Reading the Kenya Airways Tea Leaves

Today is the last day of the Kenya Airways  rights issue in which they are seeking to raise Kshs 20 billion ($240 million) from shareholders.  The 35 year old company is  one of the most talked about companies in Kenya mainly as as a model of privatization gone right. 

The airline which dubs itself The Pride of Africa, has set out to branch out across Africa and cover every African capital, but has also had to fight a rear guard action from a handful of local airlines and Gulf carrier.

The information memorandum is about 236 pages, but with most of the data in it one year old, relating for the financial year that ended in March 2011. Also, there have been no stockbroker reports about this rights issue.
 

Shareholders: - The company 73,612 shareholders (old data)
-  The authorized share capital of the airline  is Kshs 10 billion (102) comprising 2  billion shares with a  par value of Kshs 5. 461 million have been issued and in 2011 shareholders had a return on equity of 15%
- Approval has been obtained from the stock exchanges in Tanzania (page 130) and Uganda  (page 127) where KQ” share are cross listed
- The directors’ shareholding is listed (98) and they don’t own much in the airline while the CEO does not own any shares in the airline (odd as the marketing camping exhorts Kenyans to invest in the pride of Africa) and this does not bind the CEO to improve the share performance of the airline.
- For any KQ shareholder who does not participate in their shareholding will mean a substantial dilution in their shareholding (93) and this has been enumerate in a court case where a shareholder sued the airline to stop the rights issue
 

Rights issue: - Proceeds of the rights issue will be used to make pre-delivery payments (28) for aircraft  between June 2012 and March 2013  and pay down some unsecured loans
- The success level of the rights issue is to raise Kshs 14.4 billion ($173 million) (26)  and KQ will lower its risk profile (and maybe borrowing costs) by having a higher equity (23)
-  Kenyans have to own at least 50% of the shares and the transaction advisors may refuse transfer of shares to foreigners that will violate that (p37)
- Shareholders are being offered 16 new shares for every 5 held. They were priced at a discount when the offer was announced, but the market price is now the same as the rights price was at a discount, but now trades (Kshs 14.9) at  about the offer price
- The  rights issue will cost Kshs 620 million ($7.4 million) (p38) -comprising commissions of Kshs 310 million, advertising 66M , CMA Kenya fees 51M, underwriting (up to 47M), and lead transaction advisor 15M  ($180,000)
-  The issue is underwritten for only up to Kshs 420 million (93) and they are aiming to raise Kshs 20 billion
 

Rump allotment: Qualified institutional investors (33) will be invited to buy shares at the discounted price concurrent with the rights issue , and these social security funds of Rwanda, Uganda, Tanzania, Burundi, pension & insurance companies in east Africa, financial forms in south Africa and other foreign institutional investors(230). Yesterday’s paper had a story that the IFC will own 7.4% of KQ after the rights issue.
 

Performance: - Despite revenue increasing from Kshs 41 billion to Kshs 55 billion  ($662 million) in the first six months of their 2012 year, operating profit for the 6 months was Kshs as 1 billion ($12 million), down from 2.4 billion  the year before. This was attributed to increased employee costs and new routes and the airline issued a profit warning in January 2012 profit wanting in January 2012 (68) citing the rising fuel costs which will impact full year profits for 2012
- For the full year to march 2011 revenue of Kshs 85 billion( comprising passenger 75, freight 6.5, handing 1.4)  and had direct costs of Kshs 54 billion (comprising fuel of 25 billion, landing 8 billion, maintenance 7, sales commission 2.7), fleet ownership of 9 billion, 13 billion on administration (11 billion on staff)
- Of the revenue, 54% is from African routes, 27% Europe, and 19% Mid-East & Asia (68)
- Their hedging policy is to hedge 80% of their fuel requirements for the next one year hedged and 50% for following months  (70)
-  Their debt equity ratio in 2010 was 111% (borrowings of Kshs 20 billion against equity of Kshs 17 billion) and this improved to 88% in 2011.
-  Deferred income - includes compensation from manufacturer (204 -likely Boeing)  of Kshs 2.5 billion and they also have deferred tax liabilities of Kshs 8 billion (203)
 

Banking: KQ has borrowing of Kshs 25 billion ($301 million) (201)  from Private Export Funding (PEFCO), Barclays and ABN Amro at rates of 4-6%  over 12 years and lien of credit for Kshs 20 billion (202) . The loans are route through Simba Finance, Swara aircraft Finance, Chui aircraft finance, and  Kifaru aircraft who are registered as owners of the aircraft  (81) (these are not subsidiaries) and will transfer their titles once the loans (secured through Eximbank) are repaid (201). KQ also drew new loan facilities in 2011 from standard bank, KCB and Barclays to pay for pre-delivery payments (87) . KQ also earns rates of 4 -6% on their deposits (198)
 

Staff: - KQ has 4,355 staff who earned Kshs 11 billion ($132 million) in 2011 (numbers in December are 4,672 (61)
-  KLM appoints the CEO, finance director and one director for each 10% they own (106)
- Directors and key management were paid 223 million in 2011, with directors earning 78 million of that (175 )
- KQ is recruiting expatriate pilots to meet a shortage (65)
- Have an Ab Initio pilot training program (pilots who had no previous flight experience)  that now has 87 pilots pilots getting training in south Africa (61). KQ has an arrangement with Co-Op bank in which these students can borrow and pay to for their expensive training of pilots and they have drawn have drawn Kshs 500 million ($6 million) (112)
- KQ will hire a director for a new fleet delivery department and separate that from the technical department (61)
 

Fleet: - KQ operates 33 aircraft, 20 under lease (108) and has 7 spare engines
- Have Kshs 20 billion worth of leases (213)  and commitments to buy about Kshs 100 billion ($1.2 billion) worth of aircraft (212)
- Paid deposits of Kshs 2.1 billion to Boeing (192) and Kshs 631 million for leases of Boeing and Embraer planes & engines
- Have signed purchase agreements for 10 Embraer 190, three 777-300ER,  and 9 Boeing 787 Dreamliner’s with options for 4 more (111)
- Future fleet will comprise Embraers (for domestic/short routes), Boeing 737 (NG) next generation (for medium/Africa routs), and Boeing 787/777 for inter-continental routes) . They also have board approval to acquire 12 freighters (53)
- Sold 2 Saab 340 aircraft to Alandia as well as land in Nairobi and Lusaka, (108)
 

