Opportunities in Africa Financial Services

Opportunities in Africa Financial Services 7 May 2013 Ronak Gadhia analyst, Exotix Limited Contact: ronak.gadhia@exotix.co.uk Tel: +44 (0)20 7725 1080

Agenda 1 2 3 Sub-Saharan Africa: the fundamentals Opportunities in the Financial Sector The BIG EIGHT banks 4 The NEXT DOZEN banks 5 Investment summary 2

Sub-Saharan Africa: the fundamentals Strong GDP growth: one of the fastest growing regions over the last 10 years 10.0 8.0 6.0 4.0 2.0 - World Advanced economies Central and Eastern Europe Developing Asia Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa Source: IMF WEO April 2013 data Growth expected to remain strong World Central and eastern Europe Latin America and the Caribbean Sub-Saharan Africa 10 Advanced economies Developing Asia Middle East and North Africa 8 6 4 2 0 2011 2012 2013 2014 2015 2016 2017 2018 Source: IMF WEO April 2013 data 3

Sub-Saharan Africa: the fundamentals SSA s share of world GDP has almost doubled over the past 10 years ASEAN-5, Central and 1.6 eastern Europe, 1.9 Middle East and North Africa, 2.4 ASEAN-5, Central and 2.7 eastern Europe, 2.5 Middle East and North Africa, 4.1 Latin America and the Caribbean, 5.4 Sub- Saharan Africa, 1.0 Developing Asia, 8.0 Latin America and the Caribbean, 8.0 Sub- Saharan Africa, 1.8 Developing Asia, 17.9 Source: IMF WEO October 2012 data SSA forecast to have 24 of 50 fastest growing economies in the world between 2013 and 2047 Country 2013 Real GDP growth South Sudan 69.6 Libya 16.7 Mongolia 15.7 Iraq 14.7 Bhutan 13.5 Paraguay 11.0 Democratic Republic of Timor-Leste 10.0 The Gambia 9.7 Kyrgyz Republic 8.5 Mozambique 8.4 Source: IMF WEO October 2012 data 4

Sub-Saharan Africa: the fundamentals Demographic dividend: large population within the right age group SSA, 12.6 Rest of the world, 87.4 Population aged 15-64, 46.0 Population aged 15-64, 54.0 Source: World Bank 2011 data Population has grown at 2.5% per annum over last 10 years More than half the population within the working age group Labour force participation rate of 70% Source: World Bank 2011 data 5

Sub-Saharan Africa: the fundamentals 18 16 Inflation is generally under control Inflation (%) 14 12 10 8 6 4 2 0 Sub Sahara Africa Emerging markets and developing countries 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f Source: IMF WEO April 2013. 6

Sub-Saharan Africa: the fundamentals as monetary policy is becoming more sophisticated Country Operating framework Supporting material Botswana M/t inflation objective (since 2008) Annual monetary policy statements, MPC meetings and press release. m-t inflation objective (3-6%). Ghana Inflation targeting (formalised May 2007) MPC meetings with press release and various supporting papers. inflation target is below 10%. Kenya Price stability Half yearly monetary policy statements, MPC meetings and press release. m/t inflation target is 5%. Mauritius Dual pillar framework (adopted Dec 2006) Monetary policy statements, MPC meetings and press release, minutes and votes published since Dec 2011. Nigeria Multiple objectives (new framework in 2006) MPC meetings with press release, minutes and voting with personal statements. Focus on single digit inflation. Uganda Price stability Inflation-targeting "lite" framework in July 2011. Adopted a policy interest rate. MPC meetings, press release and monthly monetary policy reports. Zambia Price stability Half yearly monetary policy statements. Monthly press statement. Adopted a policy interest rate in March 2012, instead of money growth targetting, and targets for inflation. Source: Exotix, national central banks 7

Eritrea Cape Verde Seychelles The Gambia Zimbabwe Guinea-Bissau Ghana Malawi Mauritius Côte d'ivoire Kenya Togo Mozambique Senegal Sierra Leone Guinea Comoros South Africa Lesotho Tanzania Madagascar Uganda Chad Benin Mali Burundi Niger Angola Liberia Rwanda Burkina Faso Zambia Namibia Gabon Ethiopia Republic of Congo Swaziland Nigeria Botswana Cameroon Equatorial Guinea Sub-Saharan Africa: the fundamentals Debt burdens have also improved 140 Public debt / GDP ratio (%) 120 100 80 60 40 20 0 Source: IMF WEO April 2013 database 8

Agenda 1 2 3 Sub-Saharan Africa: the fundamentals Opportunities in the Financial Sector The BIG EIGHT banks 4 The NEXT DOZEN banks 5 Investment summary 9

