Kenya Listed Commercial Banks Analysis Cytonn Q1’2016 Banking Sector Report “Transition continues, but to a new and different landscape”

19th June, 2016

Table of Contents I.

Overview of the Firm

II.

Kenya Economic Review and Outlook

III.

Kenya Banking Sector Overview

IV.

Cytonn’s Banking Sector Report A.

Executive Summary

B.

Banking Sector Report

V.

Appendix A.

Metrics Used

B.

Tier I Banks

C.

Tier II Banks

2

I: Overview of the Firm

3

160 Members, 1 Agenda – The Client

4

Introduction to Cytonn Investments Cytonn Investments is an independent investments management company

• Our mission is that “we work to deliver innovative & differentiated financial solutions that speak to our clients needs”

• Cytonn Investments is differentiated in several respects: 1.

Independence & Investor Focus: Cytonn is solely focused on serving the interest of clients, which is best done on an independent investment management platform to minimize conflicts of interest

2.

Alternative Investments: Specialized focus on alternative assets - real estate, private equity, and structured products

3.

Partnerships with Global Institutional Investors: Such as Taaleri of Finland

4.

Strong Alignment: Every staff member participates in ownership. When clients do well, the firm does well; and when the firm does well, staff do well

5

Cytonn’s Corporate Structure – Kshs 73 bn Under Mandate Cytonn Investments

Kenya

Cytonn Investments Ltd • Independent investment management company, serving HNW & institutional clients

Cytonn Real Estate • Development affiliate providing investment grade real estate development solutions

United States

Cytonn Diaspora

Private Equity • Financial Services • Education • Technology

6

• Diaspora platform connecting investors in the diaspora with opportunities in the East African Region

Cytonn Investments LLC • US advisory and investment management company

Board of Directors The board is comprised of 10 members from diverse backgrounds, each bringing in unique skill-sets

Prof. Daniel Mugendi, Chairman

James Maina, Non-executive Director

Edwin H. Dande, Managing Partner & CEO

Antti – Jussi Ahveninen, Non-executive Director

Kenneth Ndura Non-executive Director

Nasser Olwero, Non-executive Director

Elizabeth N. Nkukuu, Partner & CIO

7

Madhav Bhalla, Non-executive Director

Mike Bristow, Non-executive Director

Patricia N. Wanjama, Partner & Head of Legal

The Management Team The team brings in diverse global and local experience in investments, real estate, finance and brand

Edwin H. Dande, Managing Partner & CEO

Johnson Denge, Real Estate Services Manager

Gaurang Chavda, Head of Private Wealth Management

Elizabeth N. Nkukuu, Partner & CIO

Patricia N. Wanjama, Partner & Head of Legal

Maurice Oduor, Investment Manager

Robert M Mwebi, Project Manager

Kennon Mwiti, Financial Controller

Shiv Arora, Head of Private Equity Real Estate

Winfred Ndung'u, Brand & Business Admin Manager

Martin Gitonga Project Manager

Beverlyn Naliaka, PR & Communication

8

Cytonn Investment Solutions We offer differentiated investment solutions in four main areas 

High Yield Solutions

The Team’s expertise and market knowledge enable us to offer investors higher yields than the market average



Regular credit analysis, quick dealing capability and the large banking spread in the market allow the team to capitalize on investment opportunities



Real Estate Investment Solutions

Private Regular Investment Solutions

Private Equity

Our unique strategic partnerships with Cytonn Real Estate, our development affiliate, enables us to find, evaluate, structure and deliver world class real estate investment products for investors



Our platform connects global capital seeking attractive return with institutional grade development opportunities in the East African region



We understand that investors have varying financial goals. Our highly customized and simple to understand investment products will enable you to achieve your investment objective



We offer solutions to both local investors, and those in the diaspora interested in the investment opportunities back in Kenya and the region



Cytonn seeks to unearth value by identifying potential companies and growing them through capital provision and partnering with their management to drive strategy



We primarily invest in the Financial Services, Education and Technology sectors

9

Cytonn Real Estate’s Unrivalled & Unique Capabilities Cytonn has all the necessary capabilities to deliver the very best real estate investment product Fundraising

•

The global market exposure combined with local experience networks have it easier to raise funds

•

Our investors comprise of global and local institutions, local high-net-worth investors and Kenyans in the diaspora

•

An experienced and passionate team to collect and manage funds, bringing about diverse investment portfolios with good returns

•

Market Research & Site Acquisition

Research team is an essential part of any investment, helping identify the highest and best use and concept for the different land deals received and taken up by the company

•

Cytonn has one of the best research teams in the region who carry out intensive market research for internal use and uses the data to release the data for guidance of external customers as well

•

Our Site Acquisition team uses the market research to find the best sites for development given the opportunity in the economy

•

Concept Design

Cytonn has unique concept designs that arise from partnerships with global institutions in countries like Dubai

giving superior quality products to the market •

The internal concept team in collaboration with the project management function work tirelessly to deliver the products of the firm

•

Project Management

The project management function is a vital part of real estate whose role is to ensure projects are delivered in the best quality, within scope and the most efficient resource use

•

Cytonn boasts of a large PM team with diverse experience in the various aspects of project management to deliver world class real estate products

•

Sales and Marketing

The marketing and brand team have enabled the brand reach great heights and visibility locally and globally by employing their experience, passion and innovation

•

The firm has one of the best distribution teams that ensure our products reach far and wide. Their experience is backed by success stories of making sales of up to 45% even before start of construction developments

10

Global view of economic growth determines regions of focus There is demand from global capital (light colors) looking for attractive returns (dark colors)

11

Cytonn’s strategy brings three key pillars together

Financing Capability

Development Capability

1. Creating Jobs 2. Growing the Economy 3. Improving the standards of living

Landowners 12

Deal pipeline overview – 85% to low and mid-income housing

Kshs 73 Billion Deal Pipeline

Low to mid-income Housing 85%

Prime Residential and Mixed-use 15%

•

Masterplanned Development

•

High Density Integrated Mixed-use

•

Comprehensive Development

•

Gated Communities

•

Low to mid-income Modular Housing

13

Summary of Projects – Kshs 73 bn Deal Pipeline Details • • •

Set 1: Projects are in the market, construction phase and being sold Set 2: Projects are in design stage Set 3: Projects are in acquisition stage

1 2 3 4 5

6 7 8 9 10 11 12

13 14 15 16

Projects SET 1 Kanzi Plains Athi Sharpland Amara Ridge The Alma Situ Village Sub - Total SET 2 The Annex Project Kitale Rongai Sharpland III Project Westlands Ruaka III Project Ridgeways NewTown by Cytonn Real Estate Sub - Total SET 3 Project Kisumu Project Mombasa Project Hurlingham Project Upper Hill Sub - Total GRAND TOTAL

Concept

Project Size (Kshs mn)

Site & Service Scheme Site & Service Scheme Gated community Integrated lifestyle development Gated masterplanned community

395.5 644.7 1,000.0 2,744.0 4,500.0 9,284.2

Integrated lifestyle development Masterplanned development Site & Service Scheme Serviced apartment concept Integrated lifestyle development High density mixed-use development Low to mid income masterplanned city

522.9 700.0 937.4 1,000.7 2,508.0 9,317.0 22,500.0 37,486.0

Mixed Used Office complex High density mixed-use development Mixed Used Office complex Mixed used office complex

500.0 3,750.0 7,000.0 15,000.0 26,250.0 73,020.2

14

II. Kenya Economic Review and Outlook

15

Kenya Summary Economic Outlook Key indicators point to a pick-up in economic performance in 2016. We have only revised our outlook on Interest Rates from “Neutral” to “Positive” as we expect rates to remain on a downward trend that will persist for the better part of the year Macro-Economic Indicators

GDP

Interest Rates

Inflation

Exchange Rate

2015 Experience

2016 YTD Experience

Going Forward

Kenya’s 2015 full year GDP came Expected to improve with a in at 5.6% despite a tough conducive and stable We project the 2016 GDP to macroeconomic environment macroeconomic environment and come in at an average 5.8% tea exports and tourism improving for the year There has been a downward pressure on interest rates since Interest rates expected to remain The CBR increased 300 bps to January given the Government 11.5% in August 2015 with the on downward trend that will surpassing its borrowing target 91-day starting the year at a rate persist for the better part of the of 11.7% and hitting a high of The CBR was lowered by 100 bps to year. As such, we amend our 21.0% 10.5% on account of lower inflation Outlook from Neutral to Positive and a stable currency (i) December inflation at 8.0% (highest for year)

Inflation declined from the high of 8.0% in December through January to May at 5.0%

The shilling has remained stable: The shilling depreciated 13.0% supported by high forex reserves against the dollar from 90.70 in equal to 5.0 months of import Jan to 102.30 in Dec cover The foreign reserves improved to And the increased in the credit 4.5months by Dec 2015 facility by IMF to USD 1.5 bn

16

Outlook

Positive

Positive

Expected to remain within the CBK target

Neutral

Shilling to remain stable for the better part of the year on the back of strong dollar reserve at 5 months import cover. Any potential impact of the Fed rate hike have already been priced in

Neutral

Kenya Summary Economic Outlook, continued… Key indicators point to a pick up in economic performance. Our outlook on Corporate Earnings, Foreign Investor Sentiment and Security & Political Environment remain unchanged Macro-Economic Indicators

2015 Experience

2016 YTD Experience

Going Forward

The year experienced weak earnings from the listed banking The banking sector recorded an To improve due to the relatively sector with Core EPS growth of Corporate EPS growth of 13.6% in Q1’2016 improving interest rate 2.8% in 2015. 17 listed and 1 Earnings compared to the 2.8% recorded environment, stable shilling and unlisted company issued profit in FY’2015 improvement in credit growth warnings as a result of a tough operating environment Chinese economic slowdown and Increased flows out of Kenya devaluation of their currency may Investor sentiment has been lead to poor performance of owing to the US interest rate hike Foreign Investor positive with foreign investors compared to inflows into equity most emerging and frontier Sentiment being net buyers in Q1’2016 with market indices. However, Kenya’s markets as a result of volatility in net inflows of Kshs 498.0 mn interest rates NSE valuations still remains attractive to foreign investors Increased spending on security equipment and recruitment of Improvements witnessed in levels Kenya has received an upgrade in more personnel will enhance the of security with tourism levels credit rating by Moody’s as a country’s security, however Security & Political increasing in the month of positive indicator that the heightened tensions/ Environment December compared to the environment is safe to carry out demonstrations before the previous year and reduced business operations National elections next year will terrorist attacks weigh on the political environment 17

Outlook

Positive

Neutral

Neutral

III. Kenya Banking Sector Overview

18

Kenya’s Banking Sector Overview Kenya is over-banked, with 42 commercial banks (2 in receivership) serving a population of 44 mn people •

In Kenya there are a total of 42 commercial banks with two banks; Chase bank and Imperial bank in receivership, 1 mortgage finance company, 12 microfinance banks, 8 representative offices of foreign banks, 86 foreign exchange bureaus, 14 money remittance providers and 3 credit reference bureaus

•

All banks are regulated by the Central Bank of Kenya. The Capital Markets Authority has additional oversight over the listed banks. All banks are required to adhere to certain prudential regulations such as minimum liquidity ratios and cash reserve ratios with the Central Bank

•

We maintain our view that Kenya is over-banked with a relatively high ratio of banks to total population, with 42 commercial banks serving of 44 mn people, compared to Nigeria's 22 for 180 mn and South Africa's 19 for 55 mn

•

This overbanked environment has already begun leading to consolidation in the sector, and heightened M&A activity. Tanzanian Bank, Bank M, was given the go ahead to acquire 51% of Oriental Commercial Bank, GT Bank acquiring Fina Bank, Mwalimu Holdings acquiring Equatorial and I&M Bank acquiring Giro Bank over the last 2 years

Commercial Banks / Population (Millions) 1.5x 1.0x

1.0x 0.3x

0.5x

0.1x

0.0x Kenya

South Africa 19

Nigeria

Transition continues, but to a new and different landscape Transition Area

Summary • •

Sector Realignment & Flight to Quality

• •

•

More Firm & Trusted Regulator

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• •

•

Capital Requirements

•

Effect on Banking Sector

As indicated in our previous banking report, the industry is still divided into the “haves” and “have-nots”, and this difference has caused volatility in the banking sector Barclays is looking to exit and is selling 12.2% to a consortium, while Giro and ECB have been acquired There is continued consolidation, as witnessed by Oriental Commercial Bank’s purchase by Bank M of Tanzania With the jitters in the banking system brought about by isolated incidences of poor corporate governance, the market has seen a flight to quality, with Tier I banks receiving bulk of deposits, and Tier II and III banks being supported by the regulator as confidence gets restored slowly With the placement of Chase Bank and Imperial Bank in receivership, Central Bank of Kenya (CBK) have demonstrated their commitment to clean up the banking sector and improve their levels of supervision In addition, their swift acts to place Chase Bank under the management of KCB Group restored confidence to the market and reduced jitters To add further confidence to investors, provisions levels have increased as the regulator targets a more efficient and transparent sector There is a proposal in the 2016 Finance Bill to reintroduce Kshs 5 bn as a banks capital requirement, to ensure all institutions that have a public interest are well capitalized and secure In addition, Treasury wishes to amend the Banking Act to be involved before a bank is placed under receivership

• • • •

• • • • • •

Local Tier III banks will all face significant pressures to either sell, merge or raise additional capital to remain competitive There is additionally the possibility of seeing large global players enter the market through aggressive buy-out’s e.g. Bob Diamond and Carlyle looking to purchase Barclays Africa Especially with the moratorium on bank licenses, we will see increased consolidation and heightened M&A activity, which will create a more stable, attractive and transparent banking system With a big flight to quality happening in the Kenyan market, smaller banks will also be forced to consolidate, as they face liquidity pressures and low business volumes; this all will end up in a fewer number of banks, but stronger and more robust banks The Central Bank Governor, Dr. Patrick Njoroge, said himself that the regulatory capability needs to be improved, and this has already been demonstrated with Chase, Imperial and Dubai Bank Increased levels of supervision, and low levels of tolerance, for banks that do not adhere to the highest standards of governance and ethics will lead to closure The regulator will look to force consolidation in the sector, ensuring that those institutions that remain and large enough to withstand shocks, also managed well and are more transparent We shall continue to see increased levels of provisioning, as asset quality is increased across the sector for a safer banking system Higher capital levels will create a more stable banking system, and will force consolidation, and banks such as KCB Group & Family Bank already raising capital Banks looking to raise capital will have to do so at attractive valuations for investors, and for those banks unable to raise capital from the markets, they will be forced to merge

The sector is undergoing transition. However, key issues such as flight to quality towards Tier I banks, increased requirements for capital, increased focus on sufficient provisioning, and increased supervision from a stricter regulator will all force consolidation. Those unable to survive will be bought out, merge or leave. Those that remain will be stronger banks in a more efficient and stable banking sector.

20

Growth in the Banking Sector The banking sector’s Q1’2016 EPS grew by 13.6% y/y on the back of an improved macroeconomic environment, but of note was that loan growth outpaced deposit growth • Banking sector in Kenya experienced growth in Q1’2016 in assets, deposits, profitability and products offering, leveraging on diversification to alternative channels, supported by favourable macroeconomic environment • The listed banking sector’s aggregate gross loans and advances grew by 14.6% to Kshs. 1.7 trillion in March 2016 from Kshs. 1.5 trillion in March 2015 while deposits grew by 11.5% to Kshs. 2.0 trillion in March 2016 from 1.8 trillion in March

20 1210.5% in March 2016 to Kshs 2.8 trillion, from Kshs 2.5 trillion in March 2015 Total assets grew 2015

•

• Since 2010 the aggregate of listed banks profit after tax has grown at a CAGR of 13.5% • Since 2010, deposits have grown at a CAGR of 15.1%, with loans and advances having outpaced deposit growth at a CAGR of 18.7%

•

20 13 Growth has mainly been underpinned by: 

Banks responding to the needs of the Kenyan market for convenience and efficiency through alternative banking channels such as mobile, internet and agency banking



Branch network expansion strategy both in Kenya and in the East African community region



Increased use of alternative channels, such agency, mobile and internet banking. Cashless cards use has also been on the rise

21

Banking Sector Growth Drivers Alternative channels, cost containment and expansion support banks’ growth and diversification 1)

Technology to enhance cost containment initiatives: Banks have embraced integration with mobile application platforms and internet banking, and this has led to lots of efficiency in distribution, leading to increased uptake of banking services, particularly in the mass market

2)

Adoption of Agency Banking: The agency banking model has reduction of the operating expenses and improve efficiency

20 12

and will be a key driver for diversification. This also ensures a much wider reach 3)

Growth of the retail segment and the middle class : As the middle-class grows rapidly in Kenya, faster than majority of the countries in the region, there is an inherent increase in consumption expenditure and an increase in the percentage of the population which will require banking services

4)

20 13

Expansion both regionally and domestically: With increased financial inclusion in Kenya at 75%, banks looking to expand in the less penetrated markets of Tanzania, Uganda, Rwanda, South Sudan and DR Congo are opening up new channels of revenue in countries with relatively attractive spreads compared to Kenya. However risks present themselves as witnessed with the recent devaluation of the S. Sudan currency by 84.0%. Most banks bottom lines have not benefited much by the regional expansions

1)

Regulatory Environment: The CBK has tightened its regulations on banks with emphasis on transparency on lending rates, governance and capitalization. Banks are expected to remain stable and position themselves for stable growth

22

Recent Developments in the Banking Sector Interest rates declined; Chase Bank was re-opened under the management of KCB Group 1. Decline in Interest Rates: Interest rates have been declining in 2016 after an increase in the fourth quarter of 2015, with the interbank rate and the 91 day T-bill touching lows of 2.3% and 7.1% from 6.9% and 10.4%, respectively. The

Monetary Policy Committee recently lowered the CBR to 10.5% owing to improved macroeconomic environment 2. Placement of20 Chase bank under receivership and its subsequent re-opening: Chase bank was placed under

12 receivership following a ‘bank run’ that was triggered by the restatement of earnings by the bank following the realization by the auditor that the bank had non - performing insider loans; further to which were way above the statutory requirement. However, the CBK handled the situation better than they did with Dubai bank and Imperial bank

20 13

which led to the reopening of the bank a month later. The bank was put up for a bid which KCB Group won and might acquire a majority stake in the firm 3. Continued increase in Loan Loss Provisions: As a result of the high interest rate environment in 2015 and with increased supervision of banks following the closure of Imperial Bank, Dubai Bank and most recently Chase Bank, we have seen a jump in loss provisions with the most notable being the increase in the listed banks’ loan loss provisions by 167.0% in Q1’2016 following the 85.4% increment in FY’2015

23

Recent Developments in the Banking Sector, continued… The increase in Private Equity investments in the banking industry indicates foreign confidence in the growth prospects of the industry, with Barclays looking to exit and Bank M acquiring Oriental Commercial Bank 4. Private Equity Investments in the Kenya Banking Industry: The banking industry has witnessed increased private equity investment activity with the most recent deal being Jamii Bora raising Kshs. 1.2 bn from Equator Capital Partners and Progression Capital Africa Ltd 5. Barclays divesture from the African business - Barclays Plc decided to exit its African operations in order to

20 12

refocus the bank on its core UK and US markets. The bank appointed a subcommittee to study how and when to sell its 62.3% stake in Barclays Africa, which is valued at £3.5 bn (USD 4.8bn). Barclays CEO James Staley highlighted that despite the recognition that Africa is one of Barclay’s genuine growth areas, it is (i) becoming a costly distraction owing to the devaluation of the South African Rand, and (ii) extra risks of corruption and misconduct in Africa, which would

tarnish the entire African operation if something was to go wrong 6.

20 13 Corporate Governance issues – Corporate governance issues in the banking sector continued with the culprit this time being National Bank. The top executives were sent on suspension and subsequently resigned owing to unsafe practices which included issuance of loans without following due process. This led to a huge spike in NPLs which resulted to a provision charge of Kshs. 3.7 bn leading and a loss of Kshs. 1.2 bn

7. Mergers & Acquisition – Tanzanian Bank, Bank M, was given the go ahead to acquire 51% of Oriental Commercial Bank. We are seeing increased consolidation, and M&A activity, including GT Bank acquiring Fina Bank, Mwalimu Holdings acquiring Equatorial and I&M Bank acquiring Giro Bank over the last 2 years

24

Listed Banking Sector Metrics Deposits and loan growth is strong, however the growth is slowing down and is currently at a lower level than historical 5-year averages Loans and Advances (Kshs Bn) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 -

CAGR = 18.7% Q1 2016 = 14.6%*

1,675

Deposits (Kshs Bn) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 -

1,729

1,466

1,214

927

1,038

703

2010

2011

2012

2013

2014

2015 Q1'2016

CAGR = 15.1% Q1 2016 =11.5%*

CAGR = 16.6%

381

419

2010

2011

2012

2013

2014

1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 -

433

2015 Q1'2016

969

2011

2012

2013

2014

25

1,108

CAGR = 10.6% 653

2010

* Annualised Q1 2016 growth rates Source: Central Bank of Kenya

Q1'2016

1,176

Bank Branches

321 212

2015

1,757 1,499

2010

269 193

2,025

1,326

Shareholders Equity (Kshs Bn) 500 450 400 350 300 250 200 150 100 50 -

2,013

721

2011

792

2012

848

2013

912

954

2014

2015

Q1'2016

Listed Banking Sector Metrics, continued… Following a tough year in 2015, 2016 shows signs of recovery despite NPLs still persisting Cost to Income (%)

Loan to Deposits (%) 59.4%

60.0%

95.0%

58.0% 56.0%

92.4% 90.2%

90.0%

55.9% 54.5% 54.4% 54.6%

54.0%

85.0%

54.3%

80.0%

52.7%

52.0%

75.0%

50.0%

70.0%

48.0%

65.0%

2010

2011

2012

2013

2014

2015 Q1'2016

84.1%

2011

2012

77.1%

2010

10.0%

5.1% 3.8%

4.0%

6.1%

2015

Q1'2016

8.3% 8.0%

6.5%

2014

8.5%

8.7%

8.0%

2013

Net Interest Margin (%)

NPLs to Total Loans (%)

6.0%

84.1%

89.3%

86.2%

8.0%

6.4%

8.0%

7.8% 7.6%

4.5%

7.5%

7.7%

7.2%

7.0%

2.0% 0.0%

6.5%

2010

2011

2012

Source: Central Bank of Kenya

2013

2014

2015 Q1'2016

2010

26

2011

2012

2013

2014

2015

Q1'2016

Listed Banking Sector Metrics, continued… Kenya’s banking sector Q1’16 core EPS growth was 13.6%, faster than the 8.9% growth in Q1’15 Q1'2016 Listed Banking Sector Metrics Net Core EPS Deposit Loan Cost to Bank Interest NPL Ratio ROaE Growth * Growth Growth Income** Margin HF Group 47.6% 23.6% 12.1% 6.6% 51.2% 10.2% 8.5% Stanchart 42.7% 12.9% (3.7%) 9.4% 39.0% 16.4% 13.4% 19.8% 8.1% 22.4% 11.0% 48.9% 27.9% Equity Group 4.0% I&M Bank 10.3% 15.7% 11.3% 7.8% 30.3% 33.5% 4.9% DTB Bank 9.5% 26.1% 24.1% 7.4% 41.7% 16.0% 4.0% Co-op Bank 7.7% 11.9% 16.1% 16.9% 45.0% 16.5% 4.0% KCB Group 6.1% 6.6% 16.5% 8.5% 48.4% 21.0% 8.8% CFC Bank 3.0% 3.2% 14.7% 5.9% 48.8% 19.5% 5.1% Barclays Bank 2.6% 8.3% 21.7% 10.4% 51.9% 20.5% 5.2% NIC Bank (0.3%) 14.8% 6.1% 8.1% 33.7% 17.5% 12.0% National Bank (38.4%) 16.6% (5.3%) 6.8% 60.9% (27.2%) 25.6% Q1'2016 Weighted Average 13.6% 11.0% 15.8% 9.0% 8.7% 45.2% 21.4% Q1'2015 Weighted Average 8.9% 16.5% 21.3% 8.1% 4.9% 49.5% 20.8% *Average is Market cap weighted **Without Loan Loss Charge Source: Cytonn Research 27

ROaA 1.7% 3.1% 4.9% 4.8% 2.5% 2.7% 3.2% 2.8% 3.7% 3.1% (1.6%) 3.6% 3.0%

Banking Sector Multiples Kenya’s banking sector is trading at an average PBV of 1.3x and a PE of 7.3x Share Price *

No. of Shares Issued (bns)

Market Cap (bns)

PBV

P/E

National Bank*

10.5

0.3

3.2

0.6x

9.4x

HF Group

20.0

0.3

7.0

0.6x

5.4x

CFC Bank

85.0

0.4

33.6

1.2x

6.8x

KCB Group

35.5

3.0

107.4

1.3x

5.4x

Barclays Bank

10.1

5.4

54.9

1.3x

6.5x

NIC Bank

36.8

0.6

23.5

1.3x

6.3x

DTB Bank

175.0

0.3

46.6

1.3x

6.9x

Co-op Bank

16.9

4.9

82.4

1.5x

6.9x

I&M Bank

99.0

0.4

38.8

1.6x

9.2x

Standard Chartered

212.0

0.3

65.5

1.6x

9.8x

Equity Group

40.0

3.8

150.9

2.2x

8.3x

Average

1.3x

7.3x

Median

1.3x

6.9x

Bank

For P/E calculation for NBK we used normalized earnings over a period of 5 years * Share prices are as at 14th June, 2016

The Banking sector has become cheaper on a PBV basis having dropped to 1.3x from 1.7x in FY’2015 Source: NSE, Cytonn Banking Sector Report 28

Banking Sector Multiples Listed Insurance companies are a expensive compared to listed Banks based on P/B valuation 10 year Price to book value: Banking and Insurance

3.4x 3.1x 2.5x

3.1x

2.5x

2.3x

2.3x

2.3x

2.0x 1.7x

1.5x

1.3x

1.4x

1.4x 0.8x

2005

2006

2007

2008

2009

2010

2011

Banks

1.5x

1.7x 1.9x

1.6x 1.5x

1.5x

1.4x 1.3x

1.1x

2012

2013

2014

2015

Q1'2016

Insurance

On a price to book valuation, listed insurance companies are currently expensive than those in the listed banking sector

Source – Cytonn Research

29

III. Cytonn’s Banking Sector Report

30

Executive Summary Cytonn has undertaken this report to offer our investors a comprehensive view of the listed banks • All listed banks in the Kenyan market were analysed by the Cytonn Investment Team

• The analysis was brought about by a need to be able to recommend to our investors which banks are the most stable from a franchise value and from a future growth opportunity perspective • The analysis covers 20 the health and future expected performance of the financial institution, by highlighting their

12

performance using metrics to measure profitability, efficiency, growth, asset quality, liquidity, revenue diversification, capitalization and intrinsic valuation • The analysis was undertaken using Q1’2016 results (franchise value) and analyst’s projections of future performance of

20 13

the banks (future growth opportunities) • For banks which are part of a group structure, the financials of the group were utilised to take into consideration the listed counter which an investor will purchase • The overall ranking was based on a weighted average ranking of Franchise value (accounting for 40%) and Intrinsic value (accounting for 60%) • The top rankings were dominated by Tier 1 banks which performed well in terms of both Franchise and Intrinsic valuation 31

Banking Sector Report Results National Bank Ranked lowest in both franchise and intrinsic score • KCB Group emerged top supported by a strong franchise score and total return score

• Diamond Trust Bank fell three positions to position 6, affected by a drop in franchise ranking. This was due to a low Return

20 12

on Equity of 16.0% compared to the industry average of 18.6%. It also ranked poorly in diversification where it had a Non Interest to Revenue of 20.5% against an industry average of 28.7%

• CfC Stanbic declined three positions to position 9, affected by both a poor franchise and total return score. The low

20 franchise score was 13 due to a low Net Interest Margin of 5.3% against an industry average of 8.3%.

• National Bank was ranked the lowest overall, ranking lowest in both franchise and intrinsic score. NBK has the highest cost to Income ratio at 60.9% against the industry average of 45.4%. Key to note is that NBK has the largest NPLs to loans at 25.6% against the industry average of 8.7%, with one of lowest NPL coverages at 23.2% against the industry average of 33.4%

Source: Cytonn Research

32

Rankings by Franchise Value Equity Group emerged top in the franchise value rankings, with National Bank coming last Rank Bank 1 2 3 4 5 6 7 8 9 10 11

Equity Group Co-operative KCB Group I&M Holdings Barclays Standard CfC Stanbic NIC DTBK HF Group National Bank

LDR * 5 2 1 7 4 10 6 9 3 11 8

20 12

20 13

CIR ROACE NIM ** *** **** 8 5 6 1 10 3 7 2 4 9 11

2 4 3 1 5 8 6 7 9 10 11

1 4 5 6 2 3 11 8 7 9 10

PEG ratio 4 7 2 6 10 9 1 3 8 5 11

Cytonn Tangible Non Interest Cytonn Deposits/ NPLs/ NPL Corporate P/TBV Common Income/ Camel Total Branch Loans Coverage Governance Ratio Revenue Rating Score 11 11 1 1 5 3 2 5 59 8 7 3 5 4 2 4 7 62 6 8 8 4 6 7 9 1 66 10 3 4 10 7 8 1 5 69 5 9 6 3 2 5 7 3 71 9 1 10 6 3 4 6 2 74 4 2 5 8 9 1 3 11 74 3 4 9 7 1 6 8 9 76 7 6 2 2 10 10 5 4 77 1 5 7 11 8 11 10 10 107 2 10 11 9 11 9 11 8 122

• The bank ranking assigns a value of 1 for the best performing bank, and a value of 11 for the worst • The metrics highlighted a bank’s profitability, efficiency, growth, asset quality, liquidity, revenue diversification, capitalization and soundness • • • •

*LDR- Loan to Deposit Ratio **CIR- Cost to Income Ratio ***ROACE - Return on Average Common Equity ****NIM - Net Interest Margin

Source: Cytonn Research

33

Rankings by Intrinsic Value KCB Group hold the highest upside with a potential return of 44.2%

Current Price

Target Price (Valuation)

Upside

Dividend Yield FY16e

Total Potential Return

KCB Group

35.5

49.4

38.6%

5.6%

44.2%

DTBK

175.0

204.2

16.7%

1.4%

18.1%

Barclays Bank

10.1

10.9

7.9%

9.7%

17.6%

HF Group

20.0

21.6

8.0%

7.5%

15.5%

I&M Holdings

99.0

109.5

10.6%

3.5%

14.1%

Equity Group

40.0

42.1

5.3%

5.4%

10.7%

Standard Chartered

212.0

208.6

(1.6%)

5.9%

4.3%

NIC Bank

36.8

35.7

(2.9%)

2.7%

(0.2%)

Co-operative

16.9

16.0

(4.8%)

4.7%

(0.1%)

CfC Stanbic Bank

85.0

83.6

(1.7%)

0.0%

(1.7%)

National Bank

10.5

5.4

(49.0%)

0.0%

(49.0%)

Banks

• KCB Group and Diamond Trust Bank have the highest upsides at 44.2% and 18.1%, respectively • National Bank registered the highest downside of 49.0%

34

Composite Bank Ranking Overall KCB Group ranks highest supported by a high total return score CYTONN’S Q1'2016 BANKING REPORT RANKINGS Banks

Franchise Value Total Score

Total Return Score

66.0 59.0 62.0 71.0 69.0 77.0 74.0 76.0 74.0 107.0 122.0

1.0 6.0 9.0 3.0 5.0 2.0 7.0 8.0 10.0 4.0 11.0

KCB Group Equity Group Co-operative bank Barclays I&M DTBK Standard Chartered NIC CfC Stanbic HF Group National Bank

Weighted Q1'2016 Q1'2016 rank FY’2015 rank Score 27.0 27.2 30.2 30.2 30.6 32.0 33.8 35.2 35.6 45.2 55.4

1 2 3 4 5 6 7 8 9 10 11

1 2 5 7 4 3 9 8 6 10 11

• In FY’2015, franchise value was assigned a weighting of 40% while the intrinsic value was assigned 60% weight, same as in Q3’2015

• KCB maintains its top position on the back of a strong franchise and return score. Additionally KCB sored highly on corporate governance emerging top

35

Appendix

36

A. Metrics Used

37

Banking Sector Report – Metrics Used Cytonn has undertaken analysis of the listed banks in Kenya using 13 key metrics 1. Net Interest Margin - A bank’s net interest margin (NIM), is the difference between the interest paid on deposits and

the interest earned on loans, relative to the amount of interest-earning assets with higher net interest margins translating into higher profits Output: Majority of Bank’s 20 funding is towards the issuing of loans rather than the purchase of government securities. Equity had the highest NIM at 12 11.0%, with the lowest for CfC Stanbic at 5.3%

2. Return on Average Common Equity - A bank’s return on average common equity (ROACE), is the amount of profit the bank earns as a20 percentage of average common shareholders’ equity. It’s a profitability measure that shows how much a company generates13 with the money shareholders have invested Output: Banks with higher ROACEs are better at utilizing capital to generate profits. I&M has the highest ROACE at 33.5%, which was much above the industry average of the listed banks of 18.6%, while National Bank had the lowest at (20.5%) following the bank registering a loss in the full year results

38

Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 13 key metrics 3. Price/Earnings to Growth Ratio - The price/earnings to growth (PEG) ratio is the stock’s market price to earnings ratio divided by its growth in earnings for a specified period of time. The PEG ratio is used to determine the value of a stock while taking into account its growth rate, with lower PEG ratios showing the stock is undervalued given the growth in its earnings Output: To obtain this

20 12we ratio,

estimated each bank’s 5-year growth rate based on analysis of (i) bank’s fundamentals, (ii)

projections using each bank’s models and (iii) management’s input on a bank’s strategy going forward. CfC Stanbic had the lowest PEG ratio at 0.3x, while Barclays was the most overvalued at 2.2x

20 - A bank’s deposits per branch shows the amount of deposits a bank collects from each of its 4. Deposits per Branch branches, hence a 13 measure of efficiency. Banks with higher deposits per branch are preferred, as it shows for each unit cost of capital expenditure required to open new branches and their subsequent operating costs, a bank receives more in deposits.

Output: CFC Stanbic and Standard Chartered have the highest deposits per branch at 4.5 bn and 4.6 bn, respectively, while Equity Group and National bank have the lowest deposits per branch at 1.2 bn and 1.3 bn, respectively. This is due to the large corporate book of CfC Stanbic and Standard Chartered that enables them mobilise deposits with fewer branches

39

Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 13 key metrics 5. Loans to Deposits Ratio - A bank’s loans to deposit ratio (LDR) is a measure of liquidity as it shows how much of a bank’s loans are being funded by its deposits. Low LDR ratios indicate that the bank may not be earning a lot of interest. Very high LDR’s indicate that the bank might not have enough liquidity to cover any unforeseen funding requirements, and ratios above 1 show that the bank supplemented their loan issues with outside borrowing

20 Our analysis showed 12us that in Kenya, the loan to deposit ratio has been steadily increasing, showing increased uptake of Output:

loans and more aggressive use of deposits by banks. Taking a preferred LDR of 85%, we found that KCB Group was closest to the target at 81.7%, while Housing Finance was the farthest at 130.8%

20Ratio - The cost to income ratio is a measure of a bank’s efficiency, showing its costs in relation to its 6. Cost to Income 13is preferred, as it indicates a bank is more profitable. An increase in the ratio often highlights potential income. A lower ratio problems as it shows a bank’s costs rose faster than its income; while a fall in the ratio could be brought by management’s cost cutting measures Output: We see many Kenyan banks making an effort to be more efficient. Many Kenyan banks have opted to restructure in a bid to bring down costs and subsequently this ratio. I&M maintained the lowest cost to income ratio of 30.3%, while National Bank of Kenya had the highest ratio at 60.9%

40

Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 13 key metrics 7. Price to Tangible Book Value - This is a valuation ratio that expresses the bank’s market price to its tangible book value. It shows the price an investor would pay for a unit amount in the event of a liquidation. A ratio of less than one indicates that the bank’s assets are undervalued in the market while a ratio greater than one signifies overvaluation Output: We find Housing Finance 20 as the most undervalued bank as per this metric at 0.7x, while Equity bank is still the most overvalued at 2.2x 12 8. Tangible Common Equity Ratio - This is the ratio of a bank’s common equity less intangible assets to its tangible

assets. It is a common indicator of a bank’s risk and capitalization and measures how much losses a bank can take before shareholder’s equity20 is wiped out, hence solvency Output:

13

NIC is the most solvent with a tangible common ratio of 18.4%, while National Bank was the least solvent at 3.8% 9. Non-Performing Loans to Total Loans Ratio - This is a measure of the percentage of a bank’s issued loans that are non-performing that is, in default, or close to being in default Output: Equity Group had the highest quality loan book with a non-performing loans to total loans ratio of 4.0%, while National Bank had the highest non-performing loans at 25.6%

41

Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 13 key metrics 10. Non-Performing Loans Coverage - This is a credit quality metric that measures the credit risks for banks. It shows the extent to which the NPLs are covered by provisions hence the degree of stability of the bank’s lending base, with higher ratios preferred Output:

20 12

Equity Bank has the highest provisions to non-performing loans at 56.0%, while Housing Finance Group has the lowest at 11.2%

11. Non-Interest Income to Revenue - The non interest income is the income earned from sources other than loans and investments. The non-interest income to revenue therefore shows the extent of diversification of a bank’s operations.

20 13

High levels are preferred, not exceeding the point where the bank loses focus of its primary business Output:

We see that Kenyan banks’ non-interest income is set to benefit from new initiatives such as banc-assurance and mobile banking. CfC Stanbic has the highest non-interest income as a percentage of revenue at 40.7%, while Housing Finance has the lowest at 19.6% 12. Camel Rating - This is a ranking system that assesses the overall condition of a bank, that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Quality and Liquidity. We also incorporated a governance score in the ranking

42

Banking Sector Report – Metrics Used, continued… Cytonn has undertaken analysis of the listed banks in Kenya using 13 key metrics 13. Corporate Governance Score – Given the recent developments in the banking sector, which include Dubai Bank, Imperial Bank and National Bank, we developed a 13th metric to measure corporate governance This is a ranking system where we analyse 25 metrics to rank listed companies on their corporate governance. Main areas of analysis are in the board composition, audit functions, CEO tenor and evaluation, remuneration and transparency Output:

20 12

The score assumes a diffusion index with 50% as the base. Anything below 50% should be flagged as having serious corporate governance issues while anything above is skewed towards proper governance. However the variance from 100% gives the risk associated with corporate governance

20 13

43

B. Tier I Banks

44

Tier 1 Banks Value Drivers and Cons Bank

Value Drivers

Cons

Equity Group

• Equity Bank is currently the largest insurance intermediary and Equity Investment Bank is the 2nd largest Stockbroker in the country with a market share of 16% • Equitel is the fastest growing MVNO

KCB Group

• KCB Mpesa, is expected to be a key growth driver in terms of deposits and loans • Alternative channels including mobile banking and agency banking

Co-op Bank

• It has a large Sacco banking base, and the opportunity to grow upon the model in its regional expansion strategy • Co-operative bank is a financial one-stop shop owing to its full range of financial services

• Cost control: Equity bank has a big challenge to maintain their cost as they are investing highly in IT • Expansion Setbacks: Equity bank has encountered some setback in their regional expansion where they have not been as profitable as in others • Exposure to different political, economic and regulatory environments especially the impact of South Sudan operation • The bank seems to be struggling in utilising its asset base compared to its peers in generation of returns • The bank is slow in embracing technology compared to its peers in deposit mobilisation • The bank might be losing out in first mover advantage in their expansion strategy

Standard Chartered

Barclays Bank

20 13

• Custody business will continue providing the bank with a niche when it comes to wholesale banking • Strong in SME banking business

• Recently high NPLs have affected the revenues for Standard Chartered Bank. • Limited to the Kenya as the parent company prefers to operate independently in other markets

• Barclays has historically enjoyed cheaper funding from its parent company and has not had borrowings historically, this however might have to change going forward if Barclays Plc exits Africa • The bank has one of highest net interest margin of 10.8% as at FY’2015

• Stiff competition in the retail and SME banking market • The bank will continue lagging its peers in the capture of the retail market • Challenges in deposit mobilization compared to its peers

45

I. Equity Group Holdings

46

Financial Statements Extracts Equity Group’s PAT is expected to grow at a 5 Year CAGR of 17.1% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA Balance Sheet Net Loans and Advances Government Securities Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

2013 26.5 15.4 2.4 20.3 22.7 19.0 13.3 3.5 1.5 48.8% 28.1% 5.1% 2013 171.4 44.6 61.8 277.8 194.6 31.6 226.2 51.6 13.7

2014 29.2 18.5 1.6 24.8 26.3 22.4 17.2 29.2% 4.5 1.8 52.0% 29.7% 5.5%

2015 34.1 21.9 2.4 29.7 32.1 24.0 17.3 1.0% 4.6 2.0 52.9% 25.5% 4.5%

2016e 36.8 28.9 3.5 33.3 36.7 29.0 20.3 17.0% 5.4 2.1 50.6% 29.3% 4.4%

2017f 42.6 34.2 4.0 38.4 42.4 34.4 24.1 18.7% 6.4 2.6 50.1% 32.8% 4.6%

2018f 46.6 40.5 4.8 43.0 47.8 39.3 27.5 14.2% 7.3 2.9 49.4% 30.9% 4.7%

2019f 51.7 48.1 5.8 48.9 54.7 45.1 31.5 14.8% 8.4 3.3 49.0% 29.6% 4.7%

2020f 60.0 58.2 7.1 56.7 63.8 54.5 38.2 20.9% 10.1 4.0 47.9% 29.9% 5.0%

CAGR 12.0% 21.6% 23.8% 13.8% 14.7% 17.9% 17.1%

2014 214.2 48.4 82.0 344.6 245.4 35.4 280.8 63.8 16.9 23.7%

2015 269.9 42.8 115.4 428.1 302.1 53.8 355.9 72.1 19.1 13.1%

2016e 309.5 40.9 134.3 484.6 347.7 70.7 418.4 66.2 17.5 (8.3%)

2017f 350.6 45.0 156.3 551.9 399.8 71.5 471.3 80.6 21.4 21.8%

2018f 387.9 51.0 190.2 629.1 459.8 72.3 532.1 97.1 25.7 20.5%

2019f 441.0 58.0 218.9 717.9 528.8 73.1 601.9 116.0 30.7 19.5%

2020f 501.9 66.0 253.1 821.0 608.1 74.0 682.1 138.9 36.8 19.7%

CAGR 13.2% 9.1% 17.0% 13.9% 15.0% 6.6% 13.9% 14.0% 14.0%

47

17.1% 15.1%

Valuation Summary Equity Group is undervalued with a total potential return of 10.7% Cost of Equity Assumptions: Risk free rate * Beta

13.0% 0.8

Country Risk Premium

6.7%

Extra Risk Premium

0.3%

Cost of Equity Valuation Summary: Intrinsic Valuation PBV Multiple PE Multiple Fair Value Current Price Upside/(Downside) Dividend Yield Total Potential Return

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified PBV Shareholder Equity – FY20e Terminal Value-(Year 2020)

14 – June -16

18.4%

Implied Price 45.6 26.1 34.4

* Five years average yields on a 10 year Treasury bond 48

5.0% 1.0 19.7% 29.9% 1.7x 138.9 235.6 Weighting 80% 15% 5%

Weighted Value 36.5 3.9 1.7 42.1 40.0 5.3% 5.4% 10.7%

II. KCB Group

49

Financial Statements Extracts KCB Group has a high return on equity at 25.0% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROE ROA

2013 33.0 17.1 2.9 27.1 30.0 20.1 14.3 17.5% 4.6 1.9 59.8% 24.4% 3.8%

2014 35.9 22.0 5.1 29.1 34.2 23.8 16.8 17.5% 5.4 2.0 59.0% 24.2% 3.8%

2015 39.2 23.4 4.7 31.4 36.1 26.5 19.6 16.5% 6.3 2.0 57.6% 25.0% 3.7%

2016e 48.8 26.4 7.4 37.5 44.9 30.3 21.2 8.0% 6.8 2.2 59.7% 24.2% 3.5%

2017f 56.6 30.4 6.4 44.9 51.3 35.8 25.0 18.1% 8.1 2.6 58.9% 24.5% 3.6%

2018f 66.2 35.0 7.4 51.9 59.3 41.9 29.3 17.1% 9.4 3.0 58.6% 24.3% 3.7%

2019f 77.0 39.3 8.5 59.7 68.2 48.2 33.7 15.0% 10.9 3.5 58.6% 23.7% 3.7%

2020F 89.3 45.7 9.8 69.0 78.7 56.2 39.4 16.8% 12.7 4.1 58.3% 23.6% 3.8%

CAGR 17.9% 14.3% 15.7% 17.1% 16.9% 16.2% 14.9%

Balance Sheet Net Loans and Advances Government Securities Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

2013 227.7 47.5 115.6 390.9 305.7 21.8 327.5 63.4 20.4

2014 283.7 61.1 145.5 490.3 377.3 37.4 414.7 75.6 24.4 19.4%

2015 346.0 57.8 154.3 558.1 424.4 52.4 476.8 81.3 26.2 7.4%

2016e 395.5 71.7 176.7 643.8 485.5 64.6 550.1 93.7 30.2 15.4%

2017f 459.4 87.6 192.2 739.2 558.3 70.1 628.5 110.8 35.7 18.2%

2018f 524.8 100.1 212.8 837.7 642.1 65.0 707.1 130.7 42.1 18.0%

2019f 607.7 114.4 241.9 964.0 738.4 72.0 810.4 153.6 49.5 17.5%

2020f 695.4 130.9 273.7 1100.0 849.2 70.4 919.6 180.4 58.1 17.4%

CAGR 15.0% 17.8% 12.1% 14.5% 14.9% 6.1% 14.0% 17.3% 17.3%

50

14.9% 15.2%

Valuation Summary KCB Group is undervalued with a total potential return of 44.7% Cost of Equity Assumptions: Risk free rate * Beta

14 - June -16 13.0% 0.8

Country Risk Premium

6.7%

Extra Risk Premium

0.5%

Cost of Equity

18.6%

Valuation Summary: Intrinsic Valuation PBV Multiple PE Multiple Fair Value Current Price Upside/(Downside) Dividend Yield Total Potential Return

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified PBV Shareholder Equity – FY20e Terminal Value-(Year 2020)

5.0% 1.0 20.2% 23.6% 1.2x 180.4 220.3

Implied Price

Weighting

Weighted Value

50.2 44.4 50.2

80% 15% 5%

40.2 6.7 2.5 49.4 35.5 39.0% 5.6% 44.7%

* Five years average yields on a 10 year Treasury bond 51

III. Co-operative Bank

52

Financial Statement Extracts Co-operative Bank is expected to grow at a 5 Year CAGR of 12.3% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROE ROA

2013 18.6 9.3 0.8 16.6 17.4 10.9 9.1 18.2% 1.9 0.4 62% 27.4% 4.2%

2014 21.3 10.8 1.2 18.9 20.1 10.9 8.0 (12.0%) 1.6 0.5 63% 20.0% 3.1%

2015 23.2 13.2 2.0 19.4 21.4 15.4 11.7 46.0% 2.4 0.0 58.8% 25.0% 3.7%

2016e 24.3 15.9 2.5 19.4 21.9 18.3 12.8 9.7% 2.6 0.7 54.4% 23.1% 3.5%

2017f 25.6 18.4 2.5 21.1 23.6 20.4 14.3 11.2% 2.9 0.8 53.7% 21.6% 3.4%

2018f 28.9 20.6 2.8 23.6 26.4 23.0 16.1 12.9% 3.3 0.9 53.4% 20.9% 3.5%

2019f 33.0 23.4 3.1 27.0 30.2 26.3 18.4 14.2% 3.8 1.1 53.4% 20.5% 3.5%

2020f 37.0 27.2 3.5 30.7 34.2 29.9 20.9 13.7% 4.3 1.2 53.4% 20.2% 3.6%

CAGR 9.8% 15.5% 11.6% 9.7% 9.8% 14.2% 12.3%

Balance Sheet Net Loans and Advances Government Securities Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

2013 137.1 14.0 80.1 231.2 175.4 18.7 194.1 36.8 7.5 23.4%

2014 179.5 24.6 81.3 285.4 217.7 24.3 242.0 43.3 8.9 17.8%

2015 208.6 36.2 97.8 342.5 265.4 27.3 292.7 50.2 10.3 15.9%

2016e 239.2 25.9 127.3 392.3 297.2 34.6 331.8 61.1 12.5 21.7%

2017f 266.2 28.8 144.1 439.1 332.9 35.4 368.3 71.4 14.6 16.8%

2018f 296.6 32.1 163.1 491.8 372.8 36.5 409.3 83.0 17.0 16.3%

2019f 330.6 35.7 184.6 551.0 417.6 37.7 455.3 96.3 19.7 16.0%

2020f 368.7 39.9 209.0 617.6 467.7 39.1 506.8 111.3 22.8 15.7%

CAGR 12.1% 2.0% 16.4% 12.5% 12.0% 7.5% 11.6% 17.3% 17.3%

53

12.3% 13.0%

Valuation Summary Co-operative Bank is fairly valued with a total potential return of (0.1%) Cost of Equity Assumptions: Risk free rate* Beta

1.0

Country Risk Premium

6.7%

Extra Risk Premium

0.3%

Cost of Equity

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified Price to Book Value Shareholder Equity – FY20e Terminal Value-(Year 2019)

14 – June - 16 13.0%

20.1%

Valuation Summary:

5.0% 1.0 20.0% 20.2% 1.0x 111.3 112.9

Implied Price 15.6

Weighting 80%

Weighted Value 12.5

PBV Multiple

17.8

15%

2.7

PE Multiple

18.1

5%

0.9

Intrinsic Valuation

Fair Value

16.0

Current Price

16.9

Upside/(Downside)

(4.8%)

Dividend Yield

4.7%

Total Upside/(Downside)

(0.1%)

* Five years average yields on a 10 year Treasury bond 54

IV. Standard Chartered Bank

55

Financial Statement Extracts Standard Chartered has a high return on equity of 15.5% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA

2013 16.8 7.1 1.0 9.5 10.5 13.4 9.3 14.9% 27.0 13.5 44.0% 27.7% 4.5%

2014 17.9 8.2 1.3 10.4 11.7 14.3 10.4 12.5% 30.4 11.5 45.0% 27.2% 4.7%

2015e 18.1 7.2 4.9 11.3 16.2 9.2 6.3 (39.2%) 18.5 12.5 63.9% 15.5% 2.8%

2016e 19.3 8.0 2.0 11.8 13.9 13.5 9.4 48.7% 27.5 16.5 50.7% 21.9% 3.8%

2017e 20.7 9.0 2.2 12.2 14.5 15.2 10.6 12.6% 30.9 18.6 48.8% 22.5% 3.9%

2018e 23.1 9.9 2.5 13.5 15.9 17.1 12.0 12.9% 34.9 21.0 48.2% 23.2% 4.0%

Balance Sheet Net Loans and Advances Government Securities Other assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

2013 129.7 56.2 34.5 220.4 154.7 29.5 184.2 36.2 105.4

2014 122.7 58.8 41.0 222.5 154.1 27.8 181.8 40.7 118.4 12.3%

2015 115.1 73.6 45.2 234.0 172.0 20.7 192.7 41.3 120.1 1.5%

2016e 124.7 66.0 68.3 258.9 191.8 22.1 213.9 45.0 131.1 9.2%

2017f 138.4 73.2 73.1 284.8 212.9 22.5 235.5 49.3 143.5 9.4%

2018f 152.9 80.9 78.6 312.4 235.3 23.1 258.3 54.1 157.5 9.7%

Source – Company Financials

56

2019e 25.5 11.0 2.7 14.5 17.3 19.3 13.5 12.4% 39.2 23.5 47.3% 23.7% 4.1% 2019f 168.2 89.0 84.7 341.9 258.8 23.6 282.4 59.5 173.2 10.0%

2020e 28.0 12.2 3.0 16.0 19.0 21.2 14.8 10.1% 43.2 25.9 47.2% 23.8% 4.2% 2020f 184.2 97.5 91.4 373.1 283.4 24.3 307.7 65.4 190.4 10.0%

CAGR 7.7% 6.9% 14.8% 7.4% 8.3% 6.7% 6.0% 6.0% 14.5%

CAGR 8.5% 10.7% 17.4% 10.9% 13.0% -2.7% 11.1% 10.0% 10.0%

Valuation Summary Standard Chartered Bank is overvalued with a total potential return of 4.3% Cost of Equity Assumptions: Risk free rate * Adjusted Beta

14 – June - 2016 13.0% 0.8

Country Risk Premium

6.7%

Extra Risk Premium

0.0%

Cost of Equity

18.4%

Valuation Summary:

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified Price to Book Value Shareholder Equity - FY19e Terminal Value-(Year 2019)

5.0% 1.0 19.7% 23.8% 1.3x 65.4 83.5

Implied Price

Weighting

Weighted Value

Intrinsic Valuation

214.0

80.0%

171.2

PBV Multiple

200.9

15.0%

30.1

PE Multiple

144.4

5.0%

7.2

Fair Value

208.6

Current Price

212.0

Upside/(Downside)

(1.6%)

Dividend Yield

5.9%

Total Potential Return

4.3%

* Five years average yields on a 10 year Treasury bond 57

V. Barclays Bank

58

Financial Statement Extracts Barclays Bank has a high return on equity of 21.6% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA Balance Sheet Net Loans and Advances Government Securities Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

Source – Company Financials

2013 18.9 9.1 1.2 14.8 16.0 11.1 7.6 1.4 0.7 57.3% 24.6% 3.9% 2013 118.4 47.6 40.8 206.8 151.1 23.2 174.4 32.4 6.0

2014 19.6 8.7 1.4 14.5 15.9 12.3 8.4 10.7% 1.6 1.0 56.4% 23.9% 3.9%

2015 20.4 9.1 1.8 15.6 17.4 12.1 8.4 (0.4%) 1.5 1.0 59.0% 21.6% 3.6%

2016e 21.9 9.6 1.8 17.1 18.8 12.6 8.8 5.2% 1.6 1.0 59.9% 21.1% 3.6%

2017f 22.4 10.2 1.7 17.8 19.5 13.1 9.1 3.5% 1.7 1.0 59.8% 21.9% 3.6%

2018f 23.4 10.8 1.8 18.6 20.4 13.8 9.6 5.5% 1.8 1.1 59.6% 21.9% 3.8%

2019f 24.5 11.5 1.9 19.5 21.4 14.6 10.2 5.9% 1.9 1.1 59.5% 21.5% 3.8%

2020f 25.8 12.2 2.0 20.5 22.5 15.5 10.8 6.0% 2.0 1.2 59.3% 21.2% 3.9%

2014 125.4 57.2 43.3 225.8 164.8 22.9 187.7 38.2 7.0 18.0%

2015 145.4 48.1 47.4 240.9 165.1 36.1 201.2 39.7 7.3 4.0%

2016e 153.1 54.0 49.6 256.8 180.2 33.0 213.2 43.7 8.0 9.9%

2017f 158.9 56.7 54.0 269.6 189.2 33.1 222.3 47.3 8.7 8.4%

2018f 166.8 59.6 56.7 283.1 198.6 33.3 231.9 51.2 9.4 8.1%

2019f 175.2 62.6 59.5 297.3 208.5 33.4 242.0 55.3 10.2 8.0%

2020f 183.9 65.7 62.5 312.2 219.0 33.6 252.6 59.6 11.0 7.8%

59

CAGR 4.8% 6.2% 2.3% 5.6% 5.3% 5.1% 5.2% 5.2% 45.4%

CAGR 4.8% 6.5% 5.7% 5.3% 5.8% -1.4% 4.7% 8.5% 8.5%

Valuation Summary Barclays currently is undervalued with a total potential return of 17.6% Cost of Equity Assumptions: Risk free rate * Beta

14 - June -16 13.0% 0.8

Country Risk Premium

6.7%

Extra Risk Premium

0.5%

Cost of Equity

19.0%

Valuation Summary: Intrinsic Valuation PBV Multiple PE Multiple Fair Value Current Price Upside/(Downside) Dividend Yield Total Potential Return

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified PBV Shareholder Equity – FY20e Terminal Value-(Year 2020)

5.0% 1.0 20.2% 21.2% 1.1x 59.6 63.6

Implied Price

Weighting

Weighted Value

10.5 12.8 11.8

80% 15% 5%

8.4 1.9 0.6 10.9 10.1 7.9% 9.7% 17.6%

* Five years average yields on a 10 year Treasury bond 60

C. Tier II Banks

61

Tier 2 banks value drivers and cons Bank

National Bank

NIC Bank

CfC Stanbic

DTB Bank

I&M Bank

HF Group

20 13

Value Drivers

Cons

• Introduction of Islamic Banking that capitalized on the unbanked Islam community contributing to deposit growth • The introduction of bancassurance and custodial services has seen the bank diversify its revenue • Increased investment in digital platforms, NIC Now and Internet banking by 29% and 41%, respectively • NIC bank has maintained its pole positioning in asset financing and curved a niche in the market • The Corporate and Investment banking is a key driver for revenue as it contribute to 64% of the banks total income • Their mobile banking platform is set to reduce costs associated with branch transactions

• High cost of funds. Despite NBK serving retail customers, it has maintained high cost of funds averaging 5.3% thus leading to lower NIMs of 7.0% • Despite being associated with the Government, the bank is slow in county expansion

• Strong backing from financing partners, i.e. Aga Khan Fund for Economic Development and Habib bank

• Traditional SME market now being targeted by Tier 1 banks, hence it’s market share is under threat • Exposure to different political, economic and regulatory environments, especially in Kenya with the upcoming elections might slow down business • Political Instability in the countries they operate. The recent instability in S.Sudan proved to be a challenge as it affected their overall income • Their expansion strategy is limited by the presence of Standard Bank in the region • Traditional SME market now being targeted by tier I banks hence market share under threat • Exposure to different political, economic and regulatory environments

• They have consistently been among the most efficient banks in Kenya from a survey released by Think Business Banking Awards • They have also fully embraced internet bank in Kenya to further help drive their efficiency • Vibrant real estate market in Kenya with an annual housing supply which does not satisfy demand • The bank is the market leader in provision of mortgage financing

• They have not been able to aggressively market themselves as a local household bank as Equity, Co-op and KCB • They face stiff competition for clients from larger existing tier 1 bank in the SME and Retail sectors • Lack of a vibrant mortgage market in Kenya • Competition from larger banks with Mortgage facilities poses a risk for growth • Asset liability mismatch which forces the bank to resort to expensive financing

62

I. National Bank of Kenya

63

Financial Statements Extracts National Bank is expected to grow at a 5 Year CAGR of 8.1% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA

2013 5.6 2.9 0.3 6.4 6.7 1.8 1.1 52.5% 3.6 75.3% 10.0% 1.4%

Balance Sheet Net Loans and Advances Government Securities Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BVPS

2013 39.6 27.5 25.5 92.6 78.0 2.7 80.7 11.9 38.6

Source – Company Financials

2014 2015 6.8 6.4 3.1 3.2 0.5 3.7 7.0 7.5 7.5 11.2 1.3 (1.6) 0.9 (1.2) (21.8%) (232.5%) 2.8 (3.7) 70.2% 78.2% 7.2% -9.9% 0.8% -0.9% 2014 65.6 30.3 27.2 123.1 104.7 6.1 110.9 12.2 39.7 2.8%

2015 67.8 27.3 30.3 125.4 110.6 3.8 114.4 11.1 35.9 (9.6%) 64

2016e 4.8 3.6 1.5 5.5 7.0 1.4 1.0 185.0% 3.2 65.2% 8.5% 0.7%

2017f 5.1 4.3 1.7 6.1 7.9 1.5 1.1 7.2% 3.4 65.5% 8.4% 0.7%

2018f 5.7 4.8 1.9 6.9 8.8 1.6 1.1 8.3% 3.7 66.2% 8.3% 0.7%

2019f 6.1 5.4 2.1 7.6 9.7 1.7 1.2 7.4% 4.0 66.3% 8.2% 0.7%

2020f 6.7 5.9 2.3 8.4 10.7 1.9 1.3 9.4% 4.3 66.4% 8.3% 0.7%

CAGR 0.8% 13.4% -9.0% 2.2% -0.9% 8.1% 8.1%

2016e 77.9 30.4 33.4 141.7 121.7 8.0 129.7 12.0 39.1 8.9%

2017f 87.0 33.5 35.1 155.6 133.9 8.7 142.5 13.1 42.5 8.7%

2018f 95.7 36.8 38.3 170.8 147.2 9.4 156.6 14.2 46.2 8.7%

2019f 105.3 40.5 41.8 187.6 162.0 10.2 172.1 15.4 50.1 8.6%

2020f 115.8 44.5 45.6 206.0 178.2 11.0 189.2 16.8 54.5 8.7%

CAGR 11.3% 10.3% 8.5% 10.4% 10.0% 23.9% 10.6% 8.7% 8.7%

8.1% N/A

Valuation Summary National Bank is overvalued with a total potential return of (49.0%) Cost of Equity Assumptions:

Risk free rate * Beta

13.0% 0.9

Country Risk Premium

6.7%

Extra Risk Premium

4.0%

Cost of Equity Valuation Summary:

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified Price to Book value per share Preference Shares

14 – June - 2016

22.6%

5.0% 1.0 23.7% 8.3% 0.2x 5.7

Implied Price

Weighting

Weighted Value

2.6

80.0%

2.1

PBV Multiple

19.4

15.0%

2.9

PE Multiple**

7.7

5.0%

0.4

Intrinsic Valuation

Fair Value

5.4

Current Price Upside/(Downside) Dividend Yield Total Potential Return

10.5 (49.0%) 0.0% (49.0%)

*-Five years average yields on a 10 year Treasury bond **- PE is calculated using Normalised Earnings 65

II. NIC Bank

66

Financial Statements Extracts NIC bank has an average return on equity of 18.4% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA Balance Sheet Net Loans and Advances Government Securities Other Assets Total Assets Customer Deposits Other Assets Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

2013 7.3 3.2 1.1 5.5 5.0 3.2 6.7% 5.1 0.6 52.2% 20.1% 2.8% 2013 81.4 18.1 21.5 121.1 91.6 11.9 103.5 17.2 3.34

2014 8.0 3.6 0.3 5.3 6.2 4.1 27.1% 6.4 1.0 46.2% 20.6% 3.1% 2014 102.0 19.2 24.5 145.8 100.4 22.0 122.4 22.9 4.45 33.0%

2015 9.7 4.0 1.7 7.4 6.4 4.5 8.8% 7.0 1.0 53.6% 18.4% 2.9% 2015 116.0 7.5 42.3 165.8 112.4 27.1 139.4 25.9 5.0 13.1% 67

2016e 11.6 4.8 2.9 9.3 7.2 5.0 12.3% 7.9 1.2 56.3% 18.0% 2.8% 2016e 126.0 8.1 53.1 187.2 124.7 32.1 156.8 29.9 5.8 15.6%

2017f 12.6 5.3 2.9 10.0 7.9 5.5 10.2% 8.7 1.3 55.8% 17.2% 2.8% 2017f 141.2 9.0 56.4 206.7 138.4 33.1 171.5 34.6 6.7 15.8%

2018f 13.8 5.8 3.3 11.1 8.6 6.0 8.5% 9.4 1.4 56.3% 16.2% 2.8% 2018f 156.7 10.0 61.1 227.9 153.7 34.0 187.7 39.7 7.7 14.8%

2019f 15.2 6.4 3.6 12.3 9.4 6.6 9.0% 10.2 1.5 56.7% 15.4% 2.8% 2019f 174.0 11.1 61.4 246.5 170.6 30.2 200.7 45.3 8.8 14.0%

2020f 16.7 7.1 4.0 13.6 10.3 7.2 9.6% 11.2 1.7 57.0% 14.9% 2.8%

CAGR 15.9% 14.7% 65.1% 20.5% 10.5% 11.8%

2020f 193.1 12.3 66.7 272.2 189.3 30.9 220.3 51.4 10.0 13.5%

CAGR 13.6% 8.5% 22.2% 13.3% 13.5% 7.1% 12.5% 17.6% 17.6%

11.8% 11.0%

Valuation Summary NIC bank is fairly valued with a total potential return of (0.2%) Cost of Equity Assumptions: Risk free rate *

13.0%

Beta

1.03

Mature Market Risk Premium

6.7%

Extra Risk Premium

0.0%

Cost of Equity

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified Price to Book value Per Share Shareholder Equity – FY’20e Terminal Value-(Year 2020)

14- June -16

19.9%

Valuation Summary:

5.0% 1.0 19.7% 14.9% 0.7x 51.4 34.4

Implied Price 33.6

Weighting 80%

Weighted Value 26.9

PBV Multiple

41.6

15%

6.2

PE Multiple

52.1

5%

2.6

Intrinsic Valuation

Fair Value

35.7

Current Price

36.8

Upside/(Downside)

(2.9%)

Dividend Yield

2.7%

Total Potential Return

(0.2%)

* Five years average yields on a 10 year Treasury bond 68

III. CfC Stanbic Bank

69

Financial Statements Extracts CfC Stanbic has a return on equity of 13.0% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA

2013 7.5 8.7 0.8 8.2 9.0 7.2 5.1 70.3% 13.0 50.7% 17.2% 3.2%

2014 8.5 8.4 0.7 8.5 9.2 7.7 5.7 10.9% 14.4 50.2% 16.4% 3.1%

2015 9.3 7.6 0.9 8.7 9.6 7.4 4.9 (13.7%) 12.4 51.2% 13.0% 2.5%

2016e 10.7 7.9 1.3 9.4 10.8 7.9 5.5 12.5% 14.0 50.5% 13.4% 2.5%

2017f 11.7 8.9 1.5 10.4 11.9 8.7 6.1 10.5% 15.4 50.5% 13.0% 2.4%

2018f 13.0 10.1 1.9 11.6 13.5 9.5 6.7 9.4% 16.9 50.5% 12.5% 2.4%

2019f 14.4 11.5 2.3 13.0 15.4 10.5 7.3 9.6% 18.5 50.5% 12.1% 2.3%

2020f 16.0 13.0 2.6 14.8 17.4 11.6 8.1 10.5% 20.5 51.0% 11.9% 2.2%

CAGR 11.4% 11.2% 23.9% 11.2% 12.7% 9.4% 10.5%

Balance Sheet Net Loans and Advances Government securities Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BVPS

2013 103.8 6.4 70.3 180.5 130.3 17.8 148.1 32.4 82.0

2014 101.2 4.8 74.9 181.0 129.4 14.7 144.1 36.9 93.3 13.8%

2015 128.2 7.8 72.5 208.5 153.7 16.4 170.1 38.4 97.0 4.0%

2016e 141.6 9.1 84.7 235.4 175.9 15.6 191.5 43.9 111.0 14.4%

2017f 160.5 10.3 94.9 265.6 200.6 15.1 215.6 50.0 126.4 13.9%

2018f 182.0 11.7 106.3 299.9 228.6 14.6 243.2 56.7 143.3 13.4%

2019f 206.6 13.2 118.9 338.7 260.7 14.1 274.7 64.0 161.8 12.9%

2020f 234.6 15.0 133.1 382.8 297.2 13.6 310.7 72.1 182.3 12.6%

CAGR 12.9% 14.0% 12.9% 12.9% 14.1% (3.7%) 12.8% 13.4% 13.4%

70

10.5% N/A

Valuation Summary CfC Stanbic is fairly valued with a total potential return of (1.7%) Cost of Equity Assumptions: Default Spread Adjusted Risk free rate Beta

0.9 6.7%

Extra Risk Premium

0.0%

Valuation Summary: Intrinsic Valuation PBV Multiple PE Multiple

Growth rate

13.0%

Mature Market Risk Premium Cost of Equity

Terminal Assumptions:

14-June-16

5.0%

Mature Company Beta

1.0

Terminal Cost of Equity

19.7%

Return on Average Equity

11.9%

Persistency Factor

19.0%

0.5

Justified Price to Book value per share

Implied Price 80.7 97.1 89.3

Fair Value Current Price Upside/(Downside) Dividend yield Total Potential Return

Weighting 80% 15% 5%

0.5x

Weighted Value 64.6 14.6 4.5 83.6 85.0 (1.7%) 0.0% (1.7%)

* Five years average yields on a 10 year Treasury bond 71

IV. Diamond Trust Bank

72

Financial Statement Extracts DTB has an estimated 5-year PAT CAGR of 17.6% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA Balance Sheet Net Loans and Advances Government Securities Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

