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Table of Contents

Section 1 Executive Summary 5


Global Economic Downturn Meets Political Crisis 6
Banking in a New World (Single Digit Interest Rates) 7

Section 2 Socio-Political and Macroeconomic Update 9


Remembering President YarAdua 10
Change of Guards: The Doctrine of Necessity 10
Race for 2011: Seismic Shifts in the Political Terrain 11
Energy and Electoral Reforms Remain Germane 11
Corruption in Nigeria: The Cancer Within 12

Section 3 Banking Sector Update 15


Sanusis Tsunami and its Undercurrents 16
Banking on Transparency 16
The Special Audit - All Change 16
Repairing the Balance Sheet: Enter AMCON 17
Shrinking Credit to Private Sector 18
Money Market Rates Collapse 18
Equities Take a Beating 20
Legal & Regulatory Framework: Banking on Supervision 20
2009/2010 Banking Landscape 24
A Universe of Distress 26
Our Crystal Ball 27

Section 4 Company Profiles: Twelve Banks 29

Section 5 Operating and Valuation Statistics 55


Comparable Operating Statistics, Part 1 56
Comparable Operating Statistics, Part 2 57
Comparable Valuation Statistics 58
Chart List 59

Section 6 Afrinvest (West Africa) Limited 61


Contacts 62
Disclaimer 63

Page 3
Nigerian Banking Sector Report
Page 4
Section One
Executive Summary

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Executive Summary

Global Economic Downturn Meets Political Crisis

In line with consensus expectations, 2009 proved to be a difficult year across most regions of the world and sub-
Saharan Africa (SSA) was definitely no exception. Given that the vast majority of African economies are primarily
commodity exporting countries, it stands to reason that the economic fortunes of these countries would inexorably be
tied to global demand for the regions array of commodities. The International Monetary Fund (IMF) had, in its 2009
report highlighted the rising risk of the global economic downturn - decline in most commodity prices and tighter
credit conditions to the economic outlook for sub-Saharan Africa. The IMF suggested that policy makers walk a
tightrope between not aggravating the shock in aggregate demand on the one hand and protect hard-won gains in
economic fundamentals on the other.

Regarding specific risks on the horizon, the IMF rightfully identified the risks to sub-Saharan Africas financial systems
given the adverse impact that a protracted economic slow down would typically have on credit risk. Another source of
concern was counter-party risks for banks as well as the concentration risks that had gradually but steadily built up in
the portfolios of banks.

With the benefit of hindsight, a lot of the concerns raised by the IMF played out as expected; the global recession took a
toll on SSA countries with regional growth slowing considerably from an average of over 6.0% down to around 2.0%
in 2009. However, it was not all doom and gloom as the slow down in SSA was short-lived thanks to several factors
including the relative strength of the regions economies heading into 2009, the right combination of policy responses
by respective governments and a faster than expected recovery in global demand.

Nigerias macroeconomic fortunes in 2009 were tied to the vagaries of oil. The country recorded the most vicious
attacks on its oil installations leading to major production disruptions (output dropped below 1.0mbpd) and a
substantial decline in government income receipts. Worse still, the prolonged absence from office of late president
YarAdua for four straight months as he lay critically ill in Saudi Arabia provided a tonic for socio-political unrest. A
bizarre game of hide and seek ensued as Nigerians demanded to know of the Presidents true health condition. The
shoddy manner in which Presidency officials mismanaged information regarding YarAduas true health status and its
attendant effect on political stability took Nigeria to the brink of disaster. Ultimately, a curious adoption of the
constitution referred to as the Doctrine of Necessity saw the empowerment of Vice-President Goodluck Jonathan as
Acting-President on February 9, 2010 and eventually as President on May 5, 2010 following the death of YarAdua.

The joyous relief that greeted President Goodluck Jonathans swearing in conferred tremendous goodwill on him as his
utterances portrayed a leader who understood the urgency of the task at hand. As most of the reform programs
inherited by the YarAdua administration had stalled, there was pressing need to get the country back on track.
Admittedly, the success that greeted the novel amnesty initiative of President YarAdua brought peace to the troubled
Niger Delta region which helped restore production in the last quarter of 2009. President Jonathan has made the
sustenance of this program, along with power sector and electoral reforms his primary focus. Afrinvest Research is in
full support of this strategy as we have repeatedly highlighted the need for reforms to both the electoral system and the
countrys energy sector (including oil, gas and power).

The change of baton at the Central Bank of Nigeria (CBN) saw the appointment of Sanusi Lamido Sanusi as the new
Governor based on his pedigree as an astute risk manager. Sanusi was saddled with the responsibility of providing risk
management oversight on the nations banking sector as it has long been suspected of concealing the true extent of its
distressed assets.

In our 2009 report, we had indeed noted the heightened risk associated with the rapid expansion in risk asset creation
in the few years leading up to the crisis. Specifically, we had this to say:

Ready access to equity capital, foreign credit lines and domestic deposit liabilities (both public and private sector)
encouraged banks to lend more: as much to financial investors in equities and real estate, as to commodities importers
and retail consumers. Lacking in many instances the risk management expertise and corporate governance structures

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Executive Summary

to effectively contain these new exposures, many banks got caught-up mid-stride with the sudden change in
macroeconomic conditions brought on by the global credit crisis and the resulting major decline in crude oil prices.

Those words have now proven to be prescient. Nigerian banks suffered their worst year in recent history with shocking
revelations by the apex regulator of gaping holes in the balance sheets of some of the industrys leading institutions.
This followed the special audits of 2009 that saw the CBN rescue nine banks through the injection of tier II capital after
sacking their executive management teams. Virtually every bank was hit; non-performing loans spiked, as did the
provisions taken against those loans. Profitability was severely impaired while the constriction in private sector credit
implied that things would never be the same again.

Financial Sector Reforms: Too Many, Too Frequent?

A series of reform initiatives followed in such quick succession that industry watchers as well as other key stakeholders
were for long periods unsure as to what direction the industry would take. With a renewed focus on corporate
governance, improved and more frequent disclosure in financial reporting and stricter industry regulations, the CBN
set about cleansing the banks of the rot exposed by the audit. In order to address the problem of distressed assets on
the balance sheet of banks, a resolution trust vehicle, the Asset Management Company of Nigeria (AMCON), was
set up to assume ownership of some of the toxic assets and potentially underwrite an expansion of credit to the private
sector. In addition, an intervention fund was set up by the CBN and the Bank of Industry to support the extension of
credit to the real sector at single digit interest rates, long abandoned by the banks due to the countrys huge
infrastructure deficit. Against the backdrop of a Vision 2020 that seeks to place Nigeria within the top 20 global
economies by the year 2020, it is estimated that the country will require about N32.0trillion (US$213bn) over the
course of the next decade if this target were to be met.

Banking in a New World (Single Digit Interest Rates)

In this report, we review the events in the financial sector over the past 18 months, particularly the banking reforms
initiated by the CBN and seek to provide greater clarity on the mechanism and economic implication of the various
quantitative easing measures adopted by government. We also provide a summary of the key changes to the
regulatory environment following the near collapse of the banking sector. We have also tried to dimension the
potential impact of the reforms on the business of banking as well as the inherent and perceived risks to achieving
success.

From our analysis, we are convinced that the recent temporary dislocations to the nations financial system, evidenced
by a crash in money market rates, the depressed yields on government paper and CBNs initiative to provide credit to
the manufacturing sector, infrastructure projects and more recently, aviation at an all in cost of 7.0%, are in effect
symptoms of an ongoing longer term structural rebalancing. Afrinvest Research has come to the conclusion that the
ultimate objective of the various reform initiatives by the CBN is primarily to achieve a single-digit interest rate
environment in which the real sector can access sustainable long term finance for capital expansion, new product
development, investment in human capital and improvement in operating efficiency. Given the current operating
model of Nigerias banks and their high cost structure (some elements of which are self inflicted), we are of the view
that the emerging new world of banking will be fundamentally different from todays already changed environment.

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Page 8
Section Two
Socio-Political and Macroeconomic Update

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Socio-Political and Macroeconomic Update

Remembering President YarAdua

With the various appeals challenging the validity of the 2007 election results conclusively adjudicated in the first
quarter of 2009, President YarAdua received the much needed impetus to squarely focus his attention on governance.
It was widely believed that the pending electoral case served as a distraction, preventing him from discharging his
responsibility with the rigour it deserved.

In retrospect, he appeared to have found renewed vigour as he set about instituting electoral reforms while affirming a
strong commitment to the rule of law. Thereafter, he sought to bring a lasting solution to the protracted violence in the
Niger Delta region through a novel amnesty offer which lapsed on October 4, 2009. He was able to secure the peace,
albeit measured, in the troubled region as repentant militants surrendered themselves (alongside huge stockpiles of
weapons and ammunition) to their respective state governments. The apparent success that greeted this move
emboldened the presidents handlers who began to test the waters, suggesting that he stands for re-election in the
2011 elections despite his very public health problems.

Change of Guards: The Doctrine of Necessity

Believed to have been long suffering from a kidney related ailment, President YarAdua took ill while attending Friday
Jumat late in November 2009 and was subsequently flown to Saudi Arabia for medical attention. He was diagnosed
with acute pericarditis, a heart condition brought about by end stage renal failure. A continuous shroud of secrecy
surrounding the true state of the Presidents health only fuelled widespread rumours of an impending military putsch
as the country seemed to be rudderless without an in-charge Head of State, especially as the President did not execute
a formal handover to the then Vice President, Goodluck Jonathan. The persistent rumblings within various segments of
society were only met with grand schemes aimed at perpetuating an obviously incapacitated President in office
through faceless surrogates.

If we set aside the success of the amnesty program, the notion of an effective administration of the nations affairs by
the YarAdua presidency had already started to unravel even before the Presidents illness. In reality and despite his best
intentions, the reforms initiated by his predecessor appeared to have long stalled as government had reversed itself on
several earlier decisions. The much touted reforms to the electoral process had unraveled while the proposed reforms
to the corruption infested downstream oil sector remain botched. With the seemingly slow pace of governance and
bureaucratic inertia impeding government policy, Nigerians became openly critical of his government.

The sustained violent campaign by militants in the Niger Delta also took a heavy toll on the nations oil industry, leading
to huge cuts in production as output dropped to as low as 0.9mbpd from an annual estimate of between 2.1m and
2.3m bpd. With a significant reduction in government revenues attributable to lower oil prices and even lower oil
production volumes, governments across all levels had to resort to a combination of increased borrowing, enhanced
tax collection and reduced expenditure to plug budget deficits. Recourse was also made to windfall oil savings which
led to a US$10.0bn reduction in Nigerias external reserves from US$53.0bn in December 2008 to US$43.3bn as at
September 2009. In response, Standard and Poors (S&P) revised Nigerias sovereign rating downwards to negative
from stable as lower oil prices and production levels impacted foreign reserves and government spending. Fitch on
the other hand maintained a BB- sovereign rating on Nigerias economy and the local currency citing impressive
development of the domestic debt market as a major factor.

In response to pressure from civil society groups, leading politicians and traditional rulers from all over the country, the
National Assembly eventually found the courage to plug the presidential vacuum through what became known as the
Doctrine of Necessity as the Vice President was officially empowered to act as president. This singular act helped to
douse rising political tension and salvage Nigeria, yet again, from the brink of disaster.

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Socio-Political and Macroeconomic Update

Race for 2011: Seismic Shifts in the Political Terrain

The high drama that greeted Acting President Jonathans decision to reconstitute the cabinet shortly after his
empowerment was yet another low in the annals of the nations history. President YarAdua was flown into the country
under the cover of darkness (in an apparent attempt to undermine Jonathans leadership) and remained hidden from
the public until his eventual demise on May 5, 2010. On the morning the remains of the late President was to be
interred, Goodluck Jonathan was sworn-in as Nigerias new leader.

The swearing in of a southerner as President quite literally altered the political landscape and redefined alliances
among the ruling elite. The political arrangement within the ruling Peoples Democratic Party (PDP) in which
presidential power would rotate between the north and the south after a maximum of two 4-year terms came under
severe scrutiny; questions bordering on the constitutionality of such an arrangement and other socio-political
consequences continue to rage. Jonathans refusal to rule himself out of the race implies that he may yet present his
candidature later in the year. This has in effect literally thrown wide open, the race for the presidency in 2011.

Electoral and Energy Reforms Remain Germane

The set up of a new cabinet which retains a large number of former ministers in the YarAdua cabinet would seem to
suggest that Nigeria's broad policy direction is unlikely to change considerably. In the interim, President Jonathan's
public statements have shown a will to accelerate, rather than depart from, the policies of YarAdua with electoral
reforms, the anti-corruption crusade, the ailing power sector and troubled Niger Delta amnesty program top on his
agenda. His decision quite clearly underscores the critical nature of these sectors to maximizing Nigerias full economic
potential and attaining the lofty goals of Vision 2020.

It is important to note that among the militancy struggle, there were genuine advocates for positive change in the
plight of the people of the Niger Delta region. However, this was soon hijacked by criminals eager to cash in on the
kidnapping bonanza. When the IOCs withdrew most of their expatriate personnel from the region and increased
security around the remainder, the militants shifted attention to kidnapping indigenous oil workers or their family
members. The amnesty offer resulted in a marked reduction in the spate of kidnappings in the region. Sadly, this has
led to the emergence of a kidnapping industry in Nigeria, with the South Eastern states of the country as the epicentre.

With strident calls for government to implement the recommendations of the Justice Uwais led panel on electoral
reforms, the new president cannot afford to dither on the many issues contending for his attention. Given the short
time frame until the next general elections, he must ensure he hits the ground running. Beyond the recent
appointment of a new head for the electoral umpire (widely commended as it signaled a marked departure from the
norm), more fundamental changes would be required to prevent the charade that have been repeatedly passed off as
elections.

The recent conclusion of the constitutional review process by the National Assembly would have a profound impact on
the conduct of elections in Nigeria. Most notable among these changes is that elections are now scheduled to occur in
January 2010. While the intention is to provide a larger window for the resolution of election related disputes, it
remains inadequate since we have historically seen these legal battles stretch well beyond 2 years post elections. Given
the heated debate on zoning and rotational presidency, should President Jonathan effectively declare that he would
not be running for elective office come 2011, he could undoubtedly create a template for what may ultimately become
the freest elections in Nigeria. This will douse current tensions between the North-South geo-political divide and
ensure peaceful transition.

In our 2009 report, we had underscored the importance of reforms to the nations entire energy chain: oil, gas and
power. The non passage of the now contentious Petroleum Industry Bill (PIB) almost a year after the National Assembly
conducted public hearings on the proposed bill has crippled virtually all new investment in the oil and gas industry. The
imminent renewal of oil block licenses is also largely dependent on the provisions of the PIB.

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Socio-Political and Macroeconomic Update

Accomplishing the goals set out in the PIB, including greater transparency, better checks and balances, improved fiscal
terms, effective environmental and social protection, will definitely help propel Nigeria toward better management of
its resources. We however note that unless the perceived flaws in the current version of the bill are unanimously
addressed by all relevant stakeholders, it risks falling short of its high ambitions. Therefore, proponents of the bill as
well as key policy makers must be flexible enough to incorporate the input of other stakeholders without diluting the
intended objectives of establishing stronger governance mechanisms, clearer definition of roles and ensuring greater
clarity regarding the generation and effective management of government revenues.

Similarly, we had indeed expressed fears of a slowdown in GDP growth due to a significant decline in earnings from the
countrys principal foreign exchange source, a contraction in international financial market liquidity and an expected
slowdown in global economic output. However, according to provisional figures from the National Bureau of Statistics
(NBS), Nigeria achieved GDP growth of 6.6%, on the average, for all four quarters of 2009, driven mostly by the
non-oil sector.

On the contrary, Afrinvest Research believes that this may been somewhat overstated given the tough economic
terrain encountered for much of 2009. The on-going CBN-induced banking sector reforms (culminating in a near total
freeze on credit expansion) resulted in a major slowdown in economic activity in the last quarter of 2009. This was
furthe exacerbated by the failure of government to actualize previously set milestones on energy infrastructure
investment, particularly, the delivery of the much touted 6,000MW of electric power generation (this does not factor
supply side dynamics - the dilapidated distribution and transmission infrastructure).