Customers & Passengers: - Flew 3.1 million passengers in 2011 and 1.8 million in the first half of 2012
- All KQ ground staff participated in customer service training at the end of 2011  (65)
- The airline seeks to maintain & improve on on on-time performance but this has been hampered by airport congestion, traffic jams unavailability of equipment and a lack of captains (65)
- KQ plans to re-design their network to decongest JKIA by having more mid-day flight blocks, in addition to the current morning  & evening ones (58)
- Passenger meals are by KLM catering and NAS (111)
 

Risks: - Risks to the company include adverse publicity from terror alerts or attacks ,  aircraft crashes (91)  fuel prices (90) and the slow pace of Jomo Kenyatta Airport (JKIA) expansion (90) which impacts on time performance. They need the airport authorities to complete terminal 4 which will be exclusive for KQ with 7 parking bays nose in , and also construct multi-level terminals ,  have a separate domestic terminal, and (later) construct a new (greenfield) airport and second runway.

On-going construction at Jomo Kenyatta International Airport, Nairobi

But they also note in risk <i>mitigation</i> that:
 

Support from the Government of Kenya for the airline is another important positive factor, which allows the airline to compete successfully. Lenders’ and investors’ experiences with flag carriers and airlines in general across the world create an expectation that carriers tend to find some way to keep operating in difficult circumstances, and this usually involves the state in some form or another (63)
 

Litigation: KQ has suffered two fatal crashes and there are  still cases and investigations that stems from those in two in Cameroon (2007)  and ivory coast (2000) . there are minor passenger and staff cases, but also a long running claim by Kenya revenue authority for indirect taxes (page 107)
 

Competition: - KQ is largest in Africa with 42 African destinations compared to Ethiopian 40, south Africa (22) (p47)
- Comparing airline traffic (62) between Africa to the world, top is South Africa, Egypt air, Air France, and KQ is 8th , just behind Ethiopian and Emirates while for traffic between Africa and Asia, KQ  is 6th  behind  Emirates, Ethiopian, Qatar, Egypt air) .
- KQ enjoys some advantages by having a young aircraft fleet, while other countries don’t have working airlines. It competes in the region with Ethiopian & South Africa, but these airlines have distant hubs in Johannesburg and Addis, while gulf carriers pull traffic away from the region with their long haul aircraft and cheap tickets (64)
- KLM owns 26% of KQ and KQ owns 41.23% of Precision Air in Tanzania (72) after their own rights issue which reduced KQ’s shareholding from 49%.

2011 Kenya Bank Rankings Final Word

Local banks rules, but KCB holds off Equity

The top local Kenyan banks as at December 2011, ranked by assets are:

6 (6 last year) CFC Stanbic Bank: Steady assets of Kshs 140 billion ($1.7 billion) and profit of Kshs 3.1 billion ($38 million)

5 (4) Standard Chartered: Assets up 15% to Kshs 164 billion , and profits went up 8% to Kshs 8.25 billion. Deposits grew 22%, and loans went up 48% as they halved their government securities to Kshs24 billion. (Barclays & KCB also reduced their government securities positions compared to December 2010)

4 (2) Barclays: Drop from 4 to 2, but still have the best return on assets at 7.18% on a slightly smaller asset base of Kshs 167 billion. Profits went up 11% to Kshs 12.01 billion, and loans went up 14%, but there was no change in deposits.

3 (3) Cooperative: Was leap-frogged by Equity Bank, but gained a place thanks to shrinking Barclays. Steady but slow growth as assets grew by 9% to Kshs 167 billion, deposits grew by 15% and profits by 11% to Kshs. 6.16 billion as the bank still seeks to move beyond the cooperative sector.

2 (5) Equity Bank: Leap from No. 5 to 2 after reporting assets of Kshs. 177 billion and profits of Kshs. 12.1 billion, signifying growth of about 32%. for each. The years of annual 100% growth are over but as John Staley the Director of Mobile Banking and Payment Innovations, told attendees at HP leadership event dubbed Staying Ahead of the Pack, the bank has grown ten-fold every five years leveraging on technology and always with the mission to provide affordable financial services which they now plan to take beyond Uganda and Sudan.

No.1 (last year No. 1) KCB assets of 282 billion ($3.45 billion) and profit of Kshs. 14 billion ($172 million) KCB remains at number and matched Equity, growing deposits by 29%, loans 31%, and profits by 22%.

Educating Taxpayers

Do you have questions about taxes? How to calculate Value Added (VAT), Withholding, or Pay As You Earn(PAYE) or other taxes? When to assess them, and where to pay them? It's not just large corporations who are unsure on how much tax to pay, but such questions also apply to small business owners & ordinary citizens who are all taxpayers.

The Kenya Revenue Authority (KRA) has seminars and sessions for taxpayers almost every week. There are two kinds of these, one for their online system held on most Thursday's in all the major towns (Nakuru, Eldoret, Naivasha, Meru, Kericho, Malindi, Machakos, Embu, Nyeri, Kisii, Thika, Kakamega, Kisumu, Mombasa, Nairobi) and others for new taxpayers held in the same towns as well as Bungoma, Lamu, and Voi with emphasis on introduction to VAT and income tax rights and obligations.

The classes all have Q&A sessions in which many questions are asked. This is very useful as it's better to ask them there, without consequences, than ask them when you have a tax inspector visit your business premises!

Right now KRA is running dual systems - manual and online with different taxpayers using either method to file various tax returns, monthly, quarterly, or annually. It's their intention to make more online filing mandatory for taxpayers and this will be done in a phased manner.

