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CytonnWeekly#47

Disclaimer: The views expressed in this publication, are those of thewriterswhere particulars are notwarranted.Thispublication,whichisincompliancewithSection2oftheCapitalMarketsAuthorityActCap485A,ismeantforgeneralinformationonly,andisnotawarranty,representation,adviceorsolicitationofanynature.Readersareadvisedinallcircumstancestoseektheadviceofaregisteredinvestmentadvisor.

ExecutiveSummary

FixedIncome:ThelevelofT-billssubscription,thoughstillhigh,continuedtoreduceasthisweek’stotalsubscriptiondecreasedto113.5%,comparedto162.1%recordedthepreviousweek.Yieldsonthe91,182and364-dayT-billsremainedunchangedat8.3%,10.4%and10.8%,respectively;

Equities:Duringtheweek,theequitiesmarketwasonadownwardtrendwithNSE25,NASIandNSE20decliningby1.2%,1.0%and0.8%,respectively,drivenbydeclinesinlargecapstockssuchasEquityGroup,DTBKandCo-opBank,which lost5.5%,5.2%and1.8%,respectively.HousingFinanceGroup,NICBank,I&MBankandStanbicBankKenyareleasedQ3’2016resultsrecordingcoreEPSgrowthof7.8%,(6.4%),16.5%and24.1%,respectively,whileFamilyBankandNairobiSecuritiesExchangeissuedprofitwarningsforFY’2016;

PrivateEquity:FinancialservicesandhealthsectorscontinuetowitnessincreasedprivateequityactivityinKenya,withSBMHoldingsofMauritiusacquiringFidelityCommercialBankinaKshs2.7bntransaction,andCatalystPrincipalPartnerssellingitsmajoritystakeinGoodlifePharmacytoLeapFrogInvestments,aUKbasedventurecapitalfirm,inatransactionvaluedatUSD22.0mn(Kshs2.2bn);

RealEstate:TheLandIndexReportbyPropertyRealityCompany(PRC)indicatedthatRuakaTownrecordeda125.0%landpriceappreciationoverthelastone-yearduetotheinfrastructuredevelopmentinKiambuCounty,whiletheTourismRegulatoryAuthorityclassifiedeightadditionalhotelsinNairobiunderthefive-starrating,raisingthenumberoffive-starhotelsinKenyatofifteen;

CompanyUpdates

• CalebMugendi,ourInvestmentsAnalyst,discussedthemovebyTreasurytosetupasinglefinancialservicesregulatorandtheKshs203.6bninvestmentintothesteelindustry.SeeCalebonCNBC

• JohnNdua,ourInvestmentAnalyst,discussedtheacquisitionofKenyanFidelityCommercialBankby Mauritius-listed SBM Holdings, and insolvency fears that have driven East Africa PortlandCementsharesdown22.0%.SeeJohnonCNBC

• ShivArora,ourHeadofPrivateEquity,discussedFamilyBank’sprofitwarningandtherevisionofKenya’s2017GDPgrowthforecastto6.0%.SeeShivonCNBC

• CytonnInvestmentshasthisweekstartedimplantationofanEnterpriseResourcePlanning(ERP)Software,SAPBusinessOne,aimedatstreamliningfinance,riskandprocurementacrosstheentireorganisation.TheimplementationofthissystemisinlinewithCytonnInvestments’keystrategiesofcontinuallyenhancingthedeliveryofservicestoitsclientsbyimprovingprocesses.SeeEventNote

• CytonneHub,aninitiativeofCytonnFoundation,isinvitingentrepreneurstosubmitapplicationstobeconsideredforpitchingtheirbusinessesforfunding.ThepitchingwillbedonetoapanelofinvestorsattheCytonneHubInvestorsForum,scheduledforThursday,8thDecember2016attheSarovaPanafricHotelat6.00pm.ApplyHere

• Thisweek,ourManagingPartnerandCEOEdwinH.Dande,BoardMemberMr.JamesMaina,andChief Investment Officer & Head of Real Estate Elizabeth N. Nkukuu, CFA, led a team for afundraising and benchmarking trip to Dubai. This is part of Cytonn’s strategy of deliveringinstitutionalgraderealestateproductstoourclientsandinvestors,andthereisalotofinterestininvesting inKenyaandalsoentering into the realestatedevelopment inKenya;marketplayersshouldexpectglobalmarketentrantsintothesectorinthenear-term.

• CytonnPrivateWealthheldawealthmanagementtraining focusingonplanningforretirement.SeeEventNote. Thewealthmanagement trainings,whichareatno cost, areheldbiweeklyby

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CytonnPrivateWealthbutareopenonlytopre-screenedparticipants.Toregisterforthetrainingkindlyusethislink:Seetraining

• Toinvestinanyofourcurrentorupcomingrealestateprojects,pleasevisitCytonnRealEstate.Wecontinuetoseeverystronginterestinourproducts:

o TheAlma,whichisnow55.0%soldandhasdeliveredanannualizedreturnof55.0%p.a.forinvestorswhoboughtoff-plan.SeeTheAlma.Wewillbehavingsitevisitstoshowcasethisiconicdevelopmenteverytwoweeks,rightafterthewealthmanagementtrainings.Ifinterestedinattendingthesitevisit,emailclientservices@cytonn.com

o AmaraRidgeiscurrently100.0%sold.SeeAmaraRidgeo We have 12 investment-ready projects, offering attractive development returns and

buyer's targeted returns of around 25.0% p.a. See further details here: Summary ofinvestment-readyprojects

• Wecontinuetobeefuptheteamwithseveralongoinghires:CareersatCytonn.

FixedIncome

Duringtheweek,T-billsremainedoversubscribed,howevertherewasadeclineinsubscription,withoverallsubscription decreasing to 113.5%, compared to 162.1% recorded the previous week. The drop insubscription levels forT-billscanbeattributedto investorsparticipating inthebondmarket forthere-opened 15-year and 20-year bonds, whose combined subscription rate came in at 76.3%, with thegovernmentacceptingKshs22.2bn,versusatargetofKshs30.0bn.Subscriptionratesonthe91-daypaperremainedrelativelyflatduringtheweek,cominginat147.8%from146.1%thepreviousweek,whereasthe 182-day and 364-day papers subscription rates decreased to 115.6% and 88.6% from 182.5% and105.2%,respectively,thepreviousweek.Thiscanbeattributedtoinvestorslookingtolock-inattractiveyieldsonthere-openedbonds intheprimaryauctionmarket.Yieldsonthe91,182and364-dayT-billsremainedunchangedat8.3%,10.4%and10.8%,respectively.

The91-dayT-bill iscurrentlytradingbelowits5-yearaverageof10.4%.AsstatedinourCytonnWeekly#46,thedeclineonthe91-daypaperislargelyattributedtotheexpectedlowinterestrateenvironmentasaresultof(i)reducedpressurefromthegovernmentborrowingprogramgiventheyareaheadoftheirpro-rateddomesticborrowingtarget,and(ii)increasedliquidityinthemarketbroughtaboutbytheenactmentoftheBanking(Amendment)Act,2015.ThegovernmenthasthisfarborrowedKshs145.9bndomestically,againstapro-ratedtargetofKshs97.1bnconsideringthecurrentdomesticborrowingtargetofKshs229.6bn. However, it is important to note that the government is in the process of revising its domesticborrowing target upwards to Kshs 294.6 bn, which if passed by Parliament will take the pro-ratedborrowingtargettoKshs124.6bn,meaningthatthegovernmentwillstillbeaheadoftheborrowingtarget.KeytonoteisthatasindicatedinourCytonnWeekly#42,theinterestrateshavebottomedoutandweexpectthemtopersistatthecurrentlevels.

