% 23.4% 22.6% 23.7%
Fig 50: Assumptions: Generally in line with history
2007 2008 2009 2010 2011F 2012F 2013F

Balance sheet
Deposit growth 13.7% 20.2% 39.0% 35.4% 25.0% 20.0% 15.0%
LDR 70.2% 80.3% 68.0% 69.9% 75.0% 75.0% 75.0%
Income statement
Interest income/IEA 8.9% 9.4% 8.7% 8.0% 8.7% 8.7% 8.5%
Interet expense/IPL 1.7% 2.5% 2.4% 2.0% 2.2% 2.4% 2.3%
Fee income/TA 6.4% 5.7% 5.2% 4.8% 5.5% 5.4% 5.2%
Provisions/Loans 1.8% 0.8% 1.0% 0.9% 1.0% 0.9% 1.0%
Staff cost/Assets 4.1% 4.2% 4.1% 3.4% 3.9% 3.9% 3.8%
Tax/PBT 27.3% 30.9% 20.8% 18.1% 24.3% 23.5% 21.7%
Page 46 of 62
2007 2008 2009 2010 2011F 2012F 2013F
Loans and advances 4,085.719 5,869.019 7,441.411 9,274.912 13,355.642 15,765.461 18,218.321
Government securities 1,290.586 1,227.857 1,501.757 2,519.198 3,715.340 4,063.329 5,458.754
Deposits and placements 37.373 36.258 49.307 32.636 90.709 94.659 161.728
Other interest income 106.147 291.513 71.153 ‐ 258.925 290.682 223.214
Total interest income 5,519.825 7,424.647 9,063.628 11,826.746 17,420.616 20,214.130 24,062.016
Customer deposits 889.908 1,530.165 2,192.508 2,414.470 3,210.382 4,060.852 4,596.158
Deposits and placements 61.764 159.081 62.184 83.769 386.748 494.009 465.135
Other interest expense 48.760 39.510 39.647 139.893 125.371 142.098 171.465
Total interest expense 1,000.432 1,728.756 2,294.339 2,638.132 3,722.501 4,696.959 5,232.758
Net interest income 4,519.393 5,695.891 6,769.289 9,188.614 13,698.115 15,517.171 18,829.257
Fees and commissions on loans 509.831 524.377 639.482 908.281 1,244.945 1,603.785 1,673.599
Other fees and commissions 2,399.296 2,694.722 2,775.992 3,476.237 5,641.348 6,397.601 6,982.943
Foreign exchange dealing 414.221 493.581 375.887 621.201 837.406 1,036.984 1,084.954
Dividend income ‐ ‐ 7.154 6.563 5.228 7.823 11.260
Other income 433.114 242.102 1,150.383 1,471.019 1,424.037 1,761.865 2,336.022
Total non‐interest income 3,756.462 3,954.782 4,948.898 6,483.301 9,152.965 10,808.057 12,088.778
Total operating income 8,275.855 9,650.673 11,718.187 15,671.915 22,851.080 26,325.229 30,918.036
Loan loss provision 699.891 403.262 628.384 798.666 1,161.360 1,286.775 1,544.354
Staff costs 2,419.776 2,933.547 3,844.312 4,493.620 6,591.440 7,801.722 8,806.746
Directors emoluments 55.678 70.789 75.512 89.887 143.666 167.544 182.693
Rental charges 196.207 342.396 400.973 551.904 695.407 873.408 974.372
Depreciation on property 332.854 425.419 605.392 853.251 1,027.392 1,253.770 1,453.284
Amortization charges 56.337 58.592 83.692 97.434 142.818 165.714 190.132
Other operating expenses 2,196.588 2,057.649 2,344.226 3,144.511 4,820.015 5,341.314 5,988.713
Total operating expenses 5,957.331 6,291.654 7,982.491 10,029.273 14,582.097 16,890.246 19,140.295
Profit/loss before exceptional items 2,318.524 3,359.019 3,735.696 5,642.642 8,268.983 9,434.982 11,777.741
Exceptional items ‐ ‐ ‐ 129.977 ‐ ‐ ‐
Profit and loss before tax 2,318.524 3,359.019 3,735.696 5,772.619 8,268.983 9,434.982 11,777.741
Current tax 632.241 1,037.496 777.409 1,045.792 2,006.938 2,219.208 2,553.368
Deferred tax 136.678 ‐52.315 ‐9.676 146.128 ‐ ‐ ‐
Profit (loss) 1,549.605 2,373.838 2,967.963 4,580.699 6,262.045 7,215.774 9,224.372
EPS 0.799 0.850 1.312 1.793 2.066 2.641
Fig 52: Abridged Balance Sheet model
2007 2008 2009 2010 2011F 2012F 2013F

Balances due from CBK 3,619.3 3,172.6 4,348.8 8,735.3 9,431.0 10,865.1 13,216.0
Kenya Gvnt Securities 9,666.6 9,131.5 22,081.3 30,329.0 32,775.3 40,399.0 51,158.4
Gvnt and other securities for dealing 3,278.5 3,725.5 4,362.5 4,030.3 3,484.1 7,560.3 3,346.7
Loans and advances 38,429.5 52,908.5 62,274.2 86,618.3 116,136.0 139,363.2 160,267.7
Total assets 65,708.9 83,485.9 110,678.1 154,340.0 194,415.9 232,526.7 269,876.8
Customer deposits 54,775.4 65,853.7 91,518.7 123,878.4 154,848.0 185,817.6 213,690.3