The goal of this is to have a more efficient tax collection system and because it's more effective to get taxpayers to cooperate than to coerce them. Also getting more people to file their tax returns online from cyber cafes or from their business premises, will result in fewer people having to queue to pay taxes at KRA offices.

Business people who bank with National Bank, Cooperative Bank and to a lesser extent KCB also have some filing advantages as these banks have invested in systems that are compatible with KRA's and so payments made at these banks are automatically reflected as their tax filings.

Top Kenyan banking stories of 2011

Agency Banking took banking to your neighbourhood as kiosks became a bank - pioneered by Equity Bank, and followed by KCB (Mtaani) and Co-Op (Jirani) - mainly enabling cash deposits and withdrawals. Read more.

Cheque Truncation promised so much in new, more secure cheques, that would take a 1-2 days to clear compared to the current one week (four working days). However the launch was put off by a delay in printing of new cheques at several banks, and when the program rolled out a few months later, cheques resembled the old ones, and still cleared at the same old pace.

Fraud: There was increasing fraud reported as a result of faster, easier, banking through real time gross settlements and mobile banking, and there were more tales of thieves being arrested with dozen’s of skimmed ATM cards -
- so watch your statements every month

Mobile Partnerships: Banks surrendered on making customers use their own platforms for mobile banking, and instead opted to partner with Safaricom's M-pesa. In 2011, there were 8 banks that account holders could move money from their bank accounts to M-pesa and back - and these included large banks like Barclays, Co-Op, Equity and KCB. Also electronic banking is now dead as a premium products, and many of the same banks now have these as a free addition to their customers, saving them from the expense of having to print and mail statements to customers.

Super Profits: Did banks profit from the Central Bank's mismanagement of rates leading to weaker exchange rates? The Central Bank Governor said five banks did, but then refused to say who they were. Parliament continued to push and came up with a list, but could not prove the claims that the banks made super profits at the expense of the shilling.

Executive Suites: Management changes at KCB resulted in top managers leaving the bank - and moving to rivals like Family Bank and Jamii Bora where they cut equity based compensation deals based on performance (modeled after the Co-Op one of a few years ago).

Interest Rate Hike: Late in the year, there was an about turn in the monetary policy - to rescue the Kenya shilling that, and this came in the form of cut back in liquidity. From that, banks drastically raised their loan rates e.g. Mortgages at Equity bank went from 14% to 25% and many banks offered new loans at +30%. To stave off defaults, some banks held their existing loan rates steady, but with extensions of loan maturity periods. The Kenya Banker's Association then proposed other measures (PDF) such as limiting repayment rate hikes, not penalizing early payers and (unlikely) asking banks to absorb costs!

Your Bank, Your Neighbour

Agency banking came of age today with launches of agency banking by both KCB (‘KCB Mtaani’ - translation KCB in your neighbourhood) and Co-Op ('Co-op Kwa Jirani' -translation Co-Op in your neighbourhood) which are the largest and third largest banks by assets respectively. They follow in the steps of Equity Bank who have had agency banking for several months

Why Agency Banking? If 3 of the country’s 5 largest banks with the largest branch footprints chose to go agency banking. Agency banking expands the reach of the bank about 100-200 branches to anywhere from 1,000 to 20,000 outlets through the agent model Speaking at an investor briefing last year, Equity Bank CEO James Mwangi spoke of the extra reach would bring for them and which signaled an end to the rapid branch and staff expansion that the bank had been known for.

Equity initially looked like they would partner with Safaricom’s strong M-pesa agent network (22,000 agents) for their banking extension, but that partnership seems to have hit a brick wall) and now the field is open to dukas, bookshops, and grocery stores, kiosks, hardware & phone sales shops, and others established shops especially in remote villages where banks are unlikely to open branches.

The shops must fit the criteria set by Central Bank of Kenya (CBK) for bank agents (more here) - including that they cannot be mutually exclusive. (Not being tied to one bank can be an opportunity for established village business owners to act as agents for several banks)

What can agents do for bank customers?
Co-Op: Cash deposits, cash withdrawals, school fees payments, utility payments, balance enquiry, issuance of mini-statements.
KCB: Deposit taking and withdrawals. In future, balance enquiries, loan repayments and requests for chequebooks & account statements.
Equity Bank: Deposit taking, cash withdrawals, as well as origination of account opening & loan applications.

Kenya Political Party Finance

Like with Kenyan stockbrokers, just over a year ago, political parties have been drawn out of their shells to publish some semblance of financial accounts. The carrot that has drawn them out has been state political funding for parties (by taxpayers), one of whose requirements is regular account disclosures to the public.

Some findings:
- Income is from a variety of sources that range from the state a (NAP-K Kshs 0.6 million ~100%), party founders (National Vision – Kshs 4.2 million ~85%), fees charged to applicants for party posts (Ford-K Kshs 3.2 million ~30%), and contributions by party MP’s (ODM Kshs 20 million and Narc Kenya Kshs 2.2 million = both ~25%)
- Expenses vary across different parties but common to all are spending on workshops and regional /branch promotion expenses

- Campaign Finance: The need to raise money for elections has been cited as a driver behind some of the country’s largest corruptions scandals, but this money is rarely reflected in the accounts of the parties. The June 2010 South Mugirango elections was contested by Safina, PDP, Ford people, Labour party, ODM, Nark Kenya, National Vision, and KANU, and many of these did not claim to spend funds in election campaigns – and of the dozen parties that have released June 2010 numbers, only Safina (at Kshs 3.5 million) and ODM (Kshs 26 M) claim some spend on campaign expenses. ODM also claim Kshs 9.9 M spent on civic education (two months before referendum). Narc-K won two recent by-elections, thanks to their generous but controversial candidates, and its doubtful if what they spent will be measured or accounted for by the party.
- Some parties are shells: NAP-K spent its entire PPP funding of Kshs 0.6 million on among others, website 100k (www.Nap-k.org), 91k on developing party manifesto, 150k on branch opening, leaving Kshs 2,196 in the bank. You could call this a compliant briefcase party in waiting for a candidate looking to use the party to contest future elections.
- Co-operative bank is listed as the main bank for several parties, perhaps because they have a branch a stone’s throw away from parliament, but most parties don’t have much left in the bank as at June 2010.
Summary: It’s a good start, which parties should continue to be required to comply with. Over time the disclosures will improve and hopefully the governance and administration of parties and the election scene on Kenya. Safina is the only party to claim an auditor expense (of Kshs 55,000) for a clean audit.

