CFC Stanbic Holdings Limited Initiation of Coverage & Rights Issue Note

Transcription

1 EQUITY RESEARCH 21 September 2012 Recommendation: BUY Fair value: KES Upside: +23.7% Rights offer price: KES Operating performance FY11A FY12E FY13E EPS (KES) %chg 16.4% 43.0% -1.8% DPS (KES) Payout % 9.3% 14.8% TNAV (KES) PE (x) PB (x) Source: Company financials Trading data Current price month chg -9.5% Rights discount 22.8% Market cap KES m 11,700 USD m Avg. daily value KES 294, 041 traded (YTD) USD 3,500 Bloomberg CFCB KN Free float 24.27% Foreign investor flows (YTD) USD 201 k Source: Company financials Relative price performance (YTD) SIB Banks Index CSH 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep % Research is also available to our clients on: Bloomberg: SIBX <GO> Will the real CFC Stanbic stand-up We initiate coverage on CFC Stanbic Holdings (CSH), the holding company of CFC Stanbic Bank (CSB) and CFC Stan bic Financial Services Limited. CSH is part of South Africa s Standard Bank Group, Africa s largest banking franchise with operations across 17 African countries. CSB is Kenya s 6 th largest bank by asset size (FY11 total assets USD 1.70bn) and it contributes more than 95% of CSH s total assets and profits. Since 2008, CSH has undergone significant restructuring; merger between CFC Group and Stanbic this led to the creation of CSH in June 2008, de-merger of banking and insurance operations in April 2011 (FY10, discontinued operations represented 24% of CSH s attributable profit) and lastly in November 2011, sale of associate stake in Stanbic Investment Management Services a business engaged in asset management. To fund its banking operations, CSH is currently seeking to raise USD 46.20m (net) by way of a rights issue. The offer opened on 12 September and will run through to 16 October. Last day of trading rights on the NSE will be 8 October. Newly issued shares will be listed on 8 November The rights price has been set at KES 33.00, 22.8% below prevailing share price. Standard Bank (60% holding in CSH) has underwritten the offer. Valuation ation & recommendation. We initiate coverage on CSH with a BUY recommendation and advise investors to follow their rights. Our recommendation is primarily driven by our belief that CSH is now poised to deliver improved returns (ROaE & ROaA), after 4 year period of restructuring and investment in branch network and core banking system. Based on our FY12 forecast EPS and NAV, CSH currently trades at 5.0x PE and 1.0x PB (26% & 42% discount to the sector respectively). While CSH looks attractive relative to the sector, below sector ROaE and ROaA will hold back a full market rerating, in our view (medium-term, management targets ROaE of 25%; our FY14 forecast 21%). In derivinging CSH s fair value for we use a price to book approach, based on a 3 year holding period. Against our assumed 3 year sector exit PB multiple of 2.0x for Kenyan Banks, we apply a 40% discount when deriving CSH s 3 year exit PB ( historically, CSH s ROaE has trailed CoE, but we see this changing starting FY12). Amongst tier one banks, FY12-FY14, we expect CSH s dividend payout to remain the lowest (avg. 15% versus 51.9%). CSH snapshot it s all about CSB. Unlike its peers (retail banking focused), CSH s banking operations are anchored on corporate business ( FY11 median market share of deposit accounts for top 5 banks by assets stood 11.6% versus CSB s share of 0.6%). It therefore efore comes as no surprise that CSB s NIM (6.5% in FY11) is the lowest across the top banks, while NPL (1.9%) is second lowest after StanChart s (1.4%). Post-merger of banking operations in FY08, CSB has underperformed our universe of 8 listed banks in loan and deposit growth (avg. 15% & 6.3% vs. 24% & 23%), but outperformed in earnings growth (avg. 44% vs. 29%). Notably, CSH has the highest NIR/total income ratio (this highlights CSB s proficiency in generating fee based income primarily from investment banking & cross-border corporate transactions). According to management, over 60% of NIR is client driven and therefore expected to recur. On cost, CSB s CTI (68.4%) remains above sector average age (a trend we see persisting over our forecast period). Management however remains optimistic that the ratio will decline as business volumes in personal and SME banking pick-up (CTI medium-term target, 55%). After a 3 year stint of losses, management agement guides personal and business banking division will generate positive returns in 2013 (FY11, the division posted a loss of KES 1.11bn; KES 4.07 EPS equivalent).