One of the greatest challenges facing the Federal Government therefore will be how to address the recurring energy
crisis by ensuring steady supply and distribution of petroleum products across the length and breadth of the country.
The proposed deregulation of the downstream petroleum industry by the Federal Government followed the
recommendations of the Presidential Steering Committee on the Global Economic Crisis. It sought to put an end to the
inefficiencies, fraud and racketeering that have gulped an estimated N1.63tr ($10.8bn) in subsidies in the past 3 years.
Despite the obvious need and potential long term benefits of deregulation, this initiative seems to be bogged down by
a seeming lack of political will, different shades of opinion by stakeholders and a lack of clarity as to the precise steps to
be taken.

Corruption in Nigeria: The Cancer Within

Under YarAduas watch, Nigerias anti-corruption war seemed to have slipped into reverse gear as the successes
achieved by the Economic and Financial Crimes Commission (EFCC) were eroded. This followed the removal of
Nuhu Ribadu as head of the EFCC and dismissal from the police force. He subsequently went into self-imposed exile,
alleging threats to his life. Combined with YarAduas protracted ill-health, the quality of government spending
worsened significantly as the public procurement process across all tiers of government suffered serious value erosion.
Despite the bazaar of contract awards which the weekly Federal Executive Council (FEC) meetings became
synonymous with, there has been little or no impact on the economy.

Prior to Ribadus removal, the fear of arrest and conviction by the EFCC was an ever growing consciousness in the
minds of Nigerians, especially within the political class. Under his leadership, the anti-corruption war led to the
prosecution of several high profile individuals including former state governors, cabinet ministers and Senators, a
scenario that was hitherto unprecedented. Despite criticism that the EFCC was selective in its approach to fighting
corruption, there was noticeable change in the conduct of public officials. The palpable fear in the minds of people
meant that the culture of brazen display of wealth began to fade gradually. Nigeria made such significant strides in the
war against corruption that it climbed out of the bottom of global rankings in the corruption perception index.

Against this backdrop, the current state of affairs is extremely disheartening and leaves one with a feeling of
hopelessness. Where an agency of government loses direction following a change of guards, this shows up inherent
weaknesses in the nations governance and institutional structures. A situation in which a contract for the construction
of a second run-way at the Abuja International airport was awarded at the sum of N64.0bn (US$400m) indicates a

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Socio-Political and Macroeconomic Update

brazen proclivity towards misappropriation of funds. Though this contract was only recently revoked, it is indicative of
the scale of abuse present within all three tiers of government across the nation.

The 48.4% increase in the 2010 budget over 2009 (which was according to government figures was only 39.0%
implemented) also follows a similar trend of gross inflationary provisions for both recurring and capital expenditure
without sufficient justifiable explanation. President Jonathan has to go beyond merely acknowledging that contract
costs in Nigeria are 30.0% higher than the regional average; he has to confront this malaise headlong as it calls into
question the capacity of government to deliver on the lofty goals of its vision 2020 project. It is instructive to note that
the severe lack of institutional capacity for sustaining government policies and programs remains the major bane of
governance in Nigeria. Jonathan has to find the political will to fight corruption headlong as the obvious slide down the
corruption perception index will continue to impede Nigerias quest for sustained economic growth.

Chart 1: Crude Oil Prices (2009 to 2010) Chart 2: Net Foreign Currency Flows via CBN (2008 to 2010)

Bonny Light Spot Prices (US$) Net Flows (US$, Millions)


Peak: US$89.5

112.3%

Trough: US$42.14

Q4 08

Source: Bloomberg, Afrinvest Research Source: CBN, Afrinvest Research

Chart 3: Federal Revenues (2006 to 2009) Chart 4: Gross Imports of Goods and Non-Factor Services

2,500.0 Non-Oil Revenue


70.0
(Naira, Billions) 58.7
Oil Revenue
60.0
2,000.0
49.4
50.0
1,500.0 37.2
40.0
29.4
1,000.0 30.0
21.2
20.0 16.2 16.0
500.0
10.0
0.0
0.0
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09

2003

2004

2005

2006

2007

2008

2009

Source: CBN, Afrinvest Research Source: CBN, Afrinvest Research Estimates

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Nigerian Banking Sector Report
Page14
Section Three
Banking Sector Update

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Banking Sector Update

Sanusis Tsunami and its Undercurrents

Banking on Transparency

The Nigerian banking system has undergone remarkable changes over the years in terms of the number of institutions,
ownership structure, and the depth and breadth of operations. These changes have been influenced largely by
opportunities presented by the deregulation of the financial sector, globalization of operations, technological
advancements, impact of the global economic downturn and the adoption of regulatory guidelines that conform to
international standards.

As we had observed in our 2009 report, the sheer scale of the growth in the balance sheet of banks, particularly
between 2006 and 2008, far outpaced the rate of development of risk management expertise available in the industry.
The less than benign global macroeconomic conditions served to worsen the outlook for the countrys revenue profile
as its patently mono-cultural economy was critically exposed to volatility in oil prices. The prudence that attended
macroeconomic management in the latter half of the Obasanjo years was lost on all three tiers of government under
YarAduas administration. Worse still, the skill, depth and capacity of regulatory agencies to effectively exercise their
oversight function came under severe strain.

As a result, the new CBN Governors primary objective upon resumption of office was to verify the true extent to which
Nigerian banks had been adversely impacted in the wake of the global financial meltdown. Though financial reports
emanating from the banks showed no sign of considerable weaknesses, the Governor of the Central Bank of Nigeria
(CBN), Sanusi Lamido Sanusi was of the conviction and quite rightly so that the expected losses were probably being
concealed, thus reinforcing the opinion naturally shared by many market participants. As you may recall, we had
opined that the opaque nature of the transactions in the Expanded Discount Window (EDW) between October 2008
and May 2009 presented a potential red flag item for banks that chose to access it. It must be said though that the EDW
might also have served as a pressure valve, potentially averting a major liquidity crisis.

The Special Audit - All Change

In conjunction with the NDIC, the CBN initiated a special audit of all Nigerian Banks with specific focus on liquidity,
capital adequacy and corporate governance. The gravity of the rot uncovered in the first five of the ten banks initially
examined, galvanized the CBN Governor into action. Following an emergency meeting of the bankers committee held
in Lagos on Friday August 14, 2009, Sanusi announced the immediate sack of the executive management of five of
Nigerias leading banks; Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank. All five Managing
Directors and their respective Executive Directors were relieved of their positions on account of poor corporate
governance practices, a slew of reckless managerial decisions and unethical, insider related practices. Such an action
was unprecedented in the history of the Nigerian banking sector and indeed of corporate Nigeria.

Although speculation was rife that the outcome of the audit might be unpleasant, there was little to suggest the
degree of exposure by the affected institutions. With N1.2tn (US$8.0) in aggregate non-performing loans out of a total
loan exposure of N2.4tn (US$16.0), the CBN was constrained to take drastic, decisive measures to mitigate the threat
posed by these banks to the overall health of the financial system. The results of the audit were indeed alarming and
represented the highest level of losses reported in the history of corporate Nigeria. A statement by the CBN following
the release of all the results raised serious concern. The CBN noted that:

Following more detailed investigations, the new management of these banks found the situation in a number of the
affected banks to be worse that had been originally thought. A number of issues only came to light after the CBN had
put in place new management teams who therefore had access to greater and more up to date information. As a result
of these findings, the banks had to make provisions over and above the CBNs initial recommendations.

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Banking Sector Update

Prior to the audit, the banking sector was believed to be adequately capitalized. The results of the examination by the
CBN/NDIC proved otherwise. The high levels of loan-loss provisioning following the release of the audit findings have
placed a severe strain on capital adequacy, forcing many banks to seek additional funding. Expectedly, banks have
signaled a preference for issuing corporate debt in order to fund their capital requirements in light of the failed
promises of plus 100.0% gains from their recently concluded equity offerings amidst the dismal price performance
of banking stocks. Already, several banks Access, Diamond, FCMB, Fidelity, First Bank, GTBank, UBA and Zenith have
received shareholders approval to issue bonds in their quest to diversify their capital structure and resolve funding
mismatches.

The non-uniformity of reporting dates for the industry had always provided ample room for manipulation of reported
performance by those willing to collude with other banks to artificially enhance their financial positions and, by
extension, stock prices. Practices such as converting non-performing loans into commercial papers and bankers
acceptances and setting up off-balance sheet special purpose vehicles to hide losses were prevalent. The CBN put an
end to these practices in 2009 and all banks are now required to close their books by December 31 of each financial
year.

The special audit also attempted to tackle the apparent challenges plaguing banks margin, real estate as well as oil &
gas related loans for which the CBN mandated the industry to make full provision as at September 30, 2009, in line
with their individual special audit report requirements. In the weeks following the release of the results for the
remaining fourteen banks on October 2, 2009, banks published press releases showing their respective unaudited
financial position as at September 30, 2009. Of the approximately N1.3tn in provisions taken by all but four banks
(Ecobank Transnational Incorporated, Citibank, Standard Chartered Bank and Equatorial Trust Bank), nine of the ten
rescued banks took provisions of N1.1tn or 86.8% of the sector total.

Repairing the Balance Sheet: Enter AMCON

The Asset Management Corporation of Nigerian (AMCON) is a resolution trust vehicle which will provide banks with
access to liquidity through it purchasing of toxic assets. According to the CBN, AMCON will allow banks distribute
some already recognized losses through the purchase of toxic assets from the banks. The objectives of the AMCON are
as follows:

! It is the principal vehicle for the resolution of the asset quality problems that have risked the banking system in
the last two years
! It provides an alternative to the liquidation of rescued banks in addition to purchasing non-performing loans
from the banks
! It will serve as a vehicle for recapitalizing rescued banks

A harmonized version of the Bill was passed by the Senate on June 3, 2010 and on July 19, 2010 received Presidential
assent. The signing into law of the AMCON Bill will renew efforts of potential acquirers in the rescued banks as it will
provide a clearer view of their respective capital positions (post the release of 2009 year end results and negotiations on
asset value with the AMCON). The CBN had initially received expressions of interest towards acquiring the rescued
banks from both foreign and a few domestic banks. In the absence of any form of government guarantees (which
AMCON now provides), all of the foreign interest were supposedly withdrawn. Nevertheless, a few domestic banks
(Access Bank, First Bank, Fidelity Bank and Stanbic IBTC Bank) have continued to indicate an openness towards an
acquisition strategy.

We understand, from recent statements credited to the CBN governor, that the total amount of funding available to
AMCON might be as much as N1.0trillion of which 50.0% may be deployed towards the purchase of non-performing
loans, and the injection of relative liquidity. The remaining 50.0% will be channeled towards recapitalizations of the
banks by AMCON. On July 20, 2010, Nigerias 24 banks promised to provide up to N1.0tn (US$6.7bn) to cover any
liabilities incurred by AMCON over the next prevent extra costs to the public purse (US$4.1bn) of direct capital
injection made by the CBN in the rescued banks.

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Banking Sector Update

Chart 5: Operating Model for Proposed AMCON Debt Purchase from Deposit Money Banks

Borrower Borrower Borrower

Bank A Bank B Bank C


Proceeds
from loan
recovery
Consideration Toxic Assets
for Toxic Assets

Funds
Bond Investors AMCON
Debt Service

FGN Guarantee Management


Services

Federal 3rd Party Asset


Government Managers

Source: Afrinvest Research

Shrinking Credit to the Private Sector

A lingering effect of the special audit is that credit to the private sector has practically thinned out as banks have
directed focus on debt recovery. Meanwhile, they are defining new approaches to asset creation given the now
obvious requirement to exercise extra caution and due diligence in order to avoid future losses. Provisional data from
the CBN indicates that year-on-year (YOY) credit growth slowed to 30.0% in August 2009 compared to 59% in
January 2009 and the highs of over 100.0% experienced in 2008. Credit to the private sector contracted (on an
annualized basis) by 11.8% in Q1 2010 as against the provisional benchmark of a 31.5% growth forecast for 2010.
Prime and maximum lending rates were however stubbornly ascendant in Q1 2010 with the average maximum
lending rate going up to 23.3% in February. CBNs data suggests that the annual growth of credit to the private sector
rebounded marginally to 18.2% YOY in February, up from the 17.7% in January, though underperforming the 26.0%
recorded in December 2009. Perhaps the reason why the tightening credit market has confounded analysis was that it
was happening in an environment of excess liquidity in the system with CBN having pumped in N620.0 billion to shore
up the balance sheet of rescued banks, pension fund managers collecting N15.0bn monthly from contributors while
Federation Account Allocation Committee (FAAC) and excess crude remittances combined to cause banks to place
an estimated N700bn with the CBN rather than lend.

Crashing Money Market Rates

In June 2009, the CBN cut the monetary policy rate (MPR) by 2.0% from 8.0% to 6.0% which was the first clear signal
of its new policy direction of reigning in galloping interest rates. In November 2009, the CBN introduced an asymmetric
corridor around the MPR by indicating the standard deposit facility (SDF) at MPR4.0% while the standard lending
facility (SLF) remained at MPR+2.0%. In March 2010, the SDF was cut by a further 100 basis points to MPR-5.0%
translating into a deposit rate of just 1.0% for any banks wishing to place funds with the apex bank. The rationale
behind this move was to make placement by banks with the CBN unattractive, therefore forcing the creation of new
risk assets (especially towards the real sector), albeit in line with prudential guidelines. This action precipitated an
immediate crash in interbank rates across varying maturities.

Interest rates, as measured by inter-bank, T-bills and savings deposit rates fell to record lows and remained so for much
of H1 2010 (weighted average interbank rates dropped to as low as 1.1% in late March while average fixed deposit
rates fell to as low as 3.2% from an average of 12.0%-13.0% the previous two months). In the face of significantly
diminished risk-free income from CBN placements, many banks were forced to reduce their money market placement

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Banking Sector Update

Chart 6: Oil Prices and Naira/USD Exchange (Jan 2009 to Jun 2010) Chart 7: Nigerian Gross Foreign Currency Reserves

Naira per US$ Naira/US$ US$ per Barrel US$ , Billions

Bonny Light

Source: CBN, Afrinvest Research Source: CBN, Afrinvest Research Estimates

Chart 8: CBN Benchmark MPR (Q1 2009 to Q1 2010) Chart 9: Nigerian Inter-bank Offer Rate (NIBOR), January 2009 to June 2010

% Month-End Overnight Unsecured, %


12.0

10.0

8.0

6.0

4.0

2.0

0.0

Source: CBN, Afrinvest Research Source: Money Market Association of Nigeria, Afrinvest Research

Chart 10: Average Month-End Savings Deposit Rates (Jan 2009 to Jun 2010) Chart 11: Commercial Bank Prime Lending Rates (Jan 2009 to Jun 2010)

19.3 30 Day Prime Overdraft, %


4.0 %
19.1
18.9
18.7
3.5
18.5
18.3

3.0 18.1
17.9
17.7
2.5 17.5
May-09

May-10
Mar-09

Mar-10
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10

Jan-09

Jan-10
Jul-09

Sep-09

Dec-09
Nov-09
Jun-09

Oct-09

Jun-10
Aug-09
Feb-09

Apr-09

Feb-10

Apr-10

Source: CBN, Afrinvest Research Source: CBN, Afrinvest Research

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Banking Sector Update

rates. Consequently, this forced many pension fund managers who traditionally placed as much funds as was
permissible in money market instruments to turn to the bond market in search of better yields. As a result, we saw a
significant drop in average yields of FGN bonds across all maturities between February and March 2010 (the 20-year
bonds saw yields fell by as much as 4.0% while yields on 3-year bonds lost nearly 1.5%). With both bond and money
market yields ranging from 1.0% to 7.5% and YOY inflation at 10.3% as at the end of June, it invariable implied a
significant negative real return on investments.