Also the Sunday Nation has written about party finances.

Kenya Bank Rankings 1968 Edition

From reading a 1968 book Who Controls Industry in Kenya - a report of a working party comes some history of the Kenyan banking sector. It mentions that in 1968;

- Kenya had 10 banks and all but 3 banks were foreign bank off shoots.
- They had given loans of loans of £70m, deposits of £83m – a book ratio of 83% - compared to US or US which had rations of between 33% to 50%
- Depositors received 3-4% interest on deposits, and paid interest of 7-8% on loans [today deposit rates are about the same but loan borrowers pay 12 - 25%]

There were two tiers of banks then;

The Big 3 Banks which 3 held 80% of deposits and 85% of bank assets amounting to K£111 million in 1966 were
- Barclays Bank – had assets of UK£1.4 billion and had 83 branches, and Kenyan directors included Michael Blundell, S. Waruhiu and J. Opembe. Today it has 111 branches
- Nation & Grindlays (now KCB) had assets of UK £401 million and after tax profit of £1.2 million. It had 50 branches, and 16 directors who were all British. Today KCB has 165 outlets in Kenya
_ Standard Bank (now Standard Chartered) with assets of UK £892 million and a net profit of £3.1 million. It had 41 offices, 22 directors all British.

Next 7 Banks
- Bank of Baroda
- Ottoman bank
- Bank of India
- African Banking Corporation (subsidiary of standard bank)
- Commercial bank of Africa
- Algemene bank (General Bank of Netherlands)
- Habib bank

Other institutions
- Cooperative Bank of Kenya (established in 1967)
- National Bank of Kenya (established in 1968)

Finance houses
- Big 3 (licensed as banks)

- National industrial credit (then 40% owned by Standard Bank, now NIC)
- United Dominions Corporation
- Credit finance company (now CFCStanbic)

Others registered as ordinary companies
- Transaction finance corporation (subsidiary of cooper motor corporation CMC)
- Industrial promotion services (Now IPS, was est. in 1963 by the Aga Khan)
- Africindo industrial development (powerful Asian industrialists seeking credit facilities for exports o India with training for Kenyans there)

Development corporations
The big 3 commercial banks also owned development corporations to undertake longer-term investments than normal banks accepted; these were Barleys Overseas Development [assets of B£9m and 88 projects in east Africa], National & Grindalys Finance and Development [B£3m] and Standard Bank Development Corporation

Building societies
As at 1964 they had loaned k£3m more than they had in deposits; this was after sudden withdrawal in 1959 of £4m savings by European and Asian depositors
- Savings & loan society
- East African building society
- First permanent (east Africa)
- Kenya building society (subsidiary of commonwealth development corporation CDC)
- housing finance company of Kenya (now Housing Finance)

2009 Kenya Bank Rankings Part II

10. Diamond Trust (2008 rank 11) : assets of 44.9 billion ($600 million) and nine month profits of 1 billion ($14.2 million). Loans (28.6 b) grew faster than deposits (33.1b), but expenses also grew faster than income. Neck and next with NIC and I&M banks with 44 and 41 billion in assets in position 11 and 12 respectively.
9. Commercial Bank of Africa (7): assets of 52 billion and nine month profits of 1.39 billion. Deposits flat (40 b) but loans (28.2 b) are up 20% this year and with GOK paper up 77%, however income and expenses are lower than 2008.

8. National Bank of Kenya (9): assets of 55.2 billion and nine profits of 1.4 billion. The bank is in great demand with a planned further divestment by GoK which may attract significant interest next year. For 2009, NBK has had a remarkable 40% growth this year, with 27% loans (12 b) and 48% in deposits (41 b)

7. Citibank Kenya (8) assets of 55.6 billion ($742 million) and nine month profit of 2.3 billion ($31 million). while embattled in the US, Citibank had a slow down in growth of loans (22.7 b) and deposits (29.7 b) compared to ‘08 but will still record a healthy +20% growth for year 2009.

6. CFC Stanbic (4) assets of 83.5 billion and nine month profits of 981 million. Bank had no growth in loans (43 b) and assets, but sitting on a load of cash - almost 16b billion (~$214 million)

5. Equity Bank (6) assets of 92.4 billion and nine month profits of 4.2 billion. Equity is still one of Kenya’s fastest growing banks though the 100% growth margins have tapered off to more manageable 30%+ for loans (55 b)and deposits (63 b) as it expands regionally in Uganda and Sudan and continues to roll out unique banking products.

4. Cooperative Bank of Kenya(5) with assets of 98 billion and nine month profits of 2.9 billion. The bank continues its 20%+ annual growth a year after listing and has diversified into investment banking. However their re-jigged executive shareholding following n ESOP is a sore point to be debated further.

3. Standard Chartered 3 with assets of 122 billion ($1.6 billion) and nine month profits of 5.2 billion ($69 million). Despite my earlier negative outlook, stanchart was a late bloomer and has come on strong: significantly, unlike other big banks, stanchart grew faster this year compared to 2008 - with 18% growth in deposit (89 b) and loans (40 b) while profits are up by 40% as income is up 23% compared to just 5% for costs while spearheading technologial products & services to their customers. Also increased investment in government securities by 77% and holds ~ Kshs. 36 billion now.

2. KCB (2) assets of 163 billion ($2.17 billion) and nine month profits of almost 5 billion ($66 million). KCB group is larger than Barclays in assets (185 b to 168 b) but has a smaller asset base than last year. In 2009 deposits (133 b) and loans (93 b) are up over 20% but profit is up just 3% - income is up 11% but expenses are up 15%, as KCB continued its expansion, opening six branches in November and also expanding in Rwanda Uganda, South Sudan and soon to Burundi. The bank also continues to weather occasional storms against it sustainability with triton and now Kenya planters coffee union.

1. Barclays Kenya (1)assets of 168 billion ($2.25 billion) and nine month profits of 6.63 billion ($88 million) . Barclays shrunk by 2% compared to growth of 17% a year ago with lower deposits (123 b) and loans (96 b) compared to a year ago but with profits ahead of last years pace, perhaps boosted by GoK securities investments which are up 23% this year.

M-Pesa as a low cost bank account

Safaricom have extended the registration deadline for m-pesa divided payments via cell phone to today - October 15. Over 465,000 of their shareholders own less than 1,000 shares, and will get a dividend payment of less than 100 shillings ($1.31), with most in this category likely to get about shillings, assuming they have not bought any shares since the IPO allocations.

M-Pesa's latest offering During the dividend registration process, Safaricom has clarified that shareholders receiving dividends of less than 100 shillings will only be able to buy airtime with this, while those with larger dividends will be able to withdraw the cash, pay bills, send it to other people etc.

All this brings up the question that has been asked several times, most recently by research group - CGAP in the blog post cell phone bank accounts as an incentive to save money. If you compare holding cash in an m-pesa account, you are able to gain comparable benefits to low cost bank accounts offered at several leading local banks – and can use banks for those services that M-pesa or Zap (from Zain) don’t have e.g. withdraw cash via m-pesa, and go to Equity Bank and buy a banker’s cheque for 50/=

Benefits of m-pesa banking
- 24 hour banking: More reach & access than any bank or ATM network
- Mobile banking with operator tends to be cheaper then mobile banking via bank provided services
- Saving in transport costs and banking transaction costs
- Can pay a variety of bills for utilities at a low cost
Challenges of m-pesa banking
- Lack of float at dealers to transact/occasional mpesa system downtime
- No credit history; and the clumsy expensive statement from Safaricom not useful yet
- Calls for discipline to build savings
- Funds are not insured, and are more prone to crime. And dealing with a stolen phone in Kenya is not a pleasant experience.

Anyone tried to use m-pesa as their main bank a/c?

Kenya Bank Rankings 2008

Top 10 banks at December 2008

Assets
1. KCB (rank last year - 2) Kshs. 174.7 billion (~$2.19) billion
2 Barclays (1) 168.8b
3 Standard Chartered (3) 99.14b
4 Cooperative (5) 83.9b
5 CFC Stanbic (4) 83.2b
6 Equity (6) 77.2b
7 Commercial Bank of Africa (7) 50.1b
8 Citibank Kenya (8) 47.5b
9 NIC (10) 42.7b
10 National Bank of Kenya (9) 42.7b
Then Diamond Trust, Investment & Mortgages, Prime, Housing Finance, Imperial

Profits
1. Barclays Kshs 8.0 billion (~$100 million)
2. KCB 5.39b
3. Equity 4.76b
4 Standard Chartered 4.7b
5. Citibank Kenya 3.35b
Then Cooperative 3.33b, National Bank of Kenya 1.8b, Commercial Bank of Africa 1.7b, Investment & Mortgages 1.62b, NIC 1.47b

Deposits
1. Barclays Kshs. 126.4 billion (~$1.58 billion)
2. KCB 109.8b
3. Standard Chartered 76.9b
4. Cooperative 65.9b
5. CFC Stanbic 61.5b
Then Equity 50b, Commercial Bank of Africa 41.8b, NIC 35.2b, National Bank of Kenya 34.3b, Diamond Trust 32.7b

Loans
1. Barclays Kshs 108 billion (~$1.35 billion)
2. KCB 79.3b
3. Cooperative 53.3b
4. CFC Stanbic 44.2b
5. Standard Chartered 43.3b
Then Equity 40.9b, NIC 30b, Commercial Bank of Africa 26.3b, Investment & Mortgages 25.9b, Diamond Trust 25.4b
Source: from published audited accounts for 2008

Co-Op IPO Aftermath

A formal statement is out today after Monday's press conference where the bank’s management revealed that through their 2008 IPO, Co-op Bank had raised Kshs. 5.4 billion (~$77 million) but short of a revised target of Kshs 6.7 billion as 66,576 shareholders bought 546 million shares. The Business Dailyreports the shares will be allocated 60% to individual investors (340.5 million shares) , 30% to institutions (171 m shares ) and staff will get 9% (52.6 m shares)

Capital raising: the offer was not underwritten (by D&B winner - best lead transaction advisor and best investment bank), but despite the shortfall, what was raised should be enough for a few years. Co-op’s capital adequacy goes from 9% to about 18%, which is not bad [10 billion would have taken to this to 22%]

Other banks that have been reported to have engaged in recent private capital raising include K-Rep and Southern Credit while others who may need to tap shareholders next year could Chase, CBA, CFC Stanbic and even KCB (for the third time in five years?)

Glass Half Full: Though Co-op had initially set out to raise Kshs 10 billion, their listing came at a tough time and was not received as enthusiastically as past IPO’s. Still it had some positives but came in a tough market before the target was revised down, but has some positives

- For the bank: 66,000 shareholders is a manageable register , and since they did a lot of the placement and receiving work in house, the IPO was not as costly as others (budgeted at Kshs. 248 million)
- For new shareholders: no refunds to queue for, and for once a 100% allocation
- For other serious investors, a brief return to sanity as the IPO speculators with their borrowed funds kept away – Co-op was the fall guy that injected some reality back into IPO process and share investments.

2009 IPO’s: Next year could see the entry of Nakumatt supermarkets, bread maker a DPL and others from the private sector.

From the public sector (Government side) comes a series of planned privatizations a few of which could be IPO candidates to assist the Government in fund-raising:

Top of my my wish list is Kenya Pipeline, whose much improved governance saw a consortium of banks line up this month to offer the company funds for expansion (a few years ago KPC was using dubious financial intermediaries) and Kenya Wine Agencies. In addition, more shares of Kengen East African Portland Cement Company and National Bank will be sold to the public.

Other non-IPO candidates will be targeted at strategic partners [for Kenya Ports Authority- and TEAMS (submarine cable)] while private investors may be sought to invest in the sugar companies [Chemelil, Sony, Nzoia, Miwani, Muhoroni] hotels of Kenya Tourism Development Corporation, banks [Consolidated Bank, Development Bank of Kenya] and food processors [Kenya Meat Commission, New Kenya Co-operative Creameries]

Kutwa Tuesday: Sam’s Kids

They may be called Barack, Michelle, Obama, or other creative names, but many of these new kids born and given fabulous American
baby Obama names were conceived as a result of Uncle Sam’s bungled election debacle in December 2007.


Opportunities

Airbus University Challenge: the Airbus
Fly Your Ideas challenge is open to university students around the world with ideas on the future of aviation and improving its environmental position. Prizes are €30,000 and deadline is 1st December 2008

Georgetown Fellowships Apply for the Georgetown University Law Center’s Global Health Law Fellowship Program. D/L is February 16 2009

Kenya Content Conference Tandaa 08 a local content conference sponsored by the Kenya ICT Board takes place on November 14 2008.

Kenya’s Top Women The Business Daily invites you to nominate Kenya’s Top 40 women under 40. send their names, contracts and reasons why they are worthy (in less than 500 words) to top40under40@nation.co.ke by 30th November

Government of Kenya jobs:
- Judiciary 25 resident magistrates. D/L 21/11
- Electoral commission of Kenya – 39 district election coordinators

Biz brief’s

Co-Op IPO: is 1/3 of the way to target with just 3 days to go optimistic about the Co-Op IPO. transaction advisers have now released cash flow and share price projections that should have been in the Co-Op Prospectus. what happens if they fall short – will D&B pay C-op for the shortfall? Is there a last minute investor who will get preferential terms to bridge the gap? The prospectus states that in the event that this minimum amount is not attained, approval may be sought from the Authority to proceed with the listing of the existing shares and any Offer Shares that are subscribed under the Offer.

I got an SMS (as did other Co-op customers) inviting me to take part, but the application desks/tents still look rather forlorn

Equity - HF: November 4 was not just Obama day, but also the date when the Housing Finance and Equity Bank deals should have been completed

Foreign Investors Tough times for the former Rift Valley Railways and Tiomin who continue to flounder: Tiomin’s latest statement notes. …. the Government of Kenya has not completed the remaining bureaucratic steps required for the transaction to close…..Tiomin's management shares our investors' extreme frustration at this unreasonable delay….. Tiomin has acted in good faith and we are very disappointed….. If the closing continues to be delayed, we will consider terminating the MOU on the grounds of unreasonable delay….. Tiomin will issue another press release when further material information is available. Pity they have no local defenders

Geothermal prospects : two companies are scoping in Eburu (gilgil) and Menengai for geothermal energy

Brew turf Coca Cola launch minute maid juices in Kenya (what happens to 5 alive) as EABL launch Alvaro in Uganda

Sat-TV: DSTV will launch pre-paid scratch cards, following in the footsteps of rival GTV who are reaping from the ongoing English premier league

Insurance by M-Pesa: Madison Insurance now accepting insurance installment payments by M-Pesa following Old Mutual, which enabled investment, plan payments

Radio Standard Group prematurely possible radio investment worth Kshs 250 million as KISS FM parent Radio Africa rolls out their 4th radio station – XFM (rock music)

Share Portfolio November 2008

Last review in August 2008

The Stable
Diamond Trust ↓
KCB ↓
Safaricom ↓
Scangroup ↓
Stanbic (Uganda) ↓

Review
Best performer: Scangroup -8%
Worst performer Stanbic – 36%, Safaricom -28%
In: none
Out: none
Changes: None - Market down this last three months, no trades made (and no commission generated for stocbroker).
Performance: Down 12% in the last three months while the NSE Index is down 16%
Looking forward to: Possibly picking up some Kenya Airways, Kengen, and Safaricom if their shares continue to get cheaper, but sitting out the Co-Op IPO.

Co-Operative Bank Listing A to Z

Almost halfway through the IPO window which runs from October 30 to November 13 2008 at Kshs. 9.50 each. Minimum application amount is 1,000 for retail investors who will get 66% of the floated 701.3 million shares

Basis for listing funds raised will go toward new banking system, new branches, mortgage finance business, card business etc.

Cost of listing The budgeted cost is Kshs. 249 million ($3.1 million) and includes Placement fees 99m Advertising 68m, CMA fees 20m, Printing 17.5m, Lead Sponsoring Stockbrokers fees 8.4m, Public Relations 8.3m, Co-sponsoring Stockbrokers Fees 5.2m, Lead Transaction Adviser 5m, Legal Fees 5m, Receiving Bank fees 3m NSE listing 1.5m and valuation fees of 0.9m. This compares to Equity listing – 28m, Access Kenya 40m, Kenya Re 280m, Kengen IPO 401m, KCB rights 1.1 billion, and the giant Safaricom IPO at 1.1 billion shillings

Expert advice: See also Nairobist and Ratio perspectives on the Co-Op IPO

Float Retail investors will get 463 million shares and qualified Institutions will get 210 million shares, with employees another 28 million shares. The cooperative societies, which will own 62% of the company, are locked in for 5 years, but the existing individual shareholders are free to sell their (680 million) shares.

National Bank of Kenya a joint-receiving Bank for the IPO and the only bank to step forward and offer 100% loans towards the Co-op Bank IPO. Consolidated Bank has just announced that it is also financing.

Numbers Projected EPS is Kshs. 0.66 for 2008 from a profit of 3.45 billion ($43 million), and estimated assets of 87.6 billion [deposits of 66 billion and loans of 51 billion]. the bank has about 800,000 customers, 50,000 CDS accounts, 53 branches and 152ATM’s

Shareholders top shareholders comprise some of the largest savings and credit societies and also top management of the bank. These include Harambee SACCO 3.7%, Teleposta Sacco 2.97%, Afya SACCO 2.94%, Masaku Teachers SACCO 2.90%, Kipsigis Teachers SACCO 2.46% Kenya Police SACCO 2.33%, Gideon Maina Muriuki 2.32 (the Bank MD), Kiambu Unity Finance Co-operative Union Limited 2.27, Nandi Teachers SACCO 1.78%, Aembu FCS Limited 1.77% Mungania Tea Growers SACCO 1.57%. The top 10 individuals are all senior managers and board members (4%)with about 51,000 other shareholders, but there’s no lock-up period for their shares. Equity listed with 2,800 shareholders

Recapitalize a Subsidiary - Co-op consultancy services (-17m reserves) which builds capacity among SACCO’s is also one of the goals from the listing

Subscription: mid week, little traffic and activity among brokers and at various IPO tents around town. Subdued but significant marketing is taking place. Adverts in the newspapers (even the Weekly Citizen tabloid) and on TV

Timing of Listing IPO euphoria for shares has dampened somewhat since the Safaricom IPO and the downward trend of the market right up to the start of the Co-OP IPO

Transaction advisersLead advisers – PKF added to Dyer & Blair, National Bank added as a receiving bank

Valuation beyond setting the basis for the offer price at 9.50, there’s no comparison to peer banks of this size (KCB, Barclays, Equity) which would be expected.

Verdict slight over-subscription expected. barring Safaricom, past IPO’s generally appreciate after listing long enough for speculators to cash out. The shares are much less than the 10 billion from safariom, but having 1 billion shares floating in the market with a large retail pool will have the shares behave like Mumias Sugar shares [Kenya re 9.50 august 2007 for 240m shares]
Me? bypass for two reasons (i) IPO bypass theory resumes even though a lot of the negatives associated with IPO’s – queues, refunds, hassles seem to be are absent (ii) my portfolio is overweight on financial shares.

Safaricom 2s

Three weeks after Safaricom’s share price dipped into the 3 shilling range the share is on the verge of tumbling into the 2/'s [$0.025] - down from the IPO of 5/= and brief high of 8/=.

what are others saying?

Coldtusker points to some deals that can be cut cheaply with NSE shares.

KCIG states that a bear market should be no big deal for serious investors.

Analysts are still producing reports on NSE shares to buy (Access Kenya). What about when to sell?

Everyone’s doing it, so throw more stones at D&B - Dyer & Bair who structured the Safaricom IPO.

Shut down the NSE?: Closing the shares market to salvage what’s left was proposed in Nigeria and now a stockskenya thread has taken it up here as well.

Could be worse: Liquid Trader gives insights on the SA economy that are not easy to decipher by watching CNBC.

Another IPO you say? Co-Op Bank opens tomorrow. No prospectus out yet, but here’s another PDF from the Bank MD.

Looking for work? here’s a great new local Kenya job blog.

Bank Tales

(4) The Nairobi Star newspaper reports today that the ravenous Libyans are going to buy Equatorial Commercial Bank from Naushad Merali and other shareholders.

(3) T24 Rules: over a week ago KCB converted to the Temenos T24 banking system with some customers experiencing hitches - and next weekend it will be the turn of CBA to do the same.

(2) (Nairumor II) Minister(s) are itching to get licenses to open their own banks (hopefully not a return to the days of political banks)

(1) ( Nairumor I) that the Co-Operative Bank IPO will not be sold by all stockbrokers. Co-Op bank will do investor registration and most of the processing at their own (52) bank branches, with assistance from only a few brokers. That could be bad & painful news for stockbrokers as the low volumes traded and the depressed NSE this year have meant less than projected commissions & income.

Reassurance from bankers

The downward trend continued at the stock exchange again this week to Friday. So how about some banking news to reassure nervous investors?

KCB: are first out of the blocks with their third quarter results. Some shareholders might be peeved about having forked over Kshs. 25 a share in the rights issue a few months ago, only to have the share trading at below 20 this week.

How have they performed? Compared to a year ago, assets are up 67% and profit up 66% - which should go on through Q4 of the year, and hopefully the bank will reward patient shareholders with 2/3 increase (or more) in dividends after December. After three quarters, the bank has already passed their full year income mark for 2007, and aggressively loans are up over 50% against just 15% increase in deposits.

Equity: are usually one of the first banks to publish quarterly results, and have been known to run them in the Saturday newspapers, so we’ll see by Monday.

Co-Op: a week to the IPO and the media push is on, though subdued compared to past NSE offers. There’s a pre-prospectus document (PDF) at their site published a few weeks ago. See also analyst Robert Bunyi’s perspectives on the IPO (Hat tip Ratio Magazine)

Safaricom (M-PESA qualifies as a bank!) CEO Michael Joseph does his part to reassure retail investors about their Safaricom share prospects going forward. and regardless of their current price.

Opportunities

most from the Daily Nation
- East African Cables commercial manager hr@eacables.com 13/11
- Econet credit manager see www.Adeptsys.biz by 31/10
- Government of Kenya (Ministry of public service): 112 senior personal secretaries, 126 personals secretaries. D/L is 31/10 to the PS by snail mail
- KCB: head of alternative business channels, manager – trustee services & compliance. 7/11
- KPMG: seeking several public sector & development associates (PSA01/08) apply through talentrecruit@kpmg.co.ke D/L 7/11
- Suntra investment bank: Chief executive (SIB-CEO/10.08) apply through esd@deloitte.co.ke D/L 12/11

from The Economist
- African Agricultural Technology Foundation: Executive Director Nairobi, Kenya
- IUCN: Regional Director for Eastern and Southern Africa Nairobi, Kenya
- KickStart International, Inc: Development Economist / Director of Impact Evaluation & Monitoring Nairobi, Kenya
- Africa Center for Strategic Studies: Associate Dean, Relations Professor Washington, DC
- eRwanda PROJECT: Lead Technical Manager for RCIP-Rwanda Kigali, Rwanda
- Africa University: Vice Chancellor Mutare, Zimbabwe
- Alliance for a Green Africa: Senior Policy Officer, Innovative Financing for Agriculture Nairobi, Kenya
- SNV: Senior Advisor Water, Sanitation and Hygiene -Nanyuki, Kenya
- Call for Paper - First Congress of African Economists

from the mailbox
Free Web, Domain and Blog Hosting in Kenya‏: read more but buyer beware

To Coop or Not?

