Skye Bank Plc- Breaking Grounds

Transcription

1 Equity Research Report: Skye Bank Plc - NIGERIA Skye Bank Plc- Breaking Grounds June 19, 2009 This publication is produced by FSDH Securities Limited (FSDH Sec) a subsidiary of First Securities Discount House Limited (FSDH) solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of FSDH for actions taken as a result of Information provided in this publication. FSDH Equity Research Report Page 1

2 Equity Research Report: Skye Bank Plc - NIGERIA EXECUTIVE SUMMARY Skye Bank Plc (formerly Prudent Bank Plc) is a Public Limited Liability Company incorporated in Nigeria on 8 December, 1989 in accordance with the provisions of the companies act, It was issued a banking license on February, 1990 to carry on all classes of merchant banking as Prudent Merchant Bank Limited in accordance with the provisions of the Banking Act, The Bank commenced operations on May 02, 1990 and it is wholly owned by Nigerians. The Bank s name was changed to Prudent Bank Plc in 2000 following an approval in principle by the Central Bank of Nigeria (CBN) for the conversion of the Bank to a commercial bank. The Bank commenced operations as a commercial bank in Skye has evolved into one of the top financial institutions in Nigeria, after its seamless consolidation exercise in With a cumulative wealth of experience that spans over 50 years, the Bank is historically one of the oldest banks in Nigeria and West Africa. It has over 300,000 shareholders that have a shareholding structure that puts no more than 5% in the control of any one individual or company. To date, it operates out of over 250 branches and transaction centers across Nigeria. In addition, the Bank operates 600 ATM machines within its premises and other strategic business locations across Nigeria. As part of its growth and expansion strategy, it began the process of exploring commercial and business opportunities in other African countries. The initial focus is on West African countries, with particular interest in the former English colonies. The primary focus is to build competencies in countries with similar business culture as Nigeria and hopefully, experiences and successes in these countries will be replicated in other countries in the region. The following are the countries that are currently covered under the expansion project: Sierra Leone; Gambia, Liberia; Sao Tome and Principe, Angola; Congo (DRC); Guinea and Equatorial Guinea. Structure As at September 30, 2008, Skye had the following subsidiaries and associated companies namely: Law Union & Rock Insurance Plc (51%), Skye Trustees Limited (100%), Skye Mortgage Bankers Limited (100%), PSL Limited (100%), Skye Financial Services Limited (100%), Apex Integrated Technical Limited (100%) and Coop Savings & Loans Limited (27%). The financial statements of Law Union & Rock Insurance Plc, PSL Ltd., Skye Trustees Ltd., Skye Mortgage Bankers Ltd. were consolidated during the period under review for the first time. The financial statements of Skye Financial Services Limited and Apex Integrated Technical Ltd have not been consolidated in the period under review as they are yet to commence full operations as at 30 September, Business Skye is engaged in the business of commercial banking in all its branches whilst its major subsidiaries, Law Union & Rock, Skye Mortgage Bankers, PSL Ltd., Skye Financial Services, Skye Trustees, Coop Savings & Loans and Apex Integrated Technical carry on the business of insurance, mortgage financing, capital markets, stock brokerage, trusteeship and financial services, respectively. Table 1: Professional Parties Party City Securities (Registrars) Limited Ernst & Young and Akintola Williams Deloitte Role Registrars Auditors Price as at June 18, 2009 N 7.09 Fair Value N Recommendation BUY Table 2 : Company Summary Ticker *Indirect Shareholding SKYE Sector BANKING Date of Incorporation December 7, 1999 Date of Listing November 24, 2005 Financial Year End December Number of Fully Paid Share 11,584,970,080 Current Capitalisation(N) 82,137,437, NSE Capitalization (N) 6,662,892,789, % of NSE Capitalisation Week High(N) Week Low (N) 3.44 YTD Return (%) (17.46) 52 Weeks Volume Traded 6,884,540 Trailing EPS (N) 1.63 Trailing P/E ratio (X) 4.34 Table 3: Directors Shareholding as at September 30, 2008 Director Position No of Shares Alhaji M.A.K Smith Chairman 1,602,492 Mrs. M. Onasanya Vice Chairman 4,186,666 Mr. A. Akinfemiwa Mgr. Director 65,061,132 Mr. K. Durosinmi-Etti Dep. Mgr. Director 16,326,036 Mr. S. Oloketuyi Executive 11,102,057 Mr. O. Ademulegun Executive 7,734,935 Mr. V.S. Adenigbabge Executive 125,863 Princess A.A. Executive * 87,681,559 Adeniran Mr. K. Awodein Executive 242,636 Mr. O. Ayeni Executive 95,938,174 Dr. J. Fadeyi N. Executive *509,999,998 Mr. M.J. Tarfa N. Executive 49,999 *177,097,902 Mr. V. Tuteja N. Executive 2,000,000 *358,221,169 Brig. Gen. A. Ukpo N. Executive - Dr. I. Adewusi N. Executive 8,046,073 * 436,294,000 Mr. C. Chikeluba N. Executive 2,248,677 Page 2