2 Going forward key focus is on earning a return in PBB. Asking management what the key strategy will be over the next couple of years, we received a simple answer scaling up of volumes in personal & business banking (PBB), while retaining market share in corporate & investment banking franchise. On PBB, 25% of group assets as at end of FY11, management s focus will be on growing SME local currency loan assets, while targeting the middle-upper income retail segment to grow cheaper deposit liabilities. In our view, given CFC s Bank history in asset finance and lending to the agricultural sector, we think CSB stands a fair chance against larger peers in the SME space. We are however less optimistic when it comes to CSB growing its personal banking franchise. Looking at current industry terrain, CSB is wedged between larger banks and listed & non-listed smaller banks by asset size (but larger by branch network); all of whom are targeting the same middle-upper income segment. We also note CSB s targeted retail strategy deviates from Standard Bank group s broad based retail strategy in other countries. Overall, over our forecast period we expect CSB s balance sheet to remain largely foreign currency denominated (estimated at 50% at end of FY11) and skewed to corporate business. CSH price performance underperformer YTD, CSH has returned 9.4%, versus 30.4% for the SIB Banking Index (CSH has only outperformed Housing Finance and NBK). At USD 201k, CSH boasts of having the 6 th highest level of foreign inflows YTD.

3 Key themes 1. 1H12 summary performance EPS Total assets Advances Customer Deposits Total NPL % y/y % q/q % y/y % q/q % y/y % q/q % y/y % q/q % y/y % q/q Barclays 17.2% 17.0% -4.5% -4.2% 10.1% 0.8% -4.5% -1.7% -28.6% 6.7% CFC Stanbic 52.6% 21.5% 23.6% -0.9% -4.2% 2.1% 7.0% 1.8% 13.7% 63.7% Co-op Bank 21.8% 5.4% 7.8% 2.1% 18.4% -0.9% 11.5% -0.2% 27.0% 6.2% Diamond Trust 26.9% 15.4% 24.4% 5.5% 27.2% 6.8% 25.2% 6.6% 17.6% 9.2% Equity Bank 14.0% 4.9% 28.3% 5.2% 27.4% 2.8% 21.9% 0.3% -13.2% 11.0% KCB 49.0% 50.8% 24.9% 4.5% 15.3% 3.5% 29.1% 7.1% -12.8% 2.0% NIC 45.4% 20.4% 30.7% 4.5% 32.0% 10.3% 31.0% 4.9% -3.9% 7.6% StanChart 87.8% -3.8% 22.8% 11.2% 24.4% 7.8% 26.5% 16.5% 115.8% 84.5% Average 39.3% 16.4% 19.8% 3.5% 18.8% 4.2% 18.5% 4.4% 14.5% 23.9% 2. Recap of restructuring Phase 1: Merger of banking assets (finalized in May 2008): CFC Bank acquisition of 100% in Stanbic Bank Kenya Limited (SBKL) CFC Holdings acquired 100.0% share holding in SBKL (96.3% owned by Standard Bank and 3.7% owned by the Government of Kenya) in exchange for an allotment of 113,341,663 newly created CFC Holdings shares priced at KES credited as fully paid up (113,341,663341,663 allotted to Standard Bank and 4,342,548 to GOK). This transaction priced SBKL at 3.79x PB, versus prevailing sector PB of 4.13x. Issuance of the new shares diluted CFC Bank s existing shareholders 43.0%. Goodwill arising from the purchase was KES 9.4bn Standard Bank s acquisition of effective control in CFC Holdings In addition dition to the newly allotted shares, Standard Bank acquired a further 50,868,864 CFC Holdings shares from the principals of Gambit Holdings (initially holding 71,243,617 or 45.67% in CFC Holdings). Upon completion Standard Bank held a total of 164,210,527 shares s or 60.0% of CFC Stanbic Holdings Limited (CSHL) the newly created merged entity. Standard Bank Group (60.0%) Private Institutions & Government (14.97%) CFC Stanbic Holdings Limited (CSH) Other public (9.3%) African Liasion & Consultants Services LTD (15.73%) 35.92% CFC Stanbic Bank (100.0%) CFC Financial Services (100.0%) CFC Insurance Holding Limited (100.0%) Heritage (64.08%) Stanbic Investment Management Services (24.41% CFC Life (100%)

