Bank of Kigali Valuation

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1 HIGHLIGHTS Bank of Kigali (BOK) released its annual report on June 20 for CY Preliminary results were released much earlier, but this provided a far more complete view of the company. We like what we see. BOK continues to successfully execute its growth plans and exceed its targets We maintain our positive outlook on Bank of Kigali. Our 1-yr forecast is RWF 482 Valuation Bank of Kigali Valuation FD Shares Outstanding 667,438,027 Price as of RWF NTM dividend yield RWF yr 3-yr 5-yr Target Price RWF RWF RWF Return 65.1% 108.9% 190.4% Current Capitalization Market cap. (RWFmm) 200,231 Market cap ($USDmm) $300 Plus: Net debt 23 Plus: Non-controlling interest 0 Enterprise value (RWFmm) 200,555 Market Valuation Metrics F2013A F2014E F2015E F2016E EV/EBITDA 8.9x 5.9x 4.9x 4.3x P/E 13.5x 9.7x 8.0x 7.0x Dividend yield 2.9% 3.8% 4.5% 5.2% FCF yield 35.0% 19.3% 19.8% 20.4% BUY Target Price Calculations EV/EBITDA Method EBITDA Exit EV/EBITDA Implied Target price 1-year x year x year x PE Method EPS Target PE Implied Target price 1-year x year x year x SHALIFAY LLP INVESTMENT FRONTIER 1

2 THINGS WE LIKE Bank of Kigali had a spectacular year in Revenue was up 26% yoy, the cost/income ratio declined from a 2012 peak of over 53% back to its long-term average of 48%, and the number of client accounts increased 26% to 260,000 client accounts. Bank of Kigali increased its market share of total banking assets in Rwanda from 32.7% at Q to 35.6% at the end of Q branches were open in 2013 and BOK is on target to open another 6 this year and in The pointof-sale strategy of partnering with existing retailers and agents has been executed well, with 568 POS agents at December 31. Significant growth will come in 2014 from this segment, with an expected 1,000 operational agents by the end of this year. BOK now has over 145,500 VISA debit cards issued and we expect this number to double in the next three years. BOK itself estimates the issuance of 50,000 new cards in Mobile banking has also experienced strong growth and will eventually be a major revenue driver for Bank of Kigali. THINGS WE DON T LIKE The NPL ratio increased by 40bps in While this in of itself is not concerning as the NPL ratio still stands below 7%. However, we do have some concern that in the pursuit of growth the quality of the loan book will decline. We have observed that the proportion of NPLs from the retail segment is rising, and fast (see the Appendix). If we disaggregate the NPL number, you will see the following: Table 1: NPLs by segment (tabulated by Investment Frontier) % 6.5% 5.5% 6.5% This is a worrying trend and we have not heard management address it. The aggressive growth in POS and mobile banking are what we attribute to this rise. We will be monitoring this carefully to see how this evolved over the next year. If the NPL ratio rises significantly from here, it would prompt us to revise our valuation. The Rwandan Franc has declined relative to USD by 7.3% over the last 15 months. This depreciation trend will make the cost of borrowing for BOK significantly higher. Particularly in an anticipated environment where US interest rates begin to rise. We were happy to see BOK secure four addition lines of credit in 2013, but the vast majority of BOK s interest rate exposure is to floating rate, LIBOR-based debt. In the event of a rise in interest rates, BOK s borrowing costs will increase at the same time as the currency depreciates. Borrowed funds in Q increased by $10mm and BOK s debt to equity ratio now stands at 20%. We do not want to see this higher than 30%, and we will be monitoring BOK s discipline with cash going forward. CONCLUSION BOK s share price has declined about 10% in the last three months, and there are several challenges in executing management s growth plan. However, we remain confident in the team and remain satisfied with the growth trajectory of the company. NPLs are our primary concern, but BOK remains buy-rated by Investment Frontier. SHALIFAY LLP INVESTMENT FRONTIER 2

3 RWF BANK OF KIGALI REPORT JUNE 22, 2014 APPENDIX Figure 1: Market Share at December 31, 2013 for Rwandan Banks by Total Assets 40% 35% 36% 30% 25% 20% 15% 10% 5% 14% 9% 11% 10% 7% 7% 4% 4% 0% BOK BPR Cogebanque I&M Bank Ecobank FINA Bank KCB Access Bank Equity Bank Figure 2: Bank of Kigali Share Price Chart (IPO June 20, 2014) SHALIFAY LLP INVESTMENT FRONTIER 3

4 Figure 3: NPLs by Segment (2013 and 2012) % 30.70% 57.80% 69.30% Figure 4: Bank of Kigali Assets by Segment (2013 and 2012) % 30.20% 73.00% 69.80% SHALIFAY LLP INVESTMENT FRONTIER 4

5 DISCLOSURES This report is dated April 28, Copyright 2014, Shalifay LLP. Shalifay LLP are holders in Bank of Kigali equity. This report is the opinion and commentary of Shalifay LLP. It is not an offer to sell, or a solicitation of an offer to sell or subscribe for any financial product or instrument. Shalifay LLP does not make any guarantee on the veracity of the information provided in the report. Information in the report is thought to be true at the time of printing. Shalifay LLP does not accept any liability for any errors or omissions. Past performance is not an indicator of future performance. Investment Frontier assigns ratings to stocks on the following basis. We assess upside in the next 3 years. Any stock with an expected annual return in those 3 years, greater than 10% will be considered as a buy. The stock is then assessed on its downside risk, liquidation value, and book value. A qualitative assessment is made of the downside on each equity relative to its upside. Investment Frontier has three ratings, BUY, SELL, and HOLD. A sell rated stock is any stock which has an expected annual downside greater than -10%. A hold rated stock is anything that does not meet the minimum buy or minimum sell criteria. SHALIFAY LLP INVESTMENT FRONTIER 5