Author Archives: bankelele

Depositary Receipts for Afreximbank Investors

Afreximbank, an African multilateral financial institution, is raising equity of up to $300 million and expanding its shareholder base by selling depositary receipts backed by Class D shares which will be listed and traded on the Stock Exchange of Mauritius.

The African Export-Import Bank (Afreximbank) depositary receipts private placement which opened on July 25, and today in Nairobi, representatives of the bank, State Bank of Mauritius (SBM Holdings), and CBA Group (Kenya) met institutional investors as Kenyan pension and fund managers are a key target for the offer. The depositary receipts have also been marketed to Nigerian investors.

Mauritius has long been a financial gateway to India, with over 1,000 funds there overseeing investments in India. But SBM Holdings Chairman Kee Chong Li, was proud to  say that the depositary receipts arrangement was a historic first for shares of  a pan-African bank, arranged by African advisers, to be listed on an African stock exchange.

Afreximbank, headquartered in Cairo, aims to narrow the trade financing gap in Africa, estimated at $120 billion annually by offering intra-Africa trade finance products including local content finance (Nigeria and Angola oil) , special risks finance, a countercyclical trade liquidity Facility (COTRALF – which has provided $8 billion to African central banks and commercial banks in 2016) guarantees, construction & tourism finance, and one for medical tourism.

Afreximbank has 135 shareholders in four different classes: Class “A”- comprising African governments, central banks (include Central Banks of Egypt (9.83%) and Nigeria (7.33%), Reserve Bank of Zimbabwe (6.74%), banks of Uganda and Ghana, governments of Nigeria (6.17%), Cote d’Ivoire and Kenya –  in total, 43 Class A shareholders  own 63% of the bank), Class “B” – African financial institutions (including SBM Holdings, Nigeria, Egyptian banks – National (6.62%), Misr and du Caire – who combined own 26%), Class “C” made up of non-African financial institutions (13 shareholders own 10% including China Eximbank (5.48%), Standard Chartered) and a new Class “D” open to individuals that was created in 2012.

Afreximbank has a $12 billion balance sheet which includes $10 billion of loans. For 2016, net interest income was$273 million, and net earning were $113 million – of which they paid $37 million dividends. In terms of their exposure, 68% of lending were to financial institutions, then 16% to the energy sector, while geographical, lending is 43% to West Africa and 42% to North Africa, then 7% to Southern Africa and 4% in East Africa.

About the depositary receipts:

  • New class D shares and the depositary receipts are aimed at sophisticated long-term investors such as pension funds and wealthy individuals.
  • The depositary receipts will be listed on the Stock Exchange of Mauritius.
  • The 6,977 Afreximbank Class D shares are the form of 69.77 million depositary receipts (every 10,000 depositary receipt supports 1 class D share).
  • This is a private placement, and the minimum investment is $30,000. It runs from 25 July to 22 September.
  • The listing will be on 4 October at Mauritius. Currently, Afreximbank shares are not listed anywhere, but, after Mauritius, they may consider listing the depositary receipts in Nairobi and Lagos.
  • Holders of depositary receipts will be entitled to receive dividends as class D shareholders
  • The shares are dollar-denominated which is a stable currency. The placement in Mauritius where there are no capital gains or dividend taxes, and, in addition, the SBM Chairman said that Mauritius will grant residency to (large) investors who buy $500,000 worth of depositary receipts.
  • The target for the Class D depositary receipts was $100 million from African investors, but they got very positive response from beyond Africa that’s more than double.
  • The deal is being handled by SBM Mauritius Asset Managers as the lead arranger, and co-transaction advisors are CBA Capital and Lion’s Head Global Partners.