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Lastweek,theKenyanGovernmentre-openedtwobonds,a15-yearand20-yearwitheffectivetenorsof6.0yearsand11.6years,respectively,toraiseKshs30.0bnforbudgetarysupport.Yieldsonthebondscameinat13.6%and14.3%againstourrecommendedbiddingrangeofbetween13.0%-13.5%and13.8%-14.2%forthe15-yearand20-year,respectively.AsrecommendedinourCytonnWeekly#46,investorsparticipationwasskewedtowardsthe15-yearwhichreceivedbidsworthKshs14.5bn,comparedtoKshs8.4bnforthe20-yearbondsinceitoffersthebestreturnsonarisk-adjustedbasis.Wecontinuetonotethe inconsistencybetweenwhatCentralBank isforcingbankstodobyreducing interestrates,andthehigheryieldthatgovernmentisacceptingintreasurysecuritiesauction.Forthisauction,itishardtoseewhyabankinginstitutionwouldlendtoanindividualat14.0%asopposedtothegovernmentat14.3%.Thiswillleadtofurthercrowdingoutoftheprivatesector,asthegovernmentisasaferinvestment,furtherreducingcreditgrowthtotheprivatesector.AsnotedinourCytonnWeekly#42,thesamewaswitnessedinthe15-yearinfrastructurebondauctionwherebythegovernmentacceptedayieldof13.2%onatax-free infrastructurebond,whichequatedtoa15.5%yieldonanequivalenttaxablebond, fora tenorof11.25years,adjustingforthe15.0%taxrate.

The latest Central Bank Weekly report dated 18th November, 2016 revealed that the interbank rateincreasedby130bpsto5.2%,from3.9%registeredthepreviousweek,despitealiquidityinjectionofKshs41.5bn.Increasedmarketliquiditycanbeattributedto(i)paymentofKshs1.4bninT-bondinterest,(ii)anincreaseinreverserepopurchaseswhichrose44.8%toKshs23.9bn,fromKshs16.5bnthepreviousweek,(iii)reposmaturitiesofKshs27.3bn,(iv)adeclineinreverserepomaturitiesby74.5%toKshs4.9bnfromKshs19.2bnthepreviousweek,and(v)an80.6%declineinrepostoKshs5.3bnfromKshs27.3bn the previous week. As highlighted in our Cytonn Weekly Report #28 the interbank rate is oftendeterminedbytheliquiditydistributionswithinthebankingsectorasopposedtothenetliquiditypositionintheinterbankmarket.

Belowisasummaryofthemoneymarketactivityduringlastweek:

allvaluesinKshsbn,unlessstatedotherwise MonthlyLiquidityPosition–Kenya

LiquidityInjection LiquidityReduction TermAuctionDepositMaturities 0.0 T-bondsales 0.0GovernmentPayments 19.3 TransferfromBanks–Taxes 24.5T-bondRedemptions 0.0 T-bill(Primaryissues) 22.7T-billRedemption 27.0 TermAuctionDeposit 0.0

22.5%

11.7%

8.3%

Average=10.4%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-1

5

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-1

6

Aug-16

Sep-16

Oct-16

Nov-16

91-dayT-bill5-yearAverageYield

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T-bondInterest 1.4 ReverseRepoMaturities 4.9ReverseRepoPurchases 23.9 Repos 5.3ReposMaturities 27.3 OMOTapSales 0.0TotalLiquidityInjection 98.9 TotalLiquidityWithdrawal 57.4

NetLiquidityInjection 41.5

AccordingtoBloomberg,yieldsonthe5-yearand10-yearEurobondsincreasedslightlyweekonweekto4.9%and7.5%from4.7%and7.4%,respectively,thepreviousweekasaresultofglobalstrengtheningofthedollar,leadingtorisinginvestordemandforfrontiermarketinvestments.Sincethemid-January2016peak,yieldsontheKenyaEurobondshavedeclinedby3.8%and2.1%,respectively,forthe5-yearand10-yearbondduetoimprovingmacroeconomicconditionsinthecountry.

TheKenyaShillingremainedrelativelystableagainstthedollar,closingtheweekatKshs101.9,fromKshs101.8thepreviousweek.Thiswasdespiteincreaseindemandforthedollarfromoilimporters.OnaYTDbasis,theshillinghasappreciatedby0.4%againstthedollar.Inrecentweeks,wehaveseenthemonthsofimportcoverdeclinebelowthe1-yearaverageof4.9months,andiscurrentlyat4.76months,downfrom4.80monthsthepreviousweek.Just1-monthago,on6thOctober2016,therewas5.2monthsofimportcover.AsstatedinourCytonnWeekly#45,this isquiteworryingastherateofdecreaseinthereservecouldbeanindicationthattheCBKisusingalotofreservestosupporttheshilling.

7.5%

4.9%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

4-Jul-1

44-Au

g-14

4-Sep-14

4-Oct-14

4-Nov-14

4-De

c-14

4-Jan-15

4-Feb-15

4-Mar-15

4-Ap

r-15

4-May-15

4-Jun-15

4-Jul-1

54-Au

g-15

4-Sep-15

4-Oct-15

4-Nov-15

4-De

c-15

4-Jan-16

4-Feb-16

4-Mar-16

4-Ap

r-16

4-May-16

4-Jun-16

4-Jul-1

64-Au

g-16

4-Sep-16

4-Oct-16

4-Nov-16

KenyaEurobondYields

10-Year 5-Year 5-yearcoupon 10-yearcoupon

5-YearCoupon,5.9%

10-YearCoupon,6.9%

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TheMonetaryPolicyCommittee(MPC)issettomeetonMonday28thNovembertoreviewtheprevailingmacroeconomicconditionsandgivethedirectionoftheCentralBankRate(CBR).IntheirpreviousmeetingheldinSeptember,MPCloweredtheCBRforthesecondtimein2016by50.0bpsto10.0%onaccountof(i)thepersistentslowdowninprivatesectorcreditgrowth,whichstoodat5.5%againsttheCBKtargetof18.3%, and (ii) the fairly stable core inflation that declined from 6.4% in July to 6.3% in August 2016,indicatingthatinflationarypressureremainsatbay.WeareexpectingtheMPCtoretaintheCBRat10.0%duetothemacroeconomicconditionsholdingsteadysincethelastmeeting,andweareprojectingthattheywillmaintaintherateat10.0%fortheremainingpartofthefiscalyear.SeeMPCNote

Lending to the private sector in Kenya slowed for the 14th consecutivemonth in Septemberwith theInternationalMonetaryFund(IMF)warningthatthiswillprobablyactasadragonthecountry’seconomicexpansionnextyear.Credit to theprivatesectorgrew5.3% inSeptember, theslowestpacesince June2008,theyearthattheeconomygrewjust0.2%.Thesignificantdeclineinprivatesectorcreditgrowthcanbeattributedtothefollowingreasons;

• Commercial lending rates have been persistently high averaging 17.5% for the past one-yearcomparedto16.0%in2015,

• The increase inNPLs discouragedbanks from lending toprivate sector andpreferred risk freeGovernmentpaper.AccordingtoCentralBank’sCreditOfficerSurveyReportasatJune2016,theindustry’sNPLsincreasedby12.6%y/yfromKshs169.4bntoKshs190.7bninJune2016,and,

• TheenactmentoftheBanking(Amendment)Act,2015,whichcappedlendingratesat4.0%abovetheCentralBankRate,whichhasseenbanksprefertolendtogovernmentathigheryieldsthanat14.0%totheprivatesector,anexamplebeingtherecentbondauctionthatsawthe20-yearbondyield14.3%,leadingtocrowdingoutoftheprivatesector.