Total liabilities 58,853.4 69,876.7 94,386.5 133,743.9 167,481.2 200,473.1 230,843.7
Total shareholder funds 6,855.5 13,609.2 16,185.0 20,477.4 26,816.0 31,934.9 38,914.4
Total liabilities and shareholder funds 65,708.9 83,485.9 110,678.1 154,340.0 194,415.9 232,526.7 269,876.8
Page 47 of 62
Initiation : KCB Limited - BUY
A solid franchise at an attractive valuation level; FY11
Target Price Kes27.6; BUY
Business and company brief: KCB is one of the oldest banks in

the system with a history that stretched back to 1896. After going
through different phases, the Government of Kenya (GoK)
acquired 100% of National Grindlays bank in 1970 and renamed it
Kenya Commercial Bank. The GoK has since reduced its
shareholding to 17.1%. Besides Kenya, KCB has operations in
Southern Sudan (11 branches), Uganda (13 branches), Tanzania
(11 branches) and Rwanda (9 branches). In CY2010, the Group
merged with S&L in order to grow its mortgage offering. The bank
boasts the highest number of branches in Kenya at 168. KCB is the
biggest bank by assets, loans and deposit.
Key differentiating factor(s): In our view, KCB is the only
mainstream banks with a material regional play. Equity Bank is
another, but it is more of an MFI than otherwise. In a region that
is increasingly becoming integrated, regional presence should bode
well for KCB, particularly in the areas of trade finance. KCB is well
placed to enjoy benefits of increasing scale.
Valuation and risks: Our 12-month price target of Kes27.6
implies upside potential of 24.2%. We forecast a potential total
return of 32%. (Forward dividend yield of 7.8%). Applying a CoE
of 18.25%, a sustainable growth rate of 12.75% (we adjust the
theoretical growth rate of 11.3% to capture value accretion from
the regional markets and the high CAR) and an ROE of 22.5%, we
obtain a Justified PBVR of 1.8X. Looking at the PER since CY05, the
current trailing PER of 9.1X (2010 EPS) is below the average of
18X. We think that even this relatively long-term PER of 18X is
expensive anyway, but at our forward PER of 6.4X, we believe the
risk return profile is attractive. Given our constructive stance on
earnings, (+43% for FY11) we question the discount to peers that
KCB is attracting.
The key risks to our valuation include 1) slower recovery on loan
loss provisions and 2) higher costs in its regional expansion
programme (i.e. execution risks). Management indicates that
Uganda and Rwanda may require more capital to ensure ability to
underwrite higher value loans.
Share price catalysts and why we are constructive: Over the
past 12 months, KCB share price has returned a derisory 4.4%.
This is against capital gains of 29.1%, 83.4%, 58.9% and 42.2%
for Barclays, Cooperative, Equity and StanChart respectively. Bad
and doubtful debts provisions have increased by 199% in FY10,
and the ratio climbed to 1.4% of loans and advances.
Normalisation to 1% should support ROA. Management expects
Tanzania, Uganda and Rwanda to break-even this year. Southern
Sudan is already profitable through transactional banking services
alone as regulations related to lending are yet to be promulgated.
Page 48 of 62
Overall, we are positive on KCB because 1) all the regional
markets, at least according to management, should either break
even or turn profitable this year. Management’s decision to
consolidate the current regional exposure than expanding into new
markets, means that no further risk is assumed in the short-term;
2) the high CAR level ensure ability to expand RWAs. Management
expect mortgage growth of 40%, and will introduce mortgage
products in some of its regional markets; and 3) relative structural
strength against local peers (i.e. excluding Barclays and
StanChart). Compared to Equity bank and Cooperative, KCB
attracts the cheapest liabilities (cost of liabilities is 1.6% vs. 1.8%
for Cooperative and 2% for Equity). The asset rotation at 13.6% is
higher than Cooperative’s 11.9% although it is lower than Equity
bank’s exceptional 16.9%. Improvements in the expense ratio as a
result of no further regional expansion and extremely controlled
headcount expansion (as per management guidance) should
provide a boost to ROA.
CAMEL analysis: Below we highlight the key CAMEL ratios for
KCB. 1) Capital: The bank’s capital position is strong with a Core
CAR of 23.1% as at end of FY10. Leverage is also low at 6.4X
although we expect it to increase somewhat to ~7X. From FY07 to
FY09, the bank’s ROA has declined steadily before it’s recovered
strongly to 2.9% in FY10. Our forecasts maintain the ROA ~3%;
we forecast equity/loans ratio to decline permanently by about
3pps as loan book growth accelerates in regional markets; 2)
Asset quality: Bad debts expense/loans ratio went up in FY10 to
1.4% from 0.6%. Coverage ratio also rose moderately from 49%
in FY09 to 53%. We expect the bad debts/loans ratio to improve
on economic improvement to 1% over our forecasting period. The
low coverage ratio (only better than Equity bank) is our main
source of worry. On the other hand, growth in provisions at 34%
between CY07 and CY10 matches the 32% growth in loans and
advances; 3) Management: We expect the cost/income ratio to
improve to 57% (vs. 61% for FY10). Management indicated no
intention to increase staff and we also believe efficiency benefits
will begin to come through from regional markets. We expect net
interest income to continue to make ~60% of operating income
though; 4) Earnings: The ROA improved moderately from 2.1%
in FY09 to 2.9% in FY10. We expect this moderate upward
movement in the ROA to continue as regional markets contribution
becomes positive. We expect the NIM to remain relatively stable
at an average of 10.2% in our forecast period; and 5) Liquidity:
The LDR remained stable at ~75%. While we increase it to 80%
for our forecasting period, the bank has ample liquidity. The
disclosed liquidity ratio as at end of FY10 was 28% (our calculation
shows ~30%). It is also important to highlight that the bank’s
deposit franchise is strong. Deposits have grown by a CAGR of
27% between FY07 and FY10.
Primary assumptions and financial forecasts: The important
assumptions to mention are 1) Balance sheet: we grow deposits
Page 49 of 62
by 25% for FY11 (management guidance is 30%) and maintain a
LDR of 80%. 2) income statement: we increased the interest
income/interest earnings assets slightly to 12.5% for FY11 (vs.
12.3% for FY10) before reducing it to 12% in FY13; We increase
the interest expense/interest bearing liabilities to 2% (vs. 1.7% for
FY10; management indicates a possible cost of deposits of 1.9%).
We maintain the fee/total assets ratio slightly at 2.8% for FY11 but
increased it to 3% on expectation of rising regional penetration by
the bank. We also maintain the operating expenses/total assets
ratio at 7.5% throughout our forecast period (vs. average of 7.3%
from FY07 to FY10).
Our assumptions lead to the following important income statement
effects. 1) Operating income grows by 25% for FY11; 11% and
14% for FY12 and FY13 respectively; 2) EPS grow by 43% for
FY11; 13% in FY12; and 21% for FY13.
Fig 53: Valuation: The Justified PBVR model
Justified PBVR 1.8
FY11 BVPS 15.57
Current price 22.25
Potential capital gain 24.17%
Trailing PER 9.1
Forward PER 6.4
Source: Company reports, Bloomberg, Legae Securities, price as at c.o.b 11/3/11
Fig 54: Share price performance: Valuation risk looks low