Equities Take a Beating

Nigerias equity market closed 2009 in the red (down 33.8%) for a second consecutive year, while the market
capitalization also fell over the same period by 28.3% (32.5% in US dollar terms). The banking sector, which
accounted for 44.9% of market capitalization (as of end of 2009) declined by 51.0% over the last 2 years
counteracting gains recorded by companies in the non-financial sector, notably Fast Moving Consumer Goods
(FMCG) and Infrastructure. In our view, the decline was further exacerbated by the fact that the Nigerian banking
sector suffered a huge crisis of credibility from bad debt overhang attributable to margin loans and downstream oil
sector related losses. Equity market losses were also magnified by the release of the outcome of the CBN/NDIC special
audit where 9 out of the 21 quoted banks were found wanting. This, coupled with the publication of the list of debtors
to the rescued banks in leading national dailies, sparked an equity sell-off by debtors in a bid to repay margin loans.

Investor sentiment was expectedly fragile, given the difficult economic and operating conditions, as businesses
struggled to access finance. Fears of increased unemployment and uncertainties over the deregulation of the
downstream oil sector amidst other political uncertainties further clouded the outlook. Coming into 2010, we
expected support for market recovery to come from the deeply discounted valuations seen in Q4 2009, especially in the
context of a global market that had recovered to near pre-crisis levels with risk aversion thinning out significantly. The
liquidity glut prevalent in banks for much of the intervening period to date, amid a dearth of investible assets offering
net positive real returns, further lent credence to this view.

Legal and Regulatory Framework: Banking on Supervision

Following the seriousness of the issues uncovered by the audit in many rescued banks and its attendant effects, the
CBN conducted an extensive review of its internal processes, people, systems and operational structure. Although the
results of this internal review was not made public, the CBN has itself acknowledged that there were significant lapses
in its supervisory role. In Q1 2010,the CBN articulated a blue print for reforming Nigerias financial system over the next
10 years built around four pillars:

1. Enhancing the quality of banks,


2. Establishing financial stability,
3. Enabling healthy financial sector evolution, and
4. Ensuring that the financial sector contributes to the real economy.

In furtherance of these objectives, the CBN has since reeled out a series of new policy measures as well as revisions to
extant rules all aimed at plugging existing regulatory loopholes and mitigating perceived weaknesses. Amongst the
most notable include:

I. Review of the Tenure of Banks CEOs and Non-Executive Directors

In light of the severe corporate governance failures in the banks post-audit, the CBN stressed the need for a higher level
of corporate governance in the banking system as good governance is good business. For some of the troubled
banks, it was discovered that the concentration of power for a very long time (in some cased over 2 decades) might
have led to a series of unethical and potentially fraudulent business practices. The CBN has therefore stated that chief
executive officers of banks shall serve a maximum tenure of ten years and all CEOs who would have served for ten years

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Banking Sector Update

by July 31, 2010 shall cease to function in that capacity and hand over to their successors. Also, where a bank is a
product of a merger, acquisition, take-over or any other form of combination, the tenyear period shall include the pre
and post combination service years of a CEO provided that the bank in which he previously served as CEO was part of
the new bank that emerged from the combination. Additionally, the tenure limit for non-executive directors is now set
at 12 years. From the CBNs viewpoint, this will ensure a high level of corporate governance within the banking
industry.

II. Review of the Universal Banking Model

Under the universal banking model currently operational, banks are run as operating holding companies which are
permitted to carry out non-banking businesses through subsidiaries. The current model promised to deliver benefits of
economies of scale and achieve synergies across complementary financial services business lines. However, given the
issues raised from the special audit, it has become apparent that the current universal banking model (with a
multiplicity of different types of financial institutions under the management of concentrated groups of executive
managements and boards) exposes the banking businesses to a greater amount of contagion risk and poses a threat to
the stability of the financial system. The CBN explained that a new banking model would help the banking and financial
system in the following ways:

! Depositor/consumer protection by ring fencing banking from non-banking business


! Ensuring effective regulation of the entire business of banks while facilitating a business model that is
supportive of their growth aspirations
! Redefining the licensing model of banks and articulating rules/guidelines to guide bank operations going
forward
! Facilitating the enhancement of risk management at Group Enterprise level to enable management and
shareholders fully understand and address risks from a holistic perspective.
Chart 12: New Structure for Universal Banking

Universal Banking

Mono-line Banking Specialized Banking

Commercial Banking Non-Interest Banking

National/International Banks Micro-finance Banking

Regional Banks

Source: CBN, Afrinvest Research

To achieve the objective of having banks focus on their core banking business, the CBN proposes to issue new universal
banking guidelines which will require banks wishing to continue operating as purely commercial banks to divest from
all non-banking businesses. Banks who choose to focus on their core banking business will be required to spin off or
divest their holdings in their non-banking businesses.

The new guidelines also anticipate that some banks/banking groups may wish to retain their non-core banking
business. Such institutions will have to evolve into a holding company model (HoldCo) where a non-operating
Holding Company holds the investments in the bank and each non-core banking operation via a subsidiary. This will
entail a break up of the banks current activities into distinct and separate business lines for which specific licenses must
be obtained from the relevant regulator. A clear business case which articulates the rationale for retaining non-
banking businesses would have to be presented to the CBN, for this to happen.

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Banking Sector Update

Chart 13: Proposed Structure for non-operating Holding Company

Non-Operating Holding
Company

Bank Insurance Asset Mgt. Securities Mortgage

Source: CBN, Afrinvest Research

The proposed revision to the existing universal banking model seeks to define the new types of licenses and permitted
activities. It will also state the modalities for transiting from the existing arrangement to the new licensing regime.

Furthermore, the guidelines will also provide a cut-off date within which banks are to either spin-off or discontinue
operations which are inconsistent with the terms of their new banking license or divest from non banking subsidiaries
in which they have equity ownership. Depending on what banking area they choose to operate, they can obtain a
license in either commercial (National/International, Regional) or specialized (Microfinance, Mortgage or Non-interest)
banking.

In our view, there are a number of issues that are thrown up as a result of this review including: strict limitations around
shareholding in the holding company, a clear definition of permissible activities which precludes commercial banks
from offering non-banking services, inherent and/or future value in existing subsidiaries, potential for multiple taxation
under a holding company structure, listing requirements for holding company, timing considerations and the potential
impact of any contemplated M&A/divestment scenario. Given the potential impact of these on the business
performance and operations of banks, it is extremely important for carefully consideration in strategic decision
making.

III. Sophistication of Regulation and Regulatory Frame Work (Risk-Based Supervision)

As part of the industrys remedial programme, the CBN has set up an internal risk management specialist function to
ensure the industry complies with global best practice as defined by both the Internal Capital Adequacy Assessment
Process (ICAAP) and Committee of Sponsoring Organizations of the Treadway Commission (COSO) frameworks.
The CBN alongside other regulators will embark on a systematic review of regulations and guidelines around the key
contributors to the crisis which they have named as follows; data quality, enforcement, governance, and risk
management.

Also, sponsored by the Financial Services Regulation Coordinating Committee (FSRCC), the CBN will lead a
programme to fundamentally reform the financial services regulatory framework. The initial focus will be harmonizing
and raising to world-class standards the supervision processes, technology and people within the various financial
regulators. A multi-regulator task force that will integrate process reforms across jurisdictions will also be introduced so
as to ensure a comprehensive bank regulatory framework. Notably, a centre of competence for IFRS and N-GAAP+
implementation will be established to support examination teams and contribute to the NASB IFRS committee.

IV. Revised Prudential Guidelines for Banks

The CBN admits that there were some internal regulatory failures including many instances of weakness and/or
ignorance in the supervision and enforcement process, inefficient bank examinations, and in some cases overlooking
identified critical risk issues arising from such examinations. The CBN has responded by carrying out an internal

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Banking Sector Update

transformation of its operating structure and internal processes as well as key personnel changes in some of its key
business units.

In this regard, the revised Prudential Guidelines aim to address various aspects of banks operations such as risk
management, corporate governance, Know-Your-Customer (KYC) and anti-money laundering/counter financing of
terrorism and loan loss provisioning. The guidelines also aim to address the peculiarities of different loan types and
financing to different sectors. Speaking specifically to loan loss provisioning guidelines;

The loan loss provisioning guidelines which form part of the enhanced Prudential Guidelines provide guidance on
recognition and measurement of loans, establishment of loan loss allowances, credit risk disclosure and related
matters. It sets out CBNs views on sound loan provisioning and disclosure practices for deposit money banks in
Nigeria.

The guidelines also serve as a basic framework for evaluation of banks provisioning policies and practices. The
objectives of the enhanced provisioning guidelines are to:

! Promote enhanced provisioning policies and practices, which are consistent with sound risk management
practices for Nigerian Banks;
! Ensure that provisioning guidelines support the life cycle and gestation periods of the various specialized
loans;
! Provide a framework for ensuring that the current provisioning guidelines are counter-cyclical; and
! Provide framework for Haircuts adjustments for lost facilities.

While these prudential guidelines are to serve as the minimum requirement, licensed banks are encouraged to
implement more stringent policies and practices to enhance mitigation of risks.

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Banking Sector Update

2009/2010 Banking Landscape

The Sanusi Tsunami of the second half of 2009 marked a turning point in the history of the Nigerian banking sector.
Prior to the December 2009 common year end for financial reporting, market share analysis for the banking sector was
extremely controversial to calculate. With balance sheet data available only every 12 months, this level of disclosure by
banks made it difficult to situate sound analysis. That has begun to change. With full year audited financials for the
period ended December 31, 2009 now in the public domain for virtually all of the healthy banks save Ecobank Nigeria
and Sterling Bank (and majority of the rescued banks), there is a common basis for further detailed analysis.
Incidentally, the numbers were quite late given the heightened scrutiny by the regulators, even as more results
continue to trickle in.
Chart 14: Nigerian Banking Sector Market Share By Total Assets Chart 15: Nigerian Banking Sector Market Share By Shareholders Funds

Ntn
2.5 400.0 Nbn
350.0
2.0
300.0
1.5 250.0
200.0
1.0 150.0
100.0
0.5
50.0
0.0 0.0
FCMB

FCMB
Stanbic IBTC

Stanbic IBTC
UBA

UBA
First Bank

Zenith Bank

GTBank

Access Bank

Diamond Bank

Skye Bank

Fidelity Bank

Ecobank

Sterling Bank

Zenith Bank

First Bank

GTBank

Access Bank

Fidelity Bank

Diamond Bank

Skye Bank

Ecobank

Sterling Bank
Source: Afrinvest Research, based on most recent audited financials only Source: Afrinvest Research, based on most recent audited financials only

Chart 16: Nigerian Banking Sector Market Share By Total Deposits Chart 17: Nigerian Banking Sector Market Share By Total Loans

1,600.0 Nbn 1,200.0 Nbn


1,400.0 1,000.0
1,200.0
800.0
1,000.0
800.0 600.0
600.0
400.0
400.0
200.0 200.0

0.0 0.0
First Bank

Zenith Bank

GTBank

Diamond Bank

Skye Bank

Access Bank

Fidelity

Ecobank

Sterling Bank

First Bank

Zenith Bank

GTBank

Access Bank

Skye Bank

Diamond Bank

Fidelity

Ecobank

Sterling Bank
UBA

UBA
FCMB

FCMB

IBTC
Stanbic IBTC

Source: Afrinvest Research, based on most recent audited financials only Source: Afrinvest Research, based on most recent audited financials only

Four Banks Stand Out

From our analysis above, four top tier banks: First Bank, GTBank, UBA and Zenith Bank rank within the top 5 across all
metrics, measured strictly on the basis of balance sheet size. With all four banks accounting for total market share of
42.5% (total assets), 44.3% (total loans), 39.7% (total deposits) and 71.6% (shareholders funds), we conclude that
between them, they bear an unduly large proportion of both upside and downside potential. Similarly, our analysis
suggests that the same four banks accounted for 43.0% of industry revenues, measured by our gross revenue
estimates and 58.8% of total banking sector market capitalization as at December 2009.

Given the extreme turbulence that characterized banking in 2009, typified by the huge asset write downs and
significantly impaired earnings and profitability, the performance of these institutions are quite remarkable.
Furthermore, the fact that three of these banks (substituting GTBank for Intercontinental Bank) featured in the top four

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Banking Sector Update

rankings of our 2009 banking report underscores their remarkable resilience, having emerged largely unscathed from
the special audit. It also highlights the quality of leadership present in these institutions.

Chart 18: Nigerian Banks Market Capitalization as at July 23, 2010 Chart 19: Nigerian Banking Sector Market Share By Gross Revenues

Nbn Nbn
450.0 300.0
400.0
250.0
350.0
300.0 200.0
250.0
150.0
200.0
150.0 100.0
100.0
50.0
50.0
0.0 0.0
First Bank

Zenith Bank

GTBank

Access Bank

Diamond Bank

Skye Bank

Fidelity Bank

Ecobank

Sterling Bank

GTBank

Skye Bank

Fidelity Bank

Diamond Bank

Access Bank

Ecobank

Sterling Bank
UBA

UBA
Stanbic IBTC

FCMB

Stanbic IBTC

FCMB
Zenith Bank

First Bank
Source: NSE, Afrinvest Research Source: Afrinvest Research, based on most recent audited financials only

However, while the events of August 14 can rightfully be credited with having averted a total system collapse, the
initial release of the audit findings for only ten banks inadvertently proved disadvantageous to the remaining fourteen.
The five banks declared healthy following the first round of audits Diamond Bank, First Bank, GTBank, Sterling Bank
and UBA were, in effect, beneficiaries of an immediate flight to safety. Key stakeholders (investors, depositors and
creditors), worried by the great degree of uncertainty surrounding the health status of the remaining fourteen banks
chose to avoid these institutions. Given previous bank failures where depositors typically lost everything, limited
exposure to these institutions pending the release of audit results and greater clarity regarding financial performance
was the logical safe bet for stakeholders. We believe the resulting dynamics has stratified Nigerian banks into 4 broad
segments:

Top Tier Banks: This category comprises the large, indigenous banks that emerged relatively unscathed from the 2009
special audit. It includes First Bank, GTBank, UBA and Zenith Bank. These banks have consolidated their market share
and reinforced their leadership position within the sector over the past 18 months.

Local Subsidiaries of Foreign Banks: Citibank, Stanbic IBTC Bank and Standard Chartered Bank fall into this second
group. Of the trio, Stanbic IBTC bank is the only one that is listed on the Nigerian bourse. With appropriate corporate
governance structures in place and a culture of proper risk management practices imbued from the parent companies,
these banks were largely believed to be insulated from the rot that bedeviled the sector.

Mid-Tier Banks: This category includes mid-sized banks that also received a clean bill of health after the special audit:
Access Bank, Diamond Bank, Ecobank, Fidelity Bank, FCMB, Skye Bank and Sterling Bank. While we do not anticipate
such robust growth as was last seen in 2006 to 2008 era for the banks in this group, we believe their focus will be on
achieving stability in the short term and measured growth (relative to Top Tier banks) in the medium term.

Rescued Banks: in this last category, expectedly, are the ten banks that failed CBNs stress test; Afribank, Bank PHB,
Oceanic Bank, Union Bank, Intercontinental Bank, Spring Bank, Wema Bank, Equatorial Trust Bank, Finbank and Unity
Bank. These institutions have had their brands suffer massive impairments and brand erosion and will continue to lose
market share and linger in liquidity challenges for the rest of the year though the sector as a whole is currently awash
with liquidity.

Our analysis of the overall performance of the sector shows a marked deterioration across various operating metrics.
Beginning with profitability, Net Profit Margin (NPM) for the sector went from an average of 23.2% as at March
2009 to 0.04% by December 2009, obviously weighed down by both the mid-tier and rescued banks that reported
average margins of 2.8% and 3.6% respectively. Top tier banks posted an average of 6.5% in December 2009,
compared to 24.9% as at March 2009. Similarly, Return on Average Equity (ROAE) deteriorated, going from a

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Banking Sector Update

19.4% average (according to our March 2009 estimates) to 0.1%, by December 2009. The four top tier banks
reported ROAE of 5.6% as at December 2009 versus the 20.6% based on our March 2009 estimates, while the mid tier
banks lost 3.7% on equity by 2009 year end, versus an 18.7% average estimated for the same group of banks nine
months earlier.