Goingforward,ashighlightedinCytonnWeekly#46,wedonotexpectthecreditgrowthtopickupandconcernsariseonhowmuchimpactthedecliningcreditgrowthwillhaveoneconomicgrowthfortheyear,whichisprojectedat6.0%.

Belowisacharthighlightingprivatesectorcreditgrowthagainstcommerciallendingtogovernment,andtherecentadditionbeingtheSeptember2016growthnumberat5.3%year-on-year:

4.504.76

Average:4.90

4.004.204.404.604.805.005.205.40

Dec-15

Jan-16

Jan-16

Feb-16

Feb-16

Mar-16

Mar-16

Apr-16

Apr-16

May-16

May-16

Jun-16

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Jun-16

Jul-1

6

Jul-1

6

Aug-16

Aug-16

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Sep-16

Oct-16

Oct-16

Nov-16

Nov-16

KenyaMonthsofImportCover

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Inabidtoremedythislowcreditgrowthtotheprivatesector,theCabinethasthisweekapprovedaBillthatwouldallowborrowerstousehouseholditemsascollateralforcommercialbankloans,amoveaimedatwideningthebracketofthoseabletoaccessdebtfromcommerciallenders.TheBillwillprovideforthecreationofacentralisedelectronicregistryformovablegoods,whichwill:(i)haveauniqueidentificationnumberallowingfortrackingofthosethathavebeenusedtosecurebankloans,(ii)allowborrowerstouseasingleassettoaccesscreditfromdifferentlenders,asanewlenderwillknowwhetherthereisheadroomforadditional lending,and (iii)ease transferof loansacross the industry for theborrower.Thiswillbebeneficial toborrowersandcommercialbanks,as itwill increase thecollateralpool forborrowersandlenders.However,thesuccessofthisBillisdependentupontheestablishmentofthecentralisedregistry,whichwillbealongandprotractedprocesstogetfunctional.

Kenyaissettoinstall609kmofelectricrailwaytrackbetweenNairobiandMombasainadealreachedwithUgandaandRwanda,thatwillcostnearlyKshs49.0bn.Theelectricupgradewillbedonewithin5-years,andaheadofUgandalinkingitsStandardGaugeRailwaylinetotheKenyanone.Anelectrictrackwill(i)leadtofastermovementofgoodsandpassengerscuttingoncostoftransport,(ii)boostregionaltrade,and(iii)boostEastAfrica’scompetitivenessasaninvestmentdestination.OncetheSGRisfullyoperational,cargotransportationthroughrailwayissettoincreaseto32.0%fromthecurrent3.0%.Inaddition,theSGRisalsosettoreducethecostoftransportationtoKshs8.0fromKshs20.0atonneperkilometre.

TheGovernmentisaheadofitsdomesticborrowingforthisfiscalyearhavingborrowedKshs145.9bnforthecurrentfiscalyearagainstatargetofKshs97.1bn(assumingapro-ratedborrowingthroughoutthefinancialyearofKshs229.6bnbudgetedforthefullfinancialyear).Itisimportanttonote,however,thatthegovernmentisintheprocessofrevisingitsdomesticborrowingtargetupwardstoKshs294.6bnwhichwilltakethepro-ratedborrowingtargettoKshs124.6bn,inlinewithwhatithasborrowedthusfar. Interest rates,whichhad reversed trendsdue to theenactmentofTheBankingActAmendment,2015,appeartohavebottomedoutandweexpectthemtopersistatthecurrentlevels.Itisduetothisthatwethinkitisprudentforinvestorstobebiasedtowardsshort-termfixedincomeinstrumentsgiventheprevailinginterestratesenvironment.

Equities

Duringtheweek,theequitiesmarketwasonadownwardtrendwithNSE25,NASIandNSE20decliningby1.2%, 1.0% and 0.8%, respectively, taking their YTD performances to (13.0%), (5.7%) and (19.2%),

5.3%

30.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-1

6

Aug-16

Sep-16

PrivateSectorCreditvsGovernmentCredit

PrivateSectorCreditGrowth ComercialLendingtoGovernment

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respectively.SincetheFebruary2015peak,themarkethasbeendown40.6%and22.6%fortheNSE20andNASI,respectively.

Thisweek’sperformancewasdrivenbylossesinselectlargecapstockssuchasEquityGroup,DTBKandCo-opBank,whichlost5.5%,5.2%and1.8%,respectively.Equitiesturnoverdeclinedby5.9%toclosetheweekatKshs1.9bnfromKshs2.0bnthepreviousweek. ForeigninvestorsturnednetbuyerswithnetinflowsofUSD1.4mn,comparedtonetoutflowsofUSD0.4mnrecordedthepreviousweek,withforeigninvestorparticipationincreasingto69.5%from51.2%recordedthepreviousweek.Safaricomwasthetopmoverduringtheweekaccountingfor56.9%ofmarketactivity.

Themarket iscurrentlytradingatapricetoearnings(P/E)ratioof10.9x,versusahistoricalaverageof13.7x,withadividendyieldof 6.4%versusahistorical averageof 3.5%.The chartsbelow indicate thehistoricalP/Eanddividendyields.

CompanyResults:

NICBankofKenyareleasedQ3’2016results:

NICBankreleasedQ3'2016earnings,postinga6.4%declineincoreearningspershare(EPS)toKshs5.3fromKshs5.6inQ3'2015,againstourprojectedEPSofKshs5.8.Thedeclineinearningswasdrivenbya

10.9x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

Nov-09

Mar-10

Jul-1

0

Nov-10

Mar-11

Jul-1

1

Nov-11

Mar-12

Jul-1

2

Nov-12

Mar-13

Jul-1

3

Nov-13

Mar-14

Jul-1

4

Nov-14

Mar-15

Jul-1

5

Nov-15

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Jul-1

6

Nov-16

NASIP/E

6.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Nov-09

Mar-10

Jul-1

0

Nov-10

Mar-11

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1

Nov-11

Mar-12

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Mar-14

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4

Nov-14

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5

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6

Nov-16

NASIDividendYield

Average=3.5%

Average=13.7x

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56.6%growthinoperatingexpensesduetothe363.7%increaseinloanprovisioning,whichoutpacedthe23.7%growthinoperatingincome.