35
price PER Average +1STD ‐1STD
40
30
35
25
30
20 25
20
15
15
10
10
5 5
0
0
Jan‐05
May‐05
Sep‐05
Jan‐06
May‐06
Sep‐06
Jan‐07
May‐07
Sep‐07
Jan‐08
May‐08
Sep‐08
Jan‐09
May‐09
Sep‐09
Jan‐10
May‐10
Sep‐10
Jan‐11
Oct‐05
Oct‐06
Oct‐07
Oct‐08
Oct‐09
Oct‐10
Apr‐05
Apr‐06
Apr‐07
Apr‐08
Apr‐09
Apr‐10
Jan‐05
Jan‐06
Jan‐07
Jan‐08
Jan‐09
Jan‐10
Jan‐11
Jul‐05
Jul‐06
Jul‐07
Jul‐08
Jul‐09
Jul‐10
Page 50 of 62
Fig 55: CAMEL ratios: Robust on a stand-alone basis
2007 2008 2009 2010 2011F 2012F 2013F

C: Equity/Loans 20.5% 22.5% 18.4% 26.4% 23.3% 23.1% 24.3%
C: Leverage ratio 9.1 9.1 8.6 6.4 7.3 7.0 6.7
A:Bad debts expense/Loans 1.2% 1.5% 0.6% 1.4% 1.0% 1.0% 1.2%
M:NII/Op. income 59.8% 60.6% 64.0% 64.0% 64.0% 65.7% 66.5%
M: Cost/income 64.8% 61.8% 68.9% 61.0% 56.7% 55.4% 53.2%
E:NIM 9.9% 10.3% 10.1% 10.3% 10.2% 10.1% 10.4%
E:ROA 2.5% 2.2% 2.1% 2.9% 3.1% 3.2% 3.4%
L:Loan/deposit 68.1% 73.8% 75.2% 75.2% 80.0% 80.0% 80.0%
L:Liquid assets/deposits 40.2% 33.1% 24.4% 30.9% 31.6% 30.1% 31.5%
Fig 56: ROE decomposition: ROA and leverage to marginal improve and support ROE
2007 2008 2009 2010 2011F 2012F 2013F

Asset yield : Revenue/Assets 11.7% 10.2% 11.6% 12.2% 11.4% 11.6% 12.0%
Margin: Profits/Revenue 21.0% 21.6% 18.1% 23.5% 26.7% 27.2% 28.8%
ROA 2.5% 2.2% 2.1% 2.9% 3.1% 3.2% 3.4%
Leverage 9.1 9.1 8.6 6.4 7.3 7.0 6.7
ROE 22.5% 19.9% 18.1% 18.4% 22.4% 22.1% 23.1%
Fig 57: Assumptions: We model below management guidance for prudence
2007 2008 2009 2010 2011F 2012F 2013F

Income statement
Interest income/Interest earning assets 11.0% 12.9% 12.5% 12.2% 12.5% 12.3% 12.0%
Interest expense/interest earning liabilities ‐0.9% ‐1.8% ‐2.1% ‐1.7% ‐2.0% ‐2.0% ‐1.5%
Fees and commission income/Total assets 3.8% 3.0% 3.0% 2.8% 2.8% 3.0% 3.0%
Fees and commission expense/Total assets ‐0.2% ‐0.1% ‐0.2% ‐0.1% ‐0.1% ‐0.1% ‐0.1%
Dividend income/total assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Foreign exchange income/trading assets 0.7% 0.9% 0.8% 1.1% 1.1% 1.1% 1.1%
Other operating income/total assets 0.4% 0.2% 0.5% 0.6% 1.0% 0.7% 0.8%
Bad and doubtful debts expense/loans ‐1.2% ‐1.5% ‐0.6% ‐1.4% ‐1.0% ‐1.0% ‐1.2%
Other operating expenses/total assets ‐7.6% ‐6.3% ‐8.0% ‐7.4% ‐7.5% ‐7.5% ‐7.5%
Taxation/PBT ‐29.6% ‐30.3% ‐35.2% ‐26.7% ‐30.0% ‐30.6% ‐29.1%
Balance sheet
Deposit growth n/m 34% 29% 21% 25% 15% 10%
Loan/Deposit ratio 68% 74% 75% 75% 80% 80% 80%
Page 51 of 62
2007 2008 2009 2010 2011F 2012F 2013F

