Nigerian Banks - Atonement, Redemption and Resurrection - BUY Zenith - Diamond - Access - GT - HOLD First - UBA

June 01, 2011
NIGERIA|EQUITIES|BANKS
Our view
CONSTRUCTIVE
NIGERIAN BANKS
Atonement ,redemption and resurrection
We initiate coverage on the Nigerian banks: We initiate coverage on the Nigerian banking sector with BUY recommendations on Access Bank Plc (Access Bank), Diamond Bank Plc (Diamond bank), Guaranty Trust Bank Plc (GT Bank) and Zenith Bank Plc (Zenith Bank). We HOLD United Bank of Africa (UBA) and First Bank Plc (First Bank). We see stronger earnings recovery for Diamond Bank, while for Access we are banking on its merger with Intercontinental Bank. We also still see upside on GT Bank as it is trading below our Justified Price/Book value ratio (PBVR) despite its outperformance vs. peers. Zenith bank is our core holding among the Tier 1 banks. Balance sheet risks: We believe that credit risks in the system have reduced, and the more inhibited credit growth will continue to improve banks balance sheets. The system provisions and Non-performing loans (NPLs) ratios have improved and most banks carry high coverage ratios. However, we caution against prima facie high coverage ratios as they could indicate a higher lost loans/NPLs ratio. In terms of liquidity and solvency risks, the system carries sufficient liquidity with a Loan/Deposit ratio (LDR) of ~80% and a liquidity ratio of ~31%. The Capital Adequacy Ratio (CAR) is also high at >20% vs. the required ratio of 10%. The core deposits ratio is estimated at 60%, indicating high deposits stability/inertia. We expect system asset growth to normalise at ~20%, being credit multiplier of 2.7X and GPD growth of ~7%. Earnings risks: We think earnings risks emanating from credit risks (provisions and write offs) have reduced. Nonetheless, credit risk is not yet peripheral to earnings, in our view, although banks ability to sell NPLs to the Asset Management Corporation of Nigeria (AMCON) means that earnings risk to the banks is manageable. Lack of identification system and limited consumer credit data as the Credit Bureaux are young is still a challenge to the management of consumer credit risks. Over-exposure to the corporate sector could create a moral hazard, in our view. Valuation risks: Access Bank, Diamond bank and UBA trade below their book values. We estimate an average ROE of 14.5% for the covered banks from FY11 to FY13. Given the better regulatory environment, contained asset growth and NPLs we believe current valuations provide significant upside potential although valuations could remain depressed as catalysts could be diminished by regulatory risk related to restructuring, in the short-term.
Peter Mushangwe Lawrence Madzwara +27 11 551 3675 peterm@legae.co.za
Table of Contents
1. Summary and Conclusions 1.1 Valuation and recommendations 1.2 ROEs decomposition 1.3 CAMEL ratios analysis 1.4 Share price performances 2. Industry analysis 2.1 Profitability analysis: A positive demographic play 2.2 Credit risks: Be wary of high coverage ratios 2.3 Liquidity and funding risks: LDR cap removed 2.4 Solvency risk: High CARs in face of uncertainty 2.5 Conclusion and SWOT analysis 3. Company analysis/profiles 3.1 Access Bank, FY11 TP NGN11.31, BUY 3.2 Diamond Bank, FY11 TP NGN8.75, BUY 3.3 First Bank, FY11 TP NGN15.08, HOLD 3.4 GT Bank, FY11 TP NGN19.89, BUY 3.5 UBA Bank, FY11 TP NGN6.87, HOLD 3.6 Zenith Bank, FY11 NGN21.76, BUY 02 02 09 12 18 20 20 34 38 40 42 43 44 51 58 66 73 79
Page 1 of 87
1.
Summary and conclusions

The valuation quandary - The low Returns on Equity (ROEs) makes ordinary Justified multiples meaningless; We Adjust ROEs for excess equity: We often apply the Justified Price/Book value (PBVR) and/or Justified Price/Earnings ratio (PER) as our primary valuation methods. However, all the banks under our coverage except GT Bank, produced average ROEs <Cost of Equity (CoE), with the ROEs depressed by high capital levels as well as poorer and weaker performance. For FY11, even after adjusting for excess equity, only GT Bank and Zenith bank show ROEs > our COEs estimate. We therefore apply the Adjusted PBVR as our primary valuation method. We adjusted for excess capital by normalising the equity using target CARs. We multiply our FY11 Risk Weighted Assets (RWAs) estimates by the target CAR and use the resultant equity (read normalised book value) to calculate ROE. We then use the Adjusted ROE in our Justified PBVR model. The Adjusted PBVR is multiplied by the normalised book value (FY11). We then add back excess capital to obtain the target prices (TPs). We should highlight that for banks whose Adjusted Justified PBVR < 1X, we apply a multiple of 1.2 to FY11 book value. This is our primary valuation method. The Discounted Future Earnings method (DFE) is our secondary valuation method; Blended TPs on 60:40 weights to Adjusted PBVR and DFE respectively: While we would have preferred to employ the Justified PER as our secondary method, we find that due to ROEs that are generally lower than growth rates, resultant PERs are largely disconnected to the market and history. We therefore utilize the DFE as our secondary method. We capitalise our FY13 book value (Legae est.) by different PBVR multiples for the terminal value (TV) calculation, ranging from 1X to 2X. Our TPs are weighted average prices of the Adjusted PBVR method (60%) and the DFE (40%). High volatility and regulatory risks mean a higher required return; We are playing the up-cycle hence attraction to relatively smaller banks: We see meaningful volatility in the Nigerian banks share prices. The regulatory risk around the prohibition of universal banking and therefore creation of international banks or holding companies creates reasonable noise to our forecasting models. As a result, we are only buying shares with a potential upside of >20% while we HOLD those with potential capital gain between 0% and 20%. We favour to play the up-cycle thus we are more attracted to relatively smaller banks (Access bank and Diamond bank); banks with lower LDRs, higher liquidity ratios and higher CARs (Zenith bank, GT Bank) and banks likely to benefit from rerating (Access bank, Diamond bank). Fig 1 below is our scorecard for the banks under coverage.
1.1 Valuation and recommendations
Page 2 of 87
Fig 1: Recommendation scorecard - Key positive catalysts favour our BUYs

Positive catalysts
Long-term catalysts Accelerated RWAs growth; Above average loan growth High CAR; Low leverage; Low LDR; Strong retail deposit franchise with high CASA-tototal deposits ratios Zenith; Access and GT Bank enjoy high CARs and liquidity levels. Diamond and Zenith have best liability profiles (62% demand +savings deposits) UBA has lowest LDR but weaker CAR GT Bank and Zenith Bank Adjusted Justified PBVR > current; Diamond bank potential for rerating after strong underperformance; Access Bank, Diamond bank and UBA trading below book value Access bank signed an MoU with Intercontinental; First bank failed to agree terms with Oceanic but strong deposit base; Big 4 boast strong deposit franchises and delivery channels Diamond bank enjoy highest NIM; Stronger retail deposit franchise (relative to other Tier 2 banks); Diamond exposure to retail on the asset side constructive to spreads; GT Bank and Zenith show superior adjusted ROEs; Access and GT Bank operating income growth > operating costs growth
Indicators & comments
Stocks that are likely to benefit
Valuation
Adjusted PBVR > Current PBVR; Potential rerating in the upcycle;
Market share expansion
Acquisition/combinations with rescued banks at reasonable price; Organic deposits growth
Profitability
Strong NIM and/or interest rate spread; Potential fee accretion on transactional business; Superior Excess-EquityAdjusted ROE; JAWS
Short-term catalysts Short-term ALM benefits Shorter dated loans vs. longer dated deposits; Loans to reprice faster than deposits when interest rate are rising Trading and AFS government securities to negative affect profitability and reserves as rates are trending up Access Bank's predominantly shorter dated assets (overdrafts) vs. growing fixed deposits should provide ALM benefits in the short-term. Disclosures on AFS/HTM etc lack, but we note that Access bank has 71% of liquid assets in Gov-sec and Zenith's 56% of gov-sec/liquid assets could drag earnings/reserves; UBA and First bank should benefit from low exposure to Gov-sec; UBA just 27% of liquid assets
Portfolio structure
Negative catalysts
Capital/Liquidity constraint
Indicators & comments

Low CAR buffer to target CAR; Low liquidity ratio buffer to statutory requirement High NPL ratio; Low coverage yet high lost loans; High levels of unsecured loans; low provisions/unsecured loans
Stocks that are likely to suffer

First bank has lower liquidity ratio at only 2pp above statutory requirement (as at 1Q11); Diamond CAR ~risk CAR
NPL overhang/NPL remain stubborn
Diamond bank due to high NPL ratio; First bank due to low provisions/unsecured loans ratio and its high level of unsecured loans
Source: Company reports, Legae Securities
Why BUY Access bank? We recommend a BUY on Access Bank because we 1) are attracted to the proposed business combination with Intercontinental bank. Intercontinental banks asset base of NGN650bn, (market share of ~4.4% and rank # 8; 3Q10) is essential but we are more fascinated by the deposit franchise that Intercontinental bank would bring on board. Intercontinentals deposit market share is ~5.8%, ranking it #7 (i.e. ahead of Access Bank). With Access Banks stronger corporate exposure on the asset side, this penetration into largely retail deposit base of
Page 3 of 87
Intercontinental should diversify the combined entitys funding sources. It should also be constructive to Access banks cost of deposits and market share acquisition. Having said that, in the current environment, (rates rising), Access Bank has opportunities to exploit its balance sheet structure. The longer dated fixed deposits re-price later that the bulk of loans which are of overdraft type; 2) favour high CAR and liquidity ratio which provides room to grow RWAs particularly when compared to other Tier 2 banks; and 3) warm up to the lower historical credit risks when compared to other Tier 2 banks. We expect earnings to grow by a Compounded annual growth rate (CAGR) of 35% in our forecast period. Our FY11 TP of NGN11.31 provides potential upside of 42.3% to the current price. We see a deeper value trade in Access bank. Chief risk to our view: The major risk, in our view, originates from integration risks when the two businesses are combined. The current poorer deposit mix makes Access bank structurally weak particularly if the merger is not consummated. Why BUY Diamond bank? Diamond banks loan and advances grew by a CARG of 47% between FY05 and FY10 yet earnings decline by ~12% over the same period. The banks average provisions/loans ratio of 1.6% is the highest in our universe indicating the higher credit risks exposure. In fact provisions for loan losses went up by ~93% (vs. loan growth of ~47%). This poorer asset quality damaged the franchise, and management changes were instituted. Nevertheless, we like 1) the stronger retail franchise that management is building, notwithstanding the higher credit risks. We believe that with most major banks concentrating on corporate clients (on the asset side); Diamond bank has an opportunity to penetrate the retail and Small and Medium Enterprises (SMEs) segments where competition is reduced. Diamonds deposits mix is improving; 2) the reducing credit risks that should bode well for earnings as provisions should be benign going forward. Diamond bank, like most banks in the system, sold its NPLs to the AMCON and although the NPL ratio remains high in relative terms, it has improved. The Naira-NPLs have reduced in 1Q11. Management are of the view that provisions will decline materially as more NPLs are sold to AMCON and asset quality improves. The bank hired more experienced and qualified personnel in its credit and risk management department; 3) the restructuring that will result in the disposal of non-banking subsidiaries. This will make the Group leaner and it releases capital. Our FY11 TP is NGN8.75which presents a 45.8% potential gain to the current price. Chief risk to our view: The risk to our view comes from the relatively low CAR which provides no materially buffer to the managements risk capital level of 15%. However, the bank can still exploit its Tier 2 capital and optimise its capital structure. We have modelled a strong pre-tax earnings recovery (+68% 3-year
Page 4 of 87
CAGR and 79% for FY11). With contained RWAs growth, our earnings expectations could be missed. Why BUY GT bank? GT Banks metrics provides the best riskreturn profile in our universe. GT Bank is the only bank in our universe to have managed to create economic value between FY05 and FY10 with an average ROE>CoE. This value creation has been a result of stronger efficiency, with the lowest expense ratio among our banks. We also specify that GT Banks reporting and disclosure standards have been superior as it is already compliant with the IFRS. Despite outperforming its peers, and trading at a PBVR that could scare off some investors, we still BUY GT Bank because 1) an attractive risk/return profile as indicated by our Adjusted PBVR. Its PBVR < Justified PBVR (adjusted for excess equity). We estimate the fair PBVR at 3.77X vs. current PBVR of ~2X. GT Banks superior ROE (which is not a result of capital management as the bank still carry high levels of capital) deserves premium valuation, in our opinion; and 2) it is the only bank whose JAWS could continue to open. With no major acquisitions lined-up, we expect GT Bank to continue to improve profitability due to higher operating leverage, supported by rising differentiation between the big 4 and the Tier 2 banks, and sustain the already best-in-class Return on Assets (ROA). GT Bank is the most efficient bank and trading at a PER of ~9.9X and forward PER of ~8.3X (Legae est.), we believe the risk/reward profile is attractive. Our FY11 TP is NGN19.89 which is 22.9% above the current price. Chief risk to our view: The relatively high PBVR could continue to scare away investors and may catalyse a switching sell-off. However, we have modelled earnings growth rate of 24.7% CAGR between FY11 and FY13, which is ~1/2 the CAGR of 48% between FY05 and FY10. Why BUY Zenith bank? As is the case with GT Bank, we expect Zenith bank to benefit from increasing differentiation between the big 4 and the Tier 2 and rescued banks. We covet 1) Zenith banks liquidity profile. The bank is well placed to play this cycle in which we anticipate loan growth to pick up. The LDR is low at 56% and the liquidity ratio is extremely high at 63%. (1Q11). Zenith banks cost of liabilities (both Legae and management estimates) has improved materially in FY10. Although we expect funding costs between the Tier 1 banks and Tier 2 banks to tightening through the normalisation phase, there will still be a meaningful difference between them. Demand and savings deposits make up 63% of the banks deposits indicating a strong deposit franchise 2) Zenith banks lower NPL overhang. Zenith banks unsecured loans are only 3.6% of the banks loan book (vs. 22.1% for First bank, 8% for UBA and 9.7% for GT bank as at FY10). About 47% of the banks loan book is secured by real estate (vs. 11% for First bank; ~36% for UBA and ~37% for GT bank). The provisions/unsecured loans ratio is an admirable 121% (vs. 24% for First bank, 89% for
Page 5 of 87
UBA and 58% for GT bank). We believe Zenith banks NPL overhang risk is highly muted. At a FY TP of NGN21.76 which is 42.2% higher than the current price, Zenith bank is our core holding of the Tier 1 banks. Chief risk to our view: Historically, Zenith bank has been conservative, with a LDR average of 50% between FY05 and FY10. A deliberate low loan growth could harm our estimates and valuation. We have grown earnings by A CAGR of 25.4% between FY11 and FY13. Why HOLD First bank and UBA? 1) For First bank, we like the strong deposit franchise that is supported by a robust countrywide branch network. We however, do not think that First bank is best placed to grow risk assets particularly as the liquidity ratio is almost breaching the statutory requirement (32% for 1Q11 vs. 30%). While we applaud managements decision to discontinue talks with Oceanic/Central Bank of Nigeria (CBN) due to valuation differences, other banks that could negotiate better valuation and acquire Oceanic will likely be able to gain market share and scale. We also note that First banks deposit structure is worse when compared to Zenith bank and even Diamond bank and there could be higher NPL risk with a 22% of the loan book unsecured. However, we HOLD First bank because we believe it is a strong franchise that could improve its liquidity ratio and grow RWAs meaningfully (the CAR is fairly high). The liquid assets portfolio could benefit from the rising interest rates as funds are deployed in the interbank and government securities (at higher rates than before) in order to improve the liquidity ratio. FY10 has also registered a high cost/income ratio, deteriorating from 59% to 65%. A normalisation of the cost/income ratio to ~60% would be beneficial to earnings. Our FY TP is NGN15.08 which offer potential upside risk of 11.7%; 2) For UBA the high CAR, liquidity ratio and cost/income ratio could be optimised hence our HOLD. We carry concerns related to its Sub Sahara Africa (SSA) expansion strategy. While the proposed restructuring that seeks to separate Nigerian operations from SSA operations and both entities listed on the NSE could unlock value, details related to it are still scanty for us to make an educated opinion with strong conviction. We arrive at a FY11 TP of NGN6.87 which is only 9.6% above the current price. Primary valuation model and credit ratings: Fig 4 shows our primary valuation model. We applied different CoE for the banks, with Diamond bank attaining the highest CoE due to its thinner balance sheet and low CAR relative to the risk CAR. Our higher earnings growth expectations points to higher cost of capital. Zenith bank and First bank boast the lowest CoE due to their dominant positions. Fig 5 shows the credit ratings. We obtain the crating ratings from the banks websites and we did not verify with various rating agencies if the ratings are stale or not.
Page 6 of 87
Fig 2: Valuations and recommendations