Operating costs, as measured by Cost to Income Ratio (CIR), almost doubled for the sector, hitting 115.6% by
December up from an estimated average of 61.5% in March 2009. The huge spike in costs reflect the sudden increase
in the cost of risk across the sector on the back of the spike in loan loss write offs that followed the special audit
findings. This picture is best situated within the context of an increase in gross industry revenues; According to our
estimates, gross revenues grew by an impressive 46.2%, going by figures released prior to March 2009 and those
published as at December 2009. It thus paints a picture of remarkable resilience by an industry that struggled to find
profitable channels to deploy assets in an economy that offered little room for robust expectations in a turbulent year.
Despite the dilutive effect the decline in profitability had on industry balance sheet (specifically capital), we find that
total industry assets grew by a respectable 8.6%, from N15.2tn (US$100.5bn) to N16.5tn (US$109.2bn) between our
March 2009 estimates and December 2009 audited figures.

As expected, industry solvency (as reflected by the capital adequacy ratio -CAR) came under severe strain,
particularly on account of the drag effect created by the rescued banks. Industry CAR plunged from 17.5% (by our
March 2009 estimates) to 3.3% as at December 2009. This falls terribly below the 10.0% minimum benchmark
stipulated by the regulator. This therefore reinforces the widely held view that another round of recapitalization is
required (and imminent) in order to address this capital shortfall and mitigate a risk of a total system collapse. On the
other hand, we find that the industry was awash with substantial amounts of liquidity post-audit, as the risk aversion
towards new credit creation saw banks place an estimated N700.0bn with the CBN. As at December 2009, the top tier
banks reported average liquidity ratio of 37.0% (well above the 25.0% regulatory minimum), while the mid tier banks
invested 30.9% (on average) in liquid assets.

As has been rehashed at various forums and via multiple channels, we observed major deterioration in asset quality
across the entire industry. Using the ratio of non-performing loans (NPL) to total loans as a benchmark, we find that
a significant portion or 20.7% of the total credit advanced by the sector is at risk of being written off completely.
Assuming we wrote this off the total assets of banks as of today, an estimated N3.4tn (US$22.6bn) of the entire
industry assets would be wiped off. It paints an even scarier picture when we compare this to Nigerias revised 2010
budget of N4.4tn (US$29.1bn), especially within the context of the countrys huge infrastructure funding needs.

Nonetheless, we believe the potential industry losses have been adequately provided for given by the huge provisions
that were taken between Q4 2009 and Q1 2010. With NPL coverage ratio for the sector now at 45.4% (our estimates),
we believe that the expected reclassification of select large credit items with the growth in economic activity by the
later half of 2010, should see a reversal of some of these write-offs. We therefore expect to see some modest return to
profitability in 2010 on the back of increased economic activity, higher government receipts, election related spending
and growth in consumption.

A Universe of Distress

For the rescued banks which account for over 80.0% of distressed assets in the sector as at September 30, 2009, it is
critically important to note that more than half of them have yet to publish their financial statements to December
2009. While issuing a caveat that our analysis is based on anecdotal information from various electronic and print
media sources, including the typical headline earnings announcements made at the Nigerian Stock Exchange, we
attempt below to review their chances of survival and possible return to profitable operations.

As things stand, the rescued banks collectively hold N1.3tn ($8.4bn) in negative equity. With total assets of N4.6tn
($30.3bn), and assuming the average risk-weighted assets (RWA) from their most recent audited figures, RWA would
be N3.4tn ($24.3bn) or 74.9% of total assets. On that basis, the minimum capital required by these banks in order to
meet the 10.0% minimum capital adequacy ratio is about N366.4bn ($2.4bn). Therefore, we estimate total capital

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Banking Sector Update

requirements of the universe of rescued banks at N1.6tn ($10.8bn).

With an estimated N1.5tn ($10.0bn) expected to flow into the financial system including N1.0tn to come from
AMCON cash and from the CBN/Bank of Industry (BOI) N500.0bn infrastructure fund, Afrinvest Research believes
that the rescued banks should be in a position to benefit from these resolution funds. Taking together with the
N771.8bn ($5.1bn) in excess capital available to the healthy banks for possible M&A transactions and assuming that an
additional N1.0tn in new capital is successfully raised by these institutions, the cash required to plug negative equity
gaps and meet the regulatory minimum capital requirement should thus be available.

With specific reference to the CBN /BOI N500bn infrastructure fund, our understanding is that the CBN seeks to
stimulate credit to real sectors of the economy while immunizing its balance sheet from credit risk. It plans to engage
the BOI as an agent, for whom it would underwrite 100% of a collateralized bond issuance program. The BOI then on-
lends bond proceeds at 1.0% per annum (all in) to Deposit Money Banks (DMBs) on a collateralized basis to
eliminate credit risks, with the only eligible collateral being FGN Treasury Securities. DMBs will issue collateralized
notes when drawing upon BOI -funds, intended to support DMB credits to emergency power projects and SMEs
exclusively at a fixed rate of 7.0% maximum. As underwriter to the BOI Program, the CBN will be the sole primary
market investor for collateralized BOI program bonds. The CBN takes zero real sector credit risk, but assumes market
and operational risks of the program while DMBs assume all customer risks.

Our Crystal Ball

While we perceive heightened risks in the short term, our outlook for banks and prospects for the economy remain
positive over the medium to long term. Going forward, we are of the opinion that a number of key factors will come
into play vis--vis the nations medium to long term macro-economic prospects while the policy responses of the
government to the myriad of issues facing the economy will set the tone for local and international re-pricing of
country risk.

The ability of government to ensure peace and stability in the Niger Delta remains extremely crucial to oil production.
The relative peace enjoyed in recent months on account of the amnesty program has seen Nigerias oil production rise
steadily to an average of 2.0mbpd for the first quarter of 2010. The current goodwill enjoyed by President Jonathan
from his Niger Delta constituency (and indeed most of Nigeria) must be leveraged should he decide to run for the
presidency in 2011. In the meantime, he must come up with a more sustainable approach towards engaging the
reformed militants productively.

In addition, prudent management of the economy is pivotal to Nigerias ability to successful navigate the challenges
that lie ahead. We believe that the debt situation in the Eurozone area, brought on by the Greece debt crisis, has the
potential to dampen and possibly, constrain global demand (particularly, China and the US) and may ultimately trigger
another wave of economic recession if similar developments occur in other susceptible European economies (Spain,
Portugal). This also has potential dire implications for Nigeria both in terms of potential negative impact of weak global
demand on oil prices and investor sentiment in the equity market as a wave of sell offs by foreign institutional buyers
may trigger a fresh wave of stock market losses.

Third, governments planned quantitative easing measures an estimated N1.0tn in cash for purchasing banks toxic
assets by AMCON and the N500 billion infrastructure intervention funds are intended to provide a liquidity boost and
expand money supply. Coupled with the expected increase in government spending arising from the 2010
expansionary budget and election related spending, the prognosis is for these liquidity flows to feed through towards a
gradual return to loan growth, amidst hopefully, an environment of enhanced risk management. As the primary gate
keepers to the economy, the banks are thus in a well placed position to derive income from the financial intermediation
expected on the back of an increase in government revenues.

On that note, a number of potential impediments readily come to mind; the lack of product innovation as a driver of
profitability on the part of Nigerias banks remains a stark reality. Historically, banks have been content with booking

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Banking Sector Update

profits from arbitrage opportunities provided by gaps in the implementation of fiscal policies. The high cost structure of
present day banking operations presents yet another major challenge to achieving this goal. The implication of such a
scenario is that banks have no choice but to return to the true essence of banking; leveraging the growth of the real
sector of the economy. We believe that the true winners in the new banking world would be those banks that are most
nimble i.e. banks that are quickest at lowering their cost to income ratio would be best positioned to derive benefits
from the resultant value accretion. It is also logical to expect that banks will begin to seek out cost synergies from back-
office operations and shared services. Conscious effort is required to strategically reposition the banks within the
context of a truly challenging operating environment.

In the final analysis, we find that some of the perceived temporary dislocations evident in the nations financial system,
from the crash in deposit and interest rates to falling yields on government paper, are symptomatic of a longer term
structural rebalancing currently taking place. Afrinvest Research believes that the ultimate objective behind the various
reforms initiated by the CBN is to move the industry towards an environment where single digit interest rates are the
norm rather than the exception. Should Nigeria get to that promised land, Sanusi in his capacity as the nations
treasurer, would have won the battle to save the economic soul of the country by creating an environment wherein the
real sector can access sustainable long term finance for capital expansion, new product development, investment in
human capital and improvements in operating efficiency.

Nigerian Banking Sector Report


Page 28
Section Four
Company Profiles: Twelve Banks
Access Bank
Diamond Bank
Ecobank Nigeria
FCMB
Fidelity Bank
First Bank
Guaranty Trust Bank
Skye Bank
Stanbic IBTC Bank
Sterling Bank
UBA
Zenith Bank

Nigerian Banking Sector Report


Page 29
Company Profiles

Access Bank (FY: December 2009)


Chart 20: Access Bank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 21: Access Bank Versus Nigerian Banking Sector (2009 to 2010)

160.0 Adjusted Prices, Rebased (Jan 2009 = 100)

140.0

120.0

100.0

80.0

60.0

40.0 Banking Sector


20.0 Access Bank

0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 22: Access Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 23: Access Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Banking Still in Focus

Access Bank remains focused on its value-chain banking business model that aims to provide full-service transaction
banking primarily to large blue-chips corporations and their various captive middle-market suppliers, contractors and
distributors. Balance sheet structure reflects this focus, both from a funding and loan exposure perspective. In addition,
an analysis of the banks income statement indicates that the banks expansion drive into the retail segment of the
market may have begun to yield dividends with retail banking earnings exceeding investment banking (within the
context of a severe market correction in 2009). A closer look at its main business segments indicates that Institutional
and Commercial banking contributed 37.4% and 34.1% of pre-tax earnings respectively. Investment and retail
banking contributed 12.2% and 15.0% in that order.

Capital Adequacy and Liquidity

By our estimates, the bank reported Capital Adequacy Ratio of 16.2% as at December 2009, a healthy position
however suggests that there is room for more efficient use of capital. The banks balance sheet shows a 22.7%
investment in liquid assets, falling short of the 25.0% regulatory minimum. With 59.6% weighted towards loans, we
see a balance sheet that can easily be subjected to stress. However, the potential for increased returns may offset short
term concerns.

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Company Profiles

Asset Quality and Loan Book Evolution

Access Banks balance sheet shrunk by 7.1% between March and December 2009 following asset write downs on
account of loan losses. This however compares favourably with the 31.3% contraction seen between 2008 and 2009.
As at December 2009, the bank has a gross loans exposure of N413.5bn ($2.7bn), down 4.5% from March 2009
levels. The bank suffered a major depreciation in asset quality following significant one-off exposure to telecoms,
downstream oil and gas and margin loans. Gross provisions for loan losses climbed to 7.2% of total loans from 2.0% in
March 2009, while non-performing loans as a percentage of total loans spiked to 19.5% by December 2009.
However, with the significant provisions taken on the bad assets, whatever concerns we may have regarding the banks
outlook is downplayed by the return to profitability going by its Q1 2010 performance.

Liabilities and Funding Mix

Based on December 2009 figures, Access Banks funding structure is heavily skewed towards term deposits (61.0% of
total deposit liabilities), indicating average cost of funds that are weighted on the high side. Moreover, with 99.0% of
deposit liabilities maturing in less than 3 months (of which 59.7% relates to maturities of 30 days or less), any negative
liquidity cycle will present a solvency risk. Loans to deposit stood at 86.8% as at the year end 2009, painting a picture of
a bank with continued high risk appetite even in the midst of a very visible market downturn. We note that at 22.7%,
the banks liquid assets (slightly below the 25.0% regulatory benchmark) presents a potentially risky scenario, especially
given that the banks operating model make it dependent on complimentary relationships on both asset and liabilities
side.

Corporate Governance and Risk Management

The concentration risk presented by a large single ticket transaction in telecoms, has forced the bank to reevaluate its
risk management framework. According to management feedback, the bank has refocused on ensuring highest
standards in corporate governance while keeping its tries to moderate its previously high risk appetite. As we see no
risks to succession planning, we believe the banks strategic focus will be sustained, with no significant dent to
stakeholder confidence.

Future Outlook

Access Bank has on at least two previous occasions shown keen appetite for inorganic expansion through outright
acquisition; management feedback suggests that the bank is still very open to this option. Whether or not the bank
succeeds in this strategy, we believe the company is poised to continue to create value and deliver decent returns to its
shareholders through its value-chain banking model. Going into 2010, the focus should be on reigning in costs which
(from our analysis, has costs at 138.0% of operating income. In what we believe will be a difficult year for banks,
improving on the quality of its loan book, and achieving efficient cost containment will be key to ensuring it goes
beyond just retaining market share but gaining market share. On a valuation basis, the banks is trading at 9.9x 2010
Earnings, a significant discount to its peers (trading at 13.3x 2010 earnings).

Nigerian Banking Sector Report


Page 31
Company Profiles

Diamond Bank (FY: December 2009)


Chart 24: Diamond Bank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 25: Diamond Bank Versus Nigerian Banking Sector (2009 to 2010)

160.0 Adjusted Prices, Rebased (Jan 2009 =

140.0

120.0

100.0

80.0
1.0 60.0

40.0 Banking Sector


20.0 Diamond Bank

0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 26: Diamond Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 27: Diamond Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Leading Mid-Tier Bank Expanding its Retail Footprint

Off the back of remarkable expansion in its retail banking franchise that saw 56 new branches emerge between 2008
and 2009, Diamond Bank fought to reinforce its brand perception amidst a drive to diversify its funding source. Its
expansion strategy focused on lending to local large corporations primarily as well as the Small and Medium-sized
Enterprises (SME) - a major segment of its market. This strategy delivered a 17.3% growth in risk assets in the same
period (year to April 2009) in which Nigerian corporates faced the most stringent pressure on operations. The impact
on NPLs was not thus not unexpected, considering the lack of commensurate growth in risk management competence
for the industry. However, given the flight to safety post the first round of the audit, the bank was however unintended
beneficiary of a timing difference between the release of results for all banks. Deposit growth therefore recorded a
marked departure from the general industry trend, with the bank reporting 11.0% and 3.0% for both April and
December 2009 respectively.

Capital Adequacy and Liquidity

Our estimates suggest that Diamond Banks Liquidity Ratio (as at December 2009) was 27.8% while its CAR was
16.2%, both exceeding the regulatory minimum of 25.0% and 10.0% respectively. This is particularly noteworthy, in
light of the 7.3% decrease in equity for the year ended December 2009 primarily due to provisions of N24.7bn taken
for the eight month period to December 2009. The return to profitability and further loan recoveries in 2010 will help
reverse the trend.

Nigerian Banking Sector Report


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Company Profiles

Asset Quality and Loan Book Evolution

Diamond Banks balance sheet as at December 2009 shows a quality asset mix with 27.8% in liquid instruments,
10.6% in investments and 46.5% in loans. The bank grew its loan book by 10.7% from 45.9% of total assets in April
2009 to 53.2% in December 2009, suggesting an increase in its risk appetite. Despite this, it still kept its loans to
deposit far below the 80.0% maximum threshold, in line with its conservative approach. While the impact of the
economic downturn on its loan book was severe, management guidance suggest that this spike in NPLs was off the
back of a singular large ticket transaction. An improvement in operating cash flows of the business will see a
reclassification of the loans and an immediate drop in the NPL ratio and to the cost of risk.

Liabilities and Funding Mix

Diamond Banks liabilities deposit liabilities grew by 3.2% in the eight month period to December 2009, falling below
our expectations having scaled the first round of the special audit and therefore, in pole position to benefit from the
immediate flight to safety. The banks December 2009 figures indicate that 41.7% and 9.5% of deposits are sourced
from demand (current) and savings account holders, both of which represent relatively cheap funding sources. More
impressive is the view on deposits from a maturity perspective, where 21.9% of deposits as at December 2009 mature
after one year compared to only 8.6% in April 2009.