Interest income 9,373.39 14,745.59 17,968.46 23,109.79 30,213.92 34,080.73 37,268.49
Interest expense ‐921.82 ‐2,970.47 ‐3,499.73 ‐3,464.47 ‐5,621.16 ‐6,109.67 ‐5,001.88
Net interest income 8,451.57 11,775.12 14,468.72 19,645.33 24,592.75 27,971.06 32,266.61
Fees and commission income 4,524.18 5,778.50 5,849.69 7,159.88 8,126.20 9,438.60 10,325.17
Fees and commission expense ‐243.88 ‐229.35 ‐310.14 ‐340.75 ‐401.21 ‐454.14 ‐479.72
Net fee and commission income 4,280.30 5,549.16 5,539.55 6,819.13 7,724.99 8,984.46 9,845.45
Dividend income 23.96 6.72 1.14 1.19 ‐ ‐ ‐
Foreign exchnage income 838.89 1,628.57 1,648.23 2,775.49 3,192.44 3,460.82 3,785.90
Other operating income 540.04 467.98 936.15 1,450.80 2,902.21 2,158.10 2,596.36
Total non‐interest income 5,683.19 7,652.43 8,125.07 11,046.61 13,819.64 14,603.38 16,227.70
Operating income 14,134.76 19,427.54 22,593.79 30,691.93 38,412.39 42,574.44 48,494.31
Bad and doubtful debts expense ‐748.15 ‐1,408.51 ‐717.92 ‐2,144.43 ‐1,969.75 ‐2,290.22 ‐2,990.08
Other operating expenses ‐9,160.62 ‐12,006.17 ‐15,575.49 ‐18,719.10 ‐21,766.61 ‐23,596.50 ‐25,812.93
Profit before tax 4,225.98 6,012.86 6,300.38 9,828.41 14,676.03 16,687.72 19,691.30
Taxation ‐1,251.41 ‐1,822.17 ‐2,216.49 ‐2,620.00 ‐4,402.81 ‐5,108.54 ‐5,728.20
Profit after tax 2,974.57 4,190.69 4,083.89 7,208.41 10,273.22 11,579.18 13,963.11
EPS 1.84 2.44 3.48 3.93 4.73
Fig 59: Abridged Balance sheet model
2007 2008 2009 2010 2011F 2012F 2013F

Held for trading 4,399.1 3,765.4 2,628.8 847.9 4,426.6 3,747.4 3,716.1
Held to maturity 21,279.8 20,940.9 21,285.0 42,051.3 44,736.7 51,689.2 61,397.8
Loans and advances to customers 64,278.1 93,522.1 122,659.1 148,113.4 196,974.7 226,520.8 249,172.9
Total assets 120,479.6 191,211.6 194,777.8 251,356.2 336,160.6 366,992.9 404,746.4
Due to banks 5,828.6 38,506.0 6,668.4 9,557.4 34,839.8 22,332.5 21,992.6

Customer deposits 94,392.4 126,691.1 163,029.4 196,974.7 246,218.3 283,151.1 311,466.2
Total equity + liabilities 13,204.7 21,087.0 22,570.2 39,129.8 45,939.1 52,373.0 60,573.9
Total equity + liabilities 120,479.6 191,211.6 194,777.8 251,477.1 336,160.6 366,992.9 404,746.4
Page 52 of 62
Initiation: Standard Chartered - HOLD
Opportunities to constrained by lower relative CAR; FY11
Target Price Kes265.8; HOLD
Business description and management: StanChart has 97