AccessBank Publicmarketpricingsummary BloombergTicker Currentprice Numberofshares Marketcap(NGNmn) Marketcap(US$mn) TrailingPBVR TrailingPER TrailingValue/Deposits Forwardvaluationmetrics DFEvalue AdjustedPBVRvalue FY11TP(40:60) Potentialupside EarningsCY10CY13CAGR FY11PBVR(X) FY11PER(X) ROA(av.FY11FY13) ROE(av.FY11FY13) FY11Keyfinancials Totalassets Totaldeposits Earnings Ourrecommendation 1,215,339.4 633,003.6 14,341.4 BUY 863,234.4 515,039.9 5,988.9 BUY 2,786,351.9 1,704,416.2 49,035.2 HOLD 1,380,909.5 951,493.5 56,247.4 BUY 1,544,428.4 1,457,246.7 20,622.5 HOLD 2,259,981.8 1,581,686.4 52,608.8 BUY 10.42 11.91 11.31 42.3% 35.1% 0.8 9.92 1.4% 10.2% 7.80 9.37 8.75 45.8% 128.8% 0.7 14.60 1.0% 8.4% 17.16 13.70 15.08 11.7% 48.1% 1.2 8.98 2.2% 16.6% 18.46 20.84 19.89 22.9% 24.3% 2.3 8.39 4.0% 28.0% 6.90 6.85 6.87 9.6% 269.1% 1.1 9.83 1.2% 13.9% 21.76 21.76 21.76 42.2% 25.4% 1.3 9.15 2.2% 15.5% ACCESSNL 7.95 17,888.00 142,209.60 917.48 0.81 12.65 0.22 DIAMONDBNL FISRTBANNL 6.00 14,475.00 86,850.00 560.32 0.81 67.41 0.17 13.50 32,632.00 440,532.00 2,842.14 1.29 13.19 0.26 GUARANTYNL 16.19 29,146.48 471,881.55 3,044.40 1.84 9.96 0.50 UBANL 6.27 32,335.00 202,740.45 1,308.00 0.90 242.80 0.14 ZENITHNL 15.30 31,396.00 480,358.80 3,099.09 1.32 12.87 0.30 Diamondbank FirstBank GTBank UBA Zenithbank
Source: Company reports, Bloomberg, Legae Securities. Prices as at c.o.b 27/05/11
Fig 3: Growth rates - GT Bank shows a more appealing growth profile (FY05-FY10)
AccessBank Diamondbank Loansandadvances Deposits Equity Totalassets Interestincome Interestexpense Netinterestincome Noninterestincome Operatingincome Operatingcosts Provisions(orloanlosscharges) Profitaftertax 92.7% 71.7% 65.6% 64.4% 75.7% 68.8% 79.8% 78.9% 63.7% 63.7% 42.5% 85.7% 47.2% 38.8% 38.7% 35.4% 44.8% 38.3% 47.4% 78.5% 42.3% 40.9% 93.2% 11.9% FirstBank 56.0% 34.3% 46.9% 36.1% 36.7% 43.8% 34.2% 22.1% 29.6% 31.7% 54.8% 20.4% GTBank 55.4% 51.1% 44.1% 44.1% 48.6% 35.0% 56.4% 32.3% 45.8% 43.9% 47.8% 47.8% UBA 24.5% 43.9% 56.0% 45.2% 52.1% 68.2% 45.2% 42.1% 43.6% 44.7% 240.1% 33.4% Zenithbank 42.2% 41.4% 57.3% 41.9% 40.9% 44.8% 39.6% 38.2% 39.0% 40.0% 17.1% 39.2%
Page 7 of 87
Fig 4: Adjusted PBVR valuation - GT Bank deserves premium valuation, even when adjusted for excess capital
2011est. Earnings Reportedequity RiskWeightedAssets TargetCAR ReportedCAR Normalizedequity:TargetCARX RWAs Excesscapital:Reportedequityless normalized ROEbasedonreportedequity ROEbasedonnormalizedequity Internalgrowthrate:RetentionratioXROE CoE JustifiedPBVRatnormalizedequity AdjustedPBVR Normalizedcapitalizedequity Normalisedcapitalisedequity(usingadj.PBVR) addExcesscapital Value Numberofshares Valuepershare Currentprice Upside/Downsiderisk AccessBank 14,341.40 184,846.45 939,041.20 15.0% 19.7% 140,856.18 43,990.27 7.8% 10.2% 5% 18.80% 0.54 1.20 76,284.02 169,027.42 43,990.27 213,017.69 17,888 11.91 7.95 49.8% Diamondbank 5,988.90 116,460.97 640,991.09 15.0% 18.2% 96,148.66 20,312.31 5.1% 6.2% 3% 19.55% 0.32 1.20 30,633.75 115,378.40 20,312.31 135,690.70 14,475 9.37 6.00 56.2% FirstBank 49,035.18 382,975.04 2,134,399.02 15.0% 17.9% 320,159.85 62,815.19 12.8% 15.3% 8% 18.30% 0.84 1.20 267,951.80 384,191.82 62,815.19 447,007.01 32,632 13.70 13.50 1.5% GTBank 56,677.74 211,873.44 951,740.94 15.0% 22.3% 142,761.14 69,112.30 26.8% 39.7% 11% 18.55% 3.77 3.77 538,394.89 538,394.89 69,112.30 607,507.19 29,146 20.84 16.19 28.7% UBA 20,622.54 187,771.53 15.0% 16.7% 168,963.22 18,808.31 11.0% 12.2% 6% 18.55% 0.66 1.20 111,172.70 202,755.87 18,808.31 221,564.18 32,335 6.85 6.27 9.3% Zenithbank 52,524.76 370,220.33 15.0% 27.9% 199,337.85 170,882.49 14.2% 26.3% 13% 18.30% 2.57 2.57 512,417.58 512,417.58 170,882.49 683,300.07 31,396 21.76 15.30 42.2%
1,126,421.47 1,328,918.98
Source: Company reports, Bloomberg, Legae Securities, prices as at c.o.b 27/05/11
Fig 5: Credit ratings
S&P Access Diamond First Bank GT Bank UBA Zenith B+/Bn/a B/B+ BBn/a B+/B-
Fitch BBBA-/B B/B+ AAB+ B+
Agusto & Co Bbbn/a A+ AAA A+ Aaa
GCR AA+ AA n/a AA/A1 n/a
Source: Company reports, company websites
Page 8 of 87
1.2 ROE decomposition: Hope as system deals with legacy issues

Largely, Nigerian banks have been destroying value: We decompose the ROE for the banks and calculate the average ROEs since CY05 (see Fig 6). Our key observation is that the Nigerian banks ROEs have been relatively poor, and hence banks economic profits/spreads have largely been negative. Simply put, with the exception of GT Bank, Nigerian banks, particularly under our coverage, have been destroying value since CY05. Of course, given the capital raising exercises post consolidation, ROEs were naturally going to be depressed, but we highlight that even the ROA, in the main, has been uninspiring despite strong NIM. The expense ratio (Non-interest expense/total assets ratio) is the primary culprit. High provision and loan losses in CY09 and CY10 also aided in the erosion of profitability. Worst 5-yr average ROE - Diamond Bank: Diamond Banks average ROA of 1.1% between CY05 and CY10 is the lowest. This led to an average ROE of 6.7% over the same period which is less than our CoE estimate of 19.6%. While Diamond bank enjoys relative higher asset yields, (average 8.4%; highest in our universe), the cost of liabilities is also higher. (average 3.6%; highest in our universe). However, asset rotation is pleasing at 9.2%, only lower than GT Bank. The high operating expense ratio at 5.8% and a relative higher loan loss ratio reduces the ROA to a disappointing 1.1%. We believe that continued strong asset rotation and reduction in the cost of funds/liabilities should bode well for the ROA going forward; particularly as the banks retail deposits franchise is gaining momentum. Best 5-yr average ROE GT Bank: GT Banks strength is reflected by the lower operating expense ratio of 4.8%. (i.e. efficiency). While the asset yields and the cost of liabilities do not vary materially from those of Diamond bank, (asset yield 8.3%; cost of liabilities 2.7%), higher relative asset rotation (average 9.3%) and the operating expense ratio that is 1 percentage point (pp) lower than Diamonds, enhancing the ROA to 2.8%. More impressively, in our universe, only GT Bank created economic profit over the period (CY05 to CY10). The future ROE sources: We do not think the asset spreads (and yields) are going to expand materially even though interest rates could increase. Banks with higher liquidity could change their asset mixes and enhance the yield but we do not think it will be structural. On the other hand, we expect the cost of liabilities to increase. The CBN recently raised the reserve requirement ratio to 4% which is not supportive to the cost of deposits. (see section 2 (d)). However, increase asset rotation (expanding fee and commission income on further retail penetration and a pickup in loan growth), efficiency benefits as banks gain scale from consolidation and reduced loan losses (better asset quality) should support ROA. Nonetheless, we do not expect ROAs to expand
Page 9 of 87
beyond 3% as banks revenue will continue to rely more on interest income than fee and commission income. The ROEs could still be enlarged by leverage, so we see banks with relative lower leverage ratios (Access, Diamond, GT Bank and Zenith) having headroom to expand ROEs. UBAs relatively high leverage ratio is a holdback to ROE expansion, in the short-term.
Fig 6: ROE decomposition - Only GT Bank created economic value between CY05 and CY10
Average(CY0510) Assetyield:Interest/Assets Interestreceived/InterestEarningAssets Costofliabilities:Interestexpense/Liabilities Interestexpense/InterestBearingLiabilities Netinterestspread NetInterestMargin Assetrotation:Totalrevenue/TotalAssets Operatingexpenseratio:Op.expense/TA Loanlosscharge/Loans PreTaxROA less Tax/TotalAssets ReturnOnAssets Leverage:Totalassets/Equity ReturnOnEquity less CoE Economicspread AccessBank DiamondBank 6.6% 11.1% 2.9% 3.6% 7.4% 7.2% 7.6% 4.8% 1.0% 1.6% 0.4% 1.2% 5.86 6.9% 18.8% 11.9% 8.4% 12.2% 3.6% 4.1% 8.1% 7.8% 9.2% 5.8% 1.9% 1.5% 0.4% 1.1% 6.07 6.7% 19.6% 12.9% FirstBank 7.3% 9.7% 2.5% 3.0% 6.7% 6.9% 8.3% 5.0% 0.8% 2.5% 0.6% 1.9% 7.96 15.0% 18.3% 3.3% GTBank 8.3% 10.5% 3.5% 4.4% 6.1% 6.8% 9.3% 4.8% 1.0% 3.5% 0.7% 2.8% 6.76 19.0% 18.6% 0.4% UBA 7.4% 9.8% 3.0% 3.2% 6.6% 6.2% 8.5% 5.8% 0.8% 2.0% 0.7% 1.3% 10.66 14.1% 18.6% 4.5% ZenithBank 7.6% 9.8% 3.1% 3.6% 6.2% 6.5% 8.8% 5.4% 0.7% 2.6% 0.6% 2.0% 6.47 13.1% 18.3% 5.2%
Addressing the excess capital issues: On average Nigerian banks carry excess capital. Of course, in our view, this is meant to create confidence in the system. Our discussions with banks management teams indicate that most banks are comfortable with a risk CAR of 15%, thus a 5pps buffer to the regulatory minimum CAR of 10%. We notice intentions to shrink their CARs to this target level by expanding their RWAs rather than increasing payout ratios and/or buying back shares. In our view, a risk capital level of 15% is satisfactory. It would ensure favourable credit ratings from rating agencies, and hopefully lower the cost of deposits, particularly wholesale deposits and bond issuances. To address the issue of this excess capital, we adjust ROEs as explained in our valuation section. The other way to exploit excess capital, particularly Tier 1 is to issue additional Tier 2 capital: We discern that most of the Nigerian banks have not yet utilised the 100% Tier 2/Tier 1 capital limit. Banks can continue to hold higher levels of capital (as per their targets and choices) by issuing non-dilutive Tier 2 capital to support the resumption of RWAs growth.
Page 10 of 87
JAWS analysis: We provide a graphical JAWS analysis for the six banks under our coverage. (see Fig 7). Only Access Bank and GT Bank managed to grow operating earnings more than operating cost between FY05 and FY10. On average the banks failed to optimise their operating leverage (revenue growth < operating cost growth). Operating costs are higher and management teams fault the well documented power/energy problems.
Fig 7: Nigerian banks JAWS never opened in a meaningful manner
80,000 70,000 60,000 Operatingincome 50,000 40,000 CAGR=53.7% 30,000 20,000 10,000 2005 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2005 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2005 2006 2007 2008 2009 2010 CAGR=43.6% 2006 2007 2008 2009 2010 20,000 60,000 Operatingincome Operatingexpenses CAGR=31.7% 80,000 100,000 Operatingincome Operatingexpenses CAGR=43.9% 2006 2007 2008 2009 2010 140,000 Operatingexpenses CAGR=56% 50,000 40,000 30,000 CAGR=29.2% 20,000 10,000 2005 2006 2007 2008 2009 2010 Operatingincome operatingexpenses CAGR=27.2% 80,000
Accessbank
70,000 60,000
DiamondBank
Firstbank
CAGR=29.6% 120,000
GTBank
CAGR=45.8%
40,000
2005 2006 2007 2008 2009 2010
UBA
200,000 180,000
ZenithBank
CAGR=39%
160,000 Operatingincome Operatingexpenses CAGR=44.7% 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2005 2006 2007 2008 2009 2010 Operatingincome Operatingexpenses CAGR=40%
Page 11 of 87
1.3 CAMEL ratios analysis: Better sense of stability

