Barclays Bank of Kenya Limited

Initiation of Coverage & 3Q11 results review

EQUITY RESEARCH 02 November 2011

Recommendation: HOLD
Operating performance
EPS (KES)
% growth

We initiate coverage on Barclays Bank of Kenya (BBK) with a HOLD recommendation (fair value KES 12.87; 11% downside). In 3Q11, BBK posted 11.2% y/y rise in EPS to KES 1.12 (+16.8% q/q). Performance q/q was better than expected, supported by strong NIM expansion to 11.9% from 9.7% in 2Q11. Most impressive in the results was the growth in advances (8% y/y; 7.7% q/q) & customer deposits (6.3% y/y; 5.7% q/q) and further cut in staff costs (15% y/y; 6.4% q/q). NIR however disappointed declining 3%q/q on the back of marginal growth in fee income and 8% q/q decline in forex income.
FY12 1.88
15.2%

FY10 1.95* 1.36

69.8%

FY11 1.63 0.90

55.0%

74.0% -16.2%

DPS (KES)
Dividend payout

1.10
58.5%

Overall, we are happy with the results, specifically the growth in balance sheet which we think points to improved risk appetite (over the past 3 years management has focused on de-risking the business, leading to BBKs continued underperformance in balance sheet growth). We view BBK as a stable business that will deliver consistent earnings growth and adequate return on the back of operational efficiencies and modest but resilient income growth (FY11F; 7.1% ROaA & 28.2% ROaE). However, at current PB of 2.5x, BBK remains expensive against a sector PB 2.2x. In our view, while BBKs cost cutting drive in the past 3 years may allow it to weather current turbulent times, we still believe this doesnt warrant its current premium especially since its loan book (48% unsecured - loans to individuals) faces the same risk as that of other banks trading at lower PB multiples and positioned to deliver higher growth. For 2011, we forecast EPS of KES 1.63 (+13.5% y/y on normalized earnings after adjusting FY10 earnings for gains on sale of custody business). Against our FY12 forecasts; EPS 1.88 (+15.2 y/y) and NAV KES 6.79, BBK trades at forward PE of 7.7x and PB of 2.1x. Corporate banking key competence: consumer banking at cross-roads. BBKs main competence is in corporate banking (62% of total assets, ROaA of 14% and near zero NPLs). While still profitable, the consumer business remains at cross-roads as management repositions the unit to service middle income and high net worth clientele. To this end, in 2010, supported by a new IT platform, management rolled-out mobile and internet banking to retail clients (previously internet banking was only for corporates). The bank also opened specific late night centers accessible 7 days a week. Being the largest credit card issuer in the market, we believe BBKs consumer unit has sufficient goodwill to support managements push for a certain caliber of retail client (competition will however remain stiff since smaller banks targeting same clients are better placed to offer more personalized service). Further cut in costs versus income growth. Despite underperforming the sector in income growth over the past 3 years, BBKs ROaA & ROaE remained impressive supported by cut in operating costs, primarily staff costs (while BBK doubled its staff in 2007 to 6,900, by end of FY10 the number had been cut to just over 5,000). Management guides that there is scope to reduce costs further (mainly other operating costs) with negligible impact on income growth. In our view, further aggressive staff cuts remain unlikely since the bank currently operates 119 branches as compared to 60 branches and half the staff in 2006. On revenue, like most other banks, we see BBKs FY12 performance mainly driven by widening NIM. Over the next 3 years we see BBK posting higher asset and income growth (earnings could easily surprise as BBK is currently sitting on significant liquidity).

NAV (KES) PE (x) PB (x)

5.79 7.4 2.5

5.81 8.8 2.5

6.79 7.7 2.1

*Normalized KES 1.44 (+28.4% y/y)

Trading data
Price Market cap 14.45 78,486 792.8 11.03 111,352
BCBL KN

KES m USD m Avg.daily value traded KES m (3 months) USDk

Bloomberg

Share price graph (Jan Nov 11)

20

18

16

14

12

10

Analyst:
Francis Mwangi, CFA fmwangi@sib.co.ke Tel: +254 (20) 22 20 225 www.sib.co.ke

Standard Investment Bank Research is also available to our clients on: Bloomberg: SIBX <GO>