years Kenyan experience having opened its first branch in 2011.
The bank divides its banking services into 1) Wholesale banking
which provides trade finance, cash management, foreign exchange
dealing and corporate finance services; and 2) Personal banking
which provides consumer banking services to individuals and
SMEs. StanChart has 32 branches and is the #3 biggest bank by
assets, but only ranks #5 by advances and #4 by deposits.
Key differentiating factor(s): Standard Chartered is a strong
franchise, with an international parent that provides a global
network. The low provision/loans ratio also indicates that the bank
has been acquiring top quality assets when compared to
competitors. This ratio has been constantly below 1% from FY07.
The coverage ratio is also fair at 56%. The efficiency as indicated
by the low cost/income ratio is important. StanChart has the
lowest expense ratio at 5.6% (vs. average of 8.8% for the Top 5
banks). A competitive ROA of 3.8% when the bank’s asset rotation
is comparatively low connotes the benefits of efficiency (optimal
cost control).
Valuation and risks: We estimate a 12-month target price of
Kes265.8, just ~1.5% above the current price. We apply the same
methodology we have been subjecting other banks to i.e. the
Justified PBVR. We use a CoE of 17.5% (higher than Barclays due
to relative lower coverage ratio and lower CAR); a sustainable
growth rate of 11.83%, which is its theoretical sustainable growth
rate. Our Justified PBVR is 3.9X, which to a large extent reflects
the greater ROE that StanChart enjoys. A look at the long-term
average PER indicates that the share was trading close to its
average. However, using 2010EPS (recently released), the PER
shrinks to 14X. Our forward PER is 10.8X. We see limited
immediate potential in the share price, and with a lower CAR, (only
2pps buffer) catalysts are thin and few, although a capital raising
could be a catalyst. Meanwhile, the high payout ratio (and dividend
yield) remain a major incentive for exposure although we doubt its
sustainability given the low CAR, unless if the bank sheds off
assets.
The key risks to our valuation includes 1) a deterioration in the
credit quality than we have forecasted; 2) a deterioration in
efficiency (cost/income) ratio than we anticipate. On the upside
risk, 3) a higher than expected asset growth could lead to
outperformance.
CAMEL analysis: Like most of the big banks, the indicators are
strong except for the capital position for StanChart (and that is
relative to peers under analysis): 1) Capital: That is our greatest
concern for StanChart - a CAR of 14%, just 2pp above the
Page 53 of 62
minimum required. We do not imply that it is a low level. In some
systems, especially in the pre-crisis period, banks with CAR of
14% were reckoned to be using capital inefficiently. However,
valuation is relative. In Kenya, of the Top 5 banks under our
coverage, this is the lowest CAR. The concern is that StanChart’s
ability to grow market share (RWAs) is greatly hindered when
compared to its peers. However, it is important to highlight that
the bank increased its dividend payout ratio from 69% in FY09 and
72% in FY10, which indicates its unwillingness to build up capital
and aggressively grow its RWAs. Alternatively, the bank could be
banking on its ability to raise other forms of capital. 2) Asset
quality: The seemingly controlled asset growth is reflected in low
provisions/loans ratio when compared to peers. A coverage ratio of
56% is not particularly substandard although we would prefer to
see coverage ratio of 65% at the minimum. We give management
the benefit of doubt and assume the recovery rate is comparably
higher; 3) Management: Again, in efficiency StanChart shows
strong ratios. The cost/income ratio has averaged 45% between
FY05 and FY10. With no regional expansion, cost pressures only
come from inflation and local expansion (branch network, ATMs)
and technology based; 4) Earnings: The NIM lost >3pps from an
average of 11% pre-2008 to settle around 7%. We expect it to
grow upward mildly due to expansion in interest spreads and asset
allocation (we increase the LDR). We expect the ROE, which has
averaged 28.7% between FY05 and FY10 to average 33.5% as a
result of a positive boost from ROA and an increase in leverage
(more of capital management due to a high dividend payout) in
the next 3 years; and 5) Liquidity: Despite a low CAR, the bank is
liquid. The liquidity ratio is more than 2X the minimum required at
55% (we estimate 53%) while the LDR is 60%, the lowest among
banks under coverage in this report. Between FY06 and FY10,
deposits growth has averaged 11.8%, and we have modelled a
15% growth (vs. FY10’s 15.8%). We do not think the bank faces
immense liquidity risks, especially given a constraint in its RWAs
growth due to a comparatively low 2pps capital safeguard.
ROE breakdown: The ROE declined to 26% for FY10 despite a
strong ROA of 3.8%, as leverage declined to 7X from 8.8X in FY09.
Notwithstanding our CAR concerns, we expect leverage to take a
slight uptick in FY11 and thus amplify the ROE back to >30s. We
forecast an average ROE of 33% in the next 3 years if the bank
continues with a payout ratio of 70%.
Primary assumptions and financial forecasts: Below we show
the primary assumptions for our model 1) Balance sheet model:
we assumed a deposit growth rate 15% throughout our forecasting
period. We model a LDR of 65% for FY11, 70% for FY12 and 75%
for FY13; 2) Income statement: We raise the interest
income/interest earning assets to 9.5% for FY11 (vs. 8.2% for
FY10) on our expectation of improving economic conditions and
up-trending interest rates. We maintain the interest
expense/interest bearing liabilities ratio at 1.5% for FY11 as we do
Page 54 of 62
not see reasons for a vigorous deposit mobilisation strategy by the
bank, given its high liquidity ratio and low CAR (which constrain
RWAs growth). We raised the provisions/loan ratio slightly to 0.9%
and maintained it at that level for the next 3 year. (this is also the
average ratio between CY06 and CY10).
Our assumptions lead to the following important income statement
effects. 1) Operating income grows by 30.7%% for FY11; 11.3%
and 7% for FY12 and FY13 respectively; 2) earnings per share pick
up by 29.5% for FY11 before growth declining to 10.4% in FY12.
Average ROE 33.8%
Cost of Equity 17.5%
Justified Price/Book Value ratio 3.9
FY11 Book Value 68.6
Current price 262
Potential capital gain 1.5%
Dividend yield 6.5%
Trailing PER 14.0
Forward PER 10.8
Source: Company reports, Legae Securities, price c.o.b 11/3/11
Fig 61: Share price performance: It is within fair valuation

350
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Oct‐06
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Oct‐08
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Oct‐10
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Jan‐08
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Jan‐11
Oct‐05
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Page 55 of 62
Fig 62: CAMEL ratios: Strong but lower capital buffer constrain growth relative to competitors
2006 2007 2008 2009 2010 2011F 2012F 2013F