Corporate Governance and Risk Management

Diamond Bank was rated as having one of the best corporate governance structures in the industry, with the
institutional investment by ACTIS lending credence to this view. The release of the audit findings in August 2009 which
gave the bank a pass mark further reinforced the perception. However, the impairments suffered on its loan book
indicate a deterioration in credit quality. Management discussions inform of stringent reviews to its internal risk
management processes and procedures in order to prevent such a reoccurrence. Otherwise, there is little to suggest a
weakening in the banks corporate governance practices.

Future Outlook

Diamond remains focused on the corporate and mid-market segments with measured growth aspirations over the
long term. The banks sustained expansion into retail banking (which in this case, includes SMEs and middle-market
segments) has begun to deliver significant results, as this segment accounted for 64.2% of gross revenues as at
December 2009. We note that management expects to continue with this strategy of retail focused liabilities
expansion while limiting new business development to only the most credit worthy names in the corporate, SME and
middle-market segments.

Nigerian Banking Sector Report


Page 33
Company Profiles

Ecobank Nigeria (FY: December 2009)

Chart 28: Ecobank Trading Data (July 23, 2010) and


Operations Snapshot (Latest Audited FY, December 2009) Chart 29: Ecobank Versus Nigerian Banking Sector (2009 to 2010)

120.0 Adjusted Prices, Rebased (Jan 2009 = 100)

100.0

80.0

60.0

40.0
Banking Sector
20.0 Ecobank

0.0

May-09

May-10
Mar-09

Mar-10
Jan-09

Jan-10
Jul-09

Jul-10
Sep-09

Dec-09
Nov-09
Jun-09

Oct-09

Jun-10
Aug-09
Feb-09

Apr-09

Feb-10

Apr-10
Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 30: Ecobank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 31: Ecobank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets N/A Gross Provisions/Operating Income N/A


Core Liquid Assets/Total Assets N/A Gross Provisions/Total Loans N/A

Loans /Total Assets N/A NPLs/Gross Provisions N/A


Risk Assets/Total Assets N/A Total Costs/Operating Income N/A

Capital/Total Risk Assets N/A Net Interest Margin/Total Interest Income N/A

Capital/Total Risk Assets and Contingents N/A Loans/Deposits N/A

NPL/Total Loans N/A Deposits/Total Liabilities N/A


Capital/Total Liabilities plus Capital N/A Deposits Maturing in Less than 1 Month N/A
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Mid-Tier Player Fighting for Turf

Ecobank Nigeria Plc is a member of Ecobank Transnational Incorporated contributing about 45.0% of the groups
revenue. The bank was established in 1986 and has grown over the last 24 years to be one of the strong mid tier banks.
Ecobank in its bid to grow its operation in Nigeria acquired (cherry picked) some of the distressed banks (All states Trust
Bank, Hallmark Bank and African International Bank) as a fall out of the recent banking consolidation exercise. Despite
the recent acquisition spree, Ecobank remains a mid-player from a balance sheet perspective (total assets at N355.7bn
as at December 2009) in the context of the Nigerian banking space. The bank has however made further attempt to
merge with other banks (notably Sterling and unity bank) to create a mega entity but none of these merger talks was
seen to a logical conclusion. Ecobank with its parent company has developed important strategic alliances among
other regional member of the group and with other world class institutions in specific areas such as money transfer and
transaction syndication.

Capital Adequacy and Liquidity

Although, its capital adequacy was threatened in 2008, injection of new capital of N45.0bn by ETI, its parent company
has helped the company to stay above waters during the crisis. The fresh injection has thus buttressed the banks
capital adequacy ratio up to 16.7% which is comfortably above the industry average and CBNs requirement.
Aggressive loan growth has however affected its liquidity ratio leaving it around 29.0% just barely covering the CBNs
25.0% yardstick.

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Page 34
Company Profiles

Asset Quality and Loan Book Evolution

Ecobank loan portfolio has been badly hit by the recent financial crisis, stemming from its exposure to telecoms sector
and its credit card business. This raises questions as to the quality of its loan book and asset mix. Expansion of loan book
especially to retail clients without a sufficient risk management framework or any reliable credit check increased its
non-performing loan to N90.3bn as at December 2009. Ecobanks NPL ratio, which measures her asset quality, has
remained around 40.0% over the last 2 years due to rapid deterioration in 2008.

Liabilities and Funding Mix

Deposits continues to be an important funding avenue for Ecobanks operations while its total shareholders fund
could only fund 20.7% of total assets as at December 2009 (despite the fresh injection of N45.0bn by Ecobank
Transnational Incorporated). There is therefore the need for the bank to hold up current deposit levels while also
seeking alternative source of long-term funding. The Bank unfortunately suffered a 22.0% YoY contraction in its
deposits from December 2008 to 2009 fromN310.7bn to N243.8bn and would thus need to embark on aggressive
deposit mobilization initiative in the very near term.

Corporate Governance and Risk Management

Ecobank being a member of ETI operating in about 27 countries has built an enviable corporate governance code in
accordance with international best practice and Nigerian accounting conventions but we remain concerned about its
risk management framework. With high level amount of write-offs over the last 2 years, Ecobank needs an
improvement in its risk management framework. Huge exposure of the bank to credit card loan resulted in a significant
increase in non-performing loans with its attendant negative consequence on capital adequacy and liquidity.

Future Outlook

ECOBANK has grown its balance sheet at 34.0% CAGR over the last five years and its total assets currently stand at
N364.7bn. In our opinion, Ecobank may not replicate its sampled historical balance sheet growth given the fact that it
was largely buoyed by M&As and equity capital raising; the duo factors we mark absent over our projected numbers.
ECOBANK has grown total assets at 57% CAGR; however we expect this growth to slow down to an annually
compounded average of 13.0% through 2014. This projection is premised on our outlook on the financial system and
the banks relatively weak competitive strength within the industry.

Nigerian Banking Sector Report


Page 35
Company Profiles

FCMB (FY: December 2009)


Chart 32: FCMB Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 33: FCMB Versus Nigerian Banking Sector (2009 to 2010)

180.0 Adjusted Prices, Rebased (Jan 2009 = 100)

160.0
140.0
120.0
100.0
80.0
60.0
40.0 Banking Sector
FCMB
20.0
0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 34: FCMB Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 35: FCMB Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets 28.0%


Core Liquid Assets/Total Assets 30.1%

Loans /Total Assets 55.5%

Risk Assets/Total Assets 90.0%


Capital/Total Risk Assets 31.1%
Capital/Total Risk Assets and Contingents 27.7%

NPL/Total Loans 8.7%


Capital/Total Liabilities plus Capital 28.0%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Consumer Banking Proves The Winning Strategy

FCMB continued into 2009 with its strategy of expanding its full-service consumer banking business with a primary
focus on consumer liabilities generation. Wit Retail deposits comprising 30.0% of the banks gross liabilities, it
achieved remarkable success in this regard through its direct marketing delivery channel. Given the impact of the
market volatility on FCMBs core corporate and investment banking business in 2009, the timing of the move proved
prescient. It provided the bank a veritable source of low cost funding as wholesale financing sources came under
increasing pressure.

Capital Adequacy and Liquidity

The Bank reported a CAR of 31.1% by our estimates in December 2009, significantly higher than the sector average.
While this underscores its health status, it is indicative of inefficiencies in the deployment of capital. This can however
be situated within the context of a near total aversion to risk asset creation prevalent for much of 2009. The banks had
30.1% of its assets invested in liquid assets as at December 2009, which was slightly lower than the 34.3% reported 8
months earlier. This was however in excess of the regulatory minimum of 25.0%, a pointer to the banks ability to meet
its obligations as they fall due.

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Company Profiles

Asset Quality and Loan Book Evolution

FCMBs December 2009 full year figures indicate a proper risk-weighted balance sheet with its loan book accounting
for 51.5% of the banks total assets. This is against the backdrop of the unintended consequence of suffering a flight to
safety as it failed to make the list of the ten banks initially screened in the first round of the special audit. As a result, the
banks saw a 12.8% reduction in its loan books between April and December 2009. Despite that, the bank reported
30.1% of its assets as being in liquid instruments, affirming its capacity to meet its business obligations as they fall due.
Given the industry deterioration in asset quality, the reduction in FCMBs NPLs ratio from 10.1% in April 2009 to 8.7%
in December is commendable and runs against the industry trend. However, the bank will need to unwind its gross
loan exposure seeing as it currently exceeds the recommended threshold of 80.0% by 9.7%.

Liabilities and Funding Mix

Analysis indicates that FCMBs liabilities is 79.6% funded by deposits of which 53.7% relates to cheap funding sources
(demand and savings deposits). However, with 79.3% of its deposit liabilities maturing in less than a month, FCMB
stands the risk of a sudden run on the bank. It is extremely important that management focuses on diversifying its
funding sources away from short term sources towards the long term. This is particularly important given our
perception of a structural shift away from the high net interest margin environment into what we believe will be a
move towards a new world of single digit interest rates.

Corporate Governance and Risk Management

Going by the level of provisions made against loan losses in 2009, our assessment of FCMBs risk management
procedures is satisfactory. We believe that with a relatively well diversified loan portfolio, the bank is well poised to
successfully navigate the challenges that lie ahead. Moreover, as the current chief executive officer has a few years until
his tenure expires (in accordance with the new CBN rule), there is little risk from a succession planning standpoint.
Management has indicated a firm resolve to remain focused on maintaining the quality of its assets while still aiming to
reduce is NPL ratio..

Future Outlook

We remain positive on our outlook for FCMB as we see the continued contribution from its retail banking expansion to
the banks bottom lime. Though the current banking environment appears to be conducive for inorganic expansion,
management guidance suggests that the bank is not inclined in that direction. FCMB will therefore do well to ensure
strict adherence to its long term strategic plan to build a strong consumer business, complementing its core strength in
investment banking, and diversifying away from the volatility inherent in capital market earnings. In 2010, the focus
will be on overall asset quality, consumer business expansion and fees/commission related business.

Nigerian Banking Sector Report


Page 37
Company Profiles

Fidelity Bank (FY: December 2009)

Chart 36: Fidelity Bank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 37: Fidelity Bank Versus Nigerian Banking Sector (2009 to 2010)

Share Price (N) 2.29 120.0 Adjusted Prices, Rebased (Jan 2009 = 100)

Mkt. Cap (N, bn) 66.3


100.0
Mkt. Cap (US$, m) 441.0
Shares Out. (bn) 80.0
29.0
2010 P/E (x) 10.2 60.0
P/BV (x) 0.5
40.0
Gross Earnings (N, bn) 34.7
Banking Sector
Gross Earnings (US$, m) 231.1 20.0 Fidelity Bank
Net Earnings (N, bn) 1.6
0.0

May-09

May-10
Mar-09

Mar-10
Jan-09

Jan-10
Jul-09

Jul-10
Sep-09

Dec-09
Nov-09
Jun-09

Oct-09

Jun-10
Aug-09
Feb-09

Apr-09

Feb-10

Apr-10
Net Earnings (US$, m) 10.4
ROAE (%) 1.2

Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 38: Fidelity Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 39: Fidelity Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets 30.0% Gross Provisions/Operating Income 186.2%


Core Liquid Assets/Total Assets 49.6% Gross Provisions/Total Loans 17.7%

Loans /Total Assets 44.7% NPLs/Gross Provisions 173.7%

Risk Assets/Total Assets 51.2% Total Costs/Operating Income 109.9%


Capital/Total Risk Assets 58.6% Net Interest Margin/Total Interest Income 51.9%
Capital/Total Risk Assets and Contingents 38.0% Loans/Deposits 55.6%
NPL/Total Loans 30.7% Deposits/Total Liabilities 94.4%
Capital/Total Liabilities plus Capital 30.0% Deposits Maturing in Less than 1 Month 65.5%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Middle-Market Operator Steadily Growing Retail Franchise

As with most of the other middle market operators, Fidelity Bank has steadily grown its balance sheet and by our
estimates, reports about the highest liquidity ratio in our coverage. The bank is focused on providing banking services
through to the value chain of its key clients and customers, with aspirations of growing its market share in the blue
chip corporate segment of the market. On the basis of its December 2009 financial accounts, Fidelity Bank indicate
some of the strongest risk analysis metrics in the sector. With the bank making clear its intent to challenge for turf, we
believe the bank may hold some value notably for the support it provides the SME and middle-market transaction
banking.

Capital Adequacy and Liquidity

Based on December 2009 figures, Fidelity Bank showed extremely strong capital adequacy levels relative to
comparable banks within the industry, with CAR standing at 58.6% while 49.6% of the asset book is invested in liquid
assets. Our understanding is that the banks focus had been on sustaining loan book quality ahead of the release of its
audit results. Its classification amongst the second set of banks examined by the regulators placed the bank at a
disadvantage of sorts. Loan books therefore saw a severe 25.4% contraction from N214.9bn to N160.3bn between
June 2009 and December 2009.

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Company Profiles

Asset Quality and Loan Book Evolution

Fidelity bank was proactive in highlighting the significant impairments to its asset quality as NPLs had spiked to 19.5%
in June 2009 from the 3.0% reported the previous year. This was further exacerbated by the special audit by the CBN
which has seen NPLs deteriorate to 30.7% as at December 2009. Management feedback suggests that portions of the
banks loan book were reclassified by the special inspectors, subject to the performance of these class of borrowers in
other banks. It is therefore expected that with the new prudential guidelines, these specialized facilities (which
according to management representation constitute approximately 25.0% of its loan books) will be declassified. This
will reverse substantial provisions initially taken on these NPLs and reflate suspended interest into its income stream.
That said, we find that the banks loan to deposit ratio of 55.6% provides a much larger room for growth in interest
income which though given its now more aggressive risk appetite, presents little scope for pressure on the bank.

Liabilities and Funding Mix

Deposits were down 19.0% in the 6-month period between June and December 2009, thereby buttressing the view
that Fidelity Bank was on the receiving end of a flight to safety by depositors. Demand and savings deposits jointly
constitute 58.4% of deposits, a ready source of relatively cheap funds. The 8.8% increase in term deposits to 45.7% in
December 2009 indicates a deliberate move by the bank to lower its cost of funds. However, with 65.5% of total
deposits expected to mature in less than one month, theres an evident need to diversify towards longer tenured
funding sources. With so much excess capital in tow, the bank is aggressively seeking avenues to deploy this to more
profitable use.

Corporate Governance and Risk Management

Management suggests that Fidelity Banks corporate governance code ensures effective risk mitigation for all credit
exposures. The substantially high NPLs effectively brings to the fore a need to review the risk management processes,
and more specifically, sectoral exposure to cyclical businesses operation. On a positive note though, Fidelity had long
instituted a corporate governance code in line with Basel II requirements while it is currently working with Deloitte of
South Africa to implement a robust Enterprise-wide Risk Management framework. This places the bank in a position to
grow its business within the confines of a properly defined operating structure.

Future Outlook

Fidelity Bank has publically expressed its interest in acquiring one of the rescued banks. This may provide the bank with
an opportunity to expand the depth and scale of its operations as it looks set to up the ante over the medium term with
a specific focus on diversifying its earnings base and deepening participation in other fast growth sectors of the
economy. Whether or not it succeeds in its bid to grow inorganically, we expect the bank to remain focused on
continuing the execution of its short term expansion strategy across both corporate and retail banking; strengthening
distribution capacity, improving operating efficiency.

