(Members of the NSE since 1954) 10 th Floor, Pension Towers, Loita Street P.O. Box 45396-00100 Nairobi, Kenya Tel: +254-20-3240000 Fax: +254-20-218633 Website: www.dyerandblair.com Bank of Baroda (Uganda) Limited & DFCU Group Limited. 7 December 2012 Research Department Dealing Department +254-20-3240130/128/166 +254-20-3240124/115 COMPANY OVERVIEW Bank of Baroda (Uganda) Ltd Bank of Baroda (Uganda) Ltd. (BOBU) was established in December 1953 and later became the first financial institution to be listed on the Uganda Securities Exchange (USE) in November 2002. BOBU is a subsidiary of Bank of Baroda India (BOBI), a global banking group with a presence in 25 countries. As at 31 December 2011, BOBU had more than 2,000 institutional and retail shareholders, with the parent company BOBI owning an 80.00% stake. BOBU had a network of 15 branches across Uganda as at December 2011. In 2008, BOBU s shares were split increasing the number of ordinary shares from 40 million to 400 million and correspondingly reducing its share price 10-fold to UGX 10.00 per share. In 2011, BOBU issued bonus shares at a ratio of 1.5-to-1 in order to fulfil the revised statutory requirements stipulated by the Bank of Uganda (BoU), which increased the minimum capital from UGX 4 billion to UGX 10 billion by March 2011. The BoU recently raised this minimum to UGX 25 billion which compliance is required by March 2013. DFCU Group Limited. DFCU Group (DFCU or the Group) was established in 1964 as the Development Finance Company of Uganda. In 2000, DFCU acquired the assets of Gold Trust Bank resulting in its transformation into a commercial bank. In 2005, the Group s shares were listed on the USE. DFCU has three subsidiaries, DFCU Leasing Company Ltd., DFCU Bank Ltd. and Rwenzori Properties Ltd. The Group is involved in retail banking, consumer lending, mortgage lending, development finance, medium and long-term leasing as well as commercial real estate investments. DFCU Bank had a country-wide network of 30 branches as at August 2012. Actis, a British investment company, is the majority shareholder in DFCU owning 60.02% of the total shares. Other large shareholders include the Norwegian Investment Fund for developing countries (NORFUND) (10.06%), Investec Asset Management and related entities (8.21%) and the National Social Security Fund (Uganda) (5.93%). In June 2011, Actis stated its intention to divest from the Group. This sale process was however halted in August 2011 and has yet to be concluded. COMPARATIVE ANALYSIS OF LISTED UGANDAN BANKS Using the audited annual reports for BOBU, DFCU and Stanbic Bank Uganda (SBU), we compare their financial performances for the period FY07 11, with the aim of understanding their competitiveness and relative comparability. Table 1: Net Interest Income Growth (%) Table 2: Net Income Growth (%) 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011 70% 53% 35% 18% 0% -18% 2008 2009 2010 2011-35%
