STANBIC UGANDA

African Markets: Financials

1H09 – Defying the downturn, but

deposits take the pain
Equity Research:

Recommendation
Follow Up

We upgrade Stanbic Uganda (SBU.UG) from our previous HOLD to a BUY.

BUY Our revision is mainly motivated by:
Target: UGX194
• the falling cost of equity (CoE) that pushed our target price to
UGX194, which is a 21% discount to the current price. We
reduced our CoE from 22% to 20.75% on falling country risk premium
and receding risk free rate;

September 03, 2009 • the leverage benefits that should support the Return on Equity (ROE)
going forward as well as providing a buffer to the bank’s capital
position. The first tranche of the bond issue raised UGX26.6bn
and management expects to earn an average spread of 3.0%; and
• our expectation of a strong currency return in the medium to long
term. The shilling has lost 3.1% against the US$ on a year-to-date
(YTD) basis. The shilling trades at UGX2030/US$ against an average
of UGX1802/US$ since CY2000. With stable foreign currency
reserves and more investment in the oil sector, the downside risks to
the shilling are low in our view. A 10% appreciation in the shilling,
for example would provide investors with a 33% US$ return
should the share price reach our target.

Fig 1: Company information

Stanbic Bank 170
Company Name Uganda 160
Share Code (Bloomberg) SBU.UG 150
Current Price (LC) 160 140
Current price (US$) 0.079 130

120
Shares in Issue (mn) 5118 110
Market Cap (LC,bn) 818880 100
Market Cap (US$, mn) 403.389
25-Jan-09

8-Feb-09

22-Feb-09

8-Mar-09

22-Mar-09

5-Apr-09

19-Apr-09

3-May-09

17-May-09

31-May-09

14-Jun-09

28-Jun-09

12-Jul-09

26-Jul-09

9-Aug-09

23-Aug-09

Free Float (Legae Est) 18%

Peter Mushangwe
Zandisile Mabuya
+27 11 551 3675 Source: Bloomberg, Legae Calculations
The bank’s 1H09 set of results shows a more competitive environment,
particularly on the liability side. While our view is that SBU.UG can protect its
profitability to an extent (due to its widespread branch network, a strong
brand, strong capital base and a management team that has experience in
East Africa and Uganda in particular) the decline in deposits by 3% from
FY08’s UGX1.289tn to UGX1.245tn shows the changing shape of the
liability side of Ugandan banks balance sheets. This is why we support
the bank’s intention to issue the second tranche of its bond to enable the
bank to support the lending book. According to management, the second
tranche could be issued before 1H10, and there have been indications
of interest from some institutional investors, although it was not enough
to merit the issue.

The bank launched a number of products in order to protect its deposits.

According to management, the uptake of its new products has been better
than expected. The bank intends to aggressively market its credit card
business in the next two years. The bank also installed 5 more ATMs. One
was installed in Kikuubo, the focal point of informal micro-business in
Kampala. The remaining ATMs were installed outside the Kampala Central
Business District. Management affirmed that there was no dilution in the
average traction per ATM. Below we highlight some of the salient features of
the 1H09.

• Net interest margin (NIM) is still strong despite the rising cost of
funds. The NIM rose to 5.25% from 4.36% in 1H08. According to
management, the cost of funds for the bank remains stable at around
1.2%. Our calculation indicates that the cost of deposits in the industry
ascended to 4.5%. We envisage the bank pushing into expensive
term deposits to support loan growth. In our opinion, the bank’s
cost of deposits will steadily migrate upwards, hurting NIMs
somewhat;
• The impairment to advances ratio rose materially to 0.68% from
0.44% in 1H08. In absolute terms, the impairment losses on loans
and advances rose to UGX5.380bn from 2.515bn in 1H08. The
impairment losses also rose by 63% from FY08’s 3.309bn. On an
implied basis, this is slightly above our expectation (FY09 =
UGX8.848bn), but we are not exceedingly concerned with this as the
bank managed to reduce exposure to corporates. Management