Nigerian Banking Sector Report


Page 39
Company Profiles

First Bank (FY: December 2009)


Chart 40: First Bank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 41: First Bank Versus Nigerian Banking Sector (2009 to 2010)

140.0 Adjusted Prices, Rebased (Jan 2009 = 100)

120.0

100.0

80.0

60.0

40.0
Banking Sector
20.0 First Bank

0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 42: First Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 43: First Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Nigerian Banks Bellwether Reasserts Leadership Position

First Bank remains one of Nigerias largest financial services institution offering an array of banking and related non-
bank services. It currently ranks as the largest bank in terms of total assets, loan portfolio and also total deposits. Being
the oldest existing financial institution in Nigeria (established in 1894) and having weathered the reforms, it has earned
itself a solid reputation of strength, stability, high investor confidence and sustained interest. Through its extensive
network of 610 branches, it provides both banking and non-banking financial services to its customers which are in
excess of 5.0 million. The bank operates a well diversified financial conglomerate with interest across different spheres
of the economy and has stable funding to exploit market opportunities leveraging on its strong deposit base sourced
predominantly from cheap demand and savings deposits and also channeling same to income earning assets. This has
helped the bank in maintaining a steady and balanced growth of 31.0% CAGR in gross earnings over the last five
years. Impressive growth in earnings aside, we will like to see the bank curtail its relatively high cost-to-income ratio
and improve pricing efficiency in order to protect margins while also improving yields on earning assets.

Capital Adequacy and Liquidity

First Bank being one of the most capitalized banks in Nigeria has a healthy Capital Adequacy Ratio (CAR) of 15.8% as at
December 2009. This is above the CBN regulatory threshold and healthy for its size. Its liquidity ratio as at December
2009 was also 53.4%, comfortably exceeding the CBNs minimum of 25.0% and its internal limit of 30.0%. We dont
see any downside risk to these metrics going by the quality and mix of FBNs balance sheet.

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Company Profiles

Asset Quality and Loan Book Evolution

First Bank has maintained a well balanced loan portfolio over the years with no significant concentration risk or
exposure to any particular sector. Loan book has grown at a CAGR of 62.3% over the last five years from N191.7bn in
2006 to N1,141.5bn as at December 2009 with exposure cutting across a diverse customer base. However, recent
economic slowdown and downturn in equity markets took its toll on both its loan portfolio and asset quality with loan
loss provisioning skyrocketing to a record high, while Non-Performing Loan as a percentage of total loans stood at
8.0% in September 2009. Having taken significant provisions against non performing loan portfolio in year 2009, the
bank has cut down its exposure to risk prone sectors like financial services, share backed loans and margin loans. With
loan portfolio down by 4.5% between December 2009 and March 2010 coupled with the general cautious approach
to risk asset creation of Nigerian banks in general, the bank has revised its loan book targeted growth for year 2010 to
10.0%. Overall, we expect the bank to raise the bar as regards its risk management framework to forestall
concentration risk as in the case of Seawolf where only top 20 borrowers accounts for more than 30.0% of the Banks
total loan in the same vein, insider- related lending should also be checked.

Liabilities and Funding Mix

First Bank seems to have leveraged its deep institutional, retail, and government relationships in addition to its client
base of over 5 million customers to build a very strong deposit base from which it funds its risk assets. The Banks
strategy is to attract small savers whose principal consideration is the safety of their funds at a relatively low cost. With
shareholders approval to raise fresh capital of N500.0bn in non-convertible loans, the bank may soon raise fresh
capital to fund its acquisition plans which has become an open secret. However, unpopularity of corporate bonds in
Nigeria and the recent Fitch downgrading of FBNs individual credit rating, citing increasing levels of concentrated
risks and a significant deterioration in asset quality may water down the appetite for bond offering among investors.
We are however of the opinion that the bank needs to maintain and further build its strong deposit base franchise in a
way to optimize its funding mix and profile by continually growing the lower cost deposit base.

Corporate Governance and Risk Management

First Bank with its long history of seamless leadership successions and a well diversified shareholders base has built an
impressive corporate governance and risk management structure over the years. On the balance, we would expect First
Bank to maintain a healthy balance between risk and revenue considerations. We however still see the need for the
bank to improve on its risk management framework especially regarding the granting of credit in excess of single
obligor limit or concentrated towards a specific sector while also reducing insider-related exposures.

Future Outlook

We believe First Banks ongoing restructuring of its business at the group level will enhance portfolio optimization, and
also reduce risks and duplications across the banks businesses. Management feedback suggests that the bank is
committed to building up its non-bank business lines especially around the Insurance and Investment banking/asset
management areas, in a way to exploit synergies across board and aid both organic and inorganic expansion; the
feedback also suggests that the bank is in final stages of entering into a joint-venture agreement in insurance
underwriting with Sanlam (South Africas largest insurer). The banks restructuring exercise is also focused on
positioning the bank to harness local growth opportunities in the near term while extending its franchise into key
geographies and adjacent business lines over the medium to long term. We believe the bank will leverage its large and
strong balance sheet and translate scale into profits while also seeking to compete effectively in a more dynamic
business environment.

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Company Profiles

Guaranty Trust Bank (FY: December 2009)


Chart 44: GTBank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 45: GTBank Versus Nigerian Banking Sector (2009 to 2010)

200.0
Adjusted Prices, Rebased (Jan 2009 = 100)
180.0
160.0
140.0
120.0
100.0
80.0
60.0
Banking Sector
40.0
GTBank
20.0
0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 46: GTBank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 47: GTBank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

17.5%
40.7%

56.1%

88.7%
19.8%

14.6%
11.8%
17.6%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Post-Crisis Position Justifies Conservative Legacy

Guaranty Trust Bank plc is a leading Nigerian bank with a corporate banking base and strong service culture that has
led to consistent year on year growth in the bank's clientele base and financial indices. The bank places a high premium
on the pivotal role of exceptional service delivery in a very efficient manner in its drive to be the industry leader in
efficiency and profitability ratio. GTBanks operations are conducted through its four major business lines of
Institutional, Commercial, Public Sector and Retail Banking divisions. The institutional banking with special focus on
key sectors of the economy; telecoms and energy currently contributes about 70.0% of the banks profit, accounts for
40.0% of its loans and about a fifth of its deposits. GTBank has leveraged its strong brand name (through a
conservative business model that has earned the bank enviable customer loyalty) to gain added market share. The bank
has established a strong track record of profitability. With consistent growth in earnings over the last five years and
significant expansion of its deposit base and loan book, we are of the opinion that there will be continuous growth in
the operations of the bank.

Capital Adequacy and Liquidity

With Capital Adequacy Ratio (CAR) of 18.0%, GTBank appears adequately capitalized for the level of risk it is currently
taking. This is significantly above most of its peers and also above the CBNs required level. We do not foresee any
significant risk to this ratio based on its current level of operations and strategy. GTBank was also awash with liquidity
during the recent banking crisis resulting in a strong liquidity ratio of 57.0%. Its aggressive risk asset creation during

Nigerian Banking Sector Report


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Company Profiles

the period under review and its divestment from short term investment may pose some downside risk to its liquidity
ratio in the near term. Despite factoring downside risk, we do not expect its liquidity ratio to fall much below 50.0%

Asset Quality and Loan Book Evolution

GTBank has no doubt emerged as one of a select few that recorded a significant growth in loan portfolio during the
recent crisis period while also maintaining a quality asset mix. With N563.5bn loan portfolio and loan to deposit ratio of
82.5% as at December 2009, the bank seems to have come out of its hitherto very conservative lending policies in its
bid to ensure profitability. Loans have grown at a 5-year CAGR of 71.1% between 2004 and 2009; while the bank has
also diversified its loan portfolio across its business lines with no significant concentration risk or excessive exposure to
any single sector. Institutional banking accounts for approximately 40.0% of the loan book, commercial banking
division accounts for about 30.0% while Public Sector Division and Retail banking division account for 12.0% and
18.0% respectively. However, the bank was not totally insulated from the recent turbulence as we have seen an
unprecedented leap in the ratio of NPL as a percentage of total loans to 12.0% from 2.0%, the highest ever in its 20
year history. Management has indicated that it expects to write back a good portion of its provisions by its mid-year
audit.

Liabilities and Funding Mix

GTBank has shown impressive resilience and has continued to record strong growth across its balance sheet
parameters. The banks total asset is funded by 82.0% liabilities and 18.0% capital with 78.1% of liabilities being
customers deposits. Also, the successful completion of the banks GDR offering in July 2007 and issuance of corporate
bond in 2009 enhanced the banks capital and funding base. We however remain concerned with GTBanks ability to
generate longer-tenured deposit to finance risk assets origination. We are of the opinion that a further reduction in
deposits capital could place a constraint on asset growth and overall profitability. At present 88.9% of the deposits are
only available for a period less than 1 month, while 96.7% of the total deposits are available for less than 3 months.
This has no doubt created some degree of funding strain which could eventually lead to a funding mismatch.
Management should therefore seek to extend tenor of deposits.

Corporate Governance and Risk Management

The bank with its historical conservative and efficient business model operates a strong corporate governance model
built on a solid foundation of integrity, excellence and professionalism. The bank also parades sound, highly
experienced, innovative, young and dynamic management team. On financial reporting, GTBank long adopted the
IFRS reporting standard as part of the requirements for listing its Global Depository Receipts (GDR) on London Stock
Exchange in 2007. This enhanced the level of disclosure and transparency, over and above regulatory requirement
(efforts are reportedly underway to promote a convergence between IFRS ad the local standards). The Banks risk
management policies are in accordance with Basel II and international best practice and are established to identify and
analyze the risks faced by the Bank and to set appropriate risk limits and controls. Having a strong ERM in place no
doubt helped the bank mitigate credit related abuses and checked breaches to its single obligor limit. However, with
record high provisions, GTBank must continually strive to improve in its risk management framework. The increased
risk assets origination in line with the banks expansion objective has caused a significant increase in non-performing
loans.

Future Outlook

Overall, we remain very positive on the outlook of GTBank having emerged largely unscathed from the audits. We
expect the bank to continue its cautious approach to expansion while its famed low cost/high efficiency operating
structure makes it a winning proposition, considering our conviction that the industry is headed towards a single-digit
interest rate environment. We also expect to see increasing value accretion from its international expansion.

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Company Profiles

Skye Bank (FY: December 2009)


Chart 48: Skye Bank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 49: Skye Bank Versus Nigerian Banking Sector (2009 to 2010)

Share Price (N) 7.20 120.0 Adjusted Prices, Rebased (Jan 2009 = 100)

Mkt. Cap (N, bn) 83.4


100.0
Mkt. Cap (US$, m) 554.6
Shares Out. (bn) 11.6 80.0

2010 P/E (x) 10.1 60.0


P/BV (x) 0.9
40.0
Gross Earnings (N, bn) 131.5
Banking Sector
Gross Earnings (US$, m) 875.6 20.0 Skye Bank
Net Earnings (N, bn) -0.1
0.0

May-09

May-10
Mar-09

Mar-10
Jan-09

Jan-10
Jul-09

Jul-10
Sep-09

Dec-09
Nov-09
Jun-09

Oct-09

Jun-10
Aug-09
Feb-09

Apr-09

Feb-10

Apr-10
Net Earnings (US$, m) -0.8
ROAE (%) -0.1

Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 50: Skye Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 51: Skye Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets 14.0% Gross Provisions/Operating Income 66.0%


Core Liquid Assets/Total Assets 28.6% Gross Provisions/Total Loans 8.3%

Loans /Total Assets 56.0% NPLs/Gross Provisions 234.8%

Risk Assets/Total Assets 84.0% Total Costs/Operating Income 98.1%


Capital/Total Risk Assets 16.6% Net Interest Margin/Total Interest Income 48.0%
Capital/Total Risk Assets and Contingents 11.5% Loans/Deposits 72.2%

NPL/Total Loans 19.6% Deposits/Total Liabilities 83.0%


Capital/Total Liabilities plus Capital 14.0% Deposits Maturing in Less than 1 Month 63.0%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Full-Service Operator with Major Growth Aspirations

Built on the legacy of two of its largest constituent banks (Eko International Bank and Prudent Bank), Skye has become
an active mid-sized operator with full-service aspirations. Skye Bank has established corporate, commercial, retail and
investment banking franchises through which it has gained exposure to on Telecoms, Agriculture, Real Estate, Oil &
Gas, Power, Manufacturing, Transportation and Infrastructure financing business. As part of its full-service ambitions,
the group operates mid-sized non-banking subsidiary companies focused on insurance, capital markets, mortgage
origination and trustee/asset management. The bank has 266 online branches in Nigeria with presence in Sierra Leone,
The Gambia and Guinea Republic.

Capital Adequacy and Liquidity

Skye banks Liquidity ratio deteriorated from 40.7% reported in September 2008 to 28.6% in December 2009.
Considering that 19.4% of the banks cash (December 2009 audited figures) was held by other banks. Aside from
falling short of the regulatory minimum, it heightens the banks insolvency risk in the event of a run on any of its major
counter-parties. The ratio of the banks capital to its risk assets is 16.6%, which exceeds the 10.0% minimum
prescribed by the CBN. The bank has sufficient capital for its level of operations, especially considering that the banks
balance sheet shrunk by a massive 20.0% in the fifteen months between September 2008 and December 2009.

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Company Profiles

Asset Quality and Loan Book Evolution

Despite the huge drop in the size of the Skye banks balance sheet, riding on the back of domestic macroeconomic
headwinds, the bank grew its loan book by an massive 39.0%. Coming in a year predominated by an economic
downturn and its attendant negative effect on business cycles, this huge growth in risk assets proved to be the trigger
of the spike in the banks NPL figures. Skye banks NPL as a percentage of total loans, jumped from 3.7% as at
September 2008 to 19.6% as at December 2009. With cost of risk (measured by the ratio of gross provisions to total
loans) going from an average of 1.6% for the 3 year period ended September 2008 to 8.3% in December 2009, the
bank therefore posted a loss.

Liabilities and Funding Mix

Skye banks deposit liabilities fell by 10.0% as at December 2009 from N500bn. Taken against the 39.0% loan growth,
the banks loan to deposit ratio also spiked to 72.2% from 50.2% recorded in December 2009 and September 2008
respectively. Skye bank incidentally grew its demand deposits to 54.7% of total deposits in 2009 as against the 46.3%
reported in 2008. Together with savings deposits, the banks cost of funding was 63.3% skewed towards the low end.
This bank also funded its operations with 14.0% of leverage (measured by the ratio of the banks capital to the sum of
its total liabilities and capital.

Corporate Governance and Risk Management

The relatively ease with which Skye bank announced a successor to its current managing director in line with the CBNs
policy guideline, highlights the speed of decision making by the management. This is note worthy especially
considering that Skye bank is the product of a 5way merger. Going by the findings of a board appraisal and evaluation
exercise, Skye bank has a board of directors made up of qualified individuals whose competencies and significant
experience in their various field provide a diverse and complimentary base of experience to effectively discharge their
oversight functions. We remain positive therefore in our estimation of the capacity of the board to steer the bank to
attain its strategic objectives.

Future Outlook

Skye bank remains focused on growing its banking franchise amidst it chosen market segments and has signaled its
intention to play in the top tier. With the return to profitability in Q1, 2010, we expect the bank to deliver positive
returns to shareholders on the back of cost saving measures employed from the latter part of 2009. Also, the strategic
position occupied by Skye bank in the sub-sovereign public sector space and the revenue profile of these states
(specifically, Lagos and Rivers states), places the bank in a position to continue to drive income in lock-step with the
fortunes of these states. Management guidance suggests that the bank is open to inorganic growth opportunities that
may present themselves under the current recapitalization program of the CBN.