Standard Investment Bank

Important disclosures on the last page

Barclays Bank of Kenya Limited

Initiation of Coverage & 3Q11 results review

Summary Financials
Income statement KESm Interest income Interest expense Net Interest Income Fee & commission income Foreign exchange income Other income Total Operating income Staff costs D&A Other operating costs Total operating costs Profit before impairments Loan loss provision Profit before Tax Taxation Attributable income Weighted shares (m) Year end shares (m) EPS (KES)
Source: Company fillings

3Q10 13,272 -1,220 12,052 5,558 1,802 326 19,738 -6,413 -765 -4,372 -11,550 8,188 -1,174 7,014 -1,521 5,493 5,432 5,432 1.01

3Q11 12,699 -732 11,966 5,157 2,093 335 19,552 -5,445 -936 -3,783 -10,165 9,387 -520 8,867 -2,761 6,106 5,432 5,432 1.12

%ch y/y -4.3 -40.0 -0.7 -7.2 16.2 2.8 -0.9 -15.1 22.4 -13.5 -12.0 14.6 -55.7 26.4 81.5 11.2

%ch q/q 24.0 37.6 23.1 2.8 -8.0 -85.5 12.4 -6.4 14.2 16.4 3.4 22.4 226.6 19.7 27.0 16.8

11.2

16.8

Balance sheet KESm Cash and Central bank balances Dues from other banks Due from group Total government securities Net Loans & Advances Fixed assets Net Intangible assets Other Assets Total assets Customer deposits Due to other banks Due to group Other liabilities Shareholder equity Total liabilities and equity
Source: Company fillings

3Q10 10,789 427 5,776 54,092 91,685 6,425 680 6,998 176,872 127,731 79 7,342 13,127 28,593 176,872

3Q11 13,698 1,243 7,073 46,364 98,901 2,912 3,458 7,001 180,649 135,813 105 3,489 12,011 29,232 180,649

%ch y/y 27.0 191.0 22.5 -14.3 7.9 -54.7 408.3 -8.8 2.1 6.3 32.7 -52.5 -8.5 2.2 2.1

%ch q/q 43.2 962.1 53.0 -18.4 7.7 -6.9 6.6 -2.9 2.3 5.7 -61.3 -26.0 -26.5 9.1 2.3

Standard Investment Bank

Important disclosures on the last page

Barclays Bank of Kenya Limited

Initiation of Coverage & 3Q11 results review

Valuation Methodology
Our fair value is derived using a price to book (PB) approach based on a 3 year holding period. Using the approach, we forecast accruing net dividends for FY11, FY12 & FY13, then we use a subjective 3 year forward PB (1.9x), to derive BBKs terminal value. We then discount the derived cash - flows at 17.4% (risk free rate of 9%, risk premium of 7% & beta of 1.2x) In deriving BBKs 3 year exit value, we apply a 5% discount to our assumed 3 year sustainable banking sector PB of 2x. The discount is based on our assumption that BBK earnings growth will continue lagging most of its peers, translating to modest ROaA & ROaE improvement.
Relative Price to book valuation Dividend per share 3 year exit value Discount period Discount rate Discount factor Present Value dividend Cumulative PV of dividends PV of terminal value Per share value Assumed PB Upside/(downside) Current price
Source: Standard Investment Bank

FY11 0.85 0.17 17.4% 0.97 0.83 2.57 10.30 12.87 1.9 -10.9% 14.45

FY12 1.05 1.17 17.4% 0.83 0.87

FY13 1.23 2.17 17.4% 0.71 0.87

FY14 17.12 3.17 17.4% 0.60

Source: Standard Investment Bank estimates

Sensitivity Analysis (PB versus COE) 1.3 1.5 1.7 1.9 2.0 2.1 2.2 2.3

14.4% 10.30 11.48 12.65 13.83 14.42 15.01 15.59 16.18

15.4% 10.06 11.21 12.35 13.50 14.07 14.64 15.22 15.79

16.4% 9.84 10.95 12.06 13.18 13.73 14.29 14.85 15.41

17.4% 9.62 10.70 11.78 12.87 13.41 13.95 14.50 15.04

18.4% 9.40 10.46 11.52 12.57 13.10 13.63 14.15 14.68

19.4% 9.20 10.23 11.25 12.28 12.80 13.31 13.82 14.34

20.4% 9.00 10.00 11.00 12.00 12.50 13.00 13.50 14.00

Valuation Multiples ROaA ROaE Price to book value (x) Price to earnings (x) Dividend payout Dividend yield EPS (KES) DPS (KES) NAV (KES)