The big debate now is if the Co-Op Bank IPO should go ahead this month or if it should be postponed. The Chairman of the Nairobi Stock Exchange has issues conflicting statements on the matter but appears to have bowed to the arrangers and the stockbroking community line that it should go ahead.

IPO’s in London and New York are beign deferred as they are unlikely to be warmly taken up, and here, the dearth of IPO's in the pre-Kengen was guided by the sentiment that they would not perform well in the then deflated markets. Even the giant IPO of Safaricom – was postponed till after the 2007 elections.

The timing is just not right, with two collapsed stockbrokers still being sorted out, Safaricom refunds not fully reconciled, and the Diaspora who were so enthusiastic about Safaricom still (i) worried about repercussions of the US financial markets turmoil (ii) real estate and (iii) feeling suckered by Safaricom's post-IPO performance which they heavily invested in.

Though the funds raised are targeted towards, mortgage finance, ICT and branch expansion, the Co-Op IPO should be postponed to at least next year. It withstood the 1998 Nairobi bomb blast and has turned round a Kshs. 3 billion loss to a similar profit in 6 years and a few more months won't make a difference. But as a fall guy of Safcom, I’ll revert to my IPO bypass plan when the Co-op IPO arrives.

Need for Capital; Co-op is a fast growing bank with a retail and branch base like KCB and Equity that requires capital to be shored up. The two banks that were most in need of regulatory capital - KCB and Housing Finance have already had rights issues in 2008, and other shareholders should prepare for the same at CFCStanbic, Prime, CBA, among other smaller banks.

NSE/CMA to note; In the wake of Crown Berger and Portland Cement share collapses, it should be noted that irregular share trades happen - even to Google - but the prices were re-adjusted and trades made at erroneous prices were then canceled.

Opportunities

Barclays graduate program: The Barclays Graduate Emerging Managers (GEM) is open

US Visa The DV 2010 diversity visa (US green card) lottery kicks off today and runs till December 1

TED Global 2009: Registration for TED Global 2009 at Oxford is open.

Coop Bank IPO is Next

NSE is overweight with financial shares, and may get heavier with the listing of Co-operative Bank later this year. The listing is expected to raise 10 billion shillings ($150 million) for growth and expansion. The shareholders transferred the assets and liabilities of the bank to a limited liability company (from a co-operative socirty) last week. – and their class B shares (par value Kshs. 100 shillings will be split into shares of par value Kshs. 1)

However as a long suffering customer of the bank, I may not add to might already overweight basket of financial stocks.

edit - Co-Op IPO opens October 20 2008

elsewhere

transport

- Kenya Airways; are offering a novel business trip package – 4 trips for $1,000 to be completed by March 2009 for trips to Dubai, Bangkok, honk Kong, Guangzhou
– Delta airlines open a Nairobi office
Railway destiny in local hands
- The Government wants Rift Valley Railways to increase capacity, lay more tracks, and transfer cargo ASAP. ICDCI looks at RVR as a long term investment, but they hope to get return on the investment within 4 years. They own 10% of the company and will acquire another 10% from IFC over the next four years.

Communications
- Zain will increase share capital by 75% (raising $4.5 billion) from its Kuwaiti shareholders for expansion in Africa. They are already advertising to put up base stations and adding dealers in Kenya
- good to know Econet has the most subscribers in Zimbabwe.. That’s an ARPU in millions?

Dividend cycles
how long goes it take some NSE companies to pay declared dividends?

One month: Standard chartered (interim), Kenol (interim)

Two months: Barclays, BAT, Olympia

Three months Crown Paints, TPSEA (Serena), Jubilee, Nation Media, Total, HFCK, Diamond Trust, Pan Africa, NIC, Standard Chartered (final), Bamburi (interim)

Four months: Centum (ICDCI), Standard Newspapers, Access Kenya, Eveready, Bamburi (final)

Five months: Kenya Re, Kenya airways, Express, Rea Vipingo

Kutwa: Tuesday: Pick out a positive story

Bank Round-up

- Co-op Bank extends its banking hours from the now less-traditional 9 to 3 to 9 a.m. to 4. p.m. daily and up to noon on Saturdays. 

- bold Equity Bank announced plans last week to open new branches in Kisumu, but that was before a new outbreak of violence over the weekend and the fatal shooting of an opposition MP this morning. 

- The Business Daily reports that West African giant Ecobank plans to take over a majority stake in limping mortgage bank EABS, whose recent growth had lagged most of its peers

- NIC Bank to convert cashless ATM points into full branches and expand its network. 

Capital flight: A leading multi-national bank is considering moving an African operations department out of Nairobi, and to another country. The amount of capital flight (money leaving the country) is also at an alarming high. 

Other sectors

- Valentine’s Day massacre?; What does Naivasha flare up mean for some flower farms who Valentine's Day (Feb 14) shipment/sales can account for up to ½ their turnover in a year ?

- Nairumor that a blue chip CEO and turnaround specialist will resign next month in search of (foreign) greener pastures

- The Harvard Business School’s Africa Business Conference is on February 15-17, 2008 in Boston MA. Details from YAP

- Some troubling signs and even more today.

- Another regional airline upstart is Executive Turbine, flying 4X weekly to Kisumu for Kshs. 3,540 ($70). Regional airlines should be added to the earlier post on election winners. 

Trivia

- Will ‘President Obama’ need Equity Bank? - because 46% of African American households don’t have bank accounts - he can tap Equity Bank’s revolutionary model to bring banking to the unbanked. 

- wish I was in France: It’s better to be a rogue trader facing charges for misplacing $7 billion. But it’s also a reminder that financial shenanigans are still rarely punished and prosecuted in Kenya. E.g. Francis Thuo. (and maybe Mr. Kerviel would rather have worked for a Kenyan bank instead)