Capital: The Nigeria systems CAR is high at >20%. However, the rescued banks suffer from heavy capital deficiencies. The capital levels of our covered banks is strong, with all of them benefiting from CARs of >15%. As we mentioned already, all the banks we cover have a target risk capital of 15%. (i.e. the capital that management determines as necessary to absorb losses, often over a period of time and within some confidence level). Zenith leads the pack with an excessive CAR of 36% while Diamond bank has the least CAR at 16.6% (FY10). Capital is important for various reasons, to include confidence building in a system and loss absorption. In our view, Nigerian banks still need to maintain higher CARs so as to attract better ratings (and lower cost of funds/access foreign credit lines). Our anticipation of an increasing penetration into the retail segment also requires higher capital levels. Nonetheless, the current levels are excessive, but we believe this has been a result of subdued RWAs growth in the past two years. Diamonds 16.6% CAR vs. a target of 15% could create little room for RWAs expansion though. However, most banks CARs are predominantly Tier 1. In terms of leverage, with the exception of UBA, all banks leverage level is <7X. The low leverage provides room asset creation, particularly as the economy continues to improve. (GDP growth was 7.43% for 1Q11 vs. 7.36% in 1Q10). However, over time and as confidence rises in the system, even this risk capital should migrate towards the regulatory capital, narrowing the buffer spread. We believe that in the long-term, authorities would allow banks to earn a return that justifies capital by allowing a healthy growth in RWAs. Internal capital generation should support CARs as profitability rebounds. Asset quality: Asset quality remains a major issue in the system, in our view. Continued increases in interest rates, while constructive to earnings, will compound credit risks. With no disclosure on the levels and state of restructured loans, the underlying trend in NPLs is masked. The high NPL level ratio in CY09 and CY10 means that we may see a deceleration, albeit remain elevated, as RWAs begin to grow. Purchases of NPLs by AMCON only shifts systems bad loans from banks to AMCON and does not improve the systems credit profile per se. Banks exposure is primarily to corporates, and to a large extent also concentrated in industries such as oil and gas, construction, telecoms etc. Looking at NPLs distribution for the banks under our coverage, oil and gas and construction seem to be the most problematic sectors. Moral hazard is a risk, in our opinion. However, we believe CBN credit concentration guidelines should help in managing the concentration risks. CBN has provided banks with guidelines ranging from classification of industries to limits. For example, guidelines have a portfolio concentration limit of 10% for an industry rated BB and below and a ceiling of 5% for an unrated sector. We noted that almost all banks target NPL/Loans
Page 12 of 87
ratio is now 5% (moral suasion from CBN). Diamond bank is furthest to attain this target with its NPL ratio ~15%. This high NPL ratio commensurate with the higher exposure to the retail/SME segments when compared to the peers under analysis. For FY10, First banks 5.8% NPL ratio is the lowest and indicates the stronger asset quality of the bank. Zenith Banks and GT Banks NPL ratios of 5.9% and 6.8% correspondingly are also pleasing. (Zeniths NPL ratio improved to 5.4% in 1Q11). Looking at the coverage ratios, we note that GTBank has the highest coverage ratio at 102%. On average coverage ratios are pleasing although the caveat is that it could also indicate higher levels of lost loans for banks. The benefit is that it provides visibility to earnings growth. In terms of unsecured exposure, First Bank has the highest at 22.1% of its loan book. Access bank has the lowest unsecured exposure at only 2.4% of its loan book. (see Fig 9). Management guidance is generally for lower impairment charges for this year, and we expect the guidance to strengthen next year. Management/Efficiency: Our cost/income ratios could differ materially to the reported ones. This is mainly a result of varied disclosure among Nigerian banks. Some banks report the provisions/diminution of assets as an operating cost, thus increasing the cost base and pushing up published cost/income ratios to ~80% levels. We do not believe that provisions should be part of operating costs (provisions are mainly an accounting and regulatory issue, and more related to risk management than operating costs). Nigerian banks also employ(ed) various terminology. Some bank show provisions in their P/L while others indicate the bad debt charge. This convinced us to calculate cost/income ratios on a pre-bad debts/provision basis. Generally, the cost/income ratios are fairly high at >60% on average. However, most banks rationalised their cost bases between CY08 and CY10, with some even reducing their headcount. We see modest improvements in the cost/income ratio. Non-interest income contribution at ~40% is fair. There is room for banks to pursue non-funded revenue and improve efficiency. Product development and technology will be important to induce transactional activities. Generally, the banks under our coverage have strong and experience management teams. Earnings/Profitability: We expect net interest income growth to be largely robust as banks resume lending activities and swell their RWAs. We also expect margins to remain stable in the short- to medium-term, underpinned by favourable asset spreads given the inflation and interest rate outlook. The fact that >85% of the system loans are floating and hence re-price when policy rate increases will aid profitability should inflation remain stubborn. However, banks with short-term wholesale deposits (to include interbank deposits) that may need refinancing are likely to see an expansion in the cost of their liabilities. CBNs anticipated withdrawal of its guarantees on interbank market transactions by September will be negative to net interbank borrowers (i.e.
Page 13 of 87
elevated risk premium for counterparty risk). Those with strong deposit franchises are preferred as that would provide flexibility. Cost efficiencies and lower credit risk costs are supportive while leverage could increase with expanding RWAs both being constructive to ROEs. Fee income should also start to pick up, driven mainly by increasing penetration, particularly on the liability side and loan growth improvement, although we expect NII to continue to dominate banks revenues. Fee income drivers remain intact. In the long-term, strong mortgage finance demand (mortgage origination) and rising retail penetration should increase transactional activities. Investment banking related fee income should also be helpful given that the collapse of the NSE that resulted in the dearth of corporate activities has now halted. ROAs are therefore set to rebound. Banks with higher percentage of fixed rate loans, especially longer dated could be at a disadvantage in the short-term (e.g. Zenith bank). Similarly banks with a higher percentage of government securities in the available-for-sale (AFS) and trading portfolio may also be negatively affected by the rising interest rates as they would book losses reducing reserves and profits respectively. The analysis is limited by the fact that disclosure on the amount of AFS, Held-to-maturity and trading securities in banks portfolios remains inadequate to be of any practical use. Our concern is that Nigerian banks have largely been unable to produce economic profit post CY05. Liquidity and funding: The CBN removed the 80% LDR cap but increased the liquidity ratio to 30%, effectively putting a theoretical LDR cap of 70%. However, banks can still expand their loan books through other funding sources as long as the liquidity ratio is maintained at a minimum of 30%. The systems LDR is ~80% which provides scope to absorb system-wide funding shocks. Looking at our universe, UBA has the lowest LDR at 50%. Zenith Banks 64% and Diamond Banks 71% also provides ample room for these banks to change their assets mix in pursuit of higher earning assets. Access Bank has the highest LDR (88%) and liquidity ratio of (37%) (FY10). While most of the banks under our coverage have strong retail deposits franchises (see Fig 11), the increasing term deposits in the system will weigh on industry interest spread. Access bank has the lowest demand and savings deposits both in NGN-terms and as a percentage of its total deposits. Having said that, we believe the banks under our coverage carry plenty liquidity, in our view. Overall, Nigerias banking system structural risks have significantly diminished: We note that greedy loan growth (dominated by margin lending) has waned. We note a great deal of atonement from bank managers. Growth target are now more realistic and in some instances look easier to achieve, in our view. The realistic targets mean that banks are willing to take fewer risks in order to avoid a repeat of the recent past. In our outlook, from here on, the credit multiplier will revert to its average and system credit growth rates will commensurate real economic
Page 14 of 87
growth by the long-term credit multiplier factor (~2.7X). The consolidation, which has lead to the Top 10 banks enjoying market share of ~70% vs. ~54 in CY04 should result in enhanced regulatory overview. While consolidation benefits are more secular than cyclical, we also see a recovery in RWAs and profitability growth that is cyclical at this point in time despite our expectation of continued moral suasion from CBN against out-of-order RWAs expansion. On the other hand, we see more engagement between regulators and management. The CBN was caught out and felt embarrassed by the previous crisis that a backlash to banks that disregard rules is obvious. Gaming the regulatory system by aiding each other (banks) liquidity ratios towards year end, for example, is now impossible given the uniform reporting/accounting years. The minimum 1% general provision also attempts to standardise provision policies among banks. With contained loan growth (hence higher CAR, high liquidity ratio, and lower credit risks) and enhanced regulatory cooperation we believe risk are lower.
Fig 8: CAMEL ratios - High CARs necessary due to poor asset quality (FY10)
Access C:CAR C:Leverage A:Provisions/Loans A:NPL/Loans A:Coverageratio M:Cost/Income M:NII/Operatingincome E:NIM E:ROA E:Profit/Deposits E:ROE L:Loans/Deposits L:Liquidityratio 26.5% 4.6 7.6% 8.1% 94.0% 70.0% 63.5% 7.9% 1.4% 2.3% 6.3% 88.3% 36.9%
Diamond 16.6% 5.6 10.7% 14.8% 72.1% 62.8% 67.2% 11.6% 0.2% 0.3% 1.2% 71.4% 42.0%
FirstBank 20.4% 6.8 5.5% 7.7% 71.5% 65.5% 68.3% 7.0% 1.4% 2.3% 9.4% 78.8% 50.9%
GTBank 20.8% 5.5 6.9% 6.8% 101.9% 52.9% 68.1% 8.2% 3.3% 5.0% 18.2% 78.0% 49.1%
UBA 18.00% 9.0 7.1% 8.8% 80.6% 75.2% 51.2% 6.2% 1.3% 0.1% 14.1% 49.6% 39.0%
Zenith 33.0% 5.2 4.4% 5.9% 74.0% 64.3% 60.2% 6.3% 2.0% 2.8% 10.3% 63.7% 62.0%
Page 15 of 87
Fig 9: Access has the lowest unsecured exposure; First has the highest (FY10)
Securedbyrealestate 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Access Diamond Firstbank GTBank UBA Zenith 2.4% 5.8% 22.1% Securedbyquotedshares Otherwisesecured 9.7% Unsecured 8.0% 3.6%
Source: Company reports, Legae Securities Fig 10: Lost loans/NPL ratio high hence high coverage ratios; Provision/unsecure loans mixed
SuStandard 100% 90% 32.5% 80% 47.6% 70% 60% 50% 150% 40% 30% 20% 50% 10% 0% Access Diamond Firstbank GTBank UBA Zenith 0% Access Diamond Firstbank GTBank UBA Zenith 24% 100% 58% 89% 121% 40.0% 52.9% 57.5% 55.1% 250% 300% Doubtful Lost 350% 313%
Provisions/Unsecuredloans
200%
195%
Page 16 of 87
Fig 11: Banks liability structure - Generally a strong deposit structure except for Access
1,800,000 Zenith 55% 7% 16% 9% 1,600,000
Demand Savings Term
Demand
Savings
Term
Domiciliary
Duetobanks
UBA
35%
15%
20%
18%
1,400,000
1,200,000 276,250 240,551 1,000,000 285,933 800,000 387,808 220,769 246,498 103,419
GTBank
32%
11%
26%
11%
Domiciliary Duetobanks
Firstbank
31%
20%
14%
9%
Debtinissue OtherBorrowings
600,000
Diamond
42%
20%
23%
0%
Onlending facilities Otherliabilities
400,000 237,288 200,000 15,309 166,582
835,450 110,469 97,692 203,872 Diamond Firstbank 607,724 107,125 504,851 300,738
Access
26%
2%
38%
11%
0%
20%
40%
60%
80%
100%
Access
GTBank
UBA
Zenith
Page 17 of 87
1.4 Share price performance: GT Bank running away

