Sub Sahara Africa Banks

3Q11 Review and 4Q11 Expectations: Its dj vu

October 5, 2011 e ep o e 0 55 36 5; e a pete @ egae co a Telephone: 011 5513675; e-mail: peterm@legae.co.za

Peter Mushangwe Lawrence Madzwara

Dj vu - Salient takeaways
Major SSA markets have performed poorly to end of 3Q11. Nigeria is -17.8% (21.2% in US$ terms); Kenya is -27.2% (-41.2% in US$ terms). Only Mauritius and Ghana have +ve US$-terms returns. (see slide 3). As we enter into 4Q11, performance of the SSA banks under our coverage has been s e e te to Q , pe o a ce o t e SS ba s u de ou co e age as bee abysmal. Our 6 Nigerian banks have an average return of -32.8%. Diamond bank is worst performer (-53.3%) while GT Bank is the best performer (-9.6%). On average our universe underperformed the Nigeria ALSI return by ~15percentage points (pps) (see Slide 5); In Kenya, our banks losses are subdued (relative to Nigeria) but they remain colossal nonetheless. The Top 5 banks lost 29.6% on average. The worst performer is Equity Bank (-34%) while the best performer is KCB (-24.8%). Our universe underperformed the Nairobi ASLI by ~2pps (see Slide 6); Generally, bank shares have performed worse than other sectors. Bank shares are the most liquid shares in most markets and dominate market caps in some cases, hence have performed worst in this market sell-off; Pressure on currencies, with the KES/US$ rate having depreciated ~19% and the NGN/US$ rate ~5% has exacerbated losses to foreign investors. This currency depreciation has worsened the negativity. We still see value in the two banking systems. For the first time, we are BUYing all Nigerian banks under our coverage. In Kenya we continue to BUY KCB and Equity bank. We upgrade Barclays to BUY but downgrade Coop to SELL. We have increased our required return (CoE) for our Kenyan banks to reflect the increased volatility and 2 currency risk and our Target Prices have reduced accordingly.

Dj vu Putting losses into context: Most major SSA markets have lost significant value up-to 3Q11, and much worse in US$-terms.
Local currency 27.2% 27.2% 26.0% 23.9% 17.8% 3.4% 9.8%

Ticker Kenya Uganda Zimbabwe Nigeria Mauritius Ghana NSEASI NSEASI UGSINDX ZHMINUSD NGSEINDX SEMDEX GGSECI

US$return 41.4% 41.4% 39.9% 23.9% 21.7% 2.4% 2.3%

Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/09/11

Dj vu Putting losses into context: On average the banks we cover in Nigeria and Kenya underperformed the MSCI EM Banks and JSE Banks Indices
0.0%

5.0% 6.1% 10.0%

15.0%

20.0%

25.0% 26.9% 30.0% 32.8% NigeriaUniverse KenyanUniverse MSCIEMBanks JSEBanks 29.6%

35.0%

Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/09/11

Dj vu Nigeria Banks: Diamond bank lost >50% of shareholder value, underperforming the NSE ALSI materially. GT Bank continues to outperform
US$return GTBank NGNreturn 9.6%

ZenithBank

17.3%

NSEALSI

17.8%

FirstBank

28.8%

AccessBank

40.8%

UBA

47.1%

DiamondBank

53.3% 53 3% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

60.0%

Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/09/11.

Dj vu Kenya Banks: Equity Bank is the worst performer with a -34% return, underperforming the NSE ALSI by ~7pps.
US$ KCB KES