Despite SBU experiencing erratic growth in net interest income and bottom line during the period, FY11 growth on both numbers was marginally higher than that of both BOBU and DFCU. SBU s extensive countrywide penetration (99 branches and over 200 automated teller machines (ATMS)), consistent financial performance and the parent-company s pan-african prominence and scale of operations and indicate more favourable growth prospects than the other two listed banks. Table 3: Cost to Income Ratio (%) Table 4: Net Income margin (NIM) 1 (%) 90% 80% 70% 60% 50% 40% 15% 13% 10% 8% 5% BOBU was the most cost efficient bank during the period, gradually pushing down its cost to income ratio from 54.75% in 2007 to 49.30% in FY11. However, SBU maintained competitively higher NIMs during the period, which levels were supported by its large loan book, which at UGX 1,531.86bn in FY11 was 1.9 times the size of BOBU and DFCU combined. Table 5: Loans and Advances (UGX bn) Table 6: Customer Deposits (UGX bn) 1,600 1,200 800 400 0 1,600 1,200 800 400 0 DFCU s FY11 loans and deposits of UGX 496.43bn and UGX 525.39bn were respectively 69. 29% and 29.81% more than BOBU s. This implies that DFCU was more efficient at deploying its deposits in support its loan book, resulting in a loan to deposit ratio of 94.49% against BOBU s 72.45%. SBU s customer deposits in FY11 was UGX 1,902.95bn, implying in a loan to deposit ratio of 80.50%. STOCK MARKET PERFORMANCE BOBU s share price spiked during the first quarter of 2011, accounting for a 58.70% gain in price between 30 December 2010 and 14 February 2011. We believe this sharp movement was occasioned by the markets anticipation of a bonus issue which was necessitated by the BoU s revised minimum capital requirements expected by March 2011. Following the bonus issue which was formally announced in February 2011, BOBU s share price dropped significantly from UGX 800 to close the year at UGX 230. BOBU s and DFCU s share-price performances have broadly tracked the USE All Share index (UGSINDX) during year-to-date 2012, touching mild highs of UGX250 and UGX1,030 between August and September 2012. 1 Net interest margin (NIM) = Net interest income / Average interest bearing assets 2
Table 7: Listed Kenyan and Ugandan Banks Base = UGX16.50, SBU s share price on 26 February 2010 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 SBU UGSINDX BOBU DFCU Source: USE, NSE, Bloomberg and Dyer & Blair estimates HIGH LEVEL VALUATION Valuation Methodology The trading multiples approach (i.e. Price to Equity (P/E) and Price to Book (P/B) valuations) is the key methodology we use to value the two banks. As a reasonability check, we also rely on the Price-to-Book/Return on Equity (P/B to RoE) method to assess the validity of the trading multiples value. a) Trading Multiples Valuation The trading multiples method provides an indication of the value that investors would place on BOBU and DFCU, based on values of comparable banks. In carrying out our high level P/E and P/B valuations, we discounted eight of the 11 listed Kenyan and Ugandan banks on account of their size (i.e. market capitalisation in excess of UGX 400bn). While SBU, the Ugandan subsidiary of Standard Banking Group, is the only other listed bank, SBU is over 4 times bigger than these two banks, thereby limiting our peer group to only three: DFCU, BOBU and National Bank of Kenya Ltd (NBKL). DFCU and BOBU are generally comparable on a number of valuation metrics: BOBU DFCU Market capitalisation (as at 3 Dec 2012) UGX 250,000m UGX 248,600m Return to investors, as proxied by return on equity (RoE) (as at 31 Dec 2011) 26.44% 26.90% Book value (as at 31 Dec 2011) UGX 104,636.89m UGX 114,399m Source: USE, NSE, BOBU and DFCU 2011 Financial Statements and Dyer & Blair estimates 3
At a market capitalisation equivalent to UGX 149,378 on 3 December 2012, NBKL is the only listed Kenyan bank that is relatively comparable to both BOBU and DFCU. The peer groups analysed in undertaking valuation of the two banks are therefore as follows: - BOBU: DFCU and NBK - DFCU: BOBU and NBK Table 8: Comparable Kenyan and Ugandan Banks (As at 3 Dec 2012) Market Cap (UGX Name Ticker m) P/E:2011C P/B:2011C RoE:2011C Dvd Yld:2011C Bank of Baroda Uganda BOBU 250,000.00 9.04x 2.39x 26.4% 1.7% Development Finance Company Ltd DFCU 248,600.00 8.08x 2.17x 26.9% 3.7% National Bank of Kenya Ltd NBKL 149,378.46 3.40x 0.48x 14.3% 0.0% Stanbic Bank Uganda Ltd SBU 1,023,770.00 8.41x 3.47x 41.3% 25.7% Average_BOBU Comparables Average_BOBU Comparables 5.74x 1.33x 20.6% 1.9% Source: USE, NSE, BOBU and DFCU 2011 Financial Statements and Dyer & Blair estimates Factoring in a 15% illiquidity discount, on account of both banks tightly held strategic ownership and the USE s muted liquidity, our valuation yields target prices (TPs) of UGX 126.54 and UGX 608.09 for BOBU and DFCU, respectively, implying downside potential from the current share prices. Table 9: Implied Target Price Valuation Summary BOBU DFCU 2011 P/E based fair value (UGX) 134.91 654.22 2011 P/B based fair value (UGX) 118.17 561.96 Target price (UGX) 126.54 608.09 Current share price (UGX) 250.00 1,000.00 Potential downside to current share price -49.38% -39.19% Source: Dyer & Blair estimates Table 10: Trading Multiples Valuation P/E Valuation BOBU DFCU 2011 net income (UGX m) 27,661.67 30,774.00 Average 2011 P/E multiple for comparables 5.74x 6.22x Illiquidity discount 0.15 0.15 Implied equity value (UGX m) 134,911.24 162,640.28 Total no. of issued shares (m) 1,000.00 248.60 Equity fair value per share (UGX) 134.91 654.22 Current share price (UGX) 250.00 1,000.00 Potential -46.04% -34.58% P/B Valuation BOBU DFCU 2011 book value 104,636.89 114,399.00 Average 2011 P/B multiple for comparables 1.33x 1.44x Illiquidity discount 0.15 0.15 Implied equity value (UGX m) 118,170.15 139,702.44 Total no. of issued shares (m) 1,000.00 248.60 Equity fair value per share (UGX) 118.17 561.96 Current share price (UGX) 250.00 1,000.00 Potential -52.73% -43.80% Source: Dyer & Blair estimates 4
b) P/B to RoE regression The P/B to RoE regression analysis is used exclusively for banks valuations to establish whether bank shares are fairly priced based on their book values. This method entails the regression of the RoE against the P/B for selected banking peer companies. We maintain the same peer groups as above in analysing the two banks. Table 11: P/BV to RoE Regression Analysis 3.00x y = 14.407x - 1.5637 2011 P/BV 2.00x DFCU BOBU 1.00x NBKL 0.00x 10.0% 15.0% 20.0% 25.0% 30.0% 2011 RoE (%) Source: Dyer & Blair estimates DFCU is placed above the regression line implying that this share is currently overvalued for its level of RoE. While the regression analysis thereby validates DFCU s valuation as implied by the trading multiples methodology, the marginal upside potential implied by BOBU s P/BV to RoE analysis can be overruled on account of the findings of both the P/E and P/B valuation methods that BOBU is currently also overvalued. 5
APPENDIX Table 12: BOBU s Summarised Financials in UGXm (Year ended 31 December) Income Statement 4-yr CAGR Interest income 25,182 29,798 37,220 44,872 65,121 26.81% yoy 18.3% 24.9% 20.6% 45.1% Interest expense (8,369) (9,778) (13,806) (15,644) (22,697) 28.33% yoy 16.8% 41.2% 13.3% 45.1% Net interest income 16,813 20,021 23,414 29,228 42,424 26.03% yoy 19.1% 16.9% 24.8% 45.1% Non interest income 5,452 7,193 7,352 9,827 11,357 20.14% yoy 31.9% 2.2% 33.7% 15.6% Total Operating income 22,265 27,213 30,766 39,055 53,780 24.67% yoy 22.2% 13.1% 26.9% 37.7% Non interest expenses (8,404) (9,444) (10,393) (12,680) (15,006) 15.60% yoy 12.4% 10.0% 22.0% 18.3% Profit After Tax 10,802 13,474 16,701 21,251 27,662 26.50% yoy 24.7% 23.9% 27.2% 30.2% Balance Sheet 4-yr CAGR Assets Cash and balances with BoU 19,503 18,299 35,540 36,663 30,687 12.00% yoy -6.2% 94.2% 3.2% -16.3% Total interest bearing assets 209,441 263,280 331,561 443,386 508,853 24.85% yoy 25.7% 25.9% 33.7% 14.8% Loans and advances to customers 86,023 112,715 150,063 226,324 293,241 35.88% yoy 31.0% 33.1% 50.8% 29.6% Total assets 242,167 294,862 386,545 496,662 556,880 23.14% Total equity and liabilities Customers' deposits 173,478 214,132 271,702 339,559 404,726 23.59% yoy 23.4% 26.9% 25.0% 19.2% Total liabilities 196,638 238,750 316,082 411,393 452,243 23.15% Shareholders' Equity 45,529 56,112 70,463 85,269 104,637 23.13% Key Ratios Cost to income ratio -54.8% -52.0% -54.3% -51.8% -49.3% Net interest margin (NIM)* 8.0% 8.5% 7.9% 7.5% 8.9% * NIM = Net interest income / Average interest bearing assets Source: BOBU Annual Reports and Dyer & Blair estimates 6
Table 13: DFCU s Summarised Financials in UGXm (Year ended 31 December) Income Statement 4-yr CAGR Interest income 51,865 64,108 78,828 88,541 118,533 22.95% yoy 23.6% 23.0% 12.3% 33.9% Interest expense (20,072) (19,118) (26,890) (28,266) (37,863) 17.19% yoy -4.8% 40.7% 5.1% 34.0% Net interest income 31,793 44,990 51,938 60,275 80,670 26.21% yoy 41.5% 15.4% 16.1% 33.8% Non interest income 12,283 10,781 11,049 13,614 15,767 6.44% yoy -12.2% 2.5% 23.2% 15.8% Total Operating income 44,076 55,771 62,987 73,889 96,437 21.62% yoy 26.5% 12.9% 17.3% 30.5% Non interest expenses (32,152) (32,091) (35,451) (41,916) (50,382) 11.88% yoy -0.2% 10.5% 18.2% 20.2% Profit After Tax 8,520 13,135 19,280 23,056 30,774 37.86% yoy 54.2% 46.8% 19.6% 33.5% Balance Sheet 4-yr CAGR Assets Cash and balances with BoU 17,582 29,663 63,948 67,848 83,648 47.69% yoy 68.7% 115.6% 6.1% 23.3% Total interest bearing assets 347,777 445,656 524,922 698,980 821,603 23.98% yoy 28.1% 17.8% 33.2% 17.5% Loans and advances to customers 229,548 282,773 326,299 397,338 496,426 21.27% yoy 23.2% 15.4% 21.8% 24.9% Total assets 380,130 496,042 611,821 803,060 953,681 25.85% Total equity and liabilities Customers' deposits 162,811 254,710 346,638 480,731 525,391 34.03% yoy 56.4% 36.1% 38.7% 9.3% Total liabilities 327,716 433,416 535,250 712,458 839,282 26.50% Shareholders' Equity 52,413 62,626 76,571 90,602 114,399 21.55% Key Ratios Cost to income ratio -81.4% -68.4% -69.4% -68.7% -65.7% Net interest margin (NIM)* 9.1% 11.3% 10.7% 9.8% 10.6% * NIM = Net interest income / Average interest bearing assets Source: DFCU Annual Reports and Dyer & Blair estimates Table 14: Uganda Listed Banks 2007 2011 Growth Profile 2007-2011 CAGR Interest income 26.81% 22.95% 26.01% Interest expense 28.33% 17.19% 42.50% Net interest income 26.03% 26.21% 23.68% Non interest income 20.14% 6.44% 14.38% Total Operating income 24.67% 21.62% 20.07% Non interest expenses 15.60% 11.88% 14.37% Profit After Tax 26.50% 37.86% 23.09% Loans and advances to customers 35.88% 21.27% 33.83% Total assets 23.14% 25.85% 19.70% Customers' deposits 23.59% 34.03% 15.40% Source: BOBU, DFCU & SBU Annual Reports and Dyer & Blair estimates 7