GT Bank outperforms peers on both YTD and long-term: That is the reason we think GT Banks valuation could worry some investors. On a YTD, GT Bank share prices has appreciated by 12% vs. an average of -7% for the banks under our coverage and 4% return for the All Share index. This outperformance, however, is not just short-term. Indexing the performance to CY05, GT Bank has significantly outperformed its peers and the Nigeria Stock Exchange (NSE) All share index as well. GT Banks share price has ascended by 6X vs. an average of <2.5X for the peers under our coverage. In our view, the outperformance, to a very large extent, is deserved given the superior RoEs it has enjoyed vs. its peers. GT Banks share price is now close to its peak in CY07. Diamond Bank has underperformed peers and the All Share index; GT Bank >500% up from the CY09 lows; Diamond bank only 60% up: Indexing performance of the banks under our coverage to CY05, they have all but Diamond bank outperformed the All Share index. Diamond banks share price is only 3.7% higher than it was at the beginning of 2H05. Following an industry-wide sell-off in CY08, which troughed in February CY09, GT Bank has since gained 556%, Zenith bank 155%, Access bank 141%, UBA 140% and First Bank 123% from their lows. Diamond bank has only gone up by 60% from its CY09 lows, the only share to return <100%. It looks to us like Diamond banks poorer franchise has been punished, and rightly so, but we are taking confidence in the new management team to turn around the banks fortunes.
Fig 12: GT Bank outperforms peers on a YTD basis...
YtDsharepricereturns
GTBank AllShare Zenith FirstBank UBA Diamond Access 20% 15% 10% 5% 0% 5% 10% 15%
Source: Bloomberg, Legae Securities
Page 18 of 87
Fig 13: ...and on a longer-term basis as well, raising valuation concerns. Diamond bank is the worst performer, underperforming the ALSI.
8 Access UBA Diamond Zenith First AllShare GTBank GTBank
7 Zenith 6 Access 5 MSCIEMBanks(LC) 4 JSEBanks 3 First 2 UBA 1 Diamond 0

Feb06 Feb07 Feb08 Feb09 Feb10 Aug05 Aug06 Aug07 Aug08 Aug09 May05 Nov05 May06 Nov06 May07 Nov07 May08 Nov08 May09 Nov09 May10 Aug10 Nov10 Feb11
ReturnsfromJan2010
20%
10%
0%
10%
20%
30%
40%
50%
60%
Fig 14: Valuation comparisons - GT Bank trades below industry average on a PER basis but the PBVR is ~33% above the industry average.
25.0 PER Average 2.5 PBVR average 2.0
20.0
15.0
13.5
1.5
1.5
10.0
1.0
5.0
0.5
0.0
0.0
Access
Zenith
Skeybank
First
Fidelity
FCMB
StanbicIBTC
GTBank
Access
Zenith
Skye
Firstbank
Source: NSE, Legae Securities. For PER we discarded UBA and Diamond
Fidelity
Diamond
UBA
FCMB
IBTC
Page 19 of 87
GTBank
2.
2.1
Industry analysis
Profitability Analysis: A positive demographic play
We are applying our usual profitability indicators in order to size-up the long-term profitability of the system. (wealth level as indicated by per capita income, penetration, population and ROA, see Fig 15). We believe the Nigerian systems factors are attractive at the macro level. The high and growing population and the relatively moderate penetration are the most eye-catching factors. We are not very encouraged by the ROA and the per capita income which is still low in US$- and/or Naira-terms. Overall, the Nigerian system is a demographic play, in our view. Below we show our views on the main profitability determinants.
Fig 15: Key profitability determinants - An attractive long-term outlook
GDP Profitability
Banking assets GDP Penetration

Moderate penetration; Banking assets/GDP ~75%.
Population
Profit Banking assets
Population Per capita income

Rising GDP; expected average of 6.3%. (1Q11 GDP ~7.4%)
Population
High population; High population growth rate; ~75% of population unbanked
ROA
Fair ROA ~ 3% (C Y10); System consolidating
Upside
Downside
Absolute per capita income still low at ~US$1,500
Penetration rising faster than in other Western African countries; Financial assets/GDP >95%
Negative to per capita income esp. with a relatively high Gini ratio
C urrent fragmentation and regulatory risks are a risk to ROA
Source: Legae Securities
a) Per capita income - Still low but expanding: In our view, wealth is a predominant driver of banking assets growth in a system. As shown on Fig 16, there is a strong relationship between per capita income and system penetration levels. Rising per capita income is therefore critical to increase demand of banking products (directly for both consumer and wealth management products; indirectly as banks are better placed to leverage economic growth). In Nigerias case, the per capita income at ~US$1,500 is still low (<1/3 of Botswana, Mauritius, South Africa, and Angola, for example), but the encouraging aspect is the annual expected growth rate of ~6%. While the Gini ratio, (measurement of the skewness of wealth distribution in a country) is still high, it is relatively low when compared to South Africa and Angola for example, which means the per capita income is more representative of the general wealth level in the system.
Page 20 of 87
Fig 16: Rising per capita income will be positive to penetration...

70 banking assets/GDP UK
4.5 4.0 3.5
Ginicoefficient
60
50 3.0 2.5 2.0 1.5 1.0 Nigeria 0.5 0.0 Kenya Uganda China Japan SouthAfrica Brazil Chile 10 Korea 20 30 US 40
Turkey
Kenya
Chile
UK
Angola
German
Brazil
Russia
SouthAfrica
SouthKorea
USA
China
Nigeria
Japan
India
Uganda
percapitaincome,US$
10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
5,000
Fig 17: ...but remains a long-term outlook. Near-tem per capita income still low in absolute basis despite the growth
2000 1800 1600 1400 1200 1000 800 600 400 0.2 200 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: CBN, IMF, Central banks, UNDP report 2009, Legae Securities
Percapita Growth
0.4 Kenya 0.3 Ghana Angola 0.2 Zimbabwe Mozambique 0.1 Zambia 0 Tanzania Nigeria 0.1 DRC Botswana Namibia Uganda 0.0% 2.0% 3.3% 2.7% 4.0% 6.0% 8.0% 10.0% 12.0% 4.4% 5.2% 6.7% 6.3% 7.6% 8.1% 9.0% 8.9% 10.8% 10.3%
20102015CAGR
0.3
Source: IMF, Legae Securities
Page 21 of 87
b) Penetration - Moderate but rising: We believe the Nigerian system is moderately penetrated. Increasing intermediation as the economy becomes fully banked is important in supporting system profitability. The private sector credit/GDP is still <50% although the banking assets/GDP ratio is >50% as ~75%. However, the total financial system assets/GDP is >95% (i.e. including other noncommercial banking institutions such Merchant banks, Micro-finance, discount houses etc). The systems asset growth outpaced deposits growth materially when index to CY90. Private sector credit growth closely matched deposits growth but in CY08/CY09 the spread widened with private credit rising faster, contributing to the CY08 banking crisis. Opportunities in deposits mobilisation remain abundant, in our view, given the low deposits/GDP ratio of ~30%. We believe this relative moderate penetration is one of the main attractions of the Nigerian system. (see Fig 18 and Fig 19) Comparing Nigeria to other SSA systems, Nigerias penetration level is higher. The average banking assets/GDP ratio for SSA systems is ~38%, which is about half that of Nigeria. (see Fig 19) However, we believe the high population and the size of the economy makes the Nigerian system attractive and the long-term themes remain intact.
Fig 18: Penetration - Banking assets growth outpaced private sector growth...
50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
20,000 M2/GDP PrivateSectorCredit/GDP 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Commercialbankingassets Commercialbankingdeposits Privatesectorcredit
Source: CBN, Legae Securities
Page 22 of 87
Fig 19: ...reaching ~70% of GDP and becomes relatively higher than other SSA systems
0.8 Commercialbankingassets/GDP Deposits/GDP 0.7 70% 60% 50% 40% 0.4 30% 0.3 20% 0.2 10% 0.1 0% 80%
Bankingassets/GDPestimates
0.6
0.5
Uganda
Tanzania
Zambia
Source: CBN, IMF, Various Central banks, Legae Securities
The pain of CY08 A look at history: The CBN highlighted six (6) main causes of the Nigerian banking system meltdown in CY08/09 as 1) macroeconomic instability caused by large and sudden capital outflows; 2) major failures in corporate governance at banks; 3) lack of investor and consumer sophistication; 4) inadequate disclosure and transparency about financial positions of banks; 5) critical gaps in prudential guidelines; and 6) uneven supervision. We agree and the combination of these issues led to the loose credit growth post CY05. Loose credit growth is more often followed by a system crisis, and that is what happened in Nigeria. The Nigerian banking system has gone through various reforms. Looking at the recent past reforms, (1982-2004), we notice that the system saw a significant increase in banks and there was a nascent mushrooming of branch network. (from 40 in CY85 to over 2000 in CY92). The rather uncontrolled growth came back to haunt the system, leading to the current reforms that started in CY04. On Fig 20 below we show the metamorphosis of the Nigerian banking system.
Mozambique
Page 23 of 87
Nigeria
Kenya
Angola
Ghana
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Fig 20: The banking system has gone though several system failures and reforms
1stReformEra19291951
2ndReformEra19521971
Enactment of 1952 Banking Ordinance; Establishment of the C BN; 1962 minimum share capital raised to GBP250,000; 1970 Banking amendment decree imposed more stringent conditions
3rdReformEra19822004 4thReformEraJuly2004Date
National Economic Emergence Decree in the wake of financial distress in the system in the 1980s and 1990s; 120 banks; 66 C ommercial banks and 54 merchant banks.
Over 100 banks established in the banking boom between 1940 and 1950
C apitalization increased to NGN25bn; Number of banks reduced from 89 to 24; Banks rescued by C BN
Attrition of 30 private banks due to poor management, low capital, debt overhang and financial shock induced by the 1930 recession
Tradable instruments increased; Treasury Bills (1960), Money fund (1962), C ommercial bills (1968), Treasury certificates (1968), C ertificates of Deposits (1968)
Prudential Guidelines introduced in 1990
Banks gained scale and competition increased, product roll out increased and credit growth in the economy rose; Global economic crisis + structural lapses by NSE forces a collapse of share prices; Banks exposed significantly to the stock market; Sharp rise in NPLs. C BN governor vows to sanitize banking system with emphasis on regulation, an risk management and disclosure; A series of guidelines issued
Banking dominated by British and French banks
Banks dominated by government owned banks via Indigenization Act of 1971; Share capital raised to GBP600,000 for local banks; GBP1.5mn for foreign banks By 1980, there were 26 banks in the system
Bank branches jumped from 40 in 1985 to over 2000 in 1992
Wema established in 1945, AC B in 1948
Universal banking in 2001 with NGN1bn capital base, increased to NGN2bn with 2004 as deadline
Universal banking to be abolished
Source: CBN Presentation, Legae Securities
The credit multiplier between CY07 and CY09 significantly exceeded its long-term average, indicating a disconnection between the real economy growth and expansion of the banking assets. In fact, there was an enormous divergence between credit growth and nominal GDP, with private sector growth at >35% between CY01 and CY09 while nominal GDP expanded only by <20%. The credit multiplier between CY07 and CY09 was exceedingly above the 2.7X average indicating an overextended cycle. (see Fig 21) The moderate penetration could probably have masked this disconnection, but generally when system assets growth outpaces real economic growth by a massive margin, there is a build up of bad assets in the system. The growth (aided by rising penetration) saw Top 10 banks grow by 6X within 5yrs; Big banks continue to benefit...: The high credit expansion led to strong growth of the Top 10 banks, notwithstanding the fragmentation (i.e. 89 banks prior 2004 reforms). With consolidation, the Top 10 banks have continued to strengthen market shares. The Top 10 banks have grown by a factor of >6X between CY04 and CY09. The total assets of the Top 5 banks increased from NGN1.3trn to NGN7.9trn while Top 10 banks asset base expanded from NGN1.8trn
Page 24 of 87
to NGN11.6trn, a factor of 6.4X. The system remains fragmented, notwithstanding the consolidation. The Top 10 banks market share is ~70% vs. >90% for Top 4 banks in RSA, for example. Market shares have, however, consolidated when compared to history. The #1 bank by asset had a market share of 11% in CY04 but by 3Q10 the #1 bank commanded a market share of 16% of system assets. (see Fig 22). The biggest banks, namely First Bank, Zenith Bank, UBA and GT Bank have continued to benefit from consolidation and system problems that catalyse aversion to smaller and weaker banks. Union bank, which ranked #1 by asset in CY04 has lost significant market share and now ranks #6 with a market share half its CY04. ...and we believe authorities want bigger banks but lower risk and lower returns...The CBN reforms that started in CY04 aimed at reducing the number of banks in the system among other reforms. The intention was to build well capitalised bigger banks with scale. However, after the uncontrolled growth rates post consolidation, the system built up enormous level of risks, and the CBN again intervened. The AMCON was created to purchase bad debts from the banks, which were typically dominated by margins loans and other share backed loans. The rescued banks are now looking for suitors. This will see further consolidation which should bode well for interest spread stability. We observe that among other issues, (e.g. corporate governance) capitalisation and liquidity were the main problems of the rescued bank. 5/6 of the banks that missed the required CAR as at 3Q10 did not meet the required liquidity levels as well. (see Fig 23). If the banks are merged or taken over by other health institutions, the number of banks in the system could decrease to less than 20 banks. The bigger banks boasting high CAR levels will have opportunities to grow market shares. ...hence system growth should settle ~20% in the medium- to long-term: We note that the average credit multiplier from CY90 is 2.7X. Assuming a sustainable GDP growth of ~7%, (1Q11 GDP growth estimated at 7.41%) then system growth should normalise ~18.9%. We expect system growth to stay close to 20%.
Fig 21: The credit multiplier was above the LT average indicating system over-extension
40% Privatesectorcreditgrowth NominalGDP 35% 15 20 Creditmultiplier average
30% 10 25% 5
20%
15%
10% 5 5% 10
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0% 19601970 19711980 19811990 19912000 20012009
Page 25 of 87
Fig 22: Market shares - Top 10 banks are more than 6X larger than they were in CY04
Bank UnionBank FirstBank Zenith UBAplc GuarantyTrust Intercontinental StandardTrust Hallmark OceanicBank Diamondbank Top5 Top10total Bank FirstBank UnionBank Zenith UBAplc Intercontinental GuarantyTrust Hallmark StandardTrust Oceanic Diamond Top5 Top10
2004 Totalassets Marketshare 377 11.1% 368 10.8% 245 7.2% 178 5.2% 136 4.0% 126 3.7% 119 3.5% 97 2.9% 92 2.7% 83 2.4% 1,304 38.4% 1,821 53.7%
Rank 1 2 3 4 5 6 7 8 9 10
Bank FirstBank Zenith UBA GTBank OceanicBank UnionBank AccessBank Intercontinental DiamondBank SkyeBank
2010Q3 Totalassets Marketshare 2,424.41 16.3% 1,775.82 11.9% 1,664.82 11.2% 1,137.29 7.6% 950.54 6.4% 947.82 6.4% 819.06 5.5% 650.05 4.4% 620.73 4.2% 611.49 4.1% 7,952.88 53.4% 11,602.02 77.9% Totaldeposits Marketshare 1,550.43 14.2% 1,346.76 12.3% 1,278.01 11.7% 816.78 7.5% 741.28 6.8% 644.51 5.9% 637.92 5.8% 539.70 4.9% 481.70 4.4% 452.20 4.1% 5,733.25 52.6% 8,489.27 77.8%
Rank 1 2 3 4 5 6 7 8 9 10
Totaldeposits Marketshare Rank 226 12.6% 1 155 8.6% 2 147 8.2% 3 129 7.2% 4 71 4.0% 5 70 3.9% 6 63 3.5% 7 51 2.8% 8 47 2.6% 9 42 2.3% 10 728 40.5% 1001 56%
Bank FirstBank UBA Zenith UnionBank GTBank OceanicBank Intercontinental AccessBank BankPHB SkyeBank
Rank 1 2 3 4 5 6 7 8 9 10
Source: CBN, Legae Securities Fig 23: The rescued banks had major problems with capital and liquidity
70% Liquidityratio 20% 10% 0% 60% Required
50%
20%
40% ReportedCAR RequiredCAR 30%
40%
20% 60% 10% 80%