Sub-Saharan Africa: Financial Sector remains under-penetrated Account at a formal financial institution (% age 15+) Sudan Burundi Congo, Rep. Cameroon Sierra Leone Tanzania Lesotho Uganda Zambia Nigeria Botswana Somalia Zimbabwe Mozambique Kenya South Africa Mauritius 6.9 7.2 9.0 14.8 15.3 17.3 18.5 20.5 21.4 29.7 30.3 31.0 39.7 39.9 42.3 53.6 80.1-20.0 40.0 60.0 80.0 100.0 Source: World Bank 2011 data Domestic credit to private sector (% of GDP) Sierra Zambia Sudan Cameroon Niger Lesotho Uganda Tanzania Burundi Botswana Mozambiq Nigeria Kenya Zimbabwe Mauritius South Africa 10.4 11.5 11.6 11.9 12.6 13.6 15.8 16.2 23.0 23.4 25.8 29.4 33.8 44.5 87.8 145.5-50.0 100.0 150.0 Increase in penetration rate driven by: Banks seeking alternative opportunities as competition in corporate market intensifies Declining yields on government bond portfolios Conducive Central Bank policies, e.g. agency banking regulations Increasing literacy levels Technological adoption, e.g. mobile banking 10

What is the opportunity? BRVM region Nominal GDP (US$bn) 0.0 Population (million) 0.0 Rel GDP growth (%) 3-7% Inflation (%, eop 2-12% Stock Market Capitalisation USD, bn 7.8 Financials market cap % total market cap 12 International Bonds USD 2,332m, 2.5% 12/31/2032, YTM 6.6%, USD500m, 8.75% 05/13/2021, YTM 5.5% Ghana Nominal GDP (US$ billion) 42.6 Population (million) 25.6 Real GDP growth (%) 7.8 Inflation (%, eop) 9.5 Stock Market Capitalisation USD, bn 4.5 Financials market cap % total market cap 61 International Bonds USD750m, 8.5% 10/04/2017, YTM 4.6% Nigeria Nominal GDP (US$ billion) 293.1 Population (million) 169.3 Real GDP growth (%) 6.7 Inflation (%, eop) 9.5 Stock Market Capitalisation USD, bn 68.7 Financials market cap % total market cap 44.7 International Bonds USD500m, 6.75% 01/28/2021, YTM 4.0% Uganda Nominal GDP (US$ billion) 21.7 Population (million) 36.8 Real GDP growth (%) 5.7 Inflation (%, eop) 5 Stock Market Capitalisation USD, bn 1.2 Financials market cap % total market cap 63 International Bonds - Kenya Nominal GDP (US$ billion) 49.8 Population (million) 43.3 Real GDP growth (%) 5.6 Inflation (%, eop) 7 Stock Market Capitalisation USD, bn 19.4 Financials market cap % total market cap 46 International Bonds Expected 2H13 Tanzania Nominal GDP (US$ billion) 30.7 Population (million) 43.9 Real GDP growth (%) 6.8 Inflation (%, eop) 9.6 Stock Market Capitalisation USD, bn 2.0 Financials market cap % total market cap 33 International Bonds USD600m, 6.4499% 03/08/2020, ytm 5.3% Mauritius Nominal GDP (US$ billion) 12.4 Population (million) 1.3 Real GDP growth (%) 3.7 Inflation (%, eop) 5.1 Stock Market Capitalisation USD, bn 6.3 Financials market cap % total market cap 55 International Bonds - Source: World Bank 2011 data Botswana 2013 Nominal GDP (US$ billion) 18.2 Population (million) 1.9 Real GDP growth (%) 4.1 Inflation (%, eop) 6.1 Stock Market Capitalisation USD, bn 5.0 Financials market cap % total market cap 74 International Bonds - Zimbabwe Nominal GDP (US$ billion) 6.0 Population (million) 12.6 Real GDP growth (%) 12.3 Inflation (%, eop) 4.3 Stock Market Capitalisation USD, bn 4.8 Financials market cap % total market cap International Bonds - Zambia Nominal GDP (US$ billion) 23.1 Population (million) 14.3 Real GDP growth (%) 8.2 Inflation (%, eop) 6.1 Stock Market Capitalisation USD, bn 2.8 Financials market cap % total market cap 26 International Bonds USD750m, 5.375% 09/20/2022, YTM 5.3% 11

Where is the opportunity? Public equity investors: Relatively lower stock market capitalisation to GDP ratio relative to developed countries Increasing number and size of IPOs (e.g. Dangote secondary lisitng, I&M Banks, Nakumatt, Umeme cross border listing) Fixed income investors: Increasing number of countries planning to issue Euro bonds (Kenya, Rwanda, Uganda, Angola, Tanzania) Increasing sovereign euro bond issuance will lead to increase in corporate bond issuance (e.g. Nigerian banks) Compelling yields on local currency bonds (e.g. Nigeria, Ghana) Private equity investors: Lack of long-term funding from local banks Increasing sophistication of businesses requiring better expertise 12

Agenda 1 2 3 Sub-Saharan Africa: the fundamentals Opportunities in the Financial Sector The BIG EIGHT banks 4 The NEXT DOZEN banks 5 Investment summary 13

Where to invest? The BIG EIGHT Name Ticker Market Cap (USDm) Trading volume (USD 000) FY12 P/E (x) FY12 P/B (x) FY12 ROE (%) Exotix rec. Investment case Kenya Commercial Bank Bank Access Bank First Bank Holdings^ Guaranty Trust UBA Holdings^ Zenith Mauritius Commercial KNCB KN EQBNK KN ACCESS NL FBNH NL GUARANTY NL UBA NL equity ZENITHBA NL MCB MP 1,474 1,020 10.0 2.3 25.0 BUY Strong East Africa franchise Legacy inefficiencies being resolved 1,505 514 10.4 2.9 31.3 BUY Rapid increase in market share and earnings Strong retail focus 1,246 1,905 5.1 0.8 19.2 BUY Graduating into a Tier 1 bank, Trading at discount relative to other Tier 1 banks 3,921 2,911 13.6^ 1.7^ 13.0^ HOLD Biggest bank in Nigeria Strong and diversified earnings growth 4,337 3,193 7.9^ 2.4^ 33.8^ SELL Consistently the most profitable bank in Nigeria Good corporate governance and management 1,470 1,545-1.4-6.1 BUY Improving operating efficiency and asset quality Contribution from Africa subsidiaries increasing 3,872 3,011 6.1 1.3 23.4 SELL Consistently good asset quality Improving operating efficiency Good management 1,523 498 10.9 1.7 15.4 BUY Dominant market share Growing international franchise Good management Source: Company annual reports, Exotix estimates, ^Based on 2011 earnings as 2012 figures not released 14

Agenda 1 2 3 Sub-Saharan Africa: the fundamentals Opportunities in the Financial Sector The BIG EIGHT banks 4 The NEXT DOZEN banks 5 Investment summary 15

Where to invest?...the NEXT DOZEN Name Ticker Market Cap (USDm) Trading volume (USD 000) FY12 P/E (x) FY12 P/B (x) FY12 ROE (%) Investment case Co-op Bank Diamond Trust Skye Diamond First City Monument COOP KN DTKL KN SKYENL DIAMONDB NL FCMB NL 840 152 7.7 2.0 30.1 Strong retail franchise; leading bank for cooperative and savings societies Kenya Improving operating efficiency 369 107 8.3 1.8 25.8 Lucrative niche model (Aga Khan Community) Growing East Africa franchise 484 536 6.3 0.7 11.8 Recovering profitability after banking crisis Trading at P/B < 1 565 715 3.2 0.7 22.7 Strong retail franchise Trading at P/B < 1 despite ROE of 20%+ 530 362 6.0 0.6 11.3^ Synergy benefits from acquiring Finbank; strong growth in non-interest income, higher leverage Recovering profitability after banking crisis First National Bank Botswana FNBB 1,095 29 15.0 5.6 42.4 Leading market share of loans/ deposits High cost efficiency and good quality assets Letshego State Bank Mauritius Zanaco Stanbic Uganda National Microfinance Bank Ghana Commercial Bank LETSHEGO SBM MP ZANACO ZL SBU UG NMB TZ GCB GN 625 287 9.3 2.3 27.7 Highest in class return on assets Significant scope for increasing balance sheet leverage 1,018 216 5.4 1.3 15.4 Improving profitability Trading at a discount relative to MCB and historical levels 421 18 14.4 3.2 24.1 Improving legacy issues; cost efficiency and asset quality improved significantly after Rabobank investment in 2007 497 20 6.5 2.1 37.6 Leading corporate and retail franchise in Uganda High NIM and efficient cost structure 435 30 6.9 1.9 30.4 Leading retail franchise in Tanzania High NIM and good asset quality 594 46 8.0 3.9 60.3 Impressive turnaround in profitability after restructuring of loans by Government Significant scope for loan growth Source: Company annual reports, Exotix estimates 16

The NEXT DOZEN why they should not be ignored NEXT 12 have similar profitability and outperformed the BIG 8 Average 2012 Return on (%) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 - Simple average returns NEXT 12 Big 8 3.0 2.5 2.0 1.5 1.0 0.5-01-Jan-09 01-Jan-10 01-Jan-11 01-Jan-12 01-Jan-13 Source: Company annual reports, Bloomberg data, Exotix estimates * FCMB estimate base on 3Q12 earnings as bank is yet to announce FY12 results NEXT DOZEN under-researched and under-invested relative to the BIG EIGHT due to: Smaller market capitalisation and less liquidity Belief that lower market share will translate to lower profitability Listed in un-benchmarked markets (not in the MSCI) and therefore less known Under-appreciated business models 17