3 Equity Research Report: Skye Bank Plc - NIGERIA Table 4: Investment in Subsidiaries & Associated Companies as at September 30, 2008 Subsidiaries & Associated % Holding Value of Companies Investment (N m) Coop Savings & Loans Ltd Law Union & Rock Insurance Plc 51 1,915 PSL Ltd Skye Financial Services Ltd Skye Trustees Ltd Skye Mortgage Bankers Ltd APEX Integrated Technical Ltd Review of Nigerian Economy According to the Central Bank of Nigeria (CBN), Nigeria s Gross Domestic Product (GDP) grew in 2008 by 6.41% as against the growth rate of 6.45% in Even though the performance of the economy in 2008 was good in the light of the global economic recession, it fell below the Federal Government s target of 9.8% for the year. The growth in the economy was driven largely by non-oil sector, while the crisis in the Niger Delta area and the current global economic & financial crisis limited the contribution of the oil sector to the GDP. According to the National Bureau of Statistics (NBS), the structure of the Nigeria s economy as at December 2008 (provisional) in term of sectoral contribution to the GDP are: Agriculture: 42.07%; Manufacturing: 4.13%, Solid Minerals: 0.31%; Telecomm/Postal Services: 2.90%, Finance & Insurance: 3.79%; Building & Construction:1.83%; Hotel and Restaurants:0.46%; Crude Petroleum & Natural Gas:17.54%; Wholesale and Retail Trade:17.33% and Others: 9.63%. Currently, more than 95% of the country s foreign exchange earnings and about 85% of its revenue is derived from crude oil. In addition, the economy has a very high propensity for imported goods. The recent sharp drop in the price of oil in the international market as a result of weak demand from the industrialized nations and the weak non-oil exports in Nigeria as a result of infrastructure deficiency, are responsible for the recent depreciation and subsequent devaluation of the value of the country s currency. Some factors which have limited the growth of the economy includes poor trasportation system, epileptic power supply, poor comminucation system, regulatory and institutional environment that are not cost effective for running businesses in Nigeria and low access to long term finance. The current administration is implementing a number of policies to diversify the productive base of the economy so that the economy is less vulnerable to the international oil price volatility. The government is addressing this through the implementation of its 7- point agenda. In addition, it is embarking on a number of reform agenda to stimulate economic growth, and strengthening public expenditure management. 3.0 Review of Nigerian Banking System Following the recapitalization exercise of the banking industry in Nigeria, the country is gradually becoming the financial hub of Africa by expanding its banking activities into other countries in Africa and recording accelerating branch expansion. Since the consolidation exercise, the Apex regulatory body in the banking industry, the CBN has introduced a number of measures to strengthen the supervisory and regulatory functions of the system. Some of which are: The introduction of e-fass which was designed to enhance the efficient on-line surveillance of financial institutions. The issuance of the Code of Corporate practice for Banks in Nigeria that mandated banks to render monthly status report to the CBN. In September, 2008 the Monetary Policy Committee of the CBN reduced the Monetary Policy Rate (MPR) from 10.25% to 9.75%, Cash Reserve Requirement Ratio (CRR) from 4% to 2% and Liquidity Ratio (LR) from 40% to 30% in a bid to increase the liquidity condition in the market. Arising from its meeting at April 08, 2009, the MPC further reduced the MPR to 8%, CRR to 1% and LR to 250 in a bid to increase liquidity in the system. The industry is beginning to experience market induced-consolidation following the successful regulatory induced consolidation/reconciliation in the industry. The robust capital