Oceanic Afribank Access Zenith Union Finbank Skye Sterling Unity Fidelity Wema UBA First Diamond FCMB Intercontinental BankPHB GTBank StanbicIBTC
0%
Oceanic Afribank Access Spring Zenith Interconti Union Finbank Skye Stanbic Unity Sterling Diamond Fidelity Wema First UBA BankPHB FCMB GTBank
Page 26 of 87
c) Population: As we point out in most of our initiating reports, population is a critical determinant of system volume, and a long-term theme. Nigerias demographic structure is very appealing to us as it shows strong growth prospects and is principally a young population. (see Fig 24A and Fig 24B). The <14yrs age cohort make up 44% of the population. We think that banking and financial services will be principal beneficiaries of this attractive population structure. The rising per capita income points to the expansion of the Nigerian middle class, which should bode well for reduction in the dependence rate. Nigerias population is expected to breach 200mn by CY25 and will approach 300mn by CY50. (see Fig 24A). In our view, this is the primary exposure most investors seek as it will be critical for volume growth. Population is generally the ultimate determinant of the economic size of a country, and thus the banking system size. Related to population is urbanisation. Estimates indicate that ~54% of Nigerias population resides in rural areas. Urbanisation is, nevertheless, rising fast. We see opportunities in various banking products especially consumer credit related and mortgages.
Fig 24A: A population play - Nigerias high population and high population growth rate are major attractions...
Country Nigeria DRC Ethiopia Egypt Uganda Tanzania Sudan Kenya South Africa Ghana Angola Mozambique Cameroon Cote d Ivoire Malawi Zambia Zimbabwe Mid 2008 Ppn (mn) 148.1 66.5 79.1 74.9 29.2 40.2 39.4 38.0 48.3 23.9 16.8 20.4 18.5 20.7 13.6 12.2 13.5 <5yrs 17% 19% 17% 12% 20% 18% 15% 17% 11% 14% 19% 18% 16% 15% 18% 17% 13% 5-To-14 27% 28% 28% 22% 30% 27% 26% 26% 21% 25% 28% 27% 26% 27% 29% 28% 27% >65 3% 3% 3% 5% 3% 3% 4% 3% 4% 4% 2% 3% 4% 3% 3% 3% 4% Urban Area (% of total ppn) 46% 32% 16% 43% 13% 24% 41% 21% 59% 48% 54% 35% 54% 47% 17% 35% 36% Projected 2025 Ppn 205.4 109.7 110.5 95.9 56.4 58.2 54.3 51.3 51.5 33.7 26.2 27.5 25.5 26.2 20.4 15.5 16.0 Projected Ppn 2050 282.2 189.3 147.6 117.9 106 82.5 73.0 65.2 54.8 48.8 42.7 37.2 34.9 34.7 30.5 19.3 19.1
Source: Population Datasheet 2010, Legae Securities
Page 27 of 87
Fig 24B: ...and the young population highlights the long-term thesis
Median age Japan Italy Germany Spain France Canada UK Russia Korea Australia US China Thailand Sri Lanka Argentina 44.3 43.3 42.3 40.2 40.1 39.9 39.9 38.1 37.9 37.8 36.6 34.2 33.2 30.6 30.4 Brazil Vietnam Turkey Indonesia Mexico Iran Malaysia India South Africa Saudi Arabia Bangladesh Philippines Pakistan Zimbabwe Nigeria
Median age 29.0 28.5 28.3 28.2 27.6 26.8 26.3 25.0 24.9 24.6 24.5 23.2 21.3 19.0 18.6
Source: UN Population Division, Legae Securities
Page 28 of 87
d) Profitability: We measure system profitability using the ROA, thus ignoring the impact of leverage. Alongside a strong growth in operating income and profitability post CY05, system margin also rebounded from <20% in CY05 to ~35% in CY08 as the system consolidated. Asset rotation has also increased materially between CY06 and CY08, and the ROA which had diminished to ~1.5% in CY05 enlarged to ~4%. (see Fig 25, to Fig 27). The system ROA tumbled in CY09 and recovered in CY10 but we expect it to remain below 3%. Interest spreads: In the medium term, interest spreads should remain stable. Asset spreads are likely to improve but on the negative side we see deposits spreads worsening due to competition in deposit mobilisation. The increase in the liquidity ratio and competition on retail and longer term funding sources should deplete cost benefits from the liability side of banks balance sheets. In the last monetary policy announcement, dated May 23-24 2011, the CBN increased the cash reserve ratio from 2% to 4%. The reserve requirement ratio increases the cost of deposits to banks as it reduces the amount of deposits that is available for employment by the banks. Bank with relative higher cost of deposits (Diamond Bank and Access Bank) are hurt more than those whose cost of deposits is comparably lower. Fig 28 shows the impact of this change to the reserve ratio to various levels of cost of deposits. On the other hand, it is important to note that this 4% reserve ratio was the statutory requirement before the crisis, so the authorities may simply be normalising it. It is also comparable to other SSA systems e.g. Kenyas reserve requirement ratio is 4.5%. However, what more important to system profitability is the interest spread. The systems interest spread is still very health. Banks with low LDR and high liquidity positions have opportunities to exploit the high interest spread and enlarge NIM through change in asset structure. The spread proxy (Prime rate less savings rate) is strong at ~15% (FY09; see Fig 29). For 1Q11, the spread between the maximum lending rate (retail) and the consolidated deposit rate had widened to 19.57%. Nigerian banks shares are well placed for a secular long-term story: Related to the ROA is the market concentration or fragmentation. While it is inconceivable at this point, we believe the Nigerian bank shares can benefit from a long-term secular story and regulatory disengagement, bringing growth to RWAs and expansion to ROAs. As we mention elsewhere, we believe regulators will at some point allow banks to grow their RWAs in a materially way so as to earn returns. We estimate a ~4pp addition to the current ROEs that could come from a less restrictive regulatory regime. (note CBN has largely been using moral suasion to discourage aggressive expansion in RWAs). AMCONs continued purchase of bad debt provides confidence. We note that some banks are selling their bad debts at prices above market prices.
Page 29 of 87
Fig 25: Profitability - Consolidation led to stronger profit margins and growth...
1800 1600 1400 1200 25% 1000 20% 800 15% 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 10% 0% 5% 50% 100% 2001 2002 2003 2004 2005 2006 2007 2008 50% 100% 150% Operatingincome,LHS Profit,LHS Margin:Profit/Op.income 40% 350% 300% 250% 200%
Growthrates
Operatingincome Profit
35%
30%
0%
Source: CBN, Legae Securities Fig 26...as top banks consolidated market shares...
40% 35% 30% 25% 8% 20% 6% 15% Profit/Revenue,LHS 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Revenue/Assets 2% 4% 45.0% 40.0% 35.0% 2004 2006 2007 2008 50.0% 14% 75.0% 12% 70.0% 65.0% 60.0% 55.7% 55.0% 53.7% Assets Deposits
Marketsharesof10biggestbanks
72.3% 71.5% 71.4% 70.6% 71.8% 72.3%
10%
0%
Source: CBN, Legae Securities Fig 27:...and ROA rebounded from CY06 lows before the crisis caught up with banks
70.0%
NetInterestIncome/Operatingincome
60% ROE ROA,RHS 50%
5.0% 4.5% 4.0% 3.5% 3.0%
65.0%
60.0% 40% 55.0% 30% 50.0% 20% 45.0% 10% 40.0% 0% 35.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2000 2001 2002 2003 2004 2005 2006 2007 2008
2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Page 30 of 87
Fig 28: Banks with higher cost deposits suffer more from rising reserve ratios
Reserverequirementratio Costofdeposits Costofdeposits=2.0% Costofdeposits=2.5% Costofdeposits=3.5% Costofdeposits=4.0% Costofdeposits=4.5% Costofdeposits=5.0% Costofdeposits=5.5%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% Effectivecostofdeposits 2.00% 2.04% 2.08% 2.13% 2.17% 2.22% 2.27% 2.50% 2.55% 2.60% 2.66% 2.72% 2.78% 2.84% 3.50% 3.57% 3.65% 3.72% 3.80% 3.89% 3.98% 4.00% 4.08% 4.17% 4.26% 4.35% 4.44% 4.55% 4.50% 4.59% 4.69% 4.79% 4.89% 5.00% 5.11% 5.00% 5.10% 5.21% 5.32% 5.43% 5.56% 5.68% 5.50% 5.61% 5.73% 5.85% 5.98% 6.11% 6.25%
Fig 29: Profitability - systems interest spread remain strong

40.0 35.0 30.0 25.0 20.0 18.36 15.0 10.0 5.0 5.0 0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Q1 2008Q2 2008Q3 2008Q4 2008FY 2009Q1 2009Q2 2009Q3 2009Q4 2009FY
25.0 Interestonsavings deposits PrimeLendingrate Maximumlendingrate 20.0 Interestspread(Primelesssavings rate) average
15.4 22.90 15.0
12.4 10.0
2.94 0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Q1 2008Q2 2008Q3 2008Q4 2008FY 2009Q1 2009Q2 2009Q3 2009Q4 2009FY
Banks credit exposure is primarily corporate: Nigerian banks are primarily playing the corporate sector on the asset side. We note that most bank managers are concerned by credit risks on the retail space. In our view, the corporate sector could be overbanked and this will only result in compressed margins at best and some moral hazard at worst. The benefit is that the economy is improving and expected to growth strong in the next five years. (1Q11 = 7.4%). Nevertheless, we believe that banks exposure to the retail sector is going to increase on 1) the increased use of the Credit reference bureaux that will improve banks client profiling; and 2) regulations that may encourage the absorption of the unbanked into the system. In his address to the media on 24th May 2010, Governor Sanusi affirmed that authorities want to discourage cash transactions by making cash transactions above NGN150,000 exorbitantly expensive. He said they (authorities) are still at consultative stage in relation to the amount and level of penalties, but affirmed that this will be effected June 2012. Most bank managers seem to believe
Page 31 of 87
that this will positively affect retail penetration. However, CBN indicates that only about 8% of system cash transactions will be affected. We believe there will be some positive spill-over effect to retail penetration from this regulation. So while the system is generally a corporate play, we believe the long-term theme hinges on retail segment. This is why we believe Nigerias demographic structure is important to system profitability although we do not expect it to be material to our modelling in the next 3 years. Risks related to consumer credit: While the consumer profile for Nigeria looks attractive, supported by the high population, banks are generally comfortable with consumer products such as credit cards when they have developed robust credit scoring mechanisms. It is the same in Nigeria. Various bank management teams point to the fact that they are not yet comfortable with high levels of consumer credit risks. In fact, most retail consumer lending is salary and employer based and credit scoring is largely based on the employers internal credit rating. The majority of banks extend personal loans to employees of their corporate clients. The Credit bureaux will obviously help, but we also believe that consumer behaviour change is critical in order to support uptake of the consumer credit products in the system. Higher capital requirement also discourages retail play, in the short term: Although the retail credit risks appear elevated, there are still stringent guidelines that restrict banks exposure to the retail market. The general guideline indicates that retail exposure should not exceed 50% of the banks total loan book. The more explicit guidelines related to NPL ratios and capital requirements imply that banks require more capital in order to increase their retail exposures (see Fig 30). Given the current high levels of credit risks in the retail space, it is understandable that banks are rather averse to the retail space given the capital requirements. The NPL ratios of >10% are not uncommon in retail banking and with a cap of only 2X shareholders funds, penetration is limited. The opportunity is that these stringent regulations could be relaxed as the systems credit risks reduce (i.e. better client profiling; credit bureaux, tighter laws against willing defaulters). Nevertheless, retail remains a medium to long-term theme. In the short-term, banks will continue to fight for market share in the corporate space (on the asset side) although the low leverage and high CAR would as well permit them to build up their retail penetration.
Fig 30: More capital is required for retail exposure
%geofNonperformingretail financing/totalretailfinancing <3% 3%to5% 5%to10% >10%
Maximumlimit 10timesoftheshareholdersfunds 6timesoftheshareholders'funds 4timesoftheshareholders'funds 2timesoftheshareholders'funds
Source: CBN Prudential Guidelines, Legae Securities
Page 32 of 87
2.2. Credit risks: Be wary of high coverage ratio