4 Phase 2: Demerger & separate listing of Insurance operations (finalized in April 2011): Consolidation of insurance operations under CFC Insurance Holdings (CFCIH) The demerger commenced on 2 December 2009 with the execution of conditional legal agreement between CSH, CFC Insurance Holdings Limited (CFCIH), African Liaison & Consultants Services Limited (ALCS) and Standard Group s Liberty Holdings. April 2010: CFCIH acquired the 64.08% stake in Heritage held by CSH at cost and issued 65,705,000 (par value KES 1) new ordinary shares of CFCIH to CSH (prior to the transfer, CSH carried the investment in Heritage at a historical cost of KES m). CFCIH went further and acquired the remaining 35.92% stake in Heritage held by ALCS in exchange for 113,034,503 CFCIH shares valued at KES m (goodwill arising from transaction was KES m). Liberty then acquired 128,551,570 new shares in CFCIH representing 24.95% of CFCIH issued shares paying KES m as consideration (valuing CFCIH at KES 6.84 per share). At the conclusion of this phase, CFCIH shareholding was: 53.11% CSH, 24.95% Liberty Holdings and 21.94% held by ALCS. CFCIH was now the 100% holding company of both CFC Life and Heritage. Demerger of CFCIH from CSH In August 2010, CSH held an EGM where shareholders approved the demerger of CSH and CFCIH. Following the shareholder approval, in March 2011, CSH distributed its 53.11% shareholding in CFCIH to its share holders by declaring a dividend in specie (1 new share in CFCIH for every share in CSH) to eligible shareholders. Also distributed, was a special dividend of KES per CSH share in order to meet eligible shareholder s withholding tax and stamp duty obligations. At this juncture shareholding in CFCIH was: Standard Bank 31.87% %; ALCS 30.29%; Liberty Holdings 24.95% and 12.89% held by other shareholders. To mirror overall group structure, Standard Bank Group renounced in favor of Liberty its right to receive the dividend in specie, equivalent to 31.86% equity holding in CFCIH. Consequently, Liberty Holdings became the primary shareholder in CFCIH with a combined stake of 65.82%. The consideration payable to Standard Bank for the renunciation was set at an initial amount of USD 14m (approx. valui ng CFCIH at KES 6.85 per share). Also, Standard Bank would receive deferred amounts capped at a maximum of USD 4.87m, determined based on the performance of certain investment portfolios of the insurance business over the years ending 31 December 2010, 2011 & Listing of CFCIH (21 April 2011) The board proposed the listing of CFCIH on the Nairobi Securities Exchange by way of introduction. The board proposed a listing price of KES (10% discount to the KES 6.84 per share paid by Liberty to acquire 24.95% in CFCIH). Post listing, Liberty agreed not to dispose of any of its shareholding in CFCIH for a period of 24 months. ALCS also agreed to a 2 year lock-up period in which it would maintain a minimum shareholding of 15.29% in CFCIH. Phase 3: Sale of associate stake in Stanbic Investment Management Services (SIMS) In November 2011, CSH sold its 24.41% associate holding to Liberty holdings for a total sum of KES m (a gain of KES m or 20.22%). The transaction valued SIMS at 1.25x PB.

5 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 FY12, FY13 & FY14, then we use a subjective 3 year forward PB (1.2x), to derive CSH s 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) As discussed earlier, in deriving CSH s 3 year exit value, we apply a 40% discount to our assumed 3 year sustainable banking sector PB of 2x. Relative Price to book valuation FY12 FY13 FY14 Dividend per share year exit value Discount period Discount rate 17.4% 17.4% 17.4% 17.4% Discount factor Present Value dividend Cumulative PV of dividends 3.18 PV of terminal value Per share value Assumed exit PB 1.2 Upside/(downside) 23.7% Current price Sensitivity Analysis 14.4% 15.4% 16.4% 17.4% 18.4% 19.4% 20.4% (PB versus COE) Source: Company filling, estimates Valuation Multiples 2010A 2011A 2012F 2013F 2014F ROaA 1.4% 1.9% 2.2% 2.7% 3.6% ROaE (tangible) 12.3% 15.3% 18.5% 17.7% 21.1% Price to book value (x) Price to earnings (x) Dividend payout 15.6% 0.0% 9.3% 14.8% 20.8% Dividend yield 1.9% 0.0% 1.9% 2.9% 5.9% EPS (KES) Growth % DPS (KES) % % % % 2.50 TNAV (KES) Source: Company filling, estimates

6 Performance review INCOME STATEMENT Year to December (KES m) Interest income Interest expense Net Interest Income Fee and commission income Foreign exchange income Other operating income Total non-interest income Total Operating income Staff costs D & A Other operating costs Total operating costs Profit before impairments Loan loss provision Profit before Tax Associate income Taxation Profit after Tax (continuing operations) Discontinued operations Minorities Attributable income Weighted shares (m) Year end shares (m) Earnings per share (KES) Divide per share (KES) 2010A 6,079-1,923 4,157 1,757 1,389 1,494 4,640 8,797-2, ,327-6,314 2, , , , A 8,603-2,561 6,042 2,096 1, ,757 10,799-2, ,872-7,390 3, , ,160 1, , A 12,792-5,787 7,005 2,662 2,387 1,974 7,022 14,027-3, ,471-8,750 5,277-1,680 3, ,079 2, , F 12,526-4,478 8,048 3,434 3,107 1,354 7,894 15,942-4, ,998-9,928 6,014-1,262 4, ,426 3, , F 13,058-3,684 9,374 4,498 3,888 1,501 9,887 19,261-4, ,681-11,199 8,061-1,265 6, ,039 4, , Source: Company filling, estimates BALANCE SHEET Year to December (KES m) Cash and Central bank balances Dues from other banks Due from group companies Total government securities Net Loans & Advances Fixed assets Net Intangible assets Goodwill Assets held for distribution Other Assets Total assets Customer deposits Due to other banks Due to group companies Total debt Liabilities held for distribution 2010A 5,445 2,124 14,116 19,058 58,985 1,911 1,726 10,434 21,535 4, ,080 71,425 9,286 4,984 7,066 18, A 7,105 4,089 26,538 21,819 64,257 2,299 1,373 9,350-13, ,171 74,007 32,539 1,135 7, F 12,734 6,588 30,713 33,132 69,638 2,747 1,073 9,350-13, ,523 86,303 38,259 3,645 7, F 8,880 6,936 17,508 34,102 78,283 3, ,350-13, ,839 98,054 13,690 7,347 7, F 12,180 11,725 29,595 38,135 89,870 3, ,350-14, , ,365 23,141 12,420 7,086 - Other liabilities 4,295 16,074 17,601 16,923 19,142 Total shareholder equity 24,769 19,329 26,627 29,739 34,104 Total liabilities and equity 140, , , , ,258 Source: Company filling, estimates

7 Ratio review BALANCE SHEET Growth % (y-o-y) Total Assets Gross Loans Net Loans Customer Deposits Shareholder equity NIR Fees and commission income Total operating income Staff expense Total operating expense Profit before tax EPS DPS TNAV Capitalisation Total risk weighted assets Total Tier 1 capital Capital Adequacy (tier 1) Minimum ratio required (tier 1) Tier 1/ total deposits liabilities Equity to net loans Equity to total assets Liquidity Gross loans / customer deposits Net loans to total 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 Non Performing Loans/ Equity Impairments IS/avg gross loans Profitability Avg. yield on interest bearing assets Avg. yield on interest bearing liabilities Spread Net interest margin Staff cost/total OPEX Cost to operating income PBT margin 2010A 2010A 76,004 7, % 8.0% 9.8% 42.0% 17.7% 2010A 84.0% 42.1% 26.8% 43.9% 2010A 1.7% 49.2% 2.90% 7.03% 0.87% 2010A 6.4% 2.1% 4.4% 4.9% 39.7% 71.8% 22.3% 2011A 7.2% 9.2% 8.9% 3.6% -22.0% 2.5% 19.3% 22.8% 17.5% 17.1% 40.5% 16.4% % -12.5% 2011A 80,655 10, % 8.0% 9.5% 30.1% 12.9% 2011A 88.5% 42.8% 37.0% 51.6% 2011A 1.9% 68.8% 1.31% 4.46% 1.04% 2011A 8.2% 2.5% 5.7% 6.5% 39.9% 68.4% 25.5% 2012F 19.5% 10.2% 8.4% 16.6% 37.8% 47.6% 27.0% 29.9% 25.5% 18.4% 30.5% 43.0% % 2012F 111,579 16, % 8.0% 13.0% 38.2% 14.8% 2012F 83.6% 38.8% 43.7% 61.2% 2012F 3.5% 59.0% 2.80% 7.59% 2.44% 2012F 10.0% 4.6% 5.3% 6.2% 42.3% 62.4% 25.6% 2013F -3.7% 13.2% 12.4% 13.6% 11.7% 12.4% 29.0% 13.7% 16.5% 13.5% 32.1% -1.8% 56.4% 18.0% 2013F 110,651 19, % 8.0% 17.1% 38.0% 17.2% 2013F 83.3% 45.3% 35.9% 52.2% 2013F 4.2% 70.8% 2.50% 6.87% 1.64% 2013F 9.0% 3.4% 5.6% 6.7% 43.4% 62.3% 29.8% 2014F 21.1% 15.2% 14.8% 15.6% 14.7% 25.2% 31.0% 20.8% 12.5% 12.8% 43.0% 43.0% 101.0% 21.4% 2014F 140,784 22, % 8.0% 16.7% 37.9% 16.3% 2014F 83.0% 42.9% 40.9% 57.4% 2014F 4.5% 73.6% 2.50% 6.90% 1.44% 2014F 8.5% 2.6% 5.9% 7.1% 43.3% 58.1% 35.3% Source: Company filling, estimates