base of Nigerian banks was principally responsible for the development of different products to service the banking community better and bank the unbanked communities. Both the Institutional (Private sector and Government) and the individual clients have benefited immensely from this growth in terms of having capacity to finance the large ticket transactions that were hitherto financed from offshore. In addition, the banking operators have taken advantage of Information & Communication Technology (ICT) to bring their services closer to their customers to improve efficiency and speed. Nigerian banking community now operates their banking transactions via the internet, mobile phones and Automatic Teller Machines (ATM). All these efforts have reduced the traffic in the banking halls while contributing to the non-interest income of the Nigerian banks. We expect this trend to continue in the near future. The quest of the Nigerian banks to satisfy the needs of customers has led to impressive growth in the industry. Available data from the CBN as at December, 2007 showed that the total assets in the industry stood at N10.47trn, up from N2.77trn in 2003, representing a Compound Annual Growth Rate (CAGR) of 39%. Total Advances stood at N3.8trn in 2007 from N0.915trn, a CAGR of 43%. Total Deposit stood at N5.36trn from N1.41trn, a CAGR of 40%. The quality of assets generated in the banking industry in the period under consideration improved remarkably. The non-performing loan increased to N0.39trn in 2007 from N0.24trn in 2003 and recorded a CAGR of 13%, as against the CAGR of 43% recorded in Advances during the same period. A cursory look at the industry profitability showed that the industry recorded impressive profitability during the period. Gross earnings stood at N1.76trn from N0.51trn a CAGR of 36%. Operating Income stood at N1.19trn up from N0.36trn while Profit After Tax (PAT) increased to N0.41trn from N0.07trn in 2003, a CAGR of 53%. Table 5: Industry Performance Indicators N bn CAGR(%) Total Assets 2,768 10, Advances 915 3, Deposits 1,409 5, Non-Performing Loans Gross Earnings 510 1, Operating Income 356 1, Profit After Tax Recent Developments in the Nigerian Banking Industry Unconfirmed sources said that a number of banks that were involved in the finance of oil and gas business may have lost considerable amount of money due to the recent sharp drop in the price of oil. Some Automotive Gas Oil (Diesel) importers who obtained facilities to finance the importation of the product before the price crashed are currently finding it difficult to meet their financing obligations to their banks. This situation may lead to huge provision for these loans and eventually lead to write-off. In addition, some Nigerian banks have either direct or indirect exposure to the stock market; the value of Page 3

4 N'bn Equity Research Report: Skye Bank Plc - NIGERIA this investment is currently difficult to realize because of the bearish trend in the market. This situation is improving due to the appreciation in the general market trends. The CBN currently puts the value of such exposure to about N700bn. The impact of these factors on the banks is in the areas of credit squeeze in the market and potential decline or loss in income. The decline or loss in income may reflect in the banks profitability in the current financial year. Already, the quarterly results banks are reflecting these huge provisions. Gross earnings are growing more than double the growth in PBT and PAT. We consider the huge provisions banks are making for exposure healthy to the system as it will help to avert any crisis in December, when they will be required to harmonize their financial year. However, the magnitude of the decline or loss in income will depend on how quickly policy makers across the world, and Nigeria in particular, are able to arrest the current global crisis. With the appointment of a risk management expert as the new CBN Governor, we are confident that Nigerian Banking system will enter into a regime of placing greater emphasis on best practices in risk management framework in the interest of all stakeholders, especially investors. 4.0 Skye s Corporate Governance The bank is governed by a framework that defines the rights, roles and responsibilities of all stakeholders. This is to facilitate all necessary checks, balances, and incentives the needs to manage its various stakeholders. The Bank adheres strictly to the Central Bank of Nigeria (CBN) and the Securities & Exchange Commission (SEC) code of Best Practice on Governance system with best practice globally, and it plans subscribing to a governance rating organization to affirm its commitment to establishing a sound governance principle in the Bank. In the last 12 months, the Bank has built a solid reputation by developing governance policies built on its core values. It values its shareholders and committed to safeguarding their interests through accessibility, integrity and mutual respect in the conduct of its business. To ensure that it is guided by its governance principles, it developed a governance policy and set up an Investor s Relation department to facilitate an effective communication between the management and the shareholders. To ensure that its corporate governance practices are in compliance with international codes and best practices, the Board has established the following committees to assist it in the discharge of its corporate governance objectives: 1. General Purpose Committee 2. Staff Compensation & Remunerations Committee 3. Board Credit Committee 4. Audit Committee 5. Board Risk Management Committee 6. Board Compensation Committee and 7. Board Compensation Committee 5.0 Strengths & Opportunities Excellent customer service driven by passion to meet and surpass customers expectations and supported by investments in world class information technology Improving asset quality Good profit margin Good knowledge and expertise of domestic markets Well diversified business portfolio to take advantage of emerging opportunities in Nigeria & beyond Strong brand name Experienced and dedicated management team 5.1 Weaknesses & Threats Sophisticated customers demanding improved service at less cost Unrelenting war for talent Unstable global and domestic macroeconomic outlook in the short term Low crude oil prices Depreciation & devaluation in the value of Naira Credit crunch in the local financial market occasioned by margin facility 6.0 Analysis & Recommendation 6.1 Capital Adequacy The paid-up share capital of Skye stood at N5.79bn in 2008, an increase of 54.39% up from N3.75bn in 2007 and recorded a Compound Annual Growth Rate (CAGR) of 39.62% between 2004 and As part of the Bank s strategic plan for 2007/08, the Bank raised additional capital through a Public Offer and Rights Issue in the second quarter of the year, the hybrid offers were oversubscribed. The proceeds of the Offer were used to reinforce business expansion. It made significant capital investment in branch expansion, information technology, recapitalization of its subsidiaries and establishment of subsidiaries in other African countries. The remarkable success of the Public Offer boosted its position in the industry and rekindled its goals to be among the top five banks in Nigeria. The Bank made a hybrid offered of 2,581,316,334 ordinary shares of 50 kobo each to the public at a price of N14 per share and 1,500,608,958 ordinary shares of 50 kobo as rights at a price of N12.50 per share. The Rights Issue was fully taken, while the Public Offer was over-subscribed which led to additional allotment of 349,717,189 ordinary shares of 50 kobo each. The total allotment of the Rights Issue and Public Offer resulted to aggregate share premium of N49.823bn. The total equity of the bank increased significantly by % to N94.75bn in 2008 from N29.38bn in 2007 and recorded a CAGR of % between 2004 and At N94.75bn, the total equity is above the minimum capital requirement of N25bn in the Nigerian banking industry Shareholders Fund ( ) Total assets increased substantially by 76.50% to N790.71bn in 2008 from N447.92bn in 2007 majorly on account of % increase in due from other banks & other financial institutions which increased from N90.16bn to N217.02bn and 125% increase in loans and advances from N108.46bn to N244.73bn. Due from other banks and other financial institutions less provision for banks & other financial institutions of N205mn is made up of money market placements of N160.02bn (73.74%), in course of collection outside Nigeria: N39.91bn (18.39% and in course of collection in Nigeria: N17.08bn (7.87%). Page 4

5 N'bn N'bn Equity Research Report: Skye Bank Plc - NIGERIA Other contributors to the total assets are: Cash & Short Term Funds (growth of %); Advances Under Finance to N4.76bn from N2.27bn, a growth of %; Trading Securities increased from N21.13bn to N38.47bn, a growth of 82.08%; Fixed Assets moved to N20.53bn from N12.78bn, a growth of 60.66%; Bills Discounted rose from N47.90bn to N63.89bn, a growth of 33.30%; Other Assets increased to N148.55bn from N135.65bn, a growth of 9.51% and Long Term Investments increased from N11.37bn to N11.94bn, a growth of 5.07%. Composition of Total Equity (%) % Paid up share capital Share Premium Other reserves Fixed asset Revaluation Reserve 32% Earnings assets grew by 76.97% to N770.18bn in 2008 from N435.22bn in 2007 while fixed assets grew by 60.66% to N20.53bn in 2008 from N12.78bn in Total Assets VS Total Equity 6% 3% Table 6: Capital Adequacy Ratios CAGR Equity/Assets N/A Equity/L.&A N/A Fixed Assets/Equity N/A G/Loans (N bn) Classified Loans (N bn) Classified Loan/GL NA Classified Loans/Equity Stock Paid Up Share Capital NA Core Capital Total Equity Analysis of Gross Loan by Security % 55.98% % % % 0 Total Equity Total Assets Secured Against Real Estate Cash Collateral Unsecured Plant & Equipment Otherwise Secured The proportion of Shareholders funds to total assets increased to 11.98% in 2008 from 6.56% in 2007 as a result of more than proportionate growth in most of the equity than the balance sheet assets. The total equity could accommodate 38.72% of the total loans and advances in 2008, up from 27.08% in 2007, an indication that the bank is aggressively growing its assets in order to earn income and subsequently translating to improved return for its shareholders in the medium to long-run. Meanwhile, the proportion of the bank s equity used to support growth in fixed assets stood at 21.66% in 2008, down from 43.49% in Assets Quality The quality of the bank s assets improved between 2007 and Gross loans and advances increased significantly by % to N254.41bn in 2008 from N115.42bn in 2007; meanwhile, the total classified loans (non-performing loan) recorded an increase of 49.17% to N9.47bn in 2008 from N6.35bn in Although there was a drop in the percentage of non-performing loans to gross loans from 5.50% in 2007 to 3.72% in 2008, at 3.72%, the non-performing loan to gross loans is lower than the average of the comparables in the Nigerian banking industry (See Table 10). The improvement in the non-performing loans to gross loans can be linked to the robust risk management framework the bank has put in place. Should the non-performing loans turn bad, 10% of the Shareholders funds will be impaired as against 21.62% in The bank s total provision for bad loans increased to N7.30bn in 2008, up from N5.87bn in the preceding year. Analysis of the gross loan shows that 97% is secured while 3% is unsecured. A further analysis of the secured loan shows that 55.98% is secured against real estate; 0.18% against plants & equipment; 2.04% against cash collateral, and 38.80% is otherwise secured Classified Loans vs Provision for Bad Debts Provision for bad Debts Classified Loans (Nm) 6.3 Profitability Gross earnings (interest income and fee & commission income) grew by 87.62% to N78.28bn in 2008 from N41.72bn in The breakdown of the gross earnings shows that N55.32bn, representing 70.67%, was generated from interest income in 2008, while N22.96bn representing 29.33% was generated from other operating income. Difference between non-bank and bank sources showed that the interest income of N38.74bn (70.02%) was derived from non-bank sources, while N16.58bn (29.98%) was derived from bank sources. A further breakdown of the non-bank sources showed that the interest on loans & advances represent 98.30% and interest income on advances under finance lease (1.70%). The bank sources included bond trading income (46.73%), interest on interbank placements (27.64%) and interest on treasury bills (25.62%). Page 5

6 % N'bn N'bn N'bn Equity Research Report: Skye Bank Plc - NIGERIA Gross Earnings vs PAT Profit after Tax Gross Earnings Analysis of Gross earnings in % Analysis of Income by Sources ( ) Commission & Other Income 2008 Interest and Discount income The ratio of interest income to loans and advances which represents interest earned on loans and advances stood at 22.60% in 2008, down from 27.04% in 2007, while the ratio of interest paid to total deposits, which represents the cost of funds stood at 4.11% in 2008, up marginally from 3.94% in % 9.50% Loans & Advances vs. Deposits from Customers 6.14% Interest and Discount income Fees Commissions & Charges Other Income Interest & discount Income grew by 88.65% to N55.32bn in 2008 from N29.32bn in 2007, while commission & other income increased by 85.20% to N22.96bn in 2008 from N12.40bn in The analysis of the commission & other income include; commissions (N10.72bn), fees (N7.44bn), premium income (N2.09bn), investment income (N1.13bn), foreign exchange earnings (N691mn), other income (N477mn) and recoveries on loans previously written off (N416mn). Table 7: Profit & Loss Account (N bn) Chg % CAGR GE Interest Income Interest Exp Net Interest Income Comm.& other Income Total operation. Incom Dep PBT Taxation PAT Profitability Ratios PBT Margin (%) N/A PAT Margin (%) N/A Int. Incm/Loan (4.43) N/A Advance Net Int. Margin (0.62) N/A Cost of Fund N/A Cost/Total (10.12) N/A Income Int.Incom/GE N/A Non-Int.Incm/TR (0.38) N/A Loans and Advances to Banks Deposits from Customers Interest Income/Loans & Advances vs Cost of Funds Interest paid/total Deposit (cost of fund) Interest Income/Loan and Advances The interest & discount income increased by 88.65% to N55.32bn in 2008 up from N29.32bn in 2007, while interest expenses increased by 95.08% from N10.53bn in 2007 to N20.54bn in This resulted in a growth of 85.04% in the net interest income from N18.79bn in 2007 to N34.78bn in Looking at the five-year performance, interest expenses rose to N20.54bn in 2008 from N1.57bn in 2004, leading to a CAGR of 90.1% between 2004 and 2008 but lower than the CAGR of 97.9% in interest & discount income between the same periods. The fact that interest expenses increased more than interest & discount income in the last two years, shows that the bank is becoming less efficient in managing its interest expenses in recent years. The bank s growth in profit could not keep pace with the increases in capital and reserves between 2007 and 2008, as the Return on Capital Employed (core capital) decreased from 30.58% in 2007 to 23.80% in Page 6

7 % Equity Research Report: Skye Bank Plc - NIGERIA The Profit After Tax (PAT) increased significantly by % between 2007 and 2008 and achieved a CAGR of 125.5% between 2004 and The bank s core capital increased significantly by % between 2007 and 2008 and recorded a CAGR of % between 2004 and The Return on Average Equity (ROAE) increased to 25.81% in 2008 from 21.42% in At 25.81%, it is of note that the bank s ROAE compares favourably with its comparables in the Nigerian banking industry. The Operating Profit Before Interest and Tax (OPBIT) increased significantly by % between 2007 and 2008, while the total assets increased by 76.50% leading to a marginal increase in the Return on Total Assets (ROTAs) from 1.78% in 2007 to 2.74% in % 25.00% 20.00% 15.00% 10.00% Interest Income/Loans & Advances vs ROCE return on capital employed(roce) Interest Income/Loan and Advances ROAE Table 8: Liquidity (N bn) Chg% CAGR Cash & Balances Due from Banks L & A Fixed Assets Current Assets Total Assets Deposits & Other Acct Other Liabilities Term Loans NA Total Liabilities Management Efficiency The mangers of the bank improved on it efficiency between 2007 and The cost to income ratio declined from 73.93% in 2007 to 57.13% in Operating expenses less depreciation increased by 48.20% to N29.79bn in 2008 from N20.10bn in 2007 and recorded a CAGR of 91.87% between 2004 and Staff costs which stood at N10.03bn in 2008 increased by 98.22% from N5.06bn in 2007 and accounted for 32.6% of the operating expenses in 2008, up from 23.8% in The proportion of the bank s gross earnings that was channeled into operating expense decreased to 38.05% in 2008, down from 48.18% in In a similar development, the proportion of gross earnings that was channeled into staff costs increased marginally to 12.81% in 2008, marginally up from 12.13% in The increase in the pre-tax profit per employee at N7.59mn was higher than the increase in the staff costs per employee at N3.51mn in 2008.The pre-tax profit margin increased to 27.71% in 2008, up from 19.11% in 2007, also the post-tax profit margins increased to 20.46% in 2008, up from 14.11% in Segmental Analysis Looking at the segmental analysis of the Gross earnings of the bank by products and services N74.62bn (95.32%) was generated from banking; N2.51bn (3.21%) from insurance; N859mn (1.10%) was generated from capital market & stock brokerage, N153mn (0.20%) was generated from trusteeship & financial services, and N138mn was generated from mortgage financing. An analysis of performance by geographical segment showed that the bank generated all its gross earnings within the Nigerian market. Pre-tax Profit per Employee vs Staff Cost per employee Staff Cost Per Employee (Nm) Pre-tax Profit Per Employee (Nm) Banking Composition of Gross Earnings by Products % Insurance Capital Market & Stock brokerage Trusteeship & Financial Services Mortgage Financing 0.18% 3.21% 1.10% 0.20% 6.6 Liquidity The total deposit liabilities of the bank stood at N500.21bn in 2008 and were made up of term deposits, demand deposits, savings deposit, bankers acceptance and domiciliary account in the proportion of 40.44%, 40.40%, 6.40%, 6.66% and 6.11%, respectively. As a result of deposit liabilities mix, the bank s cost of funds stood at 4.11% in 2008, up marginally from 3.94% in 2007 but lower than the industry average of 4.5%. The classification of the deposit liabilities from the customers are presented in the chart below. Page 7

8 16-Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun-09 Equity Research Report: Skye Bank Plc - NIGERIA Analysis of Customer Deposit Liabilities (2008) 40.44% 40.40% 6.11% Term Demand Savings Bankers Acceptances Domicilliary Accounts 6.40% 6.66% The proportion of total deposit liabilities that was channeled into loans and advances increased to 48.93% in 2008 from 40.61% in In a similar development, the proportion of total assets that was channeled to loans and advances in 2008 also increased to 11.98% from 6.56% in Looking at the maturity profile of the gross loan and advances of N254.41bn, 69.72%, 21.74%, 4.68%, 3.27% and 0.59% will mature in 0-30days, 1-3months, 3-6months, 6-12 months and 1-5 years respectively. In another development, an analysis of the N500.21bn deposit liabilities shows that 55.87%, 9.96%, 15.93%, 16.50% and 1.75% will mature in 0-30days, 1-3months, 3-6months, 6-12months, and over 12months respectively. Q2 March, 2009 Unaudited Result Update The unaudited Q2 09 result of Skye Bank Plc (Skye) for the 3 months ended 31 March, 2009 showed that its Gross Earnings (GEs) rose by 86.72% to N51.67bn, compared with N27.67bn in the corresponding period of Profit Before Tax (PBT) increased by 43.36% to N13.73bn between 2008 and 2009 from N9.58bn in the corresponding period of 2008.The tax provision which increased by 43.40% between 2008 and 2009 to N4.12bn from N2.87bn in 2008 brought about a Profit After Tax (PAT) of N9.61bn in 2009 as against N6.71bn in 2008, representing an increase of 43.36%. Looking at the bank s profit margins, the costs associated with unit of income increased between Q1 08 and Q1 09. This is reflected in the PBT margin which decreased to 26.58% in Q1 09 from 34.62% as at Q1 08, and down from 27.59% in FY, 08. This shows that the total costs as a percentage of GEs stood at 73.42% in Q1 09, up from 65.38% in the corresponding period of From the above margins, it may be inferred that the bank is making provision for its non-performing assets. This is in a bid to avert any problem in the future. PAT Margin currently stands at 18.60%, down from 24.23% in the corresponding period of 2008, and down from 20.44% as at FY 08. The result also indicated that the percentage of the TO, PBT, and PAT in the Q2 09 result to the Full Year Audited TO, PBT and PAT for the period ended September, 2008 are: 66%, 63.57% and 60.08%, respectively. This suggests that the bank should meet its previous year performance at the current run rate. 6.7 Investment Analysis Investment analysis of Skye between 2004 and 2008 showed improvement and overall stability. The earnings per share (EPS) increased from N0.02 in 2004 to N1.80 in 2008, representing a CAGR of 72.47%. This is shown on the chart below. Skye paid a dividend of N0.60 per share in 2008, up from N0.35 per share paid in UBA Vs NSE ASI Rebased (Jun 08 - Jun 09) 5.01 EPS Vs DPS Dividend Per Share (DPS) (N) Earnings Per share (EPS) Skye Bank NSE ASI Rebased 7.0 Return Analysis An investment in Skye Bank Plc stock as at January 04, 2007 at N4.12 shows a total growth of 85.12% as at June 18, An investment of N100,000 in Skye Bank stock in year 2007 purchased 23,300 units after taking cognizance of transaction costs as at the time of purchase. The bank paid dividend twice during the period under review. Therefore the total dividend earned less withholding tax (on the dividend) are N19,922. The accumulated shareholding remained the same since scrip dividend was not paid. The market value at the valuation date was N165,197; higher than the investment cost. The total value of the investment of N185,118 is made up of market value of N165,197 and N19,921 dividend earned. The CAGR in the return within the period is 29.02%. It is instructive to note that the investment in the bank would have generated more than what the current position is, but for the current bearish trend in the market occasioned by the global financial crisis. 8.0 Valuation In arriving at a fair value for Skye Bank, we considered the current global economic & financial crises and the likely impact on the Bank s earnings. It is important to note that the fundamentals of Nigerian banks are strong but we cannot completely rule out the possible impact of the crises on the local banks because of the integration of the Nigerian financial system with the world financial system and economy. We project GEs, PAT, and Free Cash Flow, FCF (PAT adjusted for movement in non-cash items) for the period ending 15 months December 2009(15months), 2010, 2011, 2012 and We project GEs of N137.29bn, N141.30bn, N172.92bn, N205.37bn and N241.55bn, for 2009, 2010, 2011, 2012 and 2013 respectively. We project PAT before Page 8

9 Equity Research Report: Skye Bank Plc - NIGERIA minority interest of N19.99bn, N22.43bn, N26.96bn, N32.90bn and N37.97bn, and FCF of N27.66bn, N30.32bn, N36.62bn, N44.37bn and N51.47bn respectively for the period. We assumed a perpetual growth rate of 6.32%. We used a total 12.38bn which include the 800mn share arising from the convertible loan of the bank. Applying a beta value of 1.06, risk premium of 10.04% and risk free rate of 12.75% we arrive at a cost of equity of 23.37% (our discount rate). Using the above parameters, the Discounted Future Earnings Model (DFEM) generates N10.38 per share, and the Discounted Free Cash Flow Model generates a value of N An average of the valuation methods yields a value of N12.24 per share. The 2009 forward earnings and dividend yield (EPS at N1.61 and DPS at 51k (with a payout of 32%)) at our fair value are 13.19% and 4.20% respectively. Also the 2009 forward Price to Earnings ratio is 7.58x. We therefore place a BUY on Skye Bank Plc stock at the current market price for capital appreciation and dividend payment. Table 9: Result of Valuation Valuation Metrics Value Per Share (N) Discounted Future Earnings Discount Free Cash Flow Fair Value Current Price 7.43 Discount to Offer Price(%) Table 10: Comparative Analysis Indicators Skye Bank Diamond Bank FCMB Afribank Bank PHB Gross Earnings Interest Income Non-Int.Income IT Inc/GEs(%) NI Inc/GEs(%) PBT PAT Total Assets , Deposit Liab Loans & Adv Classified Loans NPL/GL(%) Cost of Fund(%) Total Equity NPL/Equity (%) Table 11: Annual Capital Growth & Returns Analysis of N100,000 Investment in Skye Bank Plc since Jan. 04, 2007 Value Receipt Period Total Value Amt Invested 100,000 Holding As At January 23,300 23,300 23,300 Amt. Purchased 96,000 Bonus Shares Received Share Price Jan Cumulated Holding 23,300 23,300 23,300 No of Units purchased 23,300 Dividend Earned - 7,339 12,582 19,922 VALUATION Date of Valuation 18-Jun-09 Accumulated Shareholding 23,300 % Increase in Shareholding 0.00 Price (N) 7.09 Market Value (N) 165,197 Total Dividend (N) 19,921 Value of Investment (N) 185,119 Cost of Investment (N) 100,000 Profit (N) 85,119 % Increase CAGR Page 9

10 Equity Research Report: Skye Bank Plc - NIGERIA Table 12: Forecast Earnings (N bn) Year Ending December Months Gross Earnings Interest Income Other Income Interest Expense Interest Margin Loan Loss Expenses Net Interest Income Operating Income Total Expenses PBT Tax PAT Shares in Issue ( bn) Reality Checks Gross Earnings Growth (%) Interest Income Growth (%) Interest Expense Growth (%) Operating Income Growth (%) PBT Growth (%) PAT Growth (%) Interest Income/Gross Earnings (%) Operating Income/Gross Earnings (%) PBT Margin (%) PAT Margin (%) EPS (N) DPS (N) P/E Ratio Earnings Yield (%) Dividend Yield Payout Ratio (%) Source: FSDH Research Contacts For enquiries please contact us at our offices: Lagos Office: UAC House (6 th -8 th Floors) 1/5 Odunlami Street, P.M.B Lagos. (Tel.) (Fax) Port Harcourt Office: Afribank Bank Building (2nd floor, 5 Trans Amadi Road, Port Harcourt.(Tel) (Fax) Abuja Office: Orji Uzor Kalu Plaza, Plot 979, 1st Avenue, Off Ahmadu Bello Way, Cadastral Zone AO, Central Business District, Abuja. (Tel) (Website): ( ) fsdhsecurities@fsdhgroup.com Disclaimer Policy This publication is produced by FSDH Securities (FSDH Sec) a subsidiary of First Securities Discount House Limited (FSDH) solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of FSDH or FSDH Sec. for actions taken as a result of information provided in this publication. Page 10