Page 2 of 9
 informed us that their corporate book performed excellently, but the
SME and personal sectors took some strain;
• The cost to income ratio went down to a pleasing 47.6% from
49.7% in FY08. Management indications are that the ability to further
push down this ratio are narrow and expectations are that it will
remain around 50%. A cost-to-income ratio of 50% is not excessive in
our view;
• The loan to deposit ratio continues to go up. The ratio went up to
63.1% from 56.7% for FY08. Management informed us that they will
continue to increase loans to the target ratio of 70%. Loans and
advances to customers went up by 8% from FY08’s UGX730.9bn to
UGX786.8bn;
• The credit exposure to Ugandan corporates fell by 10.6% from
UGX368.6bn in FY08 to UGX329.4bn in 1H09. Mortgage lending,
however, soared by 12.1% to UGX48.6bn from FY08’s 40.1bn.
Personal and business banking (mainly individuals and SMEs) loans
went up from UGX240.8bn to UGX318.4bn;
• Fee and commission income grew by 10%. According to
management, the bank’s pricing went up by an average of 6% in
1H09. Management believe that their products are reasonably priced,
although they are not the cheapest in the market, and they do not
covet to be the cheapest. The managed funds rose to UGX21.4bn
from UGX1.3bn in FY08. This should support fee and commission
income going forward;
• Trading income went up by 62% due to the increased volume on
forex trading primarily on the volatility of the shilling.
• As a percentage of operating income, interest income continue to
contribute the most, increasing marginally to 63.3% from 62.2% in
1H08. Commission and fee income contribution declined to 24.3%
when compared to 28.2% in 1H08; and
• Net profit went up by 40% to UGX46.9bn from UGX33.6bn in 1H08.
The bank declared an interim dividend of UGX5.27 per share from
EPs of UGX9.16

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 Fig 2: Financials and salient ratios

Growth rate
From From
1H09 1H08 FY08 1H08 FY08
Interest Income 92,659,664 74,324,150 150,656,185 25% NM
Interest Expense (7,227,317) (8,736,227) (16,572,001) -17% NM
Net interest Income 85,432,347 65,587,923 134,084,184 30% NM
Fee & commission income 32,795,145 29,681,691 61,732,409 10% NM
Net interest , fee and commission income 118,227,492 95,269,614 195,816,593 24% NM

Trading 16,699,347 10,284,280 27,973,864 62% NM

Other operating income 82,451 (155,553) 86,798 -153% NM
Operating income 135,009,290 105,398,341 223,877,255 28% NM

Impairment losses on loans and advances (5,380,119) (2,515,745) (3,309,375) 114% 63%
Employee benefits expenses (23,115,374) (18,443,837) (39,443,880) 25% NM
Other operating expenses (44,342,229) (41,806,759) (77,505,438) 6% NM

Operating profit 62,171,568 42,632,000 103,618,562 46% NM

Share of profit from associate 179,349 88,090 326,021 104% NM
Profit before income tax 62,350,917 42,720,090 103,944,583 46% NM
Income tax expense (15,484,604) (9,149,060) (25,394,495) 69% NM
Profit for the year 46,866,313 33,571,030 78,550,088 40% NM

Cash and Cash equivalents with BoU 235,972,511 154,877,520 278,484,788 52% -15%
Government Securities - available for sale 370,959,683 380,894,055 310,015,514 -3% 20%
Loans and advances to banks 36,900,976 236,584,260 108,722,830 -84% -66%
Loans and advances to customers 786,778,070 570,267,367 730,864,686 38% 8%
Deposits from customers 1,245,347,590 1,219,745,482 1,289,674,449 2% -3%
Deposits from banks 84,622,927 18,017,406 64,122,926 370% 32%
Managed funds 21,374,584 712,567 1,023,578 2900% 1988%
Retained earnings 130,593,829 95,273,313 109,919,028 37% 19%
Total Assets 1,626,479,002 1,505,569,955 1,596,318,021 8% 2%
major ratios
NIM (unannualized) 5.25% 4.36% 8.40%
Impairment to Advances 0.68% 0.44% 0.45%
Credit Loss ratio 0.71% 0.48% 0.55%
Cost to Income (adjusted) 49.97% 57.16% 52.24%
Cost to Income ratio (as per management) 47.6% 54.4% 49.7%
Loan to Deposits 63.18% 46.75% 56.67%
ROE (implied) 50.80% 55.60% 48.30%
ROA (implied) 5.80% 4.50% 4.90%
as % of Operating profit
Interest income 63.28% 62.23% 59.89%
Commission and fee 24.29% 28.16% 27.57%
Trading Income 12.37% 9.76% 12.50%

Source: Company reports, Legae Calculations

Page 4 of 9
Why an Upgrade?