The NEXT DOZEN the fundamentals Strong NIMs 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - Source: Company annual reports, Bloomberg data, Exotix estimates * FCMB estimate base on 3Q12 earnings as bank is yet to announce FY12 results NEXT DOZEN able to earn high NIMs due to: Dominant market share, e.g. Zanaco, Stanbic Uganda, Ghana Commercial Bank Profitable niche model, e.g. Co-op Bank, Diamond Trust Kenya, Diamond Bank Nigeria, National Microfinance Bank Tanzania, Letshego 18

The NEXT DOZEN the fundamentals Relatively higher C/I ratio, potential for efficiency improvement 70.0 60.0 50.0 40.0 30.0 20.0 10.0 - Source: Company annual reports, Exotix estimates Letshego continues to maintain best in class cost efficiency Potential for improvement in cost to income ratios at GCB, Zanaco as banks shed their legacy inefficiencies Nigerian banks C/I should gradually improve as recovery from banking crisis continues Kenyan banks C/I should also improve as banks adopt alternative banking channels State Bank of Mauritius C/I ratio better than MCB s 19

The NEXT DOZEN the fundamentals Cost of risk moderately higher although asset quality not a significant concern for most of them FY12 Cost of risk (%) FY12 NPL Ratio (%) 9.0 12.0 8.0 7.0 10.0 6.0 8.0 5.0 6.0 4.0 3.0 4.0 2.0 2.0 1.0 - - Source: Company annual reports, Bloomberg data, Exotix estimates * FCMB estimate base on 3Q12 earnings as bank is yet to announce FY12 results, ** FY10 NPL ratio Letshego writes-off all its non-performing loans Nigerian banks NPL ratio and cost of risk gradually improving after the crisis We expect GCB, Zanaco cost of risk to improve as legacy issues are resolved State Bank of Mauritius has better asset quality than MCB Co-op Bank, Diamond Trust Kenya s asset quality better than Kenya sector average 20

The NEXT DOZEN the fundamentals Generally more aggressive balance sheets FY12 Loan to deposit ratio (%) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 FY12 loans to assets ratio(%) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 Source: Company annual reports, Bloomberg data, Exotix estimates * FCMB estimate base on 3Q12 earnings as bank is yet to announce FY12 results High yields on government securities crowd out private sector loans Crowding out effect less evident amongst NEXT DOZEN relative to BIG 8 GCB s low loan to deposit ratio attributable to loan restructurings in 2011 Letshego has the most aggressive balance sheet 21

The NEXT DOZEN the fundamentals Banks mostly funded by deposits and Tier 1 equity 85.0 FY12 deposits to total funding (%) FY12 equity to assets ratio (%) 80.0 80.0 75.0 70.0 65.0 60.0 40.0 20.0 60.0 - Source: Company annual reports, Bloomberg data, Exotix estimates * FCMB estimate based on 3Q12 earnings as bank is yet to announce FY12 results Funding profile of NEXT DOZEN similar to BIG 8; short-term deposits are key funding source Letshego is the exception as primary funding source is equity Average capital adequacy ratio of 17.9% We believe banks will gradually raise Tier 2 capital as maturity of assets increases 22

Agenda 1 2 3 Sub-Saharan Africa: the fundamentals Opportunities in the Financial Sector The BIG EIGHT banks 4 The NEXT DOZEN banks 5 Investment summary 23

Valuation summary Bank s FY12 ROE (Y-axis) vs. FY12 P/B (x-axis) 70.0 60.0 GCB 50.0 40.0 Stanbic UG FNBB 30.0 20.0 Diamond Access NMFB GTB Co-op UBA* Letshego DTK KCB Zenith FBN* SBM MCB Zanaco 10.0 Skye FCMB* - - 1.0 2.0 3.0 4.0 5.0 6.0 Source: Company annual reports, Bloomberg data, Exotix estimates * FCMB, UBA and FBN estimates based on 3Q12 earnings as yet to announce FY12 results Based on the valuation metrics above, our top picks in the segment are: Some top-tier Nigerian banks look appealing again after recent sell-off (Access Bank) Improving profitability could result in the re-rating of Nigerian Tier 2 banks (Diamond, FCMB) Letshego, NMFB, Co-op looking attractive relative to peers SBM s discount relative to MCB unjustified 24

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For more detailed information please contact: Ronak Gadhia analyst Exotix Limited 54 Baker Street London W1U 7BU Tel: +44-20-7725-1080