Credit risk profiles improving, AMCON helpful: There were noteworthy improvements in the credit risk management of the Nigerian banking system. The processes and procedures of many banks have improved post the 2008/9 banking crisis. We continue to see improvement in regulatory and credit risks management systems. However, it is important to emphasise that the banks could still be saddle with immense amount of bad debts had it not been the creation of the AMCON which is buying bad debts from banks. The disconnection between system loan book and NPL and/or provision growth rates supports this view. Between CY00 and CY08, loans and advances grew by a CAGR of ~35% while provisions and NPLs registered muted growth rate of ~20% and ~21% respectively. In our view there was considerable under-provisioning in the system. Unfortunately, the system does not disclose restructured loans. Guided by the rise in NPLs after CY08, we suppose there was material amount of restructured loans in the system that delayed NPL recognition before then. This led to the decline in the provision and NPL ratio, giving an illusion of improvements of the credit risks in the system. (see Fig 32). We believe the purchases of bad debts by AMCON are helpful in maintaining health CARs in the system and support confidence. In fact our more certain outlook from a credit risk viewpoint is pivoted on banks ability to sell their NPLs to AMCON. According to various management teams we met, AMCON has already purchased >60% of system bad debts. That said the rising interest rates could add to asset quality problems. Supervisory oversight has improved: In our view, supervisory oversight of the CBN has considerably improved. There is continuous monitoring of the system and communication related to prudential guidelines. Reporting and disclosure has also improved and the adoption of IFRS by all banks under our coverage from CY12 should reduce misreporting (which is reflected by numerous restatements of financial statements by most Nigerian banks). Fig 31 indicates the general provisioning guidelines for facilities other than specialised loans.
Page 33 of 87
Fig 31: NPL definitions and Provision guidelines

Definition (Objective criteria) Non-performing - interest or principal is due and unpaid for 90 days or more - interest payments equal to 90 days or more have been c apitalized, rescheduled or rolled over except when loan is resc heduled or rolled over Sub-standard - unpaid principal and/or interest remain outstanding for more than 90 days but less than 180 days - unpaid principal and/or interest remain outstanding for at least 180 days but less than 360 days and are not secured by legal title to leased assets or perfected realized c ollateral in the process of c ollection or realization - unpaid principal and/or interest remain outstanding for 360 days or more and are not secured by legal title to leased assets or perfec ted realized collateral in the course of collec tion or realization - 10% of outstanding balanc e Provision requirements - A general provision of 1%, waived in CY10, reinstated
Doubtful
- 50% of outstanding balanc e
Lost
- 100% of the outstanding balanc e
Source: CBN Prudential guidelines July 2010, Legae Securities
We have reservation over authorities 1% general provision guideline...: The guideline of 1% general provisioning could be counterproductive. While we understand the good intentions and spirit of this regulations (i.e. standardisation of reporting), general provision is meant to be forward looking. It is justified when used to reflect the expected losses on performing loans. While there are other subjective criteria for banks to increase this general provision level, we believe most Nigerian banks will choose to take the 1% provision to loans irrespective of their credit profile, and hence it would not carry information about the quality of the banks loan books and management expectation. The other problem we see is the probability of banks scaling down their lending toward year-ends in order to manage their provision charges (vs. income yet to be earned from recent written loan products). ...and also caution against prima facie high NPL coverage ratios...: The Nigerian systems high coverage ratio has received considerable applause from various investors/commentators. Management target coverage ratios remain high, averaging >90% for the banks under coverage (Diamonds target coverage ratio of 75% is the lowest). Prima facie, these high coverage ratios looks very prudent, yet the ratios could be a result of higher percentage of lost loans/NPLs. (lost loans = past due 360 days). Lost loans should be provided for 100% and the higher the lost loans/NPL ratio is, the higher the coverage ratio for a bank. We illustrate this on Fig 33. Another primary caveat to the high coverage ratios is the lack of disclosure on restructured loans by the banks. Delay in NPL recognition through loans restructuring could also result in higher coverage ratios. ...although it is reputable as it reduced future drag on earnings: Notwithstanding our concerns highlighted above, we still value high coverage ratios as they provide better visibility to future earnings. We
Page 34 of 87
take comfort in a more robust supervisory role by the CBN. Although banks can still fast-track restructuring of loans they think could turn bad, the CBN guidelines allow an NPL to retain performing status only when the borrower has effected cash payment such that the outstanding unpaid interest does not exceed 90 days, for example. Also the guidelines require provision for rescheduled loans to continue until it is clear that rescheduling is working at a minimum period of 90 days. Write-offs, which reduced NPLs if fast-tracked and thus increase coverage ratios requires Board approval and the facility must have been fully provided for in the banks book for at least one year after full provision (i.e. lost loan status). For insider or related party facilities, approval by CBN is required. To this extent, we take comfort in the high coverage ratios of the system which averages 79% between CY02 and CY08. Provision growth has closely matched NPL growth over the same period (see Fig 34). NPLs composition GT Bank, UBA and Zenith carry highest lost loans/NPL; Provisions/unsecured loans ratio lowest for First bank: For CY10, GT Bank, UBA and Zenith had more than 50% of their NPLs as lost loans. Of course this is a carry-over from the previous gluttonous loan book growth, so one could assume that new NPLs formation for these banks has receded. However, as we indicated already, this would result in elevated coverage ratios for these banks into CY11. Looking at the amount of unsecured loans that is covered by provisions, we distinguish Access bank, with its unsecured loans covered by provisions >3X. The least attractive on this ratio is First bank whose unsecured loans are only covered 24% by its provisions. We should highlight that First bank seems to be benefiting from high asset quality even in its unsecured lending. Unsecured loans made up 22% of loans book (FY10).
Fig 32: Loans outpaced provisions and NPLs between CY06 and CY08.
12 Loans Provisions NPL 30% NPL/Loans Provisions/Loans 25%
10
20%
15%
10%
5%
0 2000 2001 2002 2003 2004 2005 2006 2007 2008
0% 2000 2001 2002 2003 2004 2005 2006 2007 2008
Page 35 of 87
Fig 33: High coverage ratio could be a result of high lost loans
Bank A NPL Class Sub standard Doubtful Lost Total Coverage ratio Amount 10 20 70 100 Provision guidelines 10% 50% 100% Provision 1 10 70 81 81% Amount 30 40 30 100 Bank B Provision guidelines 10% 50% 100% Provision 3 20 30 53 53%
The higher coverage ratio is a result of higher lost loans (70% of NPLs). However, low sub-standard and doubtful loans could mean reduced risk in future
The lower coverage ratio is a result of lower lost loans (only 30% of NPLs). Restructuring (delay in lost loans recognition) is the risk
Fig 34: Provision and NPL growth in unison; Coverage ratios respectable.
5.0 4.5 90% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 40% 0.5 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 30% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Provisions NPL 60% 59% 80% 75% 70% 74% 85% 81% 79% 79% 82% 100% 96%
Coverageratio
50%
Page 36 of 87
2.3 Liquidity and funding risks: Cap on LDR removed, liquidity ratio increased to 30%.
In its May 2010 Prudential guidelines, the CBN imposed a maximum LDR of 80% for banks and a liquidity ratio of 25%. The CBN has recently removed the cap but increased the liquidity ratio to 30%. In our view, the CBN has effectively caped the LDR at 70% in terms of internal financing. Of course, banks will use other forms of financing (especially borrowing) in order to grow their RWAs. On average the systems has sufficient liquidity. The LDR at an average of ~80% is reasonably fair, in our estimation. The liquidity ratio is ~31%. (see Fig 35) We believe the current LDR provides the system with scope to cope with system-wide shocks. There is enough liquidity in the system as long as the interbank market remains functional. The 31% liquidity ratio provided a 6pp buffer but after the increase of the statutory liquidity ratio to 30%, banks with lower buffers are likely to increase their liquid assets holdings. This will be at the detriment of yields and will lead to intense competition for deposits as we no longer expect banks to shed off assets in a material way. Bank with lower liquidity ratios are likely to step-up their deposit mobilisation activities and invest in liquid assets than RWAs. Looking at the system deposit make-up, we notice an increase in term deposits as a percentage of system deposits. For example, in CY00, term deposits made up ~23% of system deposits and this ratio has increased to ~40% by CY09 (see Fig 36). Term deposits tend to be more expensive than demand and savings deposits hence could be obstructive to interest spreads and margins. This phenomenon should also result in increased competition for demand and savings deposits. Banks are also creating liquidity by selling their bad debts to the AMCON and use the AMCON bond to secure funding from the interbank market.
Fig 35: Liquidity - High liquidity ratio and low LDR ensures ample system liquidity...
70 Liquidityratio Prescribed 100 90 80 70 40 60 30 50 20 40 10 30 20
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Q1 2008Q2 2008Q3 200CY 2009Q1 2009Q2 2009Q3 2009Q4 2009CY 2009FY 2009Q4 2009Q3 2009Q2 2009Q1 2008FY 2008Q4 2008Q3 2008Q2 2008Q1 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
LDR Prescribed
60
50
Page 37 of 87
Fig 36:...but the increasing time deposits could weigh on funding cost of the system.
2000
15.2% 24.8%
2009
43.9% Demand 52.0% Time Savings 23.3% 40.8% Demand Time Savings
Page 38 of 87
2.4
Solvency risks: High CARs in face of uncertainty.
High CAR but its more about risk capital than regulatory: We believe the Nigerian issue is not just about how high the dam wall is but more about how high the potential flood is. The capital level has been high but the potential risks in the system are also relatively high, in our view. The high level of capital is prudent in order to foster confidence as well as positioning the banks competitively. With a general provision guideline of 1%, the CAR is not amplified by overprovision. Nigerias CAR in CY09 ranked among the highest in the world (see Fig 37).
Fig 37: Solvency - High CAR vs. required and vs. our select set of countries...
25% CAR 20% RequiredCAR 20% 25%
Capital/RWA,2009
15% 15% 10% 10% 5% 5% 0%

Greece Mexico USA China India Chile Indonesia Nigeria Argenti Turkey RSA Poland UK Spain Brazil Australia Malaysia Russia Egypt
0% 2003 2004 2005 2006 2007 2008 2009
In some aspect, the risk weighting assigned to the on-balance sheet items by the CBN in the computation of the CAR differ from the Basel 2 requirements (using the Standardised Approach). For example, there is no weight for past-due loans and weighting are unrelated to credit ratings. We also do not see any asset class, either by classification (e.g. past-due net of specific provision risk weight = 150%) or rating (e.g. loans rated BB- risk weight = 150%) that carries a risk weight of 150%, for example. Below we provide the key balance sheet items and their weighting. We also indicate the calculation of the CAR as per the CBN guidelines (see Fig 38). The numerator i.e. total capital: While definitions are generally consistent with Basel Accord, we note that preferred stock is classified as Tier 2 capital. We also draw attention to the fact that deferred assets are considered intangible assets for capital adequacy purposes and are deducted from total capital and reserves in arriving at Tier 1 capital. Consistent with Basel Accord, the general provisions that form part of Tier 2 capital is restricted to 1.25% and Tier 2 capital is limited to 100% of Tier 1 capital as well.
Page 39 of 87
The denominator i.e. RWAs: Fig 38 shows the major on-balance sheet items and risk weights for computation of the RWAs. The computation does not adjust the RWAs for market and operational risks as is required by the Basel Accord. Off-balance sheet risk assets carry risk weights ranging from 50% to 100%. Implications: In our view, the implications of these differences with the Basel Accord in definitions and calculations are 1) Nigerian banks Tier 1 capital in absolute terms is understated as preferred stock is not part of Tier 1 capital; 2) Nigerian banks RWAs are understated relative to other system that implement the Basel Accord weights. The fact that the RWAs are not adjusted for market an operational risks (RWAs just reflect credit risks), means that to an extent RWAs are understated, and comparisons that indicate higher capital levels vs. systems that adjust RWAs for market and operational risks could be erroneous. RWAs are also understated as no risk assets are assigned a weight >100%; and 3) there is a possible overstatement of the total CARs of Nigeria banks when compared to other systems, yet, the CARs calculation is an improvement to the previous one which solely depended on loans and advances value. The calculation also means that the CARs do not fully capture market risks.
Fig 38: ...but some risk weights differ from Basel Accord
CashinhandandCashreservewithCBN CurrentaccountwithCBN Moneyatcallsecuredwithtreasurybills Collateralizedplacements PlacementssecuredwithTreasurybills Treasurybillsancertificates DuefromotherbanksinNigeria DuefromotherOECDcountries Unsecuredmoneyatall Unsecuredinterbankplacements Unsecuredplacements DuefromnonOECDcountries Overduebalanceswithotherbanks Certificatesofdepositsnonnegotiable BankersAcceptances Commercialpaper Otherassets Fixedassets Netloansandleases Investments Promissorynotesandotherfinancialinstitutions Total Assets 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 RiskWeight 0% 0% 0% 0% 0% 0% 20% 20% 20% 20% 20% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% RWA 0 0 0 0 0 0 200 200 200 200 200 500 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 10,500 TypesofcapitalandCARcalculation Tier1capital Ordinaryshare Statutoryreserves Sharepremium Generalreserves ReservesforSSI Retainedprofits less :Goodwillandintangible currentyearlossesandunderprovision QualifyingTier1Capital Tier2Capital FixedAssetsrevaluationreserves Forexrevaluationreserves Generalprovisions(@1%ofloans) Minorityinterest Hybridcapitalinstruments Preferenceshares Debenturestock QualifyingTier2Capital TotalQualifyingCapital Tier1CAR TotalCAR
500.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 800.0 100.0 100.0 10.0 100.0 100.0 100.0 100.0 610.0 1,410.0 7.6% 13.4%
Source: CBN Prudential Guidelines, July 2010, Legae Securities
Page 40 of 87
2.5 Conclusion and SWOT Analysis