24.8%

Cooperative

26.1%

NSEALSI NSE ALSI

27.2%

StanChart

31.0%

Barclays

31.9%

EquityBank

34.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

50.0%

Source: Bloomberg, Legae Securities. Prices as at c.o.b 30/9/11

Dj vu Our Q411 expectations are not buoyant. Confidence continues to lack. Good banks can get cheaper, providing opportunities to BUY
Nigeria: We expect the negative sentiment to carry on into 4Q11. Foreign investors are most likely to continue selling shares despite our strong belief that there is value in the banks we cover. Varying by bank, we expect further disconnection between the banks fundamentals (strong CAR, high liquidity, improving credit losses, rebounding ROEs) and valuations, mainly d l ti i l due t global uncertainties; to l b l t i ti Possible catalysts and headwinds: However, strong 3Q11 results could catalyze some re-rating, particularly if earnings are supported by operating income drivers (interest income, fee income) rather than credit-loss reduction. The Nigerian banks are also better placed to absorb write-offs due to higher coverage ratios and CARs Conclusions to the write offs CARs. recent M&A activities should also bring clarity to the system. The primary headwinds continue to be the equity (global/EM/frontier) markets sell-off. Kenya: Kenyas risks have worsened, in our opinion. Policy (monetary and fiscal) risks are higher while regulatory risks have also heightened. The KES depreciation has scared some foreign investors as expectations continue to point to a weaker KES/US$ rate. The high volatility of shares and the currency risk mean higher required rate of returns/cost of equity. We do not expect a strong 4Q11 share price performance, despite our positive 3Q11 results outlook; Possible catalysts and headwinds: Policy consistency and KES stability could renew interest. Kenyas real economic recovery (from 1.5% in CY08 to 5.6% in CY10) means stronger demand for imports (pressure on KES in short- to medium-term). We do not think 3Q11 results will be an important catalyst. A tighter monetary policy could reduce system loan growth into 4Q11. Kenya is relatively small to attract significant frontier money should risk appetite pick up. We see most of the headwinds in Kenya emanating from macro-issues. Elevated levels of inflation rate should be unconstructive to both loan growth and credit risk. 7

Dj vu We are now BUYing all the 6 banks we cover in Nigeria; In Kenya we BUY Equity Bank and KCB and Barclays bank. We downgrade Coop to SELL.
Stock Nigeria Access Diamond i d First GTBank Ticker Bloomberg AC C ESS NL DIAMOND B NL O FIRSTBAN NL GUARANTY NL Current Target Potential Price Price NGN 5.62 3.50 3 0 9.77 12.85 NGN 10.43 7.87 8 12.53 16.77 85.6% 125.0% 2 0% 28.2% 30.5% BUY BUY HOLD BUY BUY BUY BUY BUY Room to grow RWAs in the upturn cycle; Short term ALM benefits. Poorer deposit structure a risk; M&A risks Strong NIM and deposit structure, possible rerating after strong underperformance; Asset quality remains an issue; Liquidity ratio building up but C AR on lower end. Higher unsecured book; Strong footprint and remains a key player; Normalization of cost/income ratio beneficial; Best-in-class ROE due to efficiency; Our Justified PBVR > current, higher PBVR than peers can scare some investors; Our Buy recommendation based on low valuation risk with submean PBVR ; Strategic/execution risks remain C onservative bank but consistent; Ample room to grow RWAs; Strong asset quality and deposit structure. Our core holding. Old rating Current Rating Stock views

UBA

UBA NL

3.87

5.75

48.5%

HOLD

BUY

Zenith Kenya Barclays C ooperative Equity KC B Stanchart Uganda Stanbic DFC U

ZENITHBAN NL Bloomberg BC BL KN C OOP KN EQBNK KN KNC B KN SC BL KN Bloomberg SBU UG DFC U UG

12.41 KES 10.65 14.05 17.65 16.35 176.00 UGX 145 1015

15.60 KES 13.71 13.73 22.23 21.73 185.92 UGX 142 1163

25.7%

BUY

BUY

28.8% -2.3% 26.0% 32.9% 5.6%

HOLD HOLD BUY BUY HOLD

BUY SELL BUY BUY HOLD

Strong franchise but no regional play; C onstrained asset growth St f hi b t i l l t i d t th despite high C AR (in pursuit of quality assets); Disconnect between ROE and valuation and a poorer ROE structure; Higher leverage vs. peers; higher NPL overhang; Strong franchise in a strong market segment; regional play to become value accretive in a material manner. Elevated NPL risks; Regional markets no more a drag on local earnings; strong mortgage player; Pure Kenyan play, most efficient bank in the system leading to a stronger ROA; losing market share and poorer C AR

-2.3% 14.6%

HOLD BUY

HOLD BUY

#1 bank that could find it difficult to grow RWAs meaningfully; high valuation risk trading at 4.6x FY11 BV Improving deposit mix; strong local franchise that can break the internationals hegemony yet lower valuation risk; Asset quality concerns.

