Select African Banks: How did I miss that? One for the road...

Dear Africa Interested Individuals:

                                                         CRDB Bank Tanzania was trading at 125 Tanzania Shilling four years ago and now trades at 385 Tanzania Shilling.  This is a gain in excess of 200%.  Most of the movement actually happened over the past two years.  The bank's debt/capital is just at my maximum of threshold level of 30% and is expected to trend further downward.  NPL ratio of 8% still yielded a pre-tax income margin of 27%.  Its off-balance sheet items are 12% of its assets which is reasonable. CRDB is not the largest bank by assets in Tanzania.  

Tanzania's economy is expected to grow close to 7% this year and Uganda just opted to route its crude-oil pipeline through Tanzania as opposed to Kenya for export purposes.  CDC group acquired a stake in CRDB in September 2015.  You may have missed out on the 200% CRDB gain thus far over four years but, this journey appears not to be over.  Over to you.  

The largest bank in South Africa (Standard Bank) has gained approximately 9% over the past four years.  The largest bank in Morocco (Attijariwafa Bank) has gained approximately 2% over the past four years.  The largest bank in Nigeria (FBN Holdings) has lost approximately 68% over the past four years.  I will come back to First Bank later.

The largest bank in Egypt (National Bank) has gained approximately 43% over the past four years. The largest bank in Cote D'Ivoire (Societe Generale) has gained approximately 240% over the past four years on the BRVM.  The economy of Cote D'Ivoire has received positive reviews from the IMF and World Bank (nothing says they cannot be wrong.)  The leaders are doing a lot of things right and the convertibility between the CFA and the Euro goes a long way to ease the pressure on its reserves. This journey also appears not to be over. Over to you.        

The largest bank in Kenya (Kenya Commercial Bank) has gained approximately 77% over the past four years.  The bank was also selected by the Central Bank of Kenya to manage Chase Bank. Kenya's banking industry has a cloud over it presently that will dim the light of every bank to varying degrees.  

I & M Holdings Kenya has gained approximately 125% over the past four years.  I & M Bank was among the top-ten banks in my African Bank's productivity/efficiency ranking available on this blog.  DEG & Proparco recently exited I & M Holdings and sold their stake to CDC group who has take a 10.68% equity stake.  The share price of I & M has been pretty much stagnant over the past one year. The timing of the exit could not have been better.  Good one for DEG Germany & Proparco France given that they have a preference for debt investments over equity investments.  

There are two "how did I miss that" in this article: CRDB & Societe Generale (SGBCI).  The typical common theme in "how did I miss that" is that it was not obvious.  You either saw too many major negatives or no over arching positives.  Well do not hold your breath because I am bringing you another bank that its huge upside may not also be obvious presently.  I expect this bank to gain in excess of 200% in two years from now maximum.  This will equate to a price of N10.60 or higher relative to today's closing price.  

The bank is FBN Holdings which has done a lot of wrong things and has finally and rightfully paid the price for its wrong decisions over the past seven years.  I will mention some of FBN's transgressions over the years in no particular order.  

1. For the fiscal year ended March 2009, the bank paid out dividend almost 3X its EPS.  Dividend cover of 0.38.  That was a trying period in the economy and FBN acted as if it could not be bothered.  Profligacy instead of prudence.  Seven years later under similar circumstances, the bank paid out a third of its earnings as dividend.  We all live and learn I guess...  

2. Fixation over lending to the oil sector relative to the agriculture sector.  The reason usually provided is that there are not enough viable farmers to disburse loans to.  We all know where the oil loans has put FBN today and even in 2009.  

3. FBN was pursuing growth as a strategy; this has been in play for about ten years now.  FBN was 6.6X leveraged as at September 2009.  This was the highest leverage at the time when compared to its peers.  Despite this, FBN was targeting leverage of 8X - 9X as soon as feasibly possible.  I saw the bank;s size as an albatross and not an asset at the time.  The bank's management did not agree with me.  Today, as at December 2015, FBN's leverage is 7.2X and likely to further decline.  

FBN has sold a majority stake in its Microfinance Bank to Letshego of Botswana.  FBN also plans to cut 1,000 jobs and do less of oil industry loans.  I have also mentioned that the bank's staff count is too 'bottom heavy.'  These decisions show the bank is clearly trying to slim down.  The size asset has become to heavy to carry.  

4. Unsecured loans to gross loans was at 19% as at March 2009.  The bank has made one of the highest provisions for loan losses in Nigeria's banking industry.  These collapses typically do not happen overnight.  

5. FBN mixes business and relationships too deeply and when things go awry, the bank usually comes up with the short end of the stick.  The board needs to be overhauled.  There are some 'oldies' on the board (one in particular) that have refused to let go of the golden fleece.  Key decisions are made to please individuals rather than the business.  Personal gains for business travails.  First Bank is reaping.  

Typical in frontier markets, positive performances have price spikes and negative performances lead to downward price movements with a passion rarely seen.  The good developments for FBN in a nutshell are:

1. Earnings rose 5%.  FBN has always struggled growing earnings and still had a positive growth in a difficult period.    

2. Net interest income (before impairment) rose 9%.

3. Debt-to-capital is now at 30.8% (an improvement from H1 2015) which is at the threshold of debt generating increasing instead of diminishing returns.  

4. Operating expenses declined 12% from FY 2014 - 2015.  

5.  FBN has told us what is going on for the most part.  I will take this every day of the week over a bank that refuses to tell you what is going on for the most part.  

6. Net income was N12.6B in March 2009 and was N15.4B in December 2015.  Yes, earnings have more than doubled over that period and its share price is now a quarter of what it was back then.  The punishment is in excess of the crime.    

7.  The day after its FY 2015 and Q1 2016 conference call (April 28), investors purchased over $2 million of the stock.  For the week ended, April 29, 2016, investors took a liking to FBN over Access with its optically illuminating performance.

8. FBN is a lot less stretched relative to its capital (1.0) when net loans are deducted from its asset base in comparison to the last major crisis period of 2009.  I am not surprised that the bank said it does not need to raise capital after major provisioning for loan losses.

9. From a purely market perspective, every largest bank in Africa mentioned above has a positive price movement over the past four years except FBN Holdings.  It may just be about time for the one outlier to align.  

One key difference that I like compared to 2009/2010 is, FBN is on its own in its dire predicament. The industry as a whole has not been taken apart by the Central Bank like in 2009 and there has been no public scandal (except you count the sacking of Fidelity Bank's MD).  This has left FBN's share price more exposed to its own poor business decisions compared to 2009 where the all the banks in the industry took the price pummeling collectively and fairly equally.   

I will leave it at that.  The largest bank in Cote D'Ivoire has more than tripled in four years.  The largest bank in Nigeria will do the same in less time (2 years) in my opinion even if the economy grows at an average of 3.5% for 2016 and 2017.  I hope you will not say "How Did I Miss That?"

The sun is about to rise and shine in Africa on May 4, 2016.  Make hay while it does.

                       This blog is not about buying and selling; consider this a rarity...

                                                           Dialectic Africa Analyst