KeyhighlightsfortheperformancefromQ3’2015toQ3’2016include:

• Totaloperatingincomegrewby23.7%toKshs12.5bnfromKshs10.1bninQ3’2015,fasterthanourestimateofa14.2%growth.Thiswassupportedbya34.1%growthinNetInterest IncomedespiteNon-FundedIncomeremainingflat,

• NetInterestIncomeincreasedby34.1%toKshs9.4bnfromKshs7.0bn,supportedbyInterestIncomethatgrewby21.8%toKshs14.7bnfromKshs12.1bn, faster thanthe4.8%growth inInterest expense to Kshs 5.3 bn, fromKshs 5.1 bn. As a result, theNet InterestMargin (NIM)improvedto8.3%,from7.0%previously,

• Non-FundedIncomeremainedflatatKshs3.1bn.Otherfeesandcommissionsgrewby28.8%toKshs0.6bnfromKshs0.5bninQ3’2015,whileforeignexchangetradingincomedeclinedby22.9%toKshs0.9bnfromKshs1.1bninQ3’2015.Thecurrentrevenuemixstandsat75:25,FundedtoNon-FundedIncome,respectively,from69:31inQ3’2015,

• Operatingexpensesgrewby56.6%toKshs7.7bnfromKshs4.9bn,drivenbya363.7%riseinLoanLossProvision(LLP)toKshs3.2bnfromKshs0.7bnanda2.4%y/ygrowthinstaffcoststoKshs2.3bnfromKshs2.2bn.WithoutLLP,operatingexpensesgrewby6.8%toKshs4.5bn,fromKshs4.3bn,

• The cost to income ratiodeteriorated to62.0% from49.0% inQ3’2015. Excluding LLP, cost toincomeratiostoodat36.4%,from42.1%inthesameperiodlastyear,

• Thefastergrowthinoperatingexpensescomparedtooperatingrevenueresultedina6.4%declineinprofitaftertaxtoKshs3.4bnfromKshs3.6bn,

• Customerdepositsgrewby2.4%toKshs108.4bnfromKshs105.8bn,whileloanandadvancesremainedflatrecordingagrowthof0.7%toKshs110.5bnfromKshs111.2bn.Thisledtoadeclineintheloantodepositratioto101.9%from103.2%,whichisquitehighcomparedtotheindustryaverageof86.1%,andourpreferredrangeof80%-90%.

Whilepositivelygrowingdepositsfasterthanloandisbursement,NICBank’scosttoincomeratiohasrisensignificantlyto62.0%from49.0%inQ3’2015onaccountofthebankincreasingLLPsbyquitealargemarginascomparedtoasimilarperiodlastyear,whereLLPincreasedby235.3%,leadingtoconcernsoverloanquality.Going forward,weexpectNICBank’sgrowthwillbedrivenby increasedefficiency through: (i)cuttingdownofcosts throughreducing redundant rolesacrossallbranches thuscuttingdownonstaffcosts;NICBankplanstoretrench32senior-levelemployees,whichrepresents2.9%of itsworkforceof1,111employees,and(ii)reducingonthenon-performingloansthroughimprovedcreditriskmanagementandloanrecoveryefforts.

Foramorecomprehensiveanalysis,seeNICBankQ3’2016EarningsNote.

HousingFinanceGroupreleasedQ3’2016results

HousingFinance(HF)GroupreleasedQ3'2016earningspostinga7.8%growthincoreEPStoKshs2.4fromKshs2.2inQ3'2015,againstourprojectedEPSofKshs2.7.Thegrowthinearningswasdrivenbya21.0%growth in operating revenuedespite a 25.7% growth in operating expenses,with the absolute gain inrevenuebeinghigherthanthegaininexpenses.KeyhighlightsfortheperformancefromQ3’2015toQ3’2016include;

• Operatingrevenuegrewby21.0%toKshs3.8bnfromKshs3.1bn,fasterthanourestimateof8.3%.Thiswassupportedbya14.2%growthinNet Interest Incomeand67.1%growthinNon-FundedIncome,

• NetInterestIncomegrowthof14.2%toKshs3.1bnfromKshs2.7bnwassupportedbya14.6%growth in Interest IncometoKshs6.7bn fromKshs5.8bn,despitea fastergrowth in Interest

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expenseof15.0%toKshs3.6bnfromKshs3.1bninQ3’2015.AsaresultofgrowthinNII,theNetInterestMarginimprovedto6.7%from6.5%previously,

• Non-FundedIncomegrewby67.1%toKshs0.7bnfromKshs0.4bn.ThegrowthinNFIwasdrivenbyanincreaseinotherincomethatrecordeda223.2%growthtoKshs0.4bnfromKshs0.1bn,attributedtopropertysales,whichisanindicationofincreaseduptakeinthegroup’srealestateprojects.Therevenuemixstoodat82:18,FundedtoNon-FundedIncome,from87:13inQ3’2015,

• Operatingexpenses grewby25.7% toKshs2.6bn fromKshs2.0bnpreviously. Thegrowth inoperatingexpenseswasdrivenbya16.7%riseinLoanLossProvision(LLP)toKshs0.5bnfromKshs0.4bnandotherexpenses,whichrose20.9%toKshs0.9bnfromKshs0.7bn.Staffcostsgrew8.0%toKshs843.7mnfromKshs781.5mn.WithoutLLP,operatingexpensesgrewby28.1%toKshs2.1bnfromKshs1.6bn,

• Thecost to incomeratiodeteriorated to68.1% from65.6%.WithoutLLP, cost to incomeratiostoodat55.0%from52.0%inthesameperiodlastyear,

• Profitaftertaxincreasedby7.8%toKshs837.7mnfromKshs777.5mninQ3’2015,• Customerdeposits roseby10.8%toKshs41.6bn fromKshs37.6bnwhile loansandadvances

increasedby4.3%toKshs53.9bnfromKshs51.7bn.Thisledtoadecreaseintheloantodepositratioto129.6%from137.6%,whichisquitehighcomparedtotheindustryaverageof86.1%,andapreferentialrangeof80%-90%.

HF’sperformancewasbelowourexpectations,asLLPcontinuestorisefollowingtheCentralBank’spushto ensure banks provide sufficiently for non-performing loans. Going forward, we expect HF group tocontinuechannellingresourcestoalternativesourcesof income,which includeproperty& investmentsthroughitssubsidiary,HFDevelopmentandInvestment(HFDI),andbancassurancethroughHFInsuranceAgency.HF’spropertyandinvestmentssubsidiary,HFDI,isinajointventureagreementwithClayWorksLimited,withplanstolaunchClayCity,aKshs5.0bndevelopmentthatwillsee1,520apartmentscomeupalongThikaRoad,furthersupportingthebank’sgrowthinNon-FundedIncome.

Foramorecomprehensiveanalysis,seeHousingFinanceGroupQ3’2016EarningsNote.