Source – Company Financials

2013 11.0 3.4 0.9 6.2 7.2 7.2 5.2 19.6 1.9 43.3% 27.9% 3.5% 2013 110.9 25.4 166.5 128.8 14.0 142.8 21.0 78.9

2014 12.8 3.8 0.9 7.2 8.1 8.5 5.7 9.1% 21.4 2.2 43.4% 22.8% 3.0% 2014 137.7 35.1 211.5 161.0 18.3 179.3 29.0 108.8 37.9%

2015 15.2 4.7 2.2 8.2 10.3 9.6 6.6 15.7% 24.8 2.5 41.0% 20.9% 2.7% 2015 177.5 47.1 271.6 194.1 39.3 233.3 34.1 128.2 17.9%

73

2016e 19.9 4.2 2.7 10.8 13.5 10.7 7.5 13.0% 28.0 2.8 44.7% 18.5% 2.7%

2017f 23.9 4.5 3.5 12.5 16.0 12.4 8.7 16.7% 32.7 3.3 43.9% 19.5% 2.8%

2018f 28.8 6.5 4.2 16.5 20.7 14.6 10.2 17.4% 38.4 3.8 46.8% 20.5% 2.9%

2019f 34.2 7.8 5.0 19.7 24.7 17.3 12.1 18.7% 45.5 4.6 46.8% 21.5% 3.0%

2020f 39.6 9.1 5.9 21.7 27.6 21.2 14.8 22.4% 55.7 5.6 44.4% 17.4% 2.6%

CAGR 21.1% 14.1% 22.1% 21.5% 21.6% 17.3% 17.6%

2016e 213.3 48.6 329.9 238.4 36.7 275.2 50.7 190.2 48.4%

2017f 254.4 57.2 385.8 286.1 37.1 323.2 58.5 219.7 15.5%

2018f 305.1 67.8 453.7 343.3 38.5 381.9 67.7 254.2 15.7%

2019f 361.0 79.2 528.1 405.1 40.3 445.4 78.6 295.2 16.1%

2020f 427.5 92.7 616.3 478.1 42.2 520.3 92.0 345.4 17.0%

CAGR 19.2% 14.5% 17.8% 19.8% 1.5% 17.4% 21.9% 21.9%

17.6% 17.6%

Valuation Summary DTB’s stock is undervalued with a total potential return of 18.1% Cost of Equity Assumptions: Risk free rate Beta

13.0% 0.7

Mature Market Risk Premium

6.7%

Extra Risk Premium

0.0%

Cost of Equity

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified Price to Book value per share Shareholder Equity - FY20e Terminal Value

14 – June - 16

17.4%

Valuation Summary: Intrinsic Valuation PBV Multiple PE Multiple

Implied Price 214.8 147.5 204.0

Fair Value Current Price Upside / (Downside) Dividend Yield Total Potential Return

Weighting 80.0% 15.0% 5.0%

5.0% 1.0 19.7% 19.1% 1.0x 97.2 93.1

Weighted Value 171.8 22.1 10.2 204.2 175.0 16.7% 1.4% 18.1%

* Five years average yields on a 10 year Treasury bond 74

V. I&M Holdings

75

Financial Statements Extracts I&M Holdings has a high return on equity at 24.8% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA

2013 8.9 3.4 0.5 4.7 5.1 7.3 5.0 20.8% 12.7 2.1 37.9% 25.1% 3.8%

2014 10.4 3.8 0.9 5.3 6.2 8.2 5.7 15.3% 14.6 2.6 37.4% 23.9% 3.6%

2015 12.6 4.6 1.0 6.4 7.4 10.2 7.1 24.6% 18.2 3.5 37.2% 24.8% 3.9%

2016e 14.4 4.5 1.3 6.6 7.9 11.2 7.8 9.8% 20.0 3.6 35.1% 22.6% 3.7%

2017f 16.7 5.0 1.2 7.5 8.7 13.2 9.3 18.0% 23.6 4.2 34.8% 22.1% 3.7%

2018f 19.2 5.6 1.4 8.6 10.0 15.0 10.5 13.8% 26.8 4.8 34.9% 21.0% 3.7%

2019f 22.1 6.3 1.6 9.9 11.5 17.1 12.0 13.9% 30.6 5.5 35.0% 20.2% 3.6%

CAGR 16.2% 10.3% 13.4% 13.2% 13.2% 15.8% 15.9%

Balance Sheet Government Securities Net Loans and Advances Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % BVPS Change YoY

2013 0.0 91.9 49.3 141.2 97.1 20.4 117.5 21.9 0.1 23.9%

2014 0.0 112.5 64.0 176.5 114.2 34.2 148.4 26.1 0.1 18.9%

2015 0.0 127.8 63.9 191.7 133.0 25.0 158.0 31.4 0.1 20.7%

2016e 0.0 140.0 89.8 229.8 155.5 34.0 189.5 38.0 0.1 20.9%

2017f 0.0 162.4 104.1 266.5 180.4 38.1 218.5 45.7 0.1 20.3%

2018f 0.0 186.7 120.0 306.7 207.5 42.5 249.9 54.5 0.1 19.2%

2019f 0.0 214.7 138.1 352.9 238.6 47.5 286.1 64.5 0.2 18.3%

CAGR N/A 13.8% 16.6% 14.9% 15.9% 6.8% 14.0% 19.9% 19.9%

76

15.9% 16.5%

Valuation Summary I&M is undervalued with a total potential return of 14.1% Cost of Equity Assumptions: Risk free rate * Beta

14 – June - 16 13.0% 0.9

Country Risk Premium

6.7%

Extra Risk Premium

0.2%

Cost of Equity

18.9%

Valuation Summary: Intrinsic Valuation PBV Multiple PE Multiple Fair Value Current Price Upside/(Downside) Dividend Yield Total Potential Return

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified PBV Shareholder Equity – FY20e Terminal Value-(Year 2020)

5.0% 1.0 19.9% 19.3% 1.0x 75.7 72.9

Implied Price

Weighting

Weighted Value

118.7 72.9 72.5

80% 15% 5%

95.0 10.9 3.6 109.5 99.0 10.6% 3.5% 14.1%

* Five years average yields on a 10 year Treasury bond 77

VI. HF Group

78

Financial Statement Extracts HF Group’s PAT is expected to grow at a 5 Year CAGR of 11.0% Income Statement Net Interest Income Non Funded Income Loan Loss Provision Other Operating Expenses Total Operating Expenses Profit Before Tax Profit After tax % PAT Change YoY EPS DPS Cost to Income ROaE ROaA Balance Sheet Net Loans and Advances Government Securities Other Assets Total Assets Customer Deposits Other Liabilities Total Liabilities Shareholders Equity Book value Per share % Change in BPS YoY

Source – Company Financials

2013 2.6 1.4 0.3 2.2 2.4 1.5 1.0 2.9 1.7 55.1% 18.1% 2.3% 2013 35.2 0.3 11.9 47.4 26.5 15.0 41.5 5.9 16.8

2014 3.0 0.8 0.6 1.9 2.5 1.4 1.0 (2.0%) 2.8 1.5 49.2% 15.7% 1.8%

2015 3.6 1.2 0.5 2.6 3.1 1.8 1.2 22.7% 3.4 1.3 54.5% 13.9% 1.8%

2016e 4.2 1.2 0.7 2.9 3.6 2.0 1.4 15.7% 4.0 1.5 52.7% 11.6% 1.8%

2017f 4.8 1.4 0.8 3.2 4.0 2.2 1.6 12.0% 4.4 1.7 52.7% 11.3% 1.8%

2018f 5.5 1.5 1.0 3.8 4.7 2.4 1.7 9.4% 4.9 1.8 53.2% 11.5% 1.7%

2019f 6.3 1.7 1.2 4.3 5.5 2.6 1.8 8.6% 5.3 2.0 53.5% 11.6% 1.7%

2020f 7.3 1.9 1.5 4.9 6.4 2.9 2.0 9.5% 5.8 2.2 53.8% 11.8% 1.6%

CAGR 15.1% 10.1% 23.5% 13.6% 15.5% 10.4% 11.0%

2014 45.2 0.3 15.5 61.0 36.1 18.3 54.4 6.6 18.8 11.9%

2015 53.0 2.2 16.5 71.7 41.7 19.4 61.0 10.6 30.4 62.0%

2016e 61.5 2.4 20.4 84.4 47.3 23.8 71.1 13.3 38.0 24.8%

2017f 69.1 2.8 19.7 91.6 54.4 23.0 77.4 14.2 40.8 7.3%

2018f 78.8 3.2 21.3 103.4 62.6 25.6 88.1 15.3 43.8 7.4%

2019f 89.9 3.7 22.8 116.5 72.0 28.1 100.1 16.4 47.1 7.5%

2020f 103.4 4.3 25.0 132.7 82.7 32.3 115.0 17.7 50.6 7.6%

CAGR 14.3% 14.7% 8.7% 13.1% 14.7% 10.7% 13.5% 10.7% 10.7%

79

11.0% 11.1%

Valuation Summary HF Group is undervalued with a total potential return of 15.5% Cost of Equity Assumptions: Risk free rate * Beta

14 – June - 16 13.0% 1.2

Country Risk Premium

6.7%

Extra Risk Premium

0.0%

Cost of Equity

21.0%

Terminal Assumptions: Growth rate Mature Company Beta Terminal Cost of Equity Return on Average Equity Justified PBV Shareholder Equity – FY20e Terminal Value-(Year 2020)

Valuation Summary: Intrinsic Valuation PBV Multiple PE Multiple Fair Value Current Price Upside/(Downside) Dividend Yield Total Potential Return

Implied Price 18.9 33.9 28.5

* Five years average yields on a 10 year Treasury bond 80

5.0% 1.0 19.7% 11.8% 0.5x 17.7 8.2

Weighting 80% 15% 5%

Weighted Value 15.1 5.1 1.4 21.6 20.0 8.0% 7.5% 15.5%

Q&A 81