Nigerian Banking Sector Report


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Company Profiles

Stanbic IBTC Bank (FY: December 2009)


Chart 52: Stanbic IBTC Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 53: Stanbic IBTC Versus Nigerian Banking Sector (2009 to 2010)

Share Price (N) 9.18 140.0 Adjusted Prices, Rebased (Jan 2009 = 100)

Mkt. Cap (N, bn) 172.1 120.0


Mkt. Cap (US$, m) 1,144.4
100.0
Shares Out. (bn) 18.8
80.0
2010 P/E (x) 14.1
60.0
P/BV (x) 2.1
Gross Earnings (N, bn) 59.8 40.0
Banking Sector
Gross Earnings (US$, m) 398.0 20.0 Stanbic IBTC

Net Earnings (N, bn) 8.1 0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Net Earnings (US$, m) 54.2

ROAE (%) 10.1%

Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 54: Stanbic IBTC Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 55: Stanbic IBTC Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets 23.7% Gross Provisions/Operating Income 23.3%

Core Liquid Assets/Total Assets 28.2% Gross Provisions/Total Loans 8.3%

Loans /Total Assets 31.9% NPLs/Gross Provisions 171.4%

Risk Assets/Total Assets 86.3% Total Costs/Operating Income 85.9%


Capital/Total Risk Assets 27.4% Net Interest Margin/Total Interest Income 61.4%
Capital/Total Risk Assets and Contingents 23.4% Loans/Deposits 58.9%

NPL/Total Loans 14.3% Deposits/Total Liabilities 65.1%


Capital/Total Liabilities plus Capital 23.7% Deposits Maturing in Less than 1 Month 16.5%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Significant Expansion Drives Tremendous Growth

Following the 2006 merger between IBTC-Chartered Bank and Standard Bank of South Africa, Stanbic IBTC Bank
remains one of Nigerias youngest banks. The bank is one of the few that emerged relatively unscathed from the special
audits of H2 2009, recording some of the most best growth metrics in its relatively short history. While the strategic
focus in 2008 was to reduce the exposure to margin facilities, the focus in 2009 was on rebuilding the Personal and
Business Banking asset book. Liabilities growth was hinged on branch network expansion and by extension, drive for
deposits. Despite not having received the all clear alongside the initial five banks that were cleared by the CBN, the
bank was a major beneficiary of the flight to safety. Perhaps, in an apparent vote of confidence in the brand, an influx
of new customers resulted in a 77.6% growth in the deposit base of the bank, going by its December 2009 audited
figures.

Capital Adequacy and Liquidity

The banks 2009 audited results reflect very strong capital position of 27.4% which, despite being lower than the
51.4% recorded in 2008, remains above the regulatory minimum and indicates a much more efficient use of capital.
However, liquid assets as at December 2009 accounted for only 28.2% of the banks total assets, falling well short of
the 40.0% recommended minimum. Given the banks modest but sustainable growth strategy, the outlook for risk
asset creation is positive based on its capital position.

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Company Profiles

Asset Quality and Loan Book Evolution

Stanbic IBTC Bank reported about the most risk-weighted balance sheet across the industry with 32.4% of assets paid
out in loans, 28.2% invested in liquid assets, while investments constituted 20.8% of total assets. Looking specifically
at the quality of the loan book, we find the rather static non-performing loan ratio (14.3% for both December 2008
and 2009 rather interesting as it shows the bank as having an effective risk management platform. The 3.2%
reduction (in absolute terms) in credit impairment charges further buttresses this view. Considering that the banks
66.2% loan to deposit ratio is a marked reduction from the 104.7% seen in 2008, the benefits of the increase in
deposits becomes even more glaring.

Liabilities and Funding Mix

Deposit liabilities constituted 65.1% of total non-capital funding for the bank, with 79.4% maturing in less than 1
month as of December 2009. Current accounts and fixed term deposits collectively account for 96.5% of deposits.
Analysis shows that the huge (77.6%) overall growth in deposits was mainly driven by term deposits; though demand
deposits grew by 29.4% year on year, its contribution to total deposits fell to 48.9% while demand deposits grew by
214.6% year on year and to 47.6% of total deposits. This has been fueled by the significant impact of the personal and
business banking division of the banks business.

Corporate Governance and Risk Management

Stanbic IBTC Bank is resolutely focused on running world class financial intermediation operations in Nigeria and under
the best industry practices especially as it relates to corporate governance and risk management. The bank, already an
integral part of the operations of Standard Bank group, leverages its access to world class expertise through her parent
company, the Standard Bank group. It was particularly for this reason that Stanbic IBTC bank was able to limit its
exposure to the stock market in 2008 either through a margin call or restructured affected accounts.

Future Outlook

Stanbic IBTC Bank embarked on a bold expansion strategy in 2009 amidst the economic downturn built around a
hobble and spoke strategy for retail branch expansion in which 5 mini branches are to be built for every large branch.
To ensure continued cost control, management has indicated that large focus will be placed on the productivity levels
of staff and the improved overall efficiency in the Personal and Business Banking business. We expect the bank to
continue to leverage the growth of across its 3 business lines to deliver value.

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Company Profiles

Sterling Bank (FY: December 2009)


Chart 56: Sterling Bank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 57: Sterling Bank Versus Nigerian Banking Sector (2009 to 2010)

Share Price (N) 2.18 140.0 Adjusted Prices, Rebased (Jan 2009 = 100)

Mkt. Cap (N, bn) 27.4 120.0


Mkt. Cap (US$, m) 182.1
100.0
Shares Out. (bn) 12.6
80.0
2010 P/E (x) 6.9
60.0
P/BV (x) 0.9
Gross Earnings (N, bn) 46.7 40.0
Banking Sector
Gross Earnings (US$, m) 311.0 20.0 Sterling Bank
Net Earnings (N, bn) -9.0 0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Net Earnings (US$, m) -60.0
ROAE (%) -30.5

Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 58: Sterling Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 59: Sterling Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets 9.5% Gross Provisions/Operating Income 179.3%

Core Liquid Assets/Total Assets 8.2% Gross Provisions/Total Loans 19.3%

Loans /Total Assets 43.7% NPLs/Gross Provisions 122.1%


Risk Assets/Total Assets 87.4% Total Costs/Operating Income 360.5%
Capital/Total Risk Assets 10.9% Net Interest Margin/Total Interest Income 39.4%

Capital/Total Risk Assets and Contingents 9.6% Loans/Deposits 48.4%

NPL/Total Loans 23.6% Deposits/Total Liabilities 80.5%


Capital/Total Liabilities plus Capital 9.5% Deposits Maturing in Less than 1 Month 74.5%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Just Off a Mega-Merger; Still A Work-In-Progress

Coming from a very challenging 2009 operating year in which the bank had to make provision for debt that severely
impacted its balance sheet and eroded its shareholders fund, Sterling Bank has announced plans to shore up its capital
base through a fund raising exercise that is expected to be conducted within the next couple of months. Feedback
suggests that the decision of the bank to shore up its tier one capital is borne out of its plans to compete effectively in
the local and international financial landscape and reposition the bank to take advantage of opportunities in the
economy. Strengthening our capital position will ensure that we are better placed to improve its overall
competitiveness and ultimately deliver higher returns to investors. Overall, Sterling banks ability to raise fresh long-
term capital will be a strong determinant of its survival and its ability to remain as a stand alone bank (that cannot be
easily taken over) in the near term.

Capital Adequacy and Liquidity

With a Capital Adequacy Ratio (CAR) of 14.7% as at December 2009, Sterling bank has managed to stay above the
CBN's recommended benchmark. Coming from a very challenging 2009 operating year where huge provisioning for
bad risk assets and significant diminution in asset value negatively affected its capital structure, we remain cautious as
to Sterlings ability to sustain this current level as we expect further write down of bad assets in the near term while we
have also factored the impact of its recent shareholding reconstruction exercise on its Tier 1 capital. Sterlings bank
Liquidity ratio dropped from around 60.0% to 47.0% in 2009, the drop was caused by its expansion into risk asset

Nigerian Banking Sector Report


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Company Profiles

creation and its divestment from the interbank market, treasury bills, FGN bonds and other short term investment. This
level of liquidity ratio is nonetheless well in excess of the 25.0% regulatory minimum.

Asset Quality and Loan Book Evolution

Sterling Banks loan portfolio has grown at a CAGR of 26.6% from its post-consolidation report of 2006. We observed
a sharp spike in the proportion of total assets channeled towards risk assets from 63.2% in 2007 to 82.4% in 2008.
There was a further albeit slower increase to 87.4% in 2009. The progressive decline in Loan to deposit ratio (69.0% to
37.8%between 2006 and 2008), was reversed in 2009 with the bank posting a 48.4% loan to deposit ratio. The
balance sheet of Sterling bank shows a near equal mix between investment in liquid assets, risk assets constituting
34.3% and 35.3% of total assets. It is however instructive to note that the weaknesses in the banks capacity to
manage growth in risk assets resulted in a huge spike in NPLs, going from 9.7% in 2008 to 23.6% in 2009. On the back
of this therefore, we expect Loan growth to decelerate going into 2010 or to remain flat at best.

Liabilities and Funding Mix

In line with the industry trend, deposits continue to constitute the major funding source for the Banks operations; circa
80.0% of the banks total liabilities over the last 4 years (80.5% as at 2009). Deposits however dropped by 14.0% to
N161.3bn in December 2009 from N177.0bn in 2008. Taken together with the challenging operating environment,
the banks potential to fully play a profitable lending role to its customers was significantly constrained. Worse still we
find the adverse skew in the deposit mix a source of concern. Term deposits, as a percentage of total deposits more
than doubled from 25.8% in 2008 to 53.2% in 2009. This is due to the fact that they represent an expensive funding
source relative to other deposit classes.

Corporate Governance and Risk Management

Sterling Bank has a properly articulated corporate governance code which is well enshrined in its operations. An
appraisal of the banks board (which is responsible for providing strategic direction and oversight) by external
consultants suggests that its composition reflects a diversified mix of skills and balance of power. The operations and
processes of the board conform with both CBN codes and best practice. However, the risk management functions at
the bank were called into question given the significant impairment to the banks risk assets. Management therefore
needs to strike a healthy balance between sustainable long term balance sheet growth and prudent risk mitigation.

Future Outlook

Though Sterling Bank passed the recent CBN/NDIC joint stress test, the bank to strengthen her risk management
structure and models to improve her asset quality which we see as a source of risk to the banks earnings performance.
With demand for long term fund on the increase particularly for the real sector, Sterling Bank needs to shore up its
capital, deepen its risk management expertise and optimize efficiency of its operation so as to remain relevant in the
new evolving operating environment.

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Company Profiles

UBA (FY: December 2009)


Chart 60: UBA Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 61: UBA Versus Nigerian Banking Sector (2009 to 2010)

Share Price (N) 10.43 150.0 Adjusted Prices, Rebased (Jan 2009 = 100)

Mkt. Cap (N, bn) 269.8 130.0


Mkt. Cap (US$, m) 1,793.9
110.0
Shares Out. (bn) 25.9
2010 P/E (x) 14.9 90.0
P/BV (x) 1.5
70.0
Gross Earnings (N, bn) 246.7
50.0 Banking Sector
Gross Earnings (US$, m) 1,642.6
UBA
Net Earnings (N, bn) 2.4 30.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Net Earnings (US$, m) 15.8
ROAE (%) 1.3

Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 62: UBA Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 63: UBA Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets 11.7% Gross Provisions/Operating Income 9.8%


Core Liquid Assets/Total Assets 37.5% Gross Provisions/Total Loans 2.3%

Loans /Total Assets 39.2% NPLs/Gross Provisions 258.6%

Risk Assets/Total Assets 88.0% Total Costs/Operating Income 120.6%


Capital/Total Risk Assets 13.3% Net Interest Margin/Total Interest Income 66.5%
Capital/Total Risk Assets and Contingents 8.8% Loans/Deposits 47.6%
NPL/Total Loans 6.0% Deposits/Total Liabilities 91.5%
Capital/Total Liabilities plus Capital 11.8% Deposits Maturing in Less than 1 Month 89.7%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Strong Retail Franchise Driving Growth

Starting from the merger with STB in 2005, UBA has mushroomed into a huge financial institution in Nigeria over the
last 5 years. In addition to acquiring the erstwhile Continental Trust Bank, UBA has also cherry-picked some liquidated
banks as a fallout of the 2005 banking consolidation exercise through the CBNs purchase and assumption window. So
far the bank has acquired about 5 banks namely Trade Bank, African Express Bank, Gulf Bank, Liberty bank, and
Metropolitan Bank and has expanded its operating network extensively over the last 3 years. With 709 branches and
over 7.0 million customers, UBA has the biggest branch network in Nigeria and has also extended its tentacles to 18
African countries. Recent aggressive spread into other African countries contributed to its earnings

Capital Adequacy and Liquidity

With respect to capital adequacy, UBA appears to be threading on the edge for its level of operations. Its capital
adequacy ratio of 13.3% (as at December 2009) only slightly exceeds the CBNs 10.0% requirement, down from the
16.4% recorded in September 2009. When measured against total risk assets plus contingents, this ratio comes in at
8.8% in December 2009, down 7.6% from the September 2009 level. This reaffirms the banks desire to raise N500bn
in fresh capital, a large portion of which will be financed through bonds. Though the banks liquidity ratio declined
from an average of 66.8% for the period between 2006 and 2008 to 45.5% in September 2009, it inched up to
approximately half (49.7%) of its total assets as at December 2009. This still represents a healthy 20.5% to 24.7%
cushion above the 25.0% benchmark set by CBN.

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Company Profiles

Asset Quality and Loan Book Evolution

UBA has grown its loan book at a CAGR of 55.0% from N67.6bn in 2005 to N606.7bn as at December 2009 with loans
averaging 28.0% of total asset over the same period. However, Loans (as a percentage of total assets), grew by 34.9%
and 39.2% in September and December 2009 respectively, up from an average of 23.1% for the 2006 to 2008 period.
UBA also has one of the lowest loan-to-deposit ratios among the top-tier bank in Nigeria thus raising questions about
its ability to put its assets to optimal use. A loan to deposit ratio of 48.7% falls below the banks internal limit of 60.0%
and the regulatory maximum of 80.0%. UBAs loan book is heavily tilted towards its corporate customers as they make
up 72.0% of gross loans. Its exposure to retail clients is via loans to staff of corporate clients. UBA seems to be
comfortable channeling a bulk of its assets to low-yield liquid assets. In line with industry trend and despite its
conservative loan-to-deposit ratio, we also noticed a sharp increase in NPL as a proportion of total loans.

Liabilities and Funding Mix

Customers deposits continues to be a crucial funding channel for UBAs operations; with deposit in excess of N1.2tn,
this funds about 80.5% of total assets and accounts for 91.5% of total liabilities. Further deposit analysis shows that
about 89.7% of the total deposits have a maturity profile of between 0-30 days thus bringing to the fore the need for
the diversification of its highly concentrated funding channel. While we believe the bank can further lengthen the
tenor of its deposits to support its business, we expect to see a fast-tracking of the proposed UBA medium term
funding program where the bank seeks to raise about N500.0bn from both the debt market (80.0%) and equities
market (20.0%) to support its operations. This is very crucial as we have recently seen a 6.6% decline in the deposit
base of UBA from N1.3tn as at September 2008 to N1.2tn as at December 2009. Furthermore, going by the its Pan-
African expansion drive and its renewed interest in diversifying its loan book towards infrastructure financing, sourcing
a stable and longer term funding is inevitable within the context of this dynamic operating and economic environment
to avoid liquidity and matching problems in the near term.

Corporate Governance and Risk Management

UBA adopted the IFRS accounting standard for the preparation of its 2009 annual accounts and has been one of the
banks with the highest level of transparency in reporting. To further reinforce its strong corporate governance code,
UBA was the first bank to announce its seamless succession plan in response to the CBNs policy. As regards risk
management, the bank also operates on a very strong risk management code of conduct and has highly qualified
international risk expert manning its risk management division. We expect to see further reductions in non-performing
loans as well as exposure to risk prone sectors of the economy.

Future Outlook

We remain positive on UBA based on its Pan-African expansion strategy in its bid to increasingly diversify its income
base. We believe the bank will maintain its position as one of the biggest top-tier bank over the next 3 years. Moreover,
the bank has concluded plans to raise N500.0bn in fresh capital to finance its expansion drive, key projects and
transactions. This new capital will be deployed mainly into its expansion plan and deepening its operations.