Kenya’s Judiciary: Presidential petitions are decided quickly but other cases drag on

  • The Supreme Court rules for presidential petitions were tried and tested in 2013.
  • Virtually every Kenyan is affected by some unresolved judiciary court case, whether it’s a commercial dispute, employment, land, traffic, inheritance, bank loans and so on.
  • Disputes between borrowers and banks should not drag on for so many years that they incur legal, penalty and interest charges that eventually exceed many times the initial loan amount. From my notes while reading Charles Hornsby’s Kenya: A History since Independence, “15 petitions followed the 1969 elections and they were heard by Euro and Asian judges (Njonjo’s decision) – 3 were successful.” … “39 petitions followed the 1974 elections, and 9 MPs lost their seats, with 4 barred from contesting for 5 years.”… “The 1979 elections had no observers…31 petitions were heard by non-African judges and 9 MP’s (including 3 ministers) lost their seats”
  • This year is expected to be no different and the Deputy Chief Justice was quoted as saying the courts were expecting as many as 300 petitions following the August 8 election.

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NSE Shares Portfolio August 2017

Compared to six months ago

Comparing performance since February, this portfolio is down 3% mainly due to shares sales, while the while the NSE 20 share index is up 41% from February 2017.

The Stable

 

 

 

 

Atlas —

Bralirwa (Rwanda) ↓

Centum ↑

CIC Insurance ↑

Diamond Trust ↑

KCB ↑

Kenya Airways ↓

NIC ↑

NSE ↑

Stanbic (Uganda) ↑

Unga ↑

Summary:

  • In: None
  • Out: TPS EA (Serena), Fahari I-Reit (Stanlib)
  • Increase: None
  • Decrease: None
  • Best performer: CIC Insurance (up 95% since February) , NSE 84%, Diamond Trust up 77%.
  • Worst performer(s): Bralirwa down -3%, KQ -1%
  • There’s been a surprising resurgence in shares that’s been very quiet, amid the expected decline and investor exists with the August 8 election.
  • Kenya Airways restructuring deal has not yet hit the share price but will dilute shareholders by 95%
  • The surprising Safaricom sale with Vodacom buying out Vodafone
  • Banks are struggling, despite their rising share prices.
  • Disappointment with East Africa: The Vodacom Tanzania IPO stalled until it was opened to foreigners, and it crossed the finish line at with a full subscription after PIC of South Africa made a huge investment to bridge the gap. The Vodacom IPO was not marketed to Kenyans or through local stockbrokers. That said, it has been a struggle holding shares in different East African countries after the welcoming IPO period has passed, with difficulties collecting dividends or selling shares to get money back.

Other portfolio updates from three years and five years ago.

Interest Cap Impact and Bank Resilience

The end of August marks the deadline for Kenyan banks to publish their unaudited half-year results (January to June 2017). Those of most banks are done and there are some trends, some concerns and some resilience areas seen in what’s been a challenging year for the sector that has for a long time been seen as one that earns super-profits for its shareholders.
The interest rate capping bill was signed last August, and while its initial impact was not fully seen in the 2016 results, one year later these can now be interpreted. The law has had far-reaching impacts on different banks, their performance, operations and strategic directions. Overall, there has been a decline in bank results due to a mix of interest rate caps and digitization, as phones have taken over from branches as the main point for the bulk of customer transactions.
Some observations: 
  • Less traditional banking: there has been a decline in assets as more banks have turned to digitization to cut costs, and increase efficiency. At Equity, deposits were flat between March and June, which also marked the third straight quarter of overall loan declines
  • Lower interest income: e.g. 45% down at Family Bank, plunging it to a half-year loss
  • A buildup of government debt: Equity now has Kshs 105 billion, KCB 100 billion, and Diamond Trust 83 billion.
  • More closure of branches e.g. Barclays, Standard Chartered, Bank of Africa and Ecobank. But it’s not all gloom as some banks like Cooperative and Diamond Trust have announced plans to open new branches.
  • Job cuts have been announced at KCB, Standard Chartered, Barclays, Family Bank, National Bank of Kenya, NIC Bank, Ecobank, Bank of Africa, First Community Bank and Sidian Bank.
  • With nowhere to go, banks are giving money back to shareholders. Some banks have reduced capital, while KCB with profit flat at the half-year will pay a rare interim dividend confirming analysts’ view that some banks will return more capital to shareholders at a time when they have curtailed lending to riskier customers. 
  • Big banks are okay, small ones, not so much:

  • Losses, not profits. E.g. Family and Sidian, went into the red at the half year, despite layoffs and closures, while Ecobank managed to stay above water. These have mainly been attributed to reduced interest income.
  • Declines in loans and deposits at tier ii banks, and T1 equity
  • Mortgage declines: Buy Rent Kenya said that there has been a major drop in the number of mortgage applications over the past year and that those that the cap was meant for are currently the biggest losers as banks are skeptical to give credit to most individuals as they now have numerous terms and conditions that are not easy to meet.
  • Local banks converting debt to equity at Kenya Airways: This has been a reluctant move, with three banks delaying the Ksh 23 billion conversion that will see a consortium of Kenyan banks become the second largest shareholder at the airline.
  • Equity announced they will no longer lend unsecured loans to salaried Kenyans, cutting off a product feature that has brought them great popularity.
  • New business lines:  Banks have looked to other sources of income this year. Co-operative Bank which has net interest income and pre-tax profit that was down 10% in the half-year, received regulatory approval from the Central Bank of Kenya to enter into a joint venture with Super Group, a leading South African leasing company and together they will target major infrastructure projects, government vehicle leasing, oil & gas exploration, and other leasing opportunities. Elsewhere, National Bank entered a partnership with World Remit to allow remittances to be paid directly into bank accounts at NBK, Barclays is funding solar mini-grids in Turkana while Standard Chartered bucked the trend on Equity and will step up unsecured lending. 
  • Non performing loans (NPA’s) are up: At NBK, they are up to 29 billion, half the 57 billion loan book. NBK is awaiting a Kshs 2.9 billion NSSF (shareholder) loan to shore up capital.
  • NPA’s have also gone along with increased provisions e.g. 1.8 billion at Stanbic at the half-year.

RwandAir applies for US Flights

RwandAir, which is 99% owned by the Government of Rwanda, plans to start US flights, by applying to the US Department of Transportation for the right to fly passengers and cargo between Kigali and JFK airport (New York) from August 2018 using Airbus A330.
The government has designated RwandAir as its international services carrier and the application for US flights also has letters of support from the Rwanda Embassy in Washington, the Rwanda Minister of Finance who writes that the government has supported the airline since its inception in 2002 and support continues to be budgeted for each year.
The application includes three years of audited financial statements. For 2016, the airline’s revenue was $99 million (and this has gone up from $64 million in 2013). Expenses in 2016 included direct expenses of $115 million, staff of $11 million, and finance costs of $15 million –  for a loss before tax of $54 million that was then offset by a government grant of $53 million. Other government grants are cited including $56 million in 2015 and a $28 million in 2014. The application notes that the airline has no financial projections for the first twelve months of operation on the proposed US flights route and requests exemption from providing that (as have been granted to other carriers)

The RwandAir balance sheet at the time (June 2016) was $238 million – but this was before the arrival of new aircraft in an expansion program that included two Airbus A330, and 4 Boeing 737 next generation (NG).  The fleet is now 2 A330, 2 737-800, 2 CRJ-900 and a Bombardier Q400, and RwandAir also leases 3 other Boeing 737 and another Q400. By the end of  2017, RwandAir plans to have 18 aircraft which will include four more  Airbus A330’s.
RwandAir flies to 19 destinations but plans to add China, Germany, and the US flights. Plans to fly to Britain and India are included in the application, and these flights have already started in 2017. RwandAir has codeshare partnerships with Turkish, SN Brussels, Ethiopian, South African, Proflight (Zambia) and Precision (Tanzania) airlines and the application also lists technical and maintenance support partners for their aircraft including Lufthansa for the Airbus A330 and Ethiopian for the B737 NG.
RwandAir has only had one fatal incident; with a wet-leased Jetlink Kenya plane that hit a terminal building while taxiing out of Kigali in 2009 – it resulted in one fatality. After this, they canceled the wet-lease and invested in their own fleet