Overall, we are positive on Nigerias banking system: Despite our concerns, we are constructive on the Nigerian banking system. We see a positive long-term outlook supported by the growing per capita income, high population and high population growth and moderate penetration. With enhanced regulation, (to include improving disclosure) we believe risks are manageable, going forward. Some valuations, particularly of Tier 2 banks are indicative of a distressed system. We believe this can provide investors with entry opportunities. SWOT analysis: Fig 38 below provides our system SWOT analysis. We see more strength an opportunities than weaknesses and threats.
Fig 38: SWOT analysis - A strong medium to long-term play; Credit and regulatory risks in the short-term
Strengths
Moderate penetration with banking assets/GDP ratio ~75%. Loans/GDP and Deposits/GDP ratios are <50%; improving regulatory and oversight framework; Improving reporting and disclosure standards (IFRS compliant by next year); High capital levels for the banks under our universe and the system in general, in spite of differences in CAR calculations vs. Basel; High population and high population growth which support volume (demand); and Constructive economic growth with GDP expected to grow >6% p.a for the foreseeable future.
Weaknesses
Poor profitability (i.e. lower ROEs, which are <CoEs, mainly due to high expense ratios and low leverage); Credit risk still meaningful despite atonement and AMCONs activities. NPL ratios still >5% for most banks with a few having >10%. Lack of an identification system compounds the risks; System still fragmented with Top 4 banks enjoying a market share of ~50%; and Concentration risk on the corporate exposure which could create a moral hazard. Banks are not playing the retail sector in fear of heighted credit risks.
Opportunities
Rising per capita income and moderate penetration provides and attractive risk/return profile; Under penetration in the retail segment (provided proper risk management processes and procedures are instituted). Ebanking, m-banking opportunities are massive. Creation of Credit Bureaux will help; Capital management opportunities for banks. Banks capital is predominantly Tier 1 type; and Infrastructure backlog creates opportunities for Public Private Partnerships. Related to this are opportunities for banks to improve their cost/income ratios should the power problems be resolved. Rising urbanization should drive demand on vanilla consumer credit products and mortgages
Banks created scale post consolidation, and after the current consolidation, further scale created by previously smaller banks could mean increased competition, particularly in underwriting higher value loans offering to bigger corporates; and Regulatory risks could impact profitability growth negatively, particularly if it is aimed at maintaining relative higher CARs and/or lower RWAs growth; Wholesale funding can be volatile given the relative immaturity of the market; asset/liability mismatches can be problematic despite the high core deposit level.
Threats
Page 41 of 87
3.
Company profiles/analysis
Anchor themes: Efficiency will be key, High CARs are necessary Valuation: Inability to create economic value creates a valuation quandary
Page 42 of 87
3.1 Access Bank: FY11 PT NGN11.3, BUY

Intercontinental takeover provides a platform to take-on the Big 4 Brief company profile: Access Bank was established in 1989
and listed on the NSE a decade later. In 2003, Access merged with Capital bank and Marina bank which were relatively smaller banks. Marinas strong entre to corporate clients aided Access Banks penetration into this segment. Access Bank is #7 biggest bank by assets in Nigeria with a market share ~5.5% as at 3Q10. By deposits, Access bank is #8 with a market share of ~4.9%. Access bank has 113 branches in Nigeria and the possible business combination with Intercontinental will increase the branch network to ~400. Access bank operates in Ghana, Gambia, Sierra Leone, DRC, UK, Ivory Coast, Rwanda and Burundi. Intercontinental merger to create scale: On 28 March 2011, Access Bank and Intercontinental Bank issued a joint statement announcing a proposed business combination of the two entities. The banks signed an MoU following approvals by their respective Boards. While we did not meet Intercontinental management during our recent visit to Nigeria, Access Banks management indicated to us that Intercontinental has a stronger penetration to the retail segment. The combined institution will have a healthy retail liability side and a stronger corporate asset side. CAMEL analysis: The CAMEL ratios for Access bank look strong, in our view. Below we show the key aspects which are: Capital: The bank is well capitalised, with a 1Q11 CAR of 26.5%. The bank leverage ratio is low at <5X. (FY10). Managements target CAR ratio of 15%. Asset quality: Our calculation of the loan losses ratio declined from 1.1% in CY09 to 0.6% in CY10. The NPL ratio declined to 8% (FY10) before an uptick in 1Q11 to 11%. Coverage ratios are fairly strong with a 1Q11 ratio of 75%. Pleasing to note is that lost loans only contribute 37% of the banks NPLs. Access banks low exposure to the retail segment could hold up asset quality although we are concerned by moral hazard that could develop in the corporate credit segment. Managements NPL ratio target is 5% and we expect Access to sell some of its bad loans to the AMCON as the bank pulls down the ratio. The 21% exposure to the oil and gas sector, which contributes 56% of NPLs, is the worry. Oil and gas, general commerce, manufacturing and telecoms make up >70% of the loan book and to that end we are concerned by the limited sectoral diversification. (see Fig 41 and Fig 42). Management/Efficiency: Access banks cost/income ratio is relatively high even by our calculation. It closed CY10 at 70% and we expect it to rise to 74%. While we didnt model the Intercontinental business (which we will do when everything is confirmed and endorsed by authorities), there could be
Page 43 of 87
incremental costs as a result of the combination. This would be before efficiency benefits kick in as the two institutions are integrated (and we expect the efficiency benefits to positively affect the cost/income ratio around FY13). Net interest income continues to dominate revenue although we expect fee income generation to improve. The Intercontinental acquisition will provide a strong platform. We see fee and commission income continuing to create ~40% of the banks operating income. Although the bank has managed to open its JAWS between CY05 and CY10, we expect flat JAWS in our forecast period with both operating income and operating expenses growing by a CAGR of 30%. Earnings and profitability: The bank managed to grow its earnings by a CAGR of 84% between CY05 and CY10. This growth was supported by strong and stable NIM despite a decline in CY08. The ROA expanded from 0.7% in CY05 to 1.4% in CY10. However, the ROE has been largely weak due to the high level of capital that the bank carries. We expect earnings to grow by a CAGR of 34% up-to CY13. We expect economic spread to remain negative in our forecast period. (see ROE decomposition on Fig 44). Liquidity: The bank has sufficient liquidity, with a LDR of 80% (1Q11) down from 88% for FY10. The liquidity ratio of ~37% as at end of 1Q11 is ~7pp above the statutory of 30%. Given the removal of the LDR cap, we believe the bank has room to change its asset mix and increase the LDR. The structure of the deposit is not vastly attractive. As at the end of 1Q11, ~56% of deposits were demand and savings type, with the remainder being time type of deposits. In 1Q11, fixed deposits grew faster than demand and savings deposits. (see Fig 43). We believe Access bank has room to grow its savings deposit franchise. Management indicated to us that about 60% of the demand and savings deposits are core deposit.
Fig 40: CAMEL ratios - Low leverage ; high cost/income and poorer ROE
2005 2006 C:Leverage 4.8 6.0 A:Loanslossesexpenseratio 1.2% 0.8% M:Cost/Income 70.7% 77.0% M:NII/Operatingincome 39.8% 57.5% E:NIM 10.2% 8.1% E:ROA 0.7% 0.4% E:Profit/Deposits 1.5% 0.7% E:ROE 3.6% 2.6% L:Loans/Deposits 50% 49% L:Liquidassets/Loans 61% 76%
2007 11.6 0.5% 57.2% 52.1% 5.0% 1.9% 3.0% 21.4% 53% 96%
2008 6.1 0.3% 47.5% 60.0% 3.2% 1.5% 4.5% 9.2% 69% 195%
2009 3.8 1.1% 53.4% 61.7% 8.5% 2.9% 4.8% 11.0% 97% 39%
2010 4.6 0.6% 70.0% 63.5% 7.9% 1.4% 2.3% 6.3% 88% 34%
2011F 6.6 0.5% 74.4% 62.2% 8.0% 1.2% 2.2% 7.6% 85% 44%
2012F 7.2 0.4% 71.6% 57.5% 7.5% 1.5% 2.9% 10.8% 85% 39%
2013F 7.5 0.4% 69.9% 57.9% 7.7% 1.6% 3.1% 12.3% 85% 31%
Page 44 of 87
Fig 41: Loan exposure - Oil and gas dominates; Overdrafts facilities the main loan product
Sectorexposure
2% 2% 3% 21% 1% OilandGas General Manufacturing Telecoms RealEsate Construction 19% 15% Capitalmarkets Government Finance 18% Other Other Transport 60% Overdrafts Termloans Other 14% 26%
Loantype
4% 4% 5% 6%
Fig 42: NPLs - Oil and gas sector dominates NPLs; 37% of NPLs are lost loans
NPLsbysector NPLcategory
5%
6% 7% RealEsate Manufacturing 11% Othersectors Telecoms Generalcommerce 15% OilandGas 13% 50% 37% Substandard Doubtful Lost
56%
Page 45 of 87
Fig 43: Deposit structure Worryingly fixed deposits continue to grow faster than demand an savings deposits
Demand 100% 90% 20% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q10 2Q10 3Q10 4Q10 1Q11 46.2% 54.8% 54.9% 55.9% 53.6% 2.7% 51.1% 42.0% 42.1% 41.3% 43.5% 15% 10% 3.3% 3.0% 2.8% 2.9% 5% 0% 2Q10 5% 10% 15% 20% 3Q10 4Q10 1Q11 Savings Fixed 30% Demand 25% Savings Fixed
Fig 44: ROE decomposition - ROE to recover but remain below our CoE estimate
Interestreceived/InterestEarningAssets Assetyield:Interest/Totalassets Interestpaid/InterestBearingLiabilities Costofliabilities:Interestexpense/TLiabilities Netinterestspread NetInterestMargin VolumeofIBL:IBL/TA Liabilitycomposition:liabilities/TA Interestexpense:Interestexp./TA FeesandCommission/TotalAssets Tradingincome/TotalAssets Assetrotation:Totalrevenue/TotalAssets Operatingexpenseratio:Op.expense/TA Loanlosscharge/Totalassets Dimunitionofassets/Totalassets PreTaxROA less Tax/TotalAssets ROA Totalassets/Equity ROE less CoE Economicspread 2005 17.1% 5.9% 4.5% 3.0% 14.1% 10.2% 52.9% 79.0% 2.4% 4.4% 0.9% 8.8% 6.3% 1.2% 0.3% 1.1% 0.4% 0.7% 4.8 3.6% 18.8% 15.2% 2006 11.3% 5.0% 2.1% 1.7% 9.6% 8.1% 68.6% 83.4% 1.4% 1.9% 0.8% 6.2% 4.8% 0.8% 0.0% 0.6% 0.2% 0.4% 6.0 2.6% 18.8% 16.2% 2007 7.0% 5.1% 2.3% 1.6% 5.4% 5.0% 65.5% 91.4% 1.5% 3.0% 0.3% 7.0% 4.0% 0.5% 0.0% 2.4% 0.6% 1.9% 11.6 21.4% 18.8% 2.6% 2008 5.1% 3.9% 3.3% 1.7% 3.4% 3.2% 42.4% 83.6% 1.4% 1.4% 0.2% 4.1% 2.0% 0.3% 0.0% 1.8% 0.3% 1.5% 6.1 9.2% 18.8% 9.6% 2009 11.6% 8.7% 3.4% 3.1% 8.5% 8.5% 66.8% 73.9% 2.3% 2.2% 1.7% 10.3% 5.5% 1.1% 0.1% 3.6% 0.8% 2.9% 3.8 11.0% 18.8% 7.8% 2010 11.8% 8.2% 3.8% 3.4% 8.3% 7.9% 71.3% 78.2% 2.7% 1.8% 1.4% 8.6% 6.0% 0.6% 0.0% 2.0% 0.6% 1.4% 4.6 6.3% 18.8% 12.5% 2011F 11.3% 7.3% 3.5% 2.5% 8.8% 8.0% 59.9% 84.7% 2.1% 2.5% 0.7% 8.4% 6.3% 0.5% 0.0% 1.7% 0.5% 1.2% 6.6 7.6% 18.8% 11.2% 2012F 10.5% 7.3% 3.5% 2.5% 8.0% 7.5% 60.0% 85.5% 2.1% 3.2% 0.7% 9.1% 6.5% 0.4% 0.0% 2.1% 0.6% 1.5% 7.2 10.8% 18.8% 8.0% 2013F 10.5% 7.4% 3.3% 2.3% 8.2% 7.7% 61.2% 85.3% 2.0% 3.2% 0.7% 9.3% 6.5% 0.4% 0.0% 2.3% 0.7% 1.6% 7.5 12.3% 18.8% 6.5%
Page 46 of 87
Salient assumptions and valuation