I&MBankreleasedQ3’2016results

I&MBankreleasedQ3'2016earnings,postinga16.5%growthincoreearningspersharetoKshs172.6fromKshs148.2inQ3'2015.Thegrowthinearningswasdespitea21.6%increaseintotaloperatingexpensesoutpacingan18.3%growthintotaloperatingrevenuetoKshs12.5bn,withtheabsolutegaininrevenuebeinghigherthanthegaininexpenses.KeyhighlightsfortheperformancefromQ3’2015toQ3’2016include;

• Totaloperatingrevenuegrewby18.3%toKshs12.5bnfromKshs10.6bn.Thegrowthwasasaresultofa20.8%growthinNetInterestIncomeanda11.0%growthinNon-FundedIncome,

• NetInterestIncomegrewby20.8%toKshs9.5bnfromKshs7.9bnpreviously.Thiswassupportedby13.1%growthinInterestIncometoKshs15.8bnfromKshs14.0bn,outpacinga3.4%growthininterestexpensetoKshs6.3bnfromKshs6.1bn.Assuch,theNetInterestMarginimprovedto8.0%from7.3%previously,

• Non-Funded Income grewby 11.0% to Kshs 3.0 bn fromKshs 2.7 bn. The increase inNFIwassupportedbyan11.1%growthinotherfeesandcommissionstoKshs1.1bnfromKshs967mnand a 3.8% increase in foreign exchange trading income to Kshs 1.0 bn from Kshs 973.3mn,previously.Thecurrentrevenuemixstandsat76:24,FundedtoNon-FundedIncomefrom75:25inQ3’2015,

• Totaloperatingexpensesgrewby21.6%toKshs5.1bnfromKshs4.2bndrivenbya54.0%riseinLoanLossProvision(LLP)toKshs0.9bnfromKshs0.6bn,anda7.9%growthinstaffcoststoKshs2.0bnfromKshs1.8bn.WithoutLLP,operatingexpensesgrewby16.7%toKshs4.2bnfromKshs3.6bn

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• Cost to income ratio rose to 41.2% from 40.0%, while without LLP, the cost to income ratioimprovedto33.8%from34.4%inthesameperiodlastyear

• Profitaftertaxincreasedby16.5%toKshs5.0bnfromKshs4.3bn,• Customerdepositsgrewby9.9%toKshs129.0bnfromKshs117.4bn,whileloansandadvances

recordedagrowthof4.5%toKshs121.5bnfromKshs116.2bn.Thisledtoadeclineintheloantodepositratioto94.2%from99.0%,whichisstillhigherthanthepreferentialrangeof80%-90%andtheindustryaverageof86.1%

I&MBankpostedgoodgrowthinearningsdespitetheriseinprovisionsleadingtoanincreaseinoperatingexpenses.Theriseinprovisionsinturntookatollonthelender’scosttoincomeratio,whichhasbeenhistoricallyoneofthelowestintheindustry.WeshallreleaseanEarningsNotewithmorecomprehensiveanalysisonceI&MGroupHoldingsreleasetheirQ3’2016financialresults.

StanbicBankKenyareleasedQ3’2016results

StanbicBankKenyareleasedQ3'2016earningspostinga24.1%growthincoreearningspersharetoKshs20.0fromKshs16.1inQ3'2015.Thegrowthinearningswasdespitea27.5%increaseintotaloperatingexpensesoutpacinga23.5%growthintotaloperatingrevenuetoKshs14.4bn,withtheabsolutegaininrevenuebeinghigherthanthegaininexpenses.KeyhighlightsfortheperformancefromQ3’2015toQ3’2016include;

• Totaloperatingrevenuegrewby23.5%toKshs14.4bnfromKshs11.6bninQ3’2015.Thegrowthwas as a result of a 22.4%growth inNet Interest Incomeand a 24.9%growth inNon-FundedIncome,

• NetInterestIncomegrewby22.4%toKshs8.3bnfromKshs6.8bn.Thiswassupportedbya25.5%growthinInterestIncometoKshs13.2bnfromKshs10.5bn,despitebeingoutpacedbya31.1%growthininterestexpensetoKshs4.9bnfromKshs3.7bn,withtheabsolutegaininrevenuebeinghigherthanthegaininexpenses.NetInterestMarginimprovedto7.8%from6.5%inQ3’2015,

• Non-FundedIncome(NFI)grewby24.9%toKshs6.1bnfromKshs4.9bn.TheincreaseinNFIwassupportedbyan11.9%growthinforeignexchangetradingincometoKshs2.1bnfromKshs1.9bn.Thecurrentrevenuemixremainsunchangedat58:42,FundedtoNon-FundedIncomefromQ3’2015,

• Operatingincomebenefitedfromaboostinotherincomeby76.2%toKshs2.1bnfromKshs1.2bninQ3’2015,

• Totaloperatingexpensesgrewby27.5%toKshs9.5bnfromKshs7.4bnpreviously,drivenbya110.9%riseinLoanLossProvision(LLP)toKshs1.2bnfromKshs0.6bn,anda6.4%growthinstaffcoststoKshs3.7bnfromKshs3.5bn.WithoutLLP,operatingexpensesgrewby20.6%toKshs8.3bnfromKshs6.9bn,

• Cost to income ratio deteriorated to 66.0% from 63.9%. Without LLP, cost to income ratioimprovedto57.7%from59.0%inthesameperiodlastyear,

• Profitaftertaxincreasedby24.1%toKshs3.4bnfromKshs2.8bn.Withoutgainsfromdeferredtax,PATgrewby5.3%toKshs2.9bn,

• Customerdepositsgrewby22.8%toKshs139.4bnfromKshs113.6bn,whileloansandadvancesrecordedagrowthof1.9%toKshs106.7bnfromKshs104.7bn.Thisledtoadeclineintheloantodepositratioto76.5%from92.2%previously,whichislowerthanourpreferredrangeof80%-90%andtheindustryaverageof86.1%

Stanbic Bank Kenya posted good growth in earnings despite the rise in the Loan Loss Provision (LLP),reflectingatoughoperatingenvironment.ThechallengingenvironmentinSouthSudanhasalsoimpactedonthebank’sperformance,thoughthishasnotbeencapturedinitsfinancialstatementsasatQ3’2016asthebankisyettoadoptastandardonaccountingforhyper-inflation.WeshallreleaseanEarningsNotewithmorecomprehensiveanalysisonceCFCStanbicGroupHoldingsreleasetheirQ3’2016financialresults.

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Ofthe7listedbanksthathavereleasedQ3’2016results,Co-operativeBankhasrecordedthehighestcoreEPSgrowthof22.3%,whileNICBankearningsdeclined6.4%.Theaveragegrowthincoreearningsacrossthebanking sector stands at 12.6%, attributable to a rise in net interestmargins.On average, depositgrowthhasoutpacedloangrowthwithdepositsgrowingby8.4%,higherthanthe5.9%loangrowth.

OtherthanindustryNIMs,whichthebankshavebeenabletoprotect,everyothermetriclooksworsethisyearcomparedtolastyear.

Belowisasummaryofthekeymetrics;

Bank CoreEPSGrowth DepositGrowth LoanGrowth NetInterestMargin LoantoDepositRatio

Q3'2016 Q3'2015 Q3'2016 Q3'2015 Q3'2016 Q3'2015 Q3'2016 Q3'2015 Q3'2016 Q3'2015Co-opBank 22.3% 36.4% 1.7% 17.9% 6.9% 18.3% 9.7% 9.4% 88.1% 82.7%EquityGroup 17.7% 14.2% 4.8% 28.7% 3.0% 23.0% 11.0% 10.2% 81.9% 83.3%KCBGroup 16.1% 7.5% (7.3%) 24.9% 4.9% 22.5% 9.2% 7.1% 83.5% 73.8%DTBK 11.4% 11.0% 29.9% 8.8% 5.4% 25.2% 6.8% 6.6% 79.8% 98.4%HFGroup 7.8% 8.0% 10.8% 13.3% 4.3% 19.5% 6.4% 6.1% 129.6% 137.6%Barclays (5.1%) 5.1% 13.4% (3.2%) 14.3% 10.8% 10.9% 10.9% 87.8% 87.2%NICBank (6.4%) 7.8% 2.4% 7.4% 0.7% 14.9% 6.3% 7.0% 101.9% 105.1%WeightedAverage* 12.6% 16.8% 8.4% 17.1% 5.9% 19.6% 9.8% 9.4% 86.1% 87.9%

*Averagemarketcapweighted

FamilyBankreleasedQ3’2016results

FamilyBankGroupreleasedQ3'2016earningspostinga48.2%declineincoreearningspersharetoKshs11.5, from Kshs 22.2 in Q3'2015. The decline in earnings was as a result of a 29.3% increase in totaloperatingexpenses,whichoutpacedthe0.8%growthintotaloperatingrevenuetoKshs7.3bn.