8 Peer review Valuations Bank Bloomberg Mkt.cap Total assets Share price Fair value Mngt. Upside Recommendation code (USD m) FY11 (USDm) (KES) (KES) access Barclays BCBL KN , % HOLD Average CFC Stanbic CFCB KN , % BUY High Co-op Bank COOP KN , % HOLD High Diamond Trust DTKL KN , % BUY Average Equity Bank EQBNK KN , % HOLD High KCB KNCB KN , % BUY High NIC NICB KN % BUY Average StanChart* SCBK KN , % HOLD Low *Pre-rights issue valuation Valuation multiples PE (x) PB (x) Div. yield% ROaA % ROaE % Bank FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13A FY11A FY12F FY11A FY12A FY13F Barclays CFC Stanbic Co-op DTB Equity KCB NIC StanChart Growth EPS % Total income % Total OPEX % Gross loans % Deposits % Bank FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F Barclays CFC Stanbic Co-op Bank DTB Equity Bank KCB NIC StanChart Capitalisation & liquidity CAR (tier 1) Equity/total assets Gross loans/deposits Payout Bank FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F Barclays CFC Stanbic Co-op Bank Diamond Trust Equity Bank KCB NIC StanChart

9 Asset quality Loss reserve/gross loans Coverage NPL Ratio NPL/Equity Prov/Avg. gross loans Bank FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12A FY13F Barclays CFC Stanbic Co-op DTB Equity KCB (0.2) NIC StanChart Other key ratios NIM % NIR/total income % CTI % Staff costs/total Opex % Bank FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F FY11A FY12F FY13F Barclays CFC Stanbic Co-op Bank Diamond Trust Equity Bank KCB NIC StanChart

10 KEY CONTACTS Research Francis Mwangi, CFA Eric Musau Brenda Kithinji Head of Trading Tony Waweru Equity and Foreign Sales Eric Ruenji Legal Disclaimer: The information/quips/quotes in this newsletter originates from domestic and international information public sources (including the Internet) that are deemed reliable, along with public information, and SIB s own processing and estimates at the time. The information has not been researched independently by SIB and SIB does not vouch for the precision, veracity or rightness of the information. SIB does not intend to disappoint anyone with their views in the newsletter as the newsletter is issue oriented and one can lose money based on our views. The opinions of the authors can change without notice and SIB is not obligated to update, rectify or change the report if assumptions change. The newsletter is only published for informational purposes and shall therefore not be viewed as recommendation/advice to make or not make a particular investment or an offer to buy, sell or subscribe to specific financial instruments. SIB and its employees are not responsible for transactions that may be carried out based on information put forth in the report. Readers who are interested in making transactions are urged to seek expert advice and familiarize themselves thoroughly with the investment options on offer. Investments always entail financial risk, including risk due to local investments and fluctuations in the exchange rate of currencies. Investors investment objectives and financial position vary. It should be noted that past returns do not indicate future returns. Reports and other information from SIB are only intended for private use. This report is a short compilation and should not be considered to contain all available information on the subjects it discusses.