C: Equity/Loans 28.3% 27.7% 26.6% 24.7% 33.7% 26.2% 24.2% 22.2%
C: Leverage 8.0 8.3 8.6 8.8 7.0 8.1 8.2 8.4
A: Provisions/Loans ‐1.4% ‐0.5% ‐0.8% ‐0.8% ‐0.7% ‐0.9% ‐0.9% ‐0.9%
M: Cost/Income ‐46% ‐46% ‐50% ‐41% ‐43% ‐39% ‐40% ‐42%
M: NII/Op. income 62.9% 57.1% 58.1% 59.9% 59.2% 61.3% 59.8% 58.0%
E:NIM 13.8% 13.0% 12.7% 7.0% 7.0% 8.1% 7.9% 7.4%
E: ROA 3.3% 3.8% 3.3% 3.8% 3.8% 4.4% 4.1% 3.8%
E: ROE 26.0% 31.8% 28.3% 33.8% 26.4% 35.3% 34.2% 31.8%
L:LDR 55.1% 53.5% 56.3% 65.3% 60.0% 65.0% 70.0% 75.0%
L: Liquid assets/Deposits 8.9% 13.5% 11.7% 50.8% 53.7% 45.5% 42.0% 35.6%
Fig 63: The ROE decomposition; Leverage to pick up and ROA to remain strong
2006 2007 2008 2009 2010 2011F 2012F 2013F

Asset yield: Revenue/Total assets 9.8% 10.5% 10.2% 9.9% 9.9% 10.9% 10.6% 10.3%
Margin: Income/revenue 33.2% 36.3% 32.2% 38.6% 38.0% 40.2% 39.1% 36.9%
ROA 3.3% 3.8% 3.3% 3.8% 3.8% 4.4% 4.2% 3.8%
Leverage: Assets/Equity 8.0 8.3 8.6 8.8 7.0 8.1 8.2 8.4
ROE 26.0% 31.8% 28.3% 33.8% 26.4% 35.4% 34.2% 31.8%
Fig 64: Assumptions: Divergence from historical performance is minimal
2007 2008 2009 2010 2011F 2012F 2013F

Balance sheet model
Deposit growth 13.8% 4.1% 12.8% 15.8% 15.0% 15.0% 15.0%
LDR 53.5% 56.3% 65.3% 60.0% 65.0% 70.0% 75.0%
Earnings model
Interest income/IEA 16.6% 16.1% 9.0% 8.2% 9.5% 9.5% 9.3%
Interest expense/IPL ‐2.1% ‐2.0% ‐2.1% ‐1.5% ‐1.5% ‐1.8% ‐2.0%
Fee & commission/TA 2.4% 2.3% 2.0% 1.9% 2.5% 2.5% 2.5%
Fee & commission expense/TA ‐0.2% ‐0.1% 0.0% ‐0.1% ‐0.1% ‐0.1% ‐0.1%
Trading income/TA 1.7% 2.1% 1.7% 1.1% 1.5% 1.6% 1.6%
Other operating income/TA 0.5% 0.0% 0.3% 1.1% 0.3% 0.3% 0.3%
Staff costs/TA ‐2.8% ‐3.0% ‐2.3% ‐2.4% ‐2.5% ‐2.5% ‐2.5%
General administrative costs/TA ‐1.3% ‐1.3% ‐1.1% ‐1.4% ‐1.1% ‐1.1% ‐1.2%
Net impairment losses /Advances ‐0.5% ‐0.8% ‐0.8% ‐0.7% ‐0.9% ‐0.9% ‐0.9%
Taxation/PBT ‐29.3% ‐31.1% ‐29.7% ‐30.0% ‐30.2% ‐30.1% ‐30.2%
Page 56 of 62
2006 2007 2008 2009 2010 2011F 2012F 2013F

Interest income 6,555.621 6,977.075 7,445.466 9,347.475 9,912.435 12,431.515 14,197.968 15,987.867
Interest expense ‐1,570.646 ‐1,527.460 ‐1,568.347 ‐2,010.197 ‐1,529.125 ‐1,818.398 ‐2,448.295 ‐3,244.871
Net interest income 4,984.975 5,449.615 5,877.119 7,337.278 8,383.310 10,613.117 11,749.673 12,742.996
Fee and commission income 2,069.370 2,224.576 2,232.359 2,424.706 2,770.199 3,974.754 4,631.412 5,320.886
Fee and commission expense ‐98.195 ‐138.775 ‐75.596 ‐42.492 ‐139.443 ‐153.223 ‐169.335 ‐168.624
Net fee and commission income 1,971.175 2,085.801 2,156.763 2,382.214 2,630.756 3,821.531 4,462.077 5,152.262
Net trading income 958.076 1,532.306 2,058.143 2,128.392 1,622.154 2,405.199 2,875.002 3,434.001
Other operating income 16.172 481.677 18.045 398.548 1,513.868 476.970 555.769 638.506
Operating income 7,930.398 9,549.399 10,110.070 12,246.432 14,150.088 17,316.818 19,642.521 21,967.765
Staff costs ‐1,896.582 ‐2,586.318 ‐2,998.390 ‐2,840.833 ‐3,402.827 ‐3,974.754 ‐4,631.412 ‐5,408.997
Premise and equipment cost ‐406.579 ‐449.375 ‐538.344 ‐539.964 ‐261.132 ‐686.157 ‐773.472 ‐856.419
General administrative costs ‐1,153.903 ‐1,228.761 ‐1,263.592 ‐1,364.669 ‐2,055.292 ‐1,748.892 ‐2,037.821 ‐2,561.870
Depreciation and amortization ‐160.729 ‐168.738 ‐224.581 ‐297.583 ‐302.273 ‐282.952 ‐375.135 ‐493.374
Operating expenses ‐3,617.793 ‐4,433.192 ‐5,024.907 ‐5,043.049 ‐6,021.524 ‐6,692.755 ‐7,817.840 ‐9,320.660
Operating profit before impairment and tax 4,312.605 5,116.207 5,085.163 7,203.383 8,128.564 10,624.062 11,824.682 12,647.105
Net impairment losses ‐502.178 ‐206.019 ‐365.349 ‐474.936 ‐446.680 ‐653.302 ‐837.375 ‐1,031.765
Profit before tax 3,810.427 4,910.188 4,719.814 6,728.447 7,681.884 9,970.760 10,987.307 11,615.339
Taxation ‐1,176.127 ‐1,440.311 ‐1,469.001 ‐1,995.693 ‐2,305.693 ‐3,011.139 ‐3,303.491 ‐3,509.353
Net profit/loss 2,634.300 3,469.877 3,250.813 4,732.754 5,376.191 6,959.621 7,683.816 8,105.986
EPS 9.69 12.76 11.95 17.40 18.73 24.24 26.77 28.24
Fig 66: Abridged balance sheet
2007 2008 2009 2010 2011F 2012F 2013F

Kenya governemnt securities 2,397.72 1,615.56 41,159.85 51,353.79 45,076.07 46,520.82 42,990.22
Kenya governemnt securities 2,397.72 1,615.56 41,159.85 51,353.79 45,076.07 46,520.82 42,990.22
Loans and advances to customers 39,468.52 43,298.82 56,694.88 60,336.83 75,126.79 93,041.64 114,640.59
Total assets 91,121.94 99,019.57 123,778.97 142,746.25 159,122.45 185,422.55 212,911.76
Deposits from customers 73,840.56 76,898.46 86,773.65 100,504.07 115,579.67 132,916.63 152,854.12

Total shareholders' equity 10,916.01 11,498.81 13,992.16 20,331.12 19,695.26 22,506.28 25,487.81
Total Equity and Liabilities 91,121.94 99,019.57 123,778.97 142,746.25 159,122.45 185,422.55 212,911.76
Page 57 of 62
Follow up: Equity Bank Limited – HOLD
Price weakness provides opportunities; FY11 Target Price
Kes27.9; (Speculative) BUY
Upgrade recommendation as the potential return move into

our BUY territory: In December 2010, we downgraded our
recommendation to a HOLD as the potential return to our target
price had reduced materially. (see Could Equity Bank be a victim of
its success, dated December 7 2010). In our view, Equity Bank is a
premier micro-finance institution in the region, having entered the
Ugandan market and Southern Sudan. However, the conviction in
our BUY recommendation is watered down by the robust share
price rally (+58%) in the past 12 months. Our outlook (and
valuation) is broadly intact, and the change in recommendation is
a result of the recent price decline that has improved the potential
return.
Key differentiating factor(s): In our opinion, Equity bank’s
market segment is its key advantage. Equity bank has managed to
institutionalise micro-finance in Kenya and is moving into the
regional markets. The bank’s strong IT system is also a key
strength in the micro finance sector and Equity has managed to
benefit from its technological advantages in telephone banking to
further penetrate its market segment. The bank has >4mn
accounts in Kenya. In Uganda, management indicates ~400,000
customers while Southern Sudan has ~30,000 profitable
customers.
A look at FY10 results: 1) Balance sheet: Deposits registered a
strong growth rate of 50% to Kes104.4bn. Loan growth of 20%
was low relative to history leading to a LDR of 75%. We consider it
to be fair nonetheless, given the high base growth is now coming
from. Government securities and other securities for dealing
purposes jumped massively to Kes22.6bn from Kes6.8bn in FY09.
Total shareholders’ funds went up by 19% while the balance sheet
expanded by 42% to Kes143bn; 2) Interest income and NIM:
Interest from loans and advances increased by 20% (vs. 54% in
FY09) to Kes11.4bn, while interest from government securities
jumped by 234% to Kes2.3bn as the holdings in government
securities increased by 20%. Placements with banks remain
immaterial. Interest expense (in shilling-terms) on deposits went
up by 78% in response to deposit growth. Interest income
contribution to operating income declined to 52.9%. The NIM
increased slightly to 12.7% from 12.5% in FY09, in spite of the
high level of government securities. 3) Asset quality: The
provisions/loan ratio deteriorated to 2.4% from 1.6% in FY09.
Loan loss provision in shilling-term increased by 84% to Kes1.9bn.
Net NPLs in shilling-terms declined by 19% to Kes3.9bn, improving
the coverage ratio to 48% (still lower than our preferred minimum
of 65%). Provisions in shilling-terms have increased by 322% vs. a
growth rate of 53% in loans and advances; 4) Expenses: Staff
Page 58 of 62
costs were up 22%. Other operating expenses were also up by
20% although total expenses grew by 26% (vs. 37% in FY09); 5)
Earnings and ROE: Earnings rose by 68% to Kes7.1bn. The ROE
improved to 26.3% (vs. 18.5% in FY09) on improvements on both
leverage and ROA. ROA increased to 5% (vs. 4.2% for FY09) while
leverage inched up to 5.3X from 4.4X in FY09.
Valuation and recommendation rationale: Our rational for a
BUY is the price weakness that has seen the share price decline by
a 7.5% YTD. Our Justified PBVR is 2.6X. We applied a sustainable
growth rate 13.5% (theoretical growth rate is 14.6% but we adjust
it downwards, given the higher penetration (accounts) that Equity
experienced in the recent past), CoE of 18% and ROE of 26.5%).
This Justified PBVR provides a FY11 TP of Kes27.9. However, for
consistency, our Discounted Future Earnings method (the method
we used on initiation shows a fair value of Kes25.1 (upside
potential reduced to 1.4% only). Our BUY recommendation is
speculative.
Share price catalysts: The bottom line is to make money. We are
banking on continued strong earning production. (Our Forward PER
is 8X). Uganda which made a loss contribution of Kes700mn in
FY10 is expected to deliver better performance this year. Southern
Sudan is expected to continue to perform well after making a
positive contribution of Kes300mn in FY10. Headwinds could come
from regional expansion as management targets to open in
Rwanda and Tanzania.
CoE less growth rate 5%
Justified PBVR 2.60
FY11 BVPS 10.73
Current price 24.75
Potential capital gain 13%
Potential total return 18%
Trailing PER 12.9
Forward PER 8.0
Source: Company reports, Legae Securities, prices as at c.o.b 11/3/11
Page 59 of 62
Fig 68: Price performance: Rallied strongly in CY10, high earnings expectations
35 70
PER Average +1STD ‐1STD
Share Price
30 60
25 50
20 40
15 30
10 20
5 10
0 0
Feb‐07
Feb‐08
Feb‐09
Feb‐10
Feb‐11
Aug‐06
Aug‐07
Aug‐08
Aug‐09
Aug‐10
Nov‐06
Nov‐07
Nov‐08
Nov‐09
Nov‐10
May‐07
May‐08
May‐09
May‐10
Aug‐06
Aug‐07
Aug‐08
Aug‐09
Aug‐10
Nov‐06
Feb‐07
May‐07
Nov‐07
Feb‐08
May‐08
Nov‐08
Feb‐09
May‐09
Nov‐09
Feb‐10
May‐10
Nov‐10
Feb‐11
Page 60 of 62
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Kenyan Banks - Anchor Themes - Regionalisation and Mortgage Lending - BUY KCB - SELL Coop

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Kenyan Banks - Anchor Themes - Regionalisation and Mortgage Lending - BUY KCB - SELL Coop

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March 17, 2011 African Markets

Sector View KENYAN BANKS

 We initiate coverage on 4 more banks; now coverage

Source: Company reports, Bloomberg, Legae Securities, prices cob 11/03/11

Source: Company reports, Legae Securities

‐8.0% market share ‐60% market share

Source: CBK, Legae Securities

2009A 2010A 2011F 2012F 2013F

Source: Company reports, Legae Securities

Fig 6: Sensitivity analysis; No easy upside for StanChart and Barclays.

Source: Legae Securities

 ROE decompositions: Below we decompose the 2010 ROEs of the

Fig 7: 2010 ROE decomposition; Cooperative ROE is structurally weaker

Barclays Cooperative Equity KCB StanChart

Source: Company reports, Legae Securities

 We believe the CAMEL ratios look strong in general. We discuss the

Fig 8: CAMEL ratios: Generally strong for our universe

Source: Company reports, Legae Securities. ROAs include exceptional items

 Cooperative Bank has strongly outperformed peers; KCB is

Source: Bloomberg, Legae Securities

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Source: Bloomberg, Legae Securities, cob 11/3/11

Source: Bloomberg, Legae Securities

2.1 Industry Overview: The market is highly fragmented,

 System assets and liabilities growth: The private sector credit

Source: CBK, Legae Securities

 The industry is highly fragmented..: The system has 44

1.8% Advances market shares, Top 10 Deposits market shares, Top 10

Source: CBK, Legae Securities

Source: CBK, Legae Securities

 ‘Local banks’, especially Equity bank and KCB have been

 Barclays banks, which was #1 bank on both assets and

Total Capital,Kesmn Growth Total Capital/RWAs Change (05 -09)

Source: CBK, Legae Securities

Source: CBK, Legae Securities

 Per capita incomes, level of penetration and population

Fig 17 below shows that the growth in system banking assets is a

Banking assets = GDP X Banking assets X C apita

= per capita penetration population

Source: Legae Securities

 Per capita income is expected to rise...: Compared to other

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Source: IMF, Legae Securities

 ...but penetration is rising...: Penetration as indicted by the

2500 65% 30%

Source: IMF, Legae Securities

GDP US$mn Banking assets,US$mn Banking Assets/GDP

Source: IMF, Central banks, Legae Securities. Estimates in US$.

 ...and system accounts are now more than 30% of the

4.12 600 575

Source: CBK, Legae Securities

Source: Population Datasheet 2010, Legae Securities

 Industry profitability rising, noninterest income/operating

70.0 60% 44.0%

Source: CBK, Legae Securities

10.0% 1.5% 0.0%

Source: CBK, Legae Securities

Source: IMF Financial Stability report, Legae Securities

 Mortgages to support industry loan growth and profitability:

Source: CBK, Legae Securities

Source: CBK, Legae Securities

45.0% Market shares of Top 5 banks and HFCK 60.0% CAGR (06‐09) 57%

We initiate coverage on 4 more banks; now coverage

ROE decompositions: Below we decompose the 2010 ROEs of the

We believe the CAMEL ratios look strong in general. We discuss the

Cooperative Bank has strongly outperformed peers; KCB is

System assets and liabilities growth: The private sector credit

The industry is highly fragmented..: The system has 44

‘Local banks’, especially Equity bank and KCB have been

Barclays banks, which was #1 bank on both assets and

Per capita incomes, level of penetration and population

Per capita income is expected to rise...: Compared to other

...but penetration is rising...: Penetration as indicted by the

...and system accounts are now more than 30% of the

Industry profitability rising, noninterest income/operating

Mortgages to support industry loan growth and profitability:

System carry ample liquidity, the 20% Statutory liquidity

System credit risks have improved but the coverage ratio

System capital level is high but we do not see ‘local banks’

The political risk remains elevated in our view; real GDP

Business and company brief: Barclays Bank Kenya has had

Company and business brief: The history of Cooperative bank

Business and company brief: KCB is one of the oldest banks in