KeyhighlightsfortheperformancefromQ3’2015toQ3’2016include:

• Totaloperatingrevenuewasrelativelyunchangedgrowingmarginallyby0.8%toKshs7.3bn.Thegrowthwasasaresultofa9.0%growthinNetInterestIncomedespitea17.5%declineinNon-FundedIncome,

• NetInterestIncomegrewby9.0%toKshs5.5bnfromKshs5.0bn.Thiswassupportedby24.5%growth in Interest IncometoKshs8.8bn fromKshs7.1bndespitebeingoutpacedbya62.7%growthininterestexpensetoKshs3.3bnfromKshs2.0bnwiththeabsolutegaininrevenuebeinghigherthanthegaininexpenses.NetInterestMarginimprovedto8.6%from7.2%,

• Non-FundedIncomedeclinedby17.5%toKshs1.9bnfromKshs2.3bn.ThedeclineinNFIwasonaccountofa36.5%decline in feesandcommissionson loans toKshs0.4bn fromKshs0.6bn,despite a 33.3% increase inother fees and commissions toKshs1.5bn fromKshs1.1bn. Thecurrentrevenuemixstandsat75:25,FundedtoNon-FundedIncomefrom69:31inQ3’2015,

• Totaloperatingexpensesgrewby29.3%toKshs5.9bnfromKshs4.5bndrivenbya405.0%riseinLoanLossProvision(LLP)toKshs0.6bnfromKshs0.1bn,anda9.4%growthinstaffcoststoKshs2.1bnfromKshs1.9bn.WithoutLLP,operatingexpensesgrewby19.7%toKshs5.3bnfromKshs4.4bn,

• Costtoincomeratioroseto80.1%from62.5%whilewithoutLLP,costtoincomeratiostoodat72.3%from60.9%inthesameperiodlastyear,

• Profitaftertaxdecreasedby48.2%toKshs1.0bnfromKshs1.9bn,• Customerdepositsdeclinedby15.8%toKshs53.5bnfromKshs63.5bn,whileloansandadvances

recordedagrowthof5.7%toKshs55.8bnfromKshs52.8bn.Thisledtoanincreaseintheloanto deposit ratio that jumped to 104.3% from 83.1%, a 21.2% spike, quite higher than thepreferentialrangeof80%-90%.

FamilyBankhasissuedaprofitwarningforthefullyear2016.FamilyBankhasregisteredadeclineinprofitwith32.9%,39.8%and48.2%y/ydeclinesbeingrecordedinQ1,Q2andQ3’2016,respectively.Thebank

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sightsreasonsfortheprofitwarningas(i)increasedfundingcosts,(ii)risingexpenseswhichledtotheirannouncementtolayoffanunrevealednumberofemployeesandinturnreduceonstaffcosts,and(iii)themovebythegovernmenttoenacttheBanking(Amendment)Act,2015.ThiscomesaftertheTierIIlender published a press statement urging its customers to remain steadfast in light of social mediapropagandabringingintoquestionFamilyBank’sliquiditypositionandstability.

Wealsodidacomparisonof listedbanksandnon-listedbanks thathaveso far releasedtheirQ3’2016results,andthemetricsareasindicatedbelow;

Inthisanalysis,wenotethat;

• Non-listedbanksemergedmoreprofitablethanthelistedbankswithanaveragePATgrowthof25.5% compared to 12.0% growth for listed banks. However, listed banks rank higher both inreturnonassetsandreturnonequity, indicatingmore levelsofefficiencyandhigherreturntoshareholders,

• Non-listedbankswerealsoabletoattractdepositsfasterthanlistedbanks,experiencingagrowthof6.5%againstthelistedbanksgrowthof4.6%,

• Listedbankshavebecomemoreaggressiveinloandisbursementwiththeirloanbookgrowingat5.9%comparedtothe4.0%growthinnon-listedbanks.FollowingtheenactmentoftheBankingAct(Amendment)2015thatputsacaponinterestrateschargedonloans,thebanksaimtoissueoutmoreloanstocompensateforadeclineininterestmargins,

• LoanLossProvisionsfornon-listedbankshaveincreasedfasterat184.5%comparedto98.5%fornon-listedbanks,notingtheincreasedlevelofcreditriskacrossthewholesector

• Listedbanksareslightlymoreefficient incostmanagementwithCosttoIncomeratioat57.2%comparedtonon-listedat57.7%

NairobiSecuritiesExchangealsoissuedaprofitwarningforFY’2016.NSEsightedthedeclineinpricesofstock trading on the equities market, whose activity contributes approximately 53.0% of NSE’s totalincome, as themain reason for the decline in profit. Key to note is that the securities exchange alsoexperienceda4.5%declineingrowthinFY’2015.Despitethetwoprofitwarnings,westillexpectstrongerearnings growth in 2016 as compared to 2015 supported by a more favourable macroeconomicenvironment, with our expectations for earnings growth being 12.5%, with even listed banks to datereportingcoreEPSgrowthof12.6%onaverage.

DiamondTrustBank(DTB)Kenya,aTierIbankwithpresenceacrossEastAfrica,issettoreceiveaKshs7.5bncreditfacilityfromAfricanDevelopmentBank(AfDB)splitintoKshs5.0bnforon-lendingcreditandtheremainingKshs2.5bnassubordinateddebt.Thefundswillbeusedto(i)financeSMEsamongotherlocally-basedcompanieswithabiastothoseinthemanufacturing,construction,tradingandtransportsectors,(ii) enableDTBgrow its loanbookandexploreother similarmarkets in the region,and (iii) add to thelender’s Tier II capital hence strengthening its balance sheet. With AfDB’s main objective being tocontributetothesocio-economicprogressofits78memberstates,fundingSMElendinginKenyathroughDTB is well aligned to its mandate. We are of the view that this move will hasten DTB’s strategy of

ComparisonbetweenListedandNon-ListedBanksPerformance

Bank PATGrowth

DepositGrowth

LoanGrowth

NetInterestMargin

LoanLossProvisionGrowth

NPLRatio

CosttoIncome ROaA ROaE

AverageListed 12.0% 4.6% 5.9% 9.4% 98.5% 6.9% 57.2% 3.5% 22.5%AverageNon-Listed 25.5% 6.5% 4.0% 4.8% 184.5% 9.5% 57.7% 1.8% 13.3%

*Averagebasedonmarketshareweights

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expandingfurtheracrosstheregionandwillseethebankthriveinitseffortstofocusonextendingcreditfacilitiestotheSMEsinthisregion.

SeePrivateEquitysectiononthediscussionofFidelityBankacquisitionandwhatitmeansforthebankingsector.

Belowisourequitiesrecommendationtable.Keychangesfromourpreviousrecommendationare:

• NIC Bank has moved to an “Accumulate” recommendation with an upside of 11.6%, from a“Lighten”recommendation,withanupsideof2.1%,followingan8.8%w/wpricedecrease

allpricesinKshsunlessstatedEQUITYRECOMMENDATION

No. Company Priceasat18/11/16

Priceasat

25/11/16

w/wChange

YTDChange

TargetPrice* Dividend

Yield

Upside/(Downside)

**Recommendation

1. BamburiCement 159.0 160.0 0.6% (8.6%) 231.7 7.8% 52.6% Buy2. HFGroup 14.8 14.3 (3.4%) (32.1%) 19.8 9.2% 48.1% Buy3. KCBGroup*** 30.8 30.5 (0.8%) (30.4%) 42.5 7.5% 46.8% Buy4. ARM 28.8 25.8 (10.4%) (38.2%) 37.0 0.0% 43.7% Buy5. DTBK*** 136.0 129.0 (5.1%) (31.0%) 173.2 1.8% 36.1% Buy6. Britam 10.0 10.1 0.5% (22.3%) 13.2 2.4% 33.7% Buy7. KenyaRe 22.3 21.8 (2.2%) 3.8% 26.9 3.6% 27.3% Buy8. BAT(K) 830.0 830.0 0.0% 5.7% 970.8 6.2% 23.2% Buy9. EquityGroup 32.0 30.3 (5.5%) (24.4%) 34.2 7.7% 20.8% Buy10. StanbicHoldings 70.0 69.0 (1.4%) (16.4%) 75.5 7.9% 17.3% Accumulate11. Co-opBank 14.2 13.9 (1.8%) (22.8%) 15.2 6.8% 16.2% Accumulate12. CICInsurance 4.0 4.0 0.0% (35.5%) 4.4 2.5% 12.5% Accumulate13. Barclays 8.9 9.0 0.6% (33.8%) 9.2 9.7% 12.5% Accumulate14. NIC 31.3 28.5 (8.8%) (34.1%) 30.8 3.5% 11.6% Accumulate15. I&MHoldings 96.0 95.0 (1.0%) (5.0%) 101.1 3.9% 10.3% Accumulate16. Liberty 13.8 13.5 (2.2%) (30.8%) 13.9 0.0% 3.0% Lighten17. Jubilee 473.0 480.0 1.5% (0.8%) 482.2 1.8% 2.3% Lighten18. Stanchart*** 189.0 191.0 1.1% (2.1%) 169.9 6.6% (4.4%) Sell19. SanlamKenya 34.0 32.8 (3.7%) (45.3%) 30.5 0.0% (6.9%) Sell20. Safaricom 20.0 19.9 (0.5%) 22.1% 16.6 3.6% (12.9%) Sell21. NBK 7.6 7.8 2.6% (50.5%) 2.7 0.0% (65.4%) Sell*TargetPriceasperCytonnAnalystestimates**Upside/(Downside)isadjustedforDividendYield***IndicatescompaniesinwhichCytonnholdssharesinAccumulate–Buyingshouldberestrainedandtimedtohappenwhentherearemomentarydipsinstockprices.Lighten–Investortoconsiderselling,timedtohappenwhentherearepricerallies

We remain “neutralwith a bias to positive” for investorswith a short tomedium-term investmentshorizonand“positive”forinvestorswithlong-terminvestmentshorizon.

PrivateEquity

TheweekwasmarkedbytwolargeacquisitionannouncementsinKenya,asshownbelow:

SBMHoldingstoAcquireFidelityBank

SBMHoldingsLtd,thesecondlargestbankinMauritiuswithamarketshareofabout25%,issettoacquireKenya’sFidelityCommercialBankLtd,subjecttoregulatoryapprovalsinKenyaandMauritius.SBMGrouphasanassetbaseofMauritianRupee146.2bnasatQ3'2016,(with1MRPat2.85Kshs,thisequatestoaroundKshs416.7bn),anditsbankingarm,SBMBank,hasaninternationalfootprintinIndia,Madagascar,andarepresentativeofficeinMyanmar,andislookingtoexpandintoEastAfrica.Fidelitybankstartedasacommercialbank20-yearsago,has14branchesinKenyaandisranked31outof41Kenyanlenderswithamarketshareof0.4%.

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Thetransactiondetailsareasbelow;

1. SBMHoldingsisacquiringtheentiresharecapitalofFidelityCommercialBankforKshs1.3bn,2. SBMHoldingswilladditionallyinjectKshs1.5bnasgrowthcapitalintothebank,3. HencethetotalconsiderationisKshs.2.8bn,comprisingbothpaymentstoshareholdersofFidelity

andthenewcapitalinjection,4. AsatFidelityBank’slastreporting,Q1’2016,thebankhadabookvalueofKshs1.8bn,5. Assuch,thetransactionisbeingcarriedoutata1.6xprice-to-bookvaluation,a57.0%premium

book,representingthepremiumSBMHoldingshadtopaytoentertheKenyanbankingspace.

ThetablebelowindicatesthepreviousbankingacquisitiondealsthatwentthroughandtheirtransactionmultiplesintheKenyanbankingindustry;

Acquirer BankAcquired

BookValueatAcquisition(bn)

TransactionStake

TransactionValue(bn)

P/BvMultiple Date

SBMHoldings FidelityCommercialBank 1.75 100.0% 2.75 1.6x Nov-16MBank OrientalCommercialBank 1.80 51.0% 1.30 1.4x Jun-16I&MHoldings GiroCommercialBank 2.95 100.0% 5.00 1.7x Jun-16MwalimuSACCO EquatorialCommercialBank 1.15 75.0% 2.60 2.3x Mar-15Centum K-RepBank 2.08 66.0% 2.50 1.8x Jul-14GTBank FinaBankGroup 3.86 70.0% 8.60 3.2x Nov-13Average 77.0% 2.0x

Wenotethat for localbankacquisitions, theaverageprice-to-bookmultiple isat2.0x,withanaverageacquisition stake of 77%. Given that SBM Holdings is going for a 100% stake at a 1.6x price-to-bookvaluation,wefeelthatthe57%premiumabovethemarketisanattractiveprice,giventhat(i)thelistedmarket isatahistoric lowvaluationof1.0xbookvalue,againstahistoricalaverageof1.9x,and(ii)theacquisitionisatatimewhenCBKhasplacedamoratoriumonthelicensingofnewbanks,thusoperatingbankshaveadditionalnegotiatingpower,andthose lookingtopurchaseprivatebankswillhavetopaypremiumstothelistedmarket.

FidelityCommercialBankhadaliquiditypositionof11.0%asatQ1’2016,9.0%lowerthantheminimumstatutoryratioof20.0%,andwaslookingtosellastaketoastrategicinvestortobolsteritsliquidityandcapitalposition.Thisisafurthercaseofconsolidationinthebankingindustry,withbankssuchasFidelityCommercialBank,whoareuncompetitiveinthemarket,beingboughtout,andhighlightstheattractiveinvestmentopportunityinfinancialservicesinKenya.

Keytake-awaysfromthistransaction:

i. Consolidationinthebankingsectorwillonlygatherpacegoingforward.Therearemanylimpingplayers thatneed tomergerorbeacquired.Consolidationwill lead to amore stable and safebankingsector,asindicatedinourCytonnH1’2016BankingReport,

ii. Thereisvalueinthebankingsector.SophisticatedplayerslikeSBMarewillingtopay1.6xbookforasectortradingat1.0xbookvalue,and,

iii. Weshallseemoreforeignentriesintothemarket,followingMBankandSBM.

Foramorecomprehensiveanalysis,seeFidelityBankAcquisitionandWhatitMeanstoKenya’sBankingSectorNote.

LeapFrogbuysintoGoodlifePharmacy

PrivateequityfirmCatalystPrincipalPartnershassolditsmajoritystakeinGoodlifePharmacytoLeapFrogInvestments,withCatalysthavingonlypurchasedGoodlife2-yearsago,purchasingthebrandthenknownasMimosaPharmacies.LeapFrogpaidUSD22.0mntoacquiretheunknownmajoritystakeintheKenyanPharmaceuticalcompanyfromCatalyst.Keytonoteisthat:

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1. GoodlifePharmacyhad12branchesinthecountryasatMarch2015andplannedtoincreasethisnumberto20byDecember2015.Goodlifecurrentlyhas16storescountrywideandasstatedinourCytonnWeeklyUpdate#12,2015,thefirmplanstoinvestKshs1.7bninthenext5-yearstoopenup80pharmacies.ThisstrategicexpansionwillnowbetakenovertheLeapFrogandnotCalatyst,

2. CatalystPrincipalPartnersontheotherhand,divestedtheirstakeinordertoactualisereturnsfortheirFundIinvestors,ontheeveofthePEfirmseekingtoraiseUSD197mnfortheir2ndfundtoinvestinconsumerdrivensectorsacrosstheSub-SaharanAfricaregion.

3. Leapfrog Investmentsalsoholdsacontrollingstake inResolution Insurance,amedical insurer,givingthemauniqueopportunitytoprovidebothhealthcareproductsandhealthcareinsurance.

ThemovebyLeapFrogtoinvestinhealthcarewasdrivenbyamongotherfactors,(i)lowhealthinsurancepenetration,(ii)increasedutilisationofservices,and(iii)limitedaccessandaffordabilityofqualityhealthcare.

RealEstate

AccordingtotheLandIndexReportbyPropertyRealityCompany(PRC),Ruakatownrecordeda125.0%landpriceappreciationoverthelastoneyearduetoinfrastructuredevelopmentinKiambuCounty,whichincludes the construction of the Northern Bypass 4-years ago, and increased housing development.However,landpricesintherestofKiambuappreciated3.0%overthesameperiod.

OthersatelliteareassuchasKiserianandUtawalaalsorecordedrapidlandpriceappreciationof42.0%and32.0%,respectively.Atthesametime,thelandpricesrosemoderatelyintherestofsatelliteareasandrecordedpricestagnationonlyinKamuluandMalilitowns.

Thereportindicatedthatthedemandforlandinsatellitetownshasalsobeenboostedbyanincreaseinfinancingoptions,andthedemandissettoincreasesignificantlyduetotheincentiveofferedbythelawcappinginterestrates.Thekeytakeoutsfromthereportare:

• Ruaka,Kiambu,KikuyuandSyokimauhavethehighestrelativepricesoflandduetoproximitytoNairobiwhileJoska,IsinyaandKiserianrecordedthelowestaveragepricesasshownbelow;

• Mostpropertysoldhaveaccessroadsandarefullybeaconedwithelectricity&wateronsiteto

increasetheirvalue,• Accessto finance is thekeysetbackto land investors.Only24%ofrealestatecompanieshave

financialpartnersprovidingfinancingtoclientsfortheirproducts,and,• 70.0%oftherealestatecompaniesallowinstalmentpaymentsanddiscountsoneitherbulkor

cashpurchases.

8.0

3.83.5

2.2 1.9 1.6 1.5 1.5 1.4 1.2 1.2 1.1 1.1 0.8 0.6 0.5 0.40.01.02.03.04.05.06.07.08.09.0

Price(M

n)

Priceper1/8acreinKshsMn

16

ThePRCreportisjustinlinewiththerecentlyreleasedreportdubbed“PropertyPriceIndexforQ3’2016”byHassConsult,which indicateda21.4%landpriceappreciationforthesatellitetownsofNairobi.Thelandpricesinsatellitetownsaregrowingatatremendousrateandthereisnoexpectationofadeclineintheshorttomediumterm.Inourview,thelandinsatellitetownsinNairobiareanattractiveinvestmentduetohighcapitalappreciationandincreaseindemandduetoincreaseinmiddleclassincomeearnersbuyinglandforhomeownershipmainlyinsatellitetownstoavoidcongestioninNairobisuburbs.

Inother focusareas thisweek, thegovernment isnowexpected to factor in its lost revenue from theNationalConstructionAuthority(NCA)andtheNationalEnvironmentManagementAuthority(NEMA)feesin the 2017/2018 Budgetary Allocations. The Transport and Infrastructure Secretary James Machariaindicated that the fundingmechanismwouldensure the two institutions runoptimallybutwillalsobeexpectedtogeneratealternativerevenuestreams.Thedirective isexpectedtotakeeffect immediatelywith concerned ministries working to strengthen the regulations. The Transport and InfrastructureSecretarynotedthattheMinistrywillfindmechanismstoensurethecabinetdecisiononscrapingNCAandNEMAfeesiscompliedwith,whichisgoodfortheconstructionsectorandthecountryinefficiencyandeaseofdoingbusiness.

Over theweek, the Tourism Regulatory Authority ranked over 80 hotels, with only 30 establishmentsqualifyingforstarratings.Thereportindicatedthatthenumberofhotelswithfive-starratinghavedoubledto15-hotelsfollowingthepreviousrankingexercisethathadidentified7five-starhotels inexclusionofNairobiarea.Thehotelsclassifiedunderfive-starratingwereVillaRosaKempinski,HemingwaysNairobi,SankaraNairobi,FairmontTheNorfolk,TheSarovaStanley,RadissonBluHotel,DusitD2andTribeHotel,whiletenhotelswererankedfour–star,sixwererankedasthree-starandsixwererankedastwo-starhotelsinNairobi.

Theclassificationandratingofhotelswasmainlythroughthefollowingcriteria;

• Qualityoffacilities• Qualityofthelocation• RoomsandConferencesizes• Qualityofthedécorand• Linguisticdiversityofthestaffamongothers

Thisrankingofthehotelsandrestaurantsbringsaboutvariousadvantagesanddifferentiationofhotels.Thekeyadvantagesbeing(i)hotelspegtheirfacilitiespricingontherating,and(ii)theratingisusedasthemarketingtoolsinceinternationalguestsrelyontheseinternationalstandardsclassificationswhenbookingforhotelservices.Theincreasednumberoffive-starhotelsinNairobiismainlyinformedbytheintensiveinvestmentsinthehospitality sector over the last five-years. We remain positive on hospitality sector performance andinvestmentinNairobi,sincetheopportunityinthismarketliesinMaasaiMarafollowedbyNairobiarea,whichoffershighreturnsto investorsasperourCytonnHospitalityReport,boostedmainlyby(i)MICEtourism,and(ii)thegrowingeco-tourismandhealthtourisminvolvingenvironmentalconservation.Theinvestorsshouldhoweverbedifferentiatedbyeitherproductoffering,locationorcustomerservicetoattractabiggermarket share. Formore insight into thehospitality industry, seeourHospitality SectorReport.

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