2009A 5.4% 27.3% 3.2 12.9 55.7% 4.3% 1.12 0.63 4.46

2010A 8.0% 38.1% 2.5 7.4 69.8% 9.4% 1.95 1.36 5.79

2011F 7.1% 28.2% 2.5 8.8 55.0% 6.2% 1.63 0.90 5.81

2012F 7.6% 29.9% 2.1 7.7 58.5% 7.6% 1.88 1.10 6.79

2013F 7.8% 28.6% 1.8 6.9 62.0% 9.0% 2.09 1.30 7.83

2014F 8.2% 28.6% 1.6 6.0 62.0% 10.3% 2.41 1.50 9.01

Source: Company fillings, Standard Investment Bank estimates

Standard Investment Bank

Important disclosures on the last page

Barclays Bank of Kenya Limited

Initiation of Coverage & 3Q11 results review

Performance review
INCOME STATEMENT Year to December (KES m) Interest income Interest expense Net Interest Income Net Fee and commission income Foreign exchange income Other operating income Total Operating income Staff costs D&A Other operating costs Total operating costs Profit before impairments Loan loss provision Exceptional items Profit before Tax Taxation Profit after Tax Attributable income Weighted shares (m) Year end shares (m) Earnings per share (KES) Normalized EPS (KES) Dividends per share (KES) Payout ratio (%)
Source: Company fillings, Standard Investment Bank estimates

2008A 17,821 -3,811 14,010 6,584 2,567 466 23,627 -7,109 -633 -6,586 -14,328 9,299 -1,282 8,017 -2,491 5,526 5,526 5,432 5,432 1.02 1.02 0.50 49%

2009A 17,517 -2,748 14,769 6,256 2,193 179 23,397 -7,223 -928 -5,731 -13,882 9,515 -513 9,002 -2,911 6,091 6,091 5,432 5,432 1.12 1.12 0.63 55.7%

2010A 17,131 -1,457 15,674 7,375 2,346 630 26,025 -8,398 -1,176 -4,475 -14,049 11,976 -1,200 2,777 13,553 -2,954 10,599 10,599 5,432 5,432 1.95 1.44 1.36 69.8%

2011F 17,692 -1,120 16,572 6,924 2,933 473 26,902 -7,138 -1,307 -5,013 -13,458 13,443 -758 12,686 -3,806 8,880 8,880 5,432 5,432 1.63 1.63 0.90 55.0%

2012F 19,750 -1,427 18,322 7,747 3,372 510 29,952 -7,495 -1,392 -5,386 -14,274 15,679 -1,061 14,618 -4,385 10,233 10,233 5,432 5,432 1.88 1.88 1.10 58.5%

2013F 21,047 -1,660 19,386 8,823 3,710 541 32,460 -8,020 -1,485 -5,700 -15,205 17,256 -1,038 16,218 -4,865 11,352 11,352 5,432 5,432 2.09 2.09 1.30 62.0%

BALANCE SHEET Year to December (KES m) Cash and Central bank balances Dues from other banks Total government securities Net Loans & Advances Fixed assets Net Intangible assets Other Assets Total assets Customer deposits Due to other banks Due from group companies Total debt Other liabilities Total shareholder equity Total liabilities and equity