Our upgrade to BUY is primarily premised on:

• our expectation of a pick-up in global risk appetite. In our view,

that should bode well for the shilling and thus present investors
with a material currency return. The local currency depreciated from
around UGX1600/US$ in CY2000 to the current UGX2030/US$. Our
initial concerns with the shilling were principally on its response to the
global economic and liquidity crisis. Our view is that the shilling has
taken its pain already. Supported by the stable reserves, we expect
the shilling to appreciate against the US$. In our view, there is
enough room for optimism with regard to the shillings’
performance against the US$ in the medium term;
• our falling CoE that pushed our fair value to UGX194. We reduced
our CoE from 22.0% to 20.7% on 1) waning country risk as
sentiments on global economic recovery develop and 2) falling risk
free rate. Fitch raised Uganda’s outlook on long-term foreign and local
currency debt (Fitch: B/Positive [19.08.09]; Standard & Poor’s:
B+/Stable [31.07.09]). The bank rate has declined by 8.8% from
19.4% in January 2009 to 10.6% in June 2009. While this should
reduce the downside risk on the economy, the lending rates, however,
remain fairly high. We remain concerned with the political risks
though, especially given the fact that country will hold her presidential
election in 2011 and the continued insecurity on the boarder with
Democratic Republic of Congo; and
• the leverage benefits that the bank stand to enjoy from its bond
issue. The bank issued a bond which was overwhelmingly subscribed
for by local investors and raised UGX26.6bn (out of required
UGX30bn). The bond pays a fixed interest rate of 14.5% or a floating
rate of 182 day Uganda Government Treasury bill rate plus a 150bp.
UGX24.8bn of the issue attracted a fixed interest rate. The advantage
in the fixed rate is that the bank can lock-in its spread. In our opinion,
the bank can earn a spread of between 1.25% and 3.0% on the bond.
The bank’s minimum lending rate on mortgages is 16%. The bank’s
prime rate if 15%. We believe in the face of strong mortgage loans
demand, the bond will make asset-liability management more flexible.

Page 5 of 9
Fig 3: interest spreads are strong, and a strong shilling recovery is likely.

Bank rate has fallen materially Interest spreads are still strong
21%

21.8%
19% 21.0%
20.0% 20.2% 18.9%
18.4%
17%

15.0% 15.2%
15%
11.6% 10.7%
11.7%
13% 10.9%
10.0% 9.6%
Savings rate
8.3% Time deposit rate
11% Rediscount rate Lending rate 6.4%
91-TB 6.2%
Bank rate 5.0% Rediscount rate
9%
2.1% 2.2% 2.4%

7% 0.0%

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09
Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

FX reserves are stable The LC should continue reverting to its mean in the medium term
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09
Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09
BoU FX Reserves (US$mn)
3,000 5.7
Commercial Banks FX (US$mn)
1400
Gross FX (months of imports) HRS
2,500 5.5 1500

1600
2,000 5.3
1700
1802
1,500 5.1 1800

1900
1,000 4.9 2000
2030
2100
500 4.7
2200

- 4.5 2300
Jun-08 Dec-09 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09
2400

Source: BoU, Bloomberg, Legae Calculations

Share Price Performance

• On a YTD basis SBU.UG has outperformed its local peers - Bank of

Baroda Uganda (BOBU.UG) and DFCU (DFCU.UG). In fact SBU.UG
is the only one with a positive return of 14% against -30% and -35%
for DFCU.UG and BOBU.UG respectively.
• Compared to regional peers, (Kenyan banks) SBU.UG again out-
performs, with a US$ return of 10.8% versus an average return of -

Page 6 of 9
 9.6% for the Kenyan banks universe we created. This is in spite of the
the appreciation of the Kenya shilling against the US$
• Despite the out-performance, SBU.UG trades at an implied P/E ratio
of 8.3X, which in our view is attractive. Our judgement is that
valuation risk at current levels is minimal. We take this view because
we believe that the bank can sustain ROEs at around 40% in the
short- to medium-term.

Fig 4: The share continues to out-perform, yet valuation is still appealing.

Stanbic out-performs its peers on the USE...

-35% BOBU

-30% DFCU

SBU 14%

-40% -30% -20% -10% 0% 10% 20%

...and the regional peers as well

20%
LC
15% US$
10.8%
10%

5%

0%
Barclays KN Stanchart KN Equity KN CFC Stanbic Stanbic UG
-5% -4.1% KN

-10%
-9.0% -9.0%
-15%
-16.2%
-20%

Page 7 of 9
Source: Bloomberg, Legae Calculations

Page 8 of 9
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Web: www.legae.co.za email:

research@legae.co.za

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