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Company Profiles

Zenith Bank (FY: December 2009)


Chart 64: Zenith Bank Trading Data (July 23, 2010) and
Operations Snapshot (Latest Audited FY, December 2009) Chart 65: Zenith Bank Versus Nigerian Banking Sector (2009 to 2010)

Share Price (N) 12.86 160.0 Adjusted Prices, Rebased (Jan 2009 = 100)

Mkt. Cap (N, bn) 403.8 140.0

Mkt. Cap (US$, m) 2,684.6 120.0


Shares Out. (bn) 31.4 100.0
2010 P/E (x) 9.3 80.0
P/BV (x) 1.2 60.0
Gross Earnings (N, bn) 277.3 40.0 Banking Sector
Gross Earnings (US$, m) 1,846.2 20.0 Zenith Bank
Net Earnings (N, bn) 20.6 0.0

Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Net Earnings (US$, m) 137.2
ROAE (%) 6.1

Source: NSE, Company Data, Afrinvest Research Source: NSE, Afrinvest Research

Chart 66: Zenith Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009) Chart 67: Zenith Bank Risk Analysis Snapshot (Latest Audited FY, Dec 2009)

Capital/Total Assets 20.2% Gross Provisions/Operating Income 9.3%

Core Liquid Assets/Total Assets 42.3% Gross Provisions/Total Loans 2.0%

Loans /Total Assets 42.1% NPLs/Gross Provisions 305.2%


Risk Assets/Total Assets 73.5% Total Costs/Operating Income 103.2%
Capital/Total Risk Assets 27.5% Net Interest Margin/Total Interest Income 56.6%

Capital/Total Risk Assets and Contingents 18.1% Loans/Deposits 58.3%

NPL/Total Loans 6.0% Deposits/Total Liabilities 88.8%


Capital/Total Liabilities plus Capital 20.2% Deposits Maturing in Less than 1 Month 48.4%
Source: Company Data, Afrinvest Research Source: Company Data, Afrinvest Research

Size, Safety and Liquidity

Zenith Bank, a 20-year old institution and one of the few surviving new generation banks has emerged as one of the
biggest banks in Nigeria and has assumed a leadership role in providing excellent banking and other financial services
through its extensive branch network and 11 subsidiaries. Zenith Bank continues to operate a business that relies on a
roughly 70/30 split between interest income and fees/commission for generating gross earnings. CAGR in both lines of
gross earnings have grown at the rate of 39.7% and 34.5% respectively over the last five years. With strong brand
recognition, over 300 branches, excellent IT infrastructure and an efficient cost structure, retail and wholesale
banking is clearly the banks strength. The banks IT infrastructure has been its major strength in service delivery and has
helped the bank to create a niche for itself by using technologically driven product to propel its growth in a cost
efficient manner. The bank also has an enviable market share of the large corporate customers in the industry. All these
have helped the bank to deliver stellar performance over the years and made Zenith Bank one of the most profitable
banks in Nigeria and amongst the very few banks that reported profits for the year ended December 2009.

Capital Adequacy and Liquidity

On the back of its huge shareholders fund (over US$2.0bn), Zenith Bank has one of the highest capital adequacy ratios
in the industry, with CAR of 29.0%. Liquidity ratio of 61.0% is about the best in the industry. We will however like to
see a more efficient deployment of its capital to generating longer-term asset and further deepening of its risk asset
portfolio.

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Company Profiles

Asset Quality and Loan Book Evolution

Zenith Bank continues to demonstrate strength on crucial asset quality metrics while at the same time growing risk
asset portfolio at a rapid but healthy rate. The Banks loan book has grown at a 5 year CAGR of 53.6% from 125.5bn in
2005 to N698.3bn as at the end of 2009 and this growth has not been achieved at the expense of sound asset quality.
Despite the lull in banking activities especially lending, full year December 2009 results has shown a 54.4% growth of
its loans, one of the highest amongst its Top-tier peers. This monumental growth in loan helped also improved the
banks loan-to-deposit ratio to 59.0% while at the same time increasing net income by 28.0% to N109.6bn (from
N85.4bn as at September 2008). The bank in line with its long tradition of prudent lending currently has one of the
lowest NPL as a percentage of total loans (6.6%) in the industry while only about 19.0% of its total loans were
unsecured as at December 2009. The bank has also reduced significantly its exposure to risk prone sectors of the
economy especially its margin loans and capital market exposure through its subsidiaries notably Zenith Securities and
Zenith Capital. Afrinvest Research estimates the banks loan book will grow at an annual 20.0% over the next 5 years as
the banks seeks to grow its longer-tenured loan further.

Liabilities and Funding Mix

Zenith Banks model focuses on gathering low cost funds mainly retail deposits and channeling same to fund risk assets
to large corporates. Analysis of the banks 2009 account shows that 57.4% of its deposits are demand deposits which
are available to the bank at almost zero cost. Moreover Zenith currently being the most capitalized bank in Nigeria with
shareholders funds in excess of US$2.0bn (N337.8bn) have a very strong capital base to support its business risks and
contingencies. Also, maturity profile of the loans maturities when compared with maturity profile of deposits reflects
an almost a perfect match in absolute terms as 60.0% (N493.0bn) of its loan book matures over 12 months while
44.5% (N522.4bn) of its deposit also matures over 12 months thus easing any liquidity strain on the banks balance
sheet.

Corporate Governance and Risk Management

Although the bank operates on a strong corporate governance code, the general industry perception is that the bank is
centered around the incumbent MD and raises question as to the ability of the proposed new management to weather
the influence of the outgoing MD. In our opinion, we believe the bank has built an institution and we do not see any
overbearing influence on the outgoing MD on the banks operations. With only a reported stake of 9.0% and with
increasing numbers of institutional clients shareholders, the outgoing MD will not have any undue influence on the
banks operations in our opinion. Zenith Bank is also one of the banks that has adopted the IFRS reporting standard and
built an enterprise wide risk management framework in accordance with Basel 2 requirements. Overall, we remain
positive on Zeniths Risk management strategies and corporate governance code.

Future Outlook

We remain concerned with Zenith Banks ability to generate longer-tenored deposit to finance risk assets origination.
We are of the opinion that a further reduction in deposits and managements preference for Tier 1 capital could place a
constraint on asset growth and overall profitability. On the whole, we remain positive on the banks asset mix and
quality; management feedback also suggests that efforts are being made to expand its loan book while seeking to
extend the tenor on deposits, thereby improving margins and ultimately, profitability.

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Section Five
Operating and Valuation Statistics

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Chart 68: Afrinvest 2009 Banking Sector Comparable Operating Statistics, Part 1

Gross 2010 YE
SHF Total Capital/ Interest Operating Cost/ Latest Net Profit
Revenues
Forecast
Banks (N, bn) Assets Assets Expense Expense Income FY PAT ROAE ROAA Margin
PAT
(N, bn) (%) (N, bn) (N, bn) (N, bn) (%) (N, bn) (%)
(N, bn)

Top Tier Banks


First Bank of Nigeria 309.6 2172.3 14.2% 196.4 65.9 78.3 87.2% 3.2 36.3 1.0% 0.2% 1.6%

United Bank for Africa 181.5 1548.3 11.7% 246.7 59.7 130.1 87.4% 2.4 18.1 1.3% 0.1% 1.0%
Zenith Bank 336.0 1659.7 20.2% 277.3 84.0 113.3 73.8% 20.6 43.6 7.3% 1.4% 9.0%

Nigerian Banking Sector Report


GTBank 187.1 1066.5 17.5% 162.6 40.5 56.2 65.3% 23.7 35.4 13.0% 2.3% 14.6%
Operating and Valuation Statistics

Mean 253.5 15.9% 78.4% 5.6% 1.0% 6.5%

Median 248.3 15.9% 80.5% 4.3% 0.8% 5.3%

Middle Tier Banks

Diamond Bank 105.6 650.8 16.2% 67.7 24.9 30.1 169.9% (8.7) 14.6 (7.9%) (1.3%) (12.9%)

Access Bank 168.3 693.7 24.3% 66.1 11.3 35.9 94.3% (4.4) 16.0 (2.5%) (0.6%) (6.7%)

Ecobank 70.5 409.3 17.2% 55.2 15.4 26.0 103.6% (5.0) 3.5 (9.7%) (1.4%) (9.0%)

Stanbic IBTC 80.5 341.3 23.6% 59.8 15.8 28.6 73.5% 8.1 12.2 10.1% 2.4% 13.6%

Fidelity Bank 129.4 506.3 25.6% 72.3 18.0 27.0 78.4% 1.6 6.5 1.1% 0.3% 2.0%
FCMB 129.6 463.6 28.0% 35.8 11.4 20.4 96.0% 0.6 7.8 0.4% 0.1% 1.6%

Skye Bank 88.1 632.5 13.9% 131.5 51.9 43.9 98.1% (0.1) 8.2 (0.1%) (0.0%) (0.1%)

Sterling Bank 31.3 249.8 12.5% 46.7 20.6 22.1 210.1% (9.0) 4.0 (30.5%) (4.4%) (19.3%)

Mean 100.4 20.2% 115.5% -4.9% -0.6% -3.8%

Median 96.9 20.4% 97.0% -1.3% 0.3% -3.4%

Source: Afrinvest Research, based on most recently announced public market data as at June 18, 2010

Page 56
Operating and Valuation Statistics

Chart 69: Afrinvest 2010 Banking Sector Comparable Operating Statistics, Part 2

Total Net Net


Total Interest Interest Loans / NPL/Total
Loans Deposits NPLs Interest Interest
Banks Income Expense Deposits Loans
(N, bn) Income Margin
(N, bn) (N, bn) (N, bn) (N, bn) (%) (%)
(N, bn) (%)
Top Tier Banks
First Bank of Nigeria 1,078.5 1,339.1 94.0 162.0 65.9 96.2 80.5% 7.2% 8.7%
Zenith Bank 698.3 1,173.9 41.9 193.5 84.0 109.6 59.5% 9.3% 6.0%
GTBank 563.5 683.1 70.8 119.6 40.5 79.0 82.5% 11.6% 12.6%
United Bank for Africa 606.6 1,245.7 53.7 177.8 59.7 118.2 48.7% 9.5% 8.8%
Mean 736.7 1,110.4 65.1 163.3 62.5 100.7 67.8% 9.4% 9.0%
Median 652.5 1,209.8 62.2 169.9 62.8 102.9 70.0% 9.4% 8.8%
Middle Tier Banks
Diamond Bank 302.5 482.1 68.1 50.7 24.9 258 62.7% 5.4% 22.5%
Access Bank 383.8 442.1 80.7 47.6 11.3 36.2 86.8% 8.2% 21.0%
Ecobank 166.0 310.7 69.4 33.8 15.4 18.4 53.4% 5.9% 41.8%
Stanbic IBTC 110.5 169.2 18.8 40.9 15.8 25.1 65.3% 14.8% 17.0%
Fidelity Bank 194.7 288.1 59.7 25.7 12.4 13.4 55.6% 4.6% 30.7%
FCMB 238.7 266.0 22.5 27.7 11.4 16.3 89.7% 6.1% 9.4%
Skye Bank 316.7 450.2 69.3 100.0 51.9 48.0 70.3% 10.7% 21.9%
Sterling Bank 108.1 161.3 29.2 34.0 20.6 13.4 67.0% 8.3% 27.0%
Mean 233.1 221.5 45.7 48.3 21.2 27.1 69.8% 8.5% 20.5%
Median 238.6 344.6 48.7 44.2 16.9 25.5 66.2% 8.3% 21.5%
Source: Afrinvest Research, based on most recently announced public market data as at June 18, 2010

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Operating and Valuation Statistics

Chart 70: Afrinvest 2010 Banking Sector Comparable Valuation Statistics

Share Total Total Market 2010E 2010E 2011E


Cap 2010E 2011E Current
Banks Price Shares Capital PAT EPS EPS
P/E P/E P/ BV
(N) (Bn) (N, bn) (N, bn) (N, bn) (N) (N)

Top Tier
First Bank 14.06 29.0 309.6 407.8 36.3 1.25 1.63 11.2x 8.6x 1.3x
United Bank for Africa 10.43 25.9 181.5 269.8 18.1 0.70 1.26 14.9x 8.3x 1.5x
Zenith Bank 12.86 31.4 336.0 403.8 43.6 1.39 1.74 9.3x 7.4x 1.2x
GTBank 17.01 23.3 187.1 396.6 35.4 1.52 1.82 11.2x 9.3x 2.1x
Mean 1.22 1.61 11.6x 8.4x 1.5x
Median 1.32 1.68 11.2x 8.4x 1.4x
Middle Tier
Diamond Bank 7.50 14.5 105.6 108.6 14.6 1.01 1.21 7.4x 6.2x 1.0x
Access Bank 8.50 18.1 168.3 153.7 16.0 0.89 1.11 9.6x 7.7x 0.9x
Ecobank 4.50 7.2 70.5 32.5 3.5 0.48 0.58 9.4x 7.8x 0.5x
Stanbic IBTC 9.18 18.8 80.5 172.1 12.2 0.65 0.84 14.1x 10.9x 2.1x
Fidelity Bank 2.29 29.0 129.4 66.3 6.5 0.22 0.28 10.2x 8.2x 0.5x
FCMB 7.30 16.3 129.6 118.8 7.8 0.48 0.62 15.3x 11.8x 0.9x
Skye Bank 7.20 11.6 88.1 83.4 8.2 0.71 0.93 10.1x 7.8x 0.9x
Sterling Bank 2.18 12.6 31.3 27.4 4.0 0.32 0.38 6.9x 5.7x 0.9x
Mean 0.79 0.98 10.0x 8.0x 1.0x
Median 0.65 0.84 9.6x 7.8x 0.9x
Source: Afrinvest Research, based on most recently announced public market data as at June 18, 2010

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Chart List

PAGE NO.

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Chart List

PAGE NO.

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Section Six
Afrinvest (West Africa) Limited

Nigerian Banking Sector Report


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Contacts

Contacts

Investment Research

Victor Ndukauba vndukauba@afrinvestwa.com


Babatunde Obaniyi bobaniyi@afrinvestwa.com
Oghenerume Augoye oaugoye@afrinvestwa.com
Oladipo James ojames@afrinvestwa.com

Sales and Trading

Boye Olawoye bolawoye@afrinvestwa.com


Tola Adelaja tadelaja@afrinvestwa.com
Lanre Adeogun ladeogun@afrinvestwa.com
Ahmed Carew acarew@afrinvestwa.com

Wealth Management

Dayo Obisan dobisan@afrinvestwa.com


Francis Anyimigbo fanyimigbo@afrinvestwa.com

Investment Banking

Demola Alabi dalabi@afrinvestwa.com


Onoise Onaghinon oonaghinon@afrinvestwa.com

For further information, please contact:

Afrinvest (West Africa) Limited


Foreshore Towers, 11th & 12th Floor
2A, Osborne Road, Ikoyi,
Lagos,
Nigeria.

Tel: +234 1 2701680 - 8


Fax: +234 1 2694392

www.afrinvestwa.com

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Disclaimer

IMPORTANT DISCLOSURES AND DISCLAIMERS

This report has been issued and approved by Afrinvest West Africa Limited (Afrinvest). This report is based on
information from various sources that we believe are reliable; however, no representation is made that it is accurate or
complete. While reasonable care has been taken in preparing this document no responsibility or liability is accepted for
errors or fact or for any opinion expressed herein. This document is for information purposes only. It does not constitute
any offer or solicitation to any person to enter into any trading transaction. Any investment discussed may not be suitable
for all investors. This report is provided solely for the information of clients of Afrinvest who are expected to make their
own investment decisions. Afrinvest conducts designated investment business with market counter parties and
intermediate customers and this document is directed only at such persons. Other persons should not rely on this
document. Afrinvest accepts no liability whatsoever for any direct or consequential loss arising from any use of this report
or its contents. This report is for private circulation only. This report may not be reproduced distributed or published by
any recipient for any purpose without prior express consent of Afrinvest. Investments can fluctuate in price and value and
the investor might get back less than was originally invested. Past performance is not necessarily a guide to future
performance. It may be difficult for the investor to realize an investment. Afrinvest and/or a connected company may
have a position in any of the instruments mentioned in this document. Afrinvest and/or a connected company may or may
not have in the future a relationship with any of the entities mentioned in this document for which it has received or may
receive in the future fees or other compensation. Afrinvest is a member of The Nigerian Stock Exchange and is regulated
by the Securities and Exchange Commission to conduct investment business in Nigeria.

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