2008A 13,695 1,654 28,307 108,086 3,403 418 12,947 168,510 126,408 1,401 9,883 4,618 5,736 20,464 168,510

2009A 9,751 1,061 43,861 93,543 5,921 558 10,181 164,876 125,869 262 3,986 4,328 6,220 24,211 164,876

2010A 13,132 935 55,996 87,147 3,244 3,448 8,514 172,416 123,826 92 1,571 4,351 11,110 31,466 172,416

2011F 17,489 1,195 46,722 100,667 3,541 3,351 14,059 187,024 138,685 834 3,571 4,351 8,005 31,578 187,024

2012F 18,813 1,309 47,926 108,504 3,444 3,057 14,901 197,955 144,233 914 3,571 4,351 8,005 36,881 197,955

2013F 21,458 1,534 50,435 119,185 3,347 2,757 16,566 215,283 155,771 1,071 3,571 4,351 8,005 42,514 215,283

Standard Investment Bank

Important disclosures on the last page

Barclays Bank of Kenya Limited

Initiation of Coverage & 3Q11 results review

Ratio review
Growth % (y-o-y ) Total Assets Gross Loans Net Loans Customer Deposits NIR Fees and commission income Total operating income Staff expense Total operating expense Profit before tax EPS DPS BVPS CAPITALISATION Total risk weighted assets Ordinary share capital Retained Earnings Total Tier 1 capital Capital Adequacy (tier 1) Minimum ratio required Tier 1/RWA Equity/total deposits Equity/net loans Equity/total assets LIQUIDITY Gross loans/customer deposits Net loans to interest earning assets Liquid assets/total assets Liquid assets/total deposit liabilities ASSET QUALITY Loan loss reserve/gross loans Loan Loss Reserves/NPL (coverage) Non Performing Loans/Gross Loans (NPL ratio) Non Performing Loans/Equity Impairments IS/Avg gross loans PROFITABILITY Average yield on interest bearing assets Average yield on interest bearing liabilities Spread Net interest margin Cost to income PBT margin Effective tax rate 2008A 6.9% 2.9% 2.6% 15.9% 28.6% 10.0% 25.3% 55.6% 29.1% 12.5% 12.5% 21.2% 16.5% 2008A 133,040 2,716 17,363 20,079 15.1% 8.0% 16.2% 18.9% 12.1% 2008A 88.5% 74.5% 26.3% 32.2% 2008A 3.4% 65.2% 5.0% 27.5% 1.16% 2008A 12.6% 2.8% 9.8% 9.9% 60.6% 33.9% 31.1% 2009A -2.2% -13.0% -13.5% -0.4% -10.3% -5.0% -1.0% 1.6% -3.1% 10.2% 10.2% 25.0% 18.3% 2009A 115,880 2,716 19,599 22,315 19.3% 8.0% 19.2% 25.9% 14.7% 2009A 77.3% 64.6% 33.6% 42.1% 2009A 3.8% 59.9% 6.0% 24.3% 0.49% 2009A 12.1% 2.0% 10.1% 10.2% 59.3% 38.5% 32.3% 2010A 4.6% -6.5% -6.8% -1.6% 20.0% 17.9% 11.2% 16.3% 1.2% 74.0% 74.0% 118.0% 30.0% 2010A 106,928 2,716 25,709 28,425 26.6% 8.0% 25.4% 36.1% 18.3% 2010A 73.4% 59.1% 39.3% 52.7% 2010A 4.2% 61.0% 6.4% 18.5% 1.28% 2010A 11.7% 1.1% 10.6% 10.7% 54.0% 52.1% 21.8% 2011F 8.5% 15.0% 15.5% 12.0% -0.2% -6.1% 3.4% -15.0% -4.2% -16.2% -16.2% -34.0% 0.4% 2011F 132,033 2,716 23,323 26,039 19.7% 8.0% 22.8% 31.4% 16.9% 2011F 75.4% 64.0% 36.4% 47.5% 2011F 3.7% 57.2% 6.1% 20.2% 0.78% 2011F 11.6% 0.8% 10.8% 10.9% 50.0% 47.2% 30.0% 2012F 5.8% 8.0% 7.8% 4.0% 12.6% 11.9% 11.3% 5.0% 6.1% 15.2% 15.2% 22.6% 16.8% 2012F 140,020 2,716 27,570 30,286 21.6% 8.0% 25.6% 34.0% 18.6% 2012F 78.3% 64.8% 36.0% 47.9% 2012F 3.9% 62.3% 5.9% 18.1% 0.98% 2012F 12.2% 0.9% 11.2% 11.3% 47.7% 48.8% 30.0% 2013F 8.8% 10.0% 9.8% 8.0% 12.4% 13.9% 8.4% 7.0% 6.5% 10.9% 10.9% 17.6% 15.3% 2013F 154,388 2,716 31,884 34,600 22.4% 8.0% 27.3% 35.7% 19.7% 2013F 79.8% 65.3% 36.1% 48.5% 2013F 4.1% 66.9% 5.7% 16.7% 0.88% 2013F 12.0% 1.0% 11.0% 11.1% 46.8% 50.0% 30.0%

Source: Company fillings, Standard Investment Bank estimates

Standard Investment Bank

Important disclosures on the last page

Barclays Bank of Kenya Limited

Initiation of Coverage & 3Q11 results review

KEY CONTACTS
Research Francis Mwangi, CFA fmwangi@sib.co.ke Eric Musau emusau@sib.co.ke Deris Mogoi dmogoi@sib.co.ke Head of Trading Tony Waweru twaweru@sib.co.ke Equity and Foreign Sales Eric Ruenji eruenji@sib.co.ke

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