Source: Company reports, Legae Securities . Prices as at cob 30/09/11

Dj vu Strategic positioning of the banks under our coverage differs. Generally Nigerian banks have lower retail exposure than Kenyan banks.
Well capitalised Nigeria Access Access Diamond First GTBank UBA Zenith Kenya Barclays Cooperative Equity KCB Stanchart Uganda DFCU Stanbic LowLDR Highretail exposure Regional exposure Bold management

Source: Company reports, Legae Securities. Low LDR = LDR <80% for FY11

Dj vu We still expect meaningful earnings recovery in Nigeria. We are also positive on Kenyan banks earnings for FY11
Stock 2011F Loans and advances 2012F 664,837 21% 444,994 444 994 20% 1,997,431 36% 949,971 37% 961,783 961 783 32% 1,202,873 22% 2013F 764,563 15% 569,593 569 593 28% 2,396,917 20% 1,211,213 28% 1,206,600 1 206 600 25% 1,489,711 24% 2011F 667,088 37% 494,438 494 438 20% 1,958,265 35% 989,553 30% 1,457,247 1 457 247 15% 1,581,686 20% Deposits 2012F 782,161 17% 593,326 593 326 20% 2,349,919 20% 1,187,464 20% 1,748,696 1 748 696 20% 1,850,573 17% 2013F 899,485 15% 711,991 711 991 20% 2,819,902 20% 1,424,957 20% 2,011,000 2 011 000 15% 2,128,159 15% 2011F 0.94 49% 0.22 0 22 144% 1.89 85% 1.85 14% 0.53 0 53 1942% 1.97 66%

Earnings/share
2012F 1.33 41% 0.52 0 52 2013F 1.52 15% 0.82 0 82

Nigeria Ngn
Access Growth Diamond Growth First Growth GTBank Growth UBA Growth Zenith Growth 550,348 28% 370,829 370 829 26% 1,468,699 28% 692,687 17% 728,623 728 623 16% 988,554 39%

139%
2.37 25% 2.24 21% 0.69 0 69 31% 2.36 20%

58%
3.07 30% 2.72 21% 1.09 1 09 58% 2.88 22%

Kenya Kes
Barclays y Growth Cooperative Growth Equity Growth KCB Growth Stanchart Growth 95,346 , 9% 113,813 31% 104,431 20% 189,096 189 096 28% 92,464 53% 114,416 , 20% 136,576 20% 127,927 23% 226,915 226 915 20% 106,333 15% 131,578 , 15% 160,477 18% 153,513 20% 272,298 272 298 20% 122,283 15% 136,209 , 10% 151,751 23% 130,538 20% 236,370 236 370 20% 115,580 15% 152,554 , 12% 182,101 20% 159,909 23% 283,643 283 643 20% 132,917 15% 175,437 , 15% 213,969 18% 191,891 20% 340,372 340 372 20% 152,854 15% 1.36 -30% 1.94 48% 2.82 46% 3.14 3 14 28% 16.41 -12% 1.65 21% 2.12 9% 3.33 18% 3.58 3 58 14% 19.23 1.81 10% 2.39 13% 3.85 16% 4.94 4 94 38% 22.78

17%
11.90

18%
13.94

Uganda Ugx
Stanbic Growth DFCU Growth 1,553,275 29% 582,140 47% 1,824,600 17% 688,370 18% 2,159,361 18% 816,004 19% 2,071,033 13% 591,618 24% 2,432,800 17% 721,773 22% 2,879,148 18% 880,564 22% 9.10 29% 46.68 26%