Balance sheet assumptions: We model loan and advances as a ratio of deposits i.e. LDR. We grew deposits by 30% in FY11; 20% in FY12 and 15% in FY13. We maintained a constant LDR of 85% over the period. Income statement assumptions: We reduce our estimate of the interest/interest earning assets to 10.5% FY13 from 11.8% in FY10. (competition on the corporate credit segment). We also reduced the interest expense/interest bearing liabilities. We reduce the loan losses expense/loans ratio to 1% for FY12 and FY13 from 1.1% in FY10. For FY11 we maintained it at 1.1%. (see Fig 45)
Fig 45: Salient assumptions: - Tamed deposits growth relative to history
2005 17.1% 4.5% 4.4% 0.9% 0.0% 0.0% 6.3% 4.8% 0.3% n/m 49.6% 2006 11.3% 2.1% 1.9% 0.5% 0.0% 0.3% 4.8% 2.6% 0.0% 240.0% 48.8% 2007 7.0% 2.3% 3.0% 0.2% 0.0% 0.1% 4.0% 1.6% 0.0% 85.1% 52.5% 2008 5.1% 3.3% 1.4% 0.2% 0.0% 0.0% 2.0% 1.4% 0.0% 72.4% 69.5% 2009 11.6% 3.4% 2.2% 1.6% 0.1% 0.0% 5.5% 1.9% 0.1% 21.6% 97.2% 2010 11.8% 3.8% 1.8% 0.4% 0.8% 0.1% 6.0% 1.1% 0.0% 11.0% 88.3% 2011F 11.3% 3.5% 2.5% 0.6% 0.0% 0.1% 6.3% 1.1% 0.0% 30.0% 85.0% 2012F 10.5% 3.5% 3.2% 0.6% 0.0% 0.1% 6.5% 1.0% 0.0% 20.0% 85.0% 2013F 10.5% 3.3% 3.2% 0.6% 0.0% 0.1% 6.5% 1.0% 0.0% 15.0% 85.0%
Interestandsimilarincome/IEA Interestandsimilarexpense/IBL Feeandcommissionincome/TA Foreignexchangeincome/TA Incomefrominvestment/TA Otherincome/TA Operatingexpense/TA Loanlossexpense/Loans Diminutionofvalueofotherassets/TA Depositgrowthrate LDR
Primary valuation and CoE: Our primary valuation method shows potential upside that is >47%. Our CoE is 18.8%. The ROE adjusted for excess equity is 10.2%. The risk is that if the bank does not sweat assets to reduce its CAR to the target 15%, the ROE will remain subdued and the share price will be punished. FY11 TP shows 42% potential capital gain, BUY: Our FY11 TP of NGN11.31 is a weighted price of our primary valuation method and the DFE. For the DFE, the TV is a production of our FY13 book value estimate and 1X multiple. Access bank trades at a trailing PER of 13X (vs. industrys 13.5X) and PBVR of 0.8X (vs. industrys 1.5X). A forward PER of 10.3X does not look excessive in our opinion.
Page 47 of 87
Fig 46: Adjusted PBVR method
2011est. Earnings Reportedequity RiskWeightedAssets TargetCAR ReportedCAR Normalizedequity:TargetCARX RWAs Excesscapital:Reportedequityless normalized ROEbasedonreportedequity ROEbasedonnormalizedequity Internalgrowthrate:RetentionratioXROE CoE JustifiedPBVRatnormalizedequity AdjustedPBVR Normalizedcapitalizedequity Normalisedcapitalisedequity(usingadj.PBVR) addExcesscapital Value Numberofshares Valuepershare Currentprice Upside/Downsiderisk
AccessBank 14,341.40 184,846.45 939,041.20 15.0% 19.7% 140,856.18 43,990.27 7.8% 10.2% 5% 18.80% 0.54 1.20 76,284.02 169,027.42 43,990.27 213,017.69 17,888 11.91 7.95 49.8%
Page 48 of 87
Fig 47: Financial forecasts and growth rates

Interestandsimilarincome Interestandsimilarexpense Netinterestincome Noninterestincome Operatingincome Operatingexpense Operatingincome Loanlossexpense Diminutionofvalueofotherasset Profitbeforeassociateprofit Sharefromassociates Profitbeforetax Taxation Profit/Loss Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities Totalshareholders'funds RWAsequivalent Growthrates Interestandsimilarincome Interestandsimilarexpense Netinterestincome Feeandcommissionincome Foreignexchangeincome Otherincome Operatingincome Operatingexpense Operatingincome Loanlossexpense Profitbeforeassociateprofit Profitbeforetax Taxation Profit/Loss Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities Totalshareholders'funds RWAsequivalent 2006 8,733 2,472 6,261 1,340 10,889 8,384 2,505 1,386 0 1,119 0 1,119 382 737 54,111 174,554 110,879 145,660 28,894 94,286 122% 57% 166% 11% 50% 2980% 84% 100% 44% 80% 49% 49% 53% 47% 234% 161% 66% 176% 105% 95% 2007 16,894 4,952 11,942 1,067 22,930 13,111 9,819 1,775 0 8,043 0 8,043 1,960 6,083 107,751 328,615 205,235 300,230 28,385 156,730 93% 100% 91% 202% 29% 4% 111% 56% 292% 28% 618% 618% 413% 725% 99% 88% 85% 106% 2% 66% 2008 40,677 14,646 26,031 2,431 43,353 20,610 22,743 3,529 369 18,846 0 18,846 2,993 15,853 245,836 1,045,568 353,746 873,708 171,861 465,313 141% 196% 118% 50% 276% 77% 89% 57% 132% 99% 134% 134% 53% 161% 128% 218% 72% 191% 505% 197% 2009 61,522 16,346 45,176 12,122 73,207 39,085 34,122 7,973 469 25,680 506 26,185 5,371 20,814 418,194 710,326 430,097 525,138 185,188 565,073 51% 12% 74% 7% 389% NM 69% 90% 50% 126% 36% 39% 79% 31% 70% 32% 22% 40% 8% 21% 2010 65,787 21,621 44,166 10,919 69,521 48,644 20,877 4,524 184 16,169 0 16,169 5,101 11,068 429,782 804,824 486,926 629,453 175,370 661,025 1% 29% 22% 49% 18% 40% 27% 35% 11% 73% 697% 564% 454% 351% 12% 16% 11% 20% 4% 23% 2011F 88,952 25,463 63,489 8,189 102,062 75,959 26,104 5,919 0 20,185 0 20,185 6,055 14,129 2012F 106,703 30,600 76,103 9,592 132,332 94,730 37,601 6,457 0 31,145 0 31,145 9,343 21,801 2013F 122,403 33,021 89,382 11,852 154,375 107,942 46,433 7,425 0 39,008 0 39,008 11,703 27,306
538,053 645,664 742,513 1,215,339 1,457,389 1,660,641 633,004 759,604 873,545 1,029,794 1,245,942 1,416,945 185,546 201,650 222,410 939,041 1,173,819 1,398,457 35% 18% 44% 110% 101% 83% 47% 56% 25% 31% 25% 25% 19% 28% 25% 51% 30% 64% 6% 42% 20% 20% 20% 53% 22% 6% 30% 25% 44% 9% 54% 54% 54% 54% 20% 20% 20% 21% 9% 25% 15% 8% 17% 14% 27% 4% 17% 14% 23% 15% 25% 25% 25% 25% 15% 14% 15% 14% 10% 19%
Source: Company report, Legae Securities
Page 49 of 87
3.2 Diamond bank: FY11 NGN8.75, BUY

Difficult to predict turnaround time but there is hope Brief company profile: Diamond bank was established in 1991.
It listed on the NSE in 2005, the same year it acquired Lion bank. Diamond bank is a Tier 2 bank, and ranked #9 by 3Q10 with a market share of ~4.2% of system assets. The bank has 215 branches across Nigeria. The core focus of the bank is the middle market customers and management is developing a strong retail franchise. Following the regulatory changes related to universal banking, Diamond is evolving into an international commercial bank and seeks to dispose its non-bank subsidiaries but remains committed to regional markets i.e. Benin, Togo, Senegal and Cote DIvoire. CAMEL analysis: Fig 48 shows the main CAMEL ratios for Diamond bank. We underscore the following: Capital: Diamonds CAR of 15.2% (17.2% for the bank) in 1Q11, while providing a generous cushion when compared to the regulatory requirement of 10%, the buffer is exceptionally thin when benchmarked to managements target CAR of 15%. However, management indicated to us that the bank will raise Tier 2 capital (and Tier 1 capital issuance is not planned in the foreseeable future), and there will also be some capital release from the sale of non-banking subsidiaries. Asset quality: Asset quality has been the main problem for Diamond bank. The Groups NPL ratio was a colossal 18.2% (Dec 09) and although it has shed off ~3.5pps, it remains high at 14.8% (FY10). This was after selling off NGN11bn bad debts to AMCON in the course of year. For 1Q11, the ratio remained stubborn at 14.4%. This high level of NPL ratio makes it difficult for investors to assess the quality of the current performing book especially when not privy to restructured loans. However, management indicated that they are likely to sell another NGN40bn worthy of bad debts to AMCON this year, with a marginal impact to the profit/loss. We have reduced the provisions/loans ratio to 3.2% for FY11 (vs. 3.8% for FY10) before cutting it down to 2.3% for FY12 and FY13. We have maintained a relatively high coverage ratio of 85% vs. managements guidance of 75% given the high level of lost loans. (i.e. 40% for FY10). However, Naira-NPLs have shown a decline, closing FY10 at NGN51bn from NGN68bn in FY09. We remain concerned by sectoral concentration risk as General commerce, Oil and gas, manufacturing and real estate make 66% of the loan book. Oil and gas contribute 34% of NPL (see Fig 49). Management/Efficiency: Our calculations indicate deterioration in the cost/income ratio on a year/year basis, from 57.5% in FY09 to 62.8% for FY10. However, this cost/income
Page 50 of 87
ratio is not out-of line when compared to the industry. With rising staff productivity, and a relatively stable staff cost/total costs ratio (~35%) we expect the cost/income ratio to gradually decline to 58% by FY13. Some dead weight cost could also be shed-off through the centralisation of the back office processing. Non-funded income should slightly increase due to our expectation of continued retail penetration by the bank. Earnings/profitability: Diamond bank enjoys a high NIMs and NIMs expect it to remain strong given the retail exposure. The retail exposure is beneficial as it provides relatively cheaper and inert deposits while on the lending side it provides relatively higher yields. The banks cost of funds (managements calculation) has declined from 7.7% in FY09 to 3.4% in FY10 as retail accounts, mainly CASA, doubled in growth. Cost of funds further reduced to 2.2% in 1Q11. Meanwhile yields on assets declined to 15.2% from 16.6%. In our view, this stable retail base is important for the bank, and we are fond of managements strategy of building a strong retail deposit franchise. It also plays directly into our demographics theme. We expect ROA to improve to 0.7% before it gets >1% in FY12. While managements guidance is of a higher teen ROE by 2012, we see the ROE only getting to ~11.3% by FY13. This is after considering a leverage ratio that is above the recent 5-yr average. We expect the economic spread to remain constrained despite improvements (see ROE decomposition on Fig 52). Liquidity: The banks LDR of 71% and a liquidity ratio of 41.5% for FY10 provide enough room for the bank to change its asset mix. The deposits structure for Diamond bank is particularly strong, in our view, with retail/total deposits now contributing 47% of deposits and demand and savings deposits constituting 60% of deposits (1Q11; See Fig 51). Managements estimate of core/stable deposits is 60%.
Fig 48: CAMEL ratios - Strong NIM; Room to expand LDR; Poor ROE
C:Leverage A:Provisions/Loans A:Coverageratio M:Cost/Income M:NII/Operatingincome E:NIM E:ROA E:Profit/Deposits E:ROE L:Loans/Deposits L:Liquidassets/Deposits
2005 6.3 0.7% 31.4% 65.7% 56.3% 7.3% 1.9% 3.1% 12.0% 53.2% 75.8%
2006 7.2 0.1% 3.9% 68.7% 57.1% 6.5% 1.8% 2.7% 12.8% 54.2% 67.6%
2007 6.0 0.7% 45.2% 62.9% 53.8% 8.9% 2.2% 3.3% 13.3% 46.4% 70.0%
2008 5.3 0.8% 63.4% 56.0% 48.9% 5.2% 2.0% 3.1% 10.9% 57.3% 57.7%
2009 6.0 3.6% 98.6% 57.5% 58.4% 9.0% 0.8% 1.1% 4.5% 61.1% 36.0%
2010 5.6 3.8% 85.0% 62.8% 67.2% 11.6% 0.2% 0.3% 1.2% 71.4% 35.4%
2011F 7.4 3.2% 85.0% 58.6% 72.4% 9.8% 0.7% 1.5% 5.1% 75.0% 48.3%
2012F 8.0 3.0% 85.0% 57.1% 72.3% 10.2% 1.1% 2.1% 8.7% 75.0% 44.4%
2013F 8.7 2.4% 85.0% 58.4% 69.9% 9.9% 1.3% 2.6% 11.3% 80.0% 37.8%
Page 51 of 87
Fig 49: Loan portfolio structure - Less diversified vs. Top 4; Oil and gas worst credit performer
1%
Sectoralexposure
1% 4% Generalcommerce 21% Oilandgas 6%
1% 3%
NPLdistribution
2%
2%
1%
5% 6%
Oil&gas
34% Manufacturing Realestate Power 12%
Generalcommerce Manufcaturing Transport&Comm. Capitalmarket
7%
8%
18%
Consumercredit 13% Communication
Realestateandmortgage Others Consumercