Old Mutual Securities Equity Research Initiation of Coverage

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1 Standard Chartered Bank Kenya Old Mutual Securities Equity Research Initiation of Coverage Summary Stable CTI ratio Estimated CTI projected to stabilize at 40.2% in FY2013e. +0.4% marginal improvement compared to 40.6% for The positive uptake on online banking platforms by individuals and corporates key in helping to cut down on branch Opex. Growth in EPS forecasts - We forecast a CAGR of 8.36% in EPS (2013e- 2016e) and a marginal growth on NIMs (21.5% in FY13e vs. 39.5% in FY12A), though the pressure on total operating income will be eased by a decrease in funding costs. Bloomberg Ticker : SCBK KN Reuters Ticker: SCBK NR Share Statistics Target price (KES) Current price (KES) Issued shares (m) Market cap (KES bn) Market cap (USD m) 1, Year end Dec Free Float % 23.5 Av. daily traded T.O (USD) 69,549 Capital levels reflect strength -The group remains well capitalized with a capital adequacy ratio of 17.5% FY2013e (FY12: 15%; Q3 13: 17%), with a tier 1 ratio of 21% FY 2013e (FY12: 18%; Q3 13: 19%). SCBK continues to build up capital to support the development of its business, meet regulatory capital requirements and to maintain good credit ratings. Strong asset indicators - Loan book quality remains healthy (2.1% FY2013e) and is well diversified and conservatively positioned. Provisions are adequate and asset quality trends are healthy. Price Return Absolute Excess 3m 27.5% 10.1% 6m 21.6% 10.6% 9m 27.9% 12.2% 12m 28.8% 9.8% Source: NSE Data, OMS estimates Consistent Delivery Price Movement We initiate coverage on Standard Chartered Bank Kenya (SCBK) with a HOLD recommendation based on a price target of KES , representing 1% downside from the current price. Our investment case is informed by relatively solid asset growth (3-yr CAGR of 9.01% to FY16F) driven by innovative delivery channels including the loan bundle package (unsecured loan, credit card and mortgage) secure online banking platform (both for corporate and individual), and mobile banking along with aggressive marketing. The bank has strong fundamentals (ROaA 5.59%, ROaE 32.15%). As a result, we forecast a 3-yr CAGR of 8.36% in EPS to FY16F. The bank is currently trading at a premium to the sector with a trailing P/E of 11.17x and P/B of 3.04x against the sectors average P/E of 10.17x and P/B of 2.46x. Performance Ratios 2012A 2013E 2014F 2015F 2016F EPS % Change 38.24% 17.94% 16.59% 11.87% 13.73% DPS Price to Book Price to earnings Div Yield 4.29% 4.94% 5.68% 6.19% 6.93% RoE 33.55% 32.15% 31.11% 29.41% 28.21% RoA 5.74% 5.59% 5.63% 5.49% 5.44% NAV/Share Source: Co financials, OMS estimates 30 th January 2014 Research Analyst Geoffrey Maina geoffrey.maina@oldmutualkenya.com Available on our website: Bloomberg at OMSK <GO>

2 Investment Case Net Interest Income Growth Earnings base healthy SCBK earnings has been growing and is well positioned to continue delivering consistent performance (FY2013e 17.9%EPS growth). We believe the group still has credible growth prospects given that its targeted market segments has potential room for growth. In particular, we believe: The bank s transformation initiatives, aggressive use of online banking platform will help with its growth in Non-funded income at an estimated growth rate of 8.5% y/y in FY Impairments are also expected to remain at comfortable levels over the next three years (CAGR 2.1%), especially considering its favourable asset quality trends due to its conservative in risk appetite. We believe provisions are adequate and asset quality trends are healthy. We foresee further benefits being derived through the consolidating business structures of Retail and Business Bank and the continuous growth in its consumer banking in near future. Execution through priority and relationship management remains key. The group reflects strong defensive qualities in an uncertain economic environment which we believe increases its investor appeal: Active capital management for dividend certainty Despite cautious approach to lending, the bank has still delivered growth in loan book. Normalized earnings base provide solid platform for growth with: Non-funded Income Source: Co financials, OMS estimate Robust revenues supported by wider NII margin spreads (approximate interest gap 10.71%). Cost efficiencies set to continue (see below) Impairments bottoming out at comfortable levels. Clustering expertise in management SCB leadership remains solid modelled around the parent strategy of consolidating management expertise across the regions it operates so as to maximize on synergies. The skill set nurtured remains intact in the group as a whole. The recent transition in management saw the former CEO promoted to head Standard Chartered Southern African operations having successfully grown the East Africa operations in the same capacity. This strength has been achieved due to the greater collaboration across the wider group and also through a customer centric attitude and increased alignment with its parent strategy. PBT; Consumer and Wholesale Banking Source: Co financials, OMS estimate SCBK has a strong management team that consistently delivers value to its shareholders through innovation of new and better products. The current CEO Mr. Lamin Manjang was appointed group CEO in January Mr. Lamin is expected to be part of the team that will drive SCBK ambitious plans to invest over $100M over the next three years, and also increase branch network to , while strengthening their products and services and developing staff talents. Cost efficiencies set to continue In our view, efficiency initiatives will continue to benefit the group. In FY2012, Staff costs averaged 55.4% of total operating expenses. FY2013 estimated to be 56.3% of total operating expenses factoring yearly inflation adjustments (Inflation FY2013e 5.72%) and probable increase in staff head count. CTI for 2012 was 40.6%, FY2013e is 40.2%. Effective internal controls have enabled the bank to maximize on profitable business opportunities through effective risk management and control of its financial activities. Source: Co financials, OMS estimate Convincing asset quality indicators Loan book quality remains healthy and is well diversified and conservatively positioned. FY 2013e to be 2.1% compared to FY %. The expected decline is due to the economic slowdown experienced in the H1 of 2013 due to delays in release of cash to SMEs by government and the new CBK guideline requiring longer observations for NPLs by banks (6 months more). However the bank is well cushioned since its wholesale banking loans are largely short tenor. The consumer loan book is secured and the unsecured portfolio is grown selectively.

3 Investment Risks Regulatory environment Financial institution need to comply with the new requirements (Basel III) by December The CBK issued new prudential guidelines in relation to capital management for banking institutions, on 1st Jan 2013 with a compliance period of 24 months which expires in December Banks are supposed to maintain a minimum of 10.5% in relation to core capital/total deposit liabilities and core capital/total weighted assets respectively. In addition they are supposed to maintain 14.5% in relation to total capital/total risk weighted assets. Although such guidelines are meant to protect investors (depositors and creditors), ensure lenders activities are commensurate with their risk profiles and promote public confidence, we feel that this new enhanced capital requirement is heavy on the banking sector and might heavy impact on individual players. SCBK has sound capital buffer levels as indicated below, however going forward, we believe such increases in capital requirements and the ever evolving regulatory environment might force the lender to alter its dividend payment plans so as maintain enough cash as retained earnings in its core capital as well as funds intended for other strategic initiatives will be rechanneled as capital. Evolving regulatory environment might force the lender to alter its dividend payment plans so as maintain enough cash as retained earnings in its core capital.. Capital Adequacy Q1 Q2 Q3 FY2013E Statutory Requirement Core Capital to Total Deposits (%) Core Capital to Risk Weighted Assets (%) Total Capital to Risk Weighted Assets (%) Liquidity Ratio (%) Source: Company, OMS estimates Competition SCBK has positioned itself as a lender targeting the affluent as its niche market for its consumer and wholesale banking units through priority banking. Although the targeted market segmentation is working for them, this niche market approach is attracting all key players increasing competition. For instance, KCB has KCB Advantage Banking and Barclays Kenya has Prestige Banking. Kenya has very few HNW individuals who can fully exploit some these premier benefit services offered. Target niche banking is bound to be saturated by competition. Reducing funding costs to enhance margins Interest spreads between lending and deposit rates remains very high. The banking sector plays a dominant role in the financial sector, particularly with respect to mobilization of savings and provision of credit. Kenya s financial sector was liberalized in the early 1990s to allow for market determination of interest rates, concerns about high interest rate spreads have persisted and attracted a lot of debate in both public and policy forums. With these, there is a risk of capping interest rates at a certain point and thus is this comes to light might seriously affect the banks and other players in the industry performance.

4 Valuation In obtaining our fair value estimate for Stan Chart Bank, we used Excess Return on Equity. Our model suggests a fair value of KES /share based on long-term growth rate of 7% and a discount rate (cost of equity) assumption of 15.45% using a beta of 0.7 and a risk free rate of 12.30%. Other components driving our cost of equity include an equity risk premium of 5%. Excess return on equity (KES M) Terminal Net income 9,349 10,928 12,245 13,950 Less Equity cost 5,573 6,545 7,613 8,870 Excess Equity Return 3,776 4,383 4,632 5,080 64,322 Period Discount factor Present value of excess return 3,776 3,796 3,475 3,301 41,800 Equity invested 36,070 PV of equity excess return 14,349 Terminal excess return 41,800 Preference Share Capital (280) Equity Value 91,939 No of shares 309 Value per share current price Upside/downside -1% Sensitivity Analysis 5% 6% 7% 8% 9% 10% 12.45% % % % % % % Peer Comparison Relative Value Based on peer comparable, SCB Bank appears slightly overvalued as compared to its peers Equity and, KCB remain the stocks to watch out of this universe within the banking sector. Value addition will most likely be driven by the companies performances. Barclays Bank is the most overvalued bank among this peers. KCB is trading on lower multiples compared to its peers range. Source: Bloomberg, OMS estimate

5 Financials Income Statement (KES M) 2011A 2012A 2013E 2014F 2015F 2016F Interest income 12,011 19,375 21,886 25,249 29,419 34,616 Interest expense (2,160) (5,633) (5,193) (5,815) (6,417) (7,521) Net interest income 9,851 13,742 16,694 19,434 23,002 27,094 Other operating income Fees and commission income 3,402 3,333 3,563 3,754 3,965 4,206 Foreign exchange trading income 2,247 3,486 3,835 3,835 3,451 3,106 Total income 15,913 20,671 24,212 27,448 30,564 34,457 Less operating expenses (7,245) (8,398) (9,742) (10,789) (11,912) (13,241) Operating profit 8,668 12,273 14,470 16,659 18,652 21,216 Bad debt charge (413) (717) (840) (768) (875) (997) Profit before tax 8,255 11,556 13,630 15,891 17,778 20,219 Less tax (2,418) (3,487) (4,113) (4,795) (5,364) (6,101) Profit after tax 5,837 8,069 9,517 11,096 12,413 14, % 38.24% 17.94% 16.59% 11.87% 13.73% EPS DPS Balance Sheet (KES M) 2011A 2012A 2013E 2014F 2015F 2016F Cash and balances with CBK 12,005 13,575 14,704 19,584 25,724 30,828 Government securities 41 2,915 3,352 3,855 4,433 5,098 Balances due from banks 2,542 2,374 2,648 2,958 3,308 3,703 Loans and advances 96, , , , , ,203 Fixed assets 4,116 4,034 5,403 6,307 7,136 7,713 Other assets 49,245 59,760 61,959 64,357 66,976 72,332 Total assets 164, , , , , ,877 Shareholders equity 20,694 30,753 36,070 42,362 49,275 57,413 Customer deposits 122, , , , , ,122 Deposits due to banks 7,740 3,514 3,514 3,514 3,514 3,514 Other liabilities 13,290 20,561 21,542 22,720 24,133 25,829 Total equity and liabilities 164, , , , , ,877 Key Ratios 2011A 2012A 2013E 2014F 2015F 2016F Net interest margin 11.90% 12.69% 13.05% 13.15% 13.63% 14.08% Cost to income ratio 45.53% 40.63% 40.24% 39.31% 38.97% 38.43% Non funded income to total income 38.09% 33.52% 31.05% 29.20% 24.74% 21.37% Return on average Equity 14.09% 40.11% 34.71% 33.34% 30.79% 28.86% Return on average Assets 1.88% 5.74% 5.59% 5.62% 5.47% 5.39% Gross loans to deposits 78.56% 80.20% 83.03% 84.14% 84.88% 85.63% Bad debt charge as % of gross loan 0.42% 0.63% 0.63% 0.50% 0.50% 0.50%

6 About Standard Chartered Bank Company Overview Standard Chartered Bank Kenya was established in 1911 with the first branch opened in Mombasa Treasury Square. Today, the bank is one of the leading Banks locally, with an excellent franchise. It has a total of 34 branches spread across the country, 97 automated teller machines (ATMs) and over 1,900 employees. The bank has local shareholding of about 26%, comprising about 32,000 shareholders. The company was listed on the Nairobi Securities Exchange in The bank has a diversified portfolio cutting across select sectors that include business services, manufacturing, wholesale and retail trade, transport and communication, real estate, agriculture, energy and water. Standard Chartered Bank Kenya Limited hosts the regional Shared Service Centre supporting the Bank's technology operations in Uganda, Tanzania, Zambia and Botswana and South Africa on a real time basis. Shareholding Stan Chart Bank has an Authorized share capital of KES 1,905 Million made up of 325 million shares of KES 5.00 each, and 56 million shares non-redeemable, non-cumulative, non-voting, non-participating and non-convertible preference shares of KES 5.00 each. SCBK Top Shareholders Holder Name Position % Standard Chartered Holdings 228,432, National Social Security Fund 3,594, Kabarak Ltd 3,178, Standard Chartered Africa 1,307, Old Mutual Insurance Co 971, Eaton Vance Management 929, Prudential Financial Inc. 181, Eaton Vance Advisors Ireland 129, Advanced Series Trust 90, Strong Board and Management team to enhance shareholder value The bank s Board of Directors is chaired by Mrs. Anne Mutahi. She has served the Board as a director since February 2009 and as a chairlady since She has vast experience in the financial sector having worked for various financial institutions including Middle East Bank, ABN AMRO Bank, Citibank and Jitegemee Trust Limited where she served as the Chief Executive Officer. The banks management team is led by Mr. Lamin Manjangi. He was recently appointed the managing director early this year. Mr. Manjang was the CEO of SCB Oman. He has more than 20 years experience in finance, the last 13 of which have been at Standard Chartered where he has held senior positions across Standard Chartered African businesses. The Board of Directors Anne Mutahi Lamin Manjang Chemutai Murgor Michael C. Hart Nancy Oginde Kariuki Ngari Kaushik Shah Les Baillie Robin Bairstow Group Chairlady Managing Director & CEO Executive Director, CFO Non-Executive Director Company Secretary Non-Executive Director Non-Executive Director Non-Executive Director Executive Director, Origination and Client Coverage Management Team Lamin Manjang Chemutai Murgor Robin Bairstow George Akello Bhartesh Shah Peter Gitau Annie Kigira-Kinuthia Managing Director & CEO Executive Director, CFO Executive Director, Origination and Client Coverage Chief Risk Officer Head of Consumer Banking Head, Technology and Operations, Kenya and CIO East Africa Head, Corporate Affairs

7 Key Contacts Research Desk Eric Munywoki Halima Saadia Geoffrey Maina OMS Research Group Address Trading Desk Alistair Gould Bedan Kagunda Institutional Sales Steve Nchoe Stanslaus Kimani

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