31%
56.59

17%
83.08

21%

47%

Source: Company reports, Legae Securities

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Dj vu Attractive forward PERs for Kenya and Nigeria. We increased the CoE for Kenyan banks by 100bps to reflect the negative outlook/sentiment
Valuation Summary
Stock Nigeria Access Diamond First GTBank UBA Zenith Average Kenya Barclays p C ooperative Equity KC B Stanchart Average Uganda DFC U Stanbic Average US$mn 284.03 849.61 8.7 15.9 12.3 7.2 12.2 9.7 6.1 10.4 8.3 2.5 4.8 3.7 2.0 3.8 2.9 2.0 3.1 2.6 3.0% 3.4% 3.2% 3.1% 3.4% 3.2% 3.0% 3.3% 28.8% 31.5% 28.5% 30.3% 32.9% 27.5% 30.2% 2.9 4.7 3.8 19.0% 19.8% 19.4% US$mn 1,874.1 1,677.6 , 1,554.5 2,732.1 1,551.6 7.8 7.3 6.3 5.2 10.7 7.5 6.5 6.6 5.3 4.6 9.2 6.4 5.9 5.9 4.6 3.3 7.7 5.5 2.2 1.8 1.7 1.1 2.7 1.9 1.9 1.5 1.4 0.9 2.4 1.6 1.7 1.3 1.1 0.8 2.2 1.4 4.4% 3.5% 5.6% 2.9% 2.9% 3.8% 4.4% 3.2% 5.4% 2.9% 2.9% 3.8% 4.3% 3.1% 5.2% 3.3% 2.9% 28.0% 24.8% 26.9% 20.6% 25.3% 29.4% 22.8% 25.9% 20.8% 25.3% 28.1% 21.7% 24.7% 24.2% 25.3% 24.8% 2.8 1.8 2.1 1.4 2.9 2.2 18.0% 19.5% 19.0% 19.3% 18.5% 18.9% Total assets 2010A US$mn 4,087.4 3,166.9 14,969.2 7,480.5 10,504.5 12,305.4 6.0 16.1 5.2 7.0 7.3 6.3 8.0 4.2 6.7 4.1 5.7 5.6 5.3 5.3 3.7 4.3 3.2 4.7 3.6 4.3 4.0 0.5 0.4 0.8 1.8 0.7 1.0 0.9 0.5 0.4 0.7 1.6 0.7 0.9 0.8 0.4 0.4 0.6 1.5 0.6 0.9 0.7 1.4% 0.4% 2.1% 3.9% 0.9% 0 9% 2.6% 1.9% 1.6% 0.8% 1.9% 3.8% 1.0% 1 0% 2.6% 1.9% 1.6% 1.0% 2.1% 3.9% 1.4% 1 4% 2.6% 9.0% 2.8% 15.7% 25.9% 9.2% 9 2% 16.4% 11.7% 6.2% 16.6% 27.9% 11.6% 11 6% 18.0% 12.2% 8.9% 17.9% 30.6% 17.4% 17 4% 20.2% 17.9% 0.3 0.2 0.7 2.4 0.5 05 0.9 0.82 20.8% 22.1% 20.3% 19.3% 20.8% 20 8% 19.3% 20.4% Price/Earnings 2011F 2012F 2013F Price/Book Value 2011F Return on Assets Return on Equity 2013F Justfied CoE PBVR 2012F 2013F 2011F 2012F 2013F 2011F 2012F

2.1% 13.2% 15.3%

3.7% 25.1% 24.8%

3.2% 30.2% 29.4%

Source: Company reports, Legae Securities. Prices as at c.o.b 30/9/11

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Dj vu Kenyan banks attract premium valuation for their superior ROEs. Surprisingly, the regression model shows fair valuation in both markets.
6.0 PBVR

5.0

Stanbic Stanbic

4.0

3.0

StanChart Barclays

2.0 2.0

Kenya Equity Coop

DFCU

GTbank

1.0 Diamond

UBA Access

Nigeria First

Zenith

KCB

0% 5% 10% 15% ROE 20% 25% 30% 35%

Source: Company reports, Bloomberg, Legae Securities est. FY13

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Disclaimer and Disclosures

Legae Securities (Pty) Ltd Member of the JSE Securities Exchange 1st Floor, Building B, Riviera Road Office Park, 6-10 Riviera Road, Houghton, Johannesburg, South Africa P.O Box 10564, Johannesburg, 2000, South Africa Tel 27 T l +27 11 551 3601, Fax +27 11 551 3635 3601 F 27 Web: www.legae.co.za, email: research@legae.co.za Analyst Certification and Disclaimer I/we the author (s) hereby certify that the views as expressed in this document are an accurate of my/our personal views on the stock or sector as covered and reported on by myself/each of us herein. I/we furthermore certify that no part of my/our compensation was, is or will be related, directly or indirectly, to the specific recommendations or views as expressed in this document This report has been issued by Legae Securities (Pty) Limited. It may not be reproduced or further distributed or published, in whole or in part, for any purposes. Legae Securities (Pty) Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Legae Securities (Pty) Limited makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion herein are those of the author only and are subject to change without notice. This document is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment. Important Disclosure This disclosure outlines current conflicts that may unknowingly affect the objectivity of the analyst(s) with respect to the stock under analysis in this report. The analyst(s) do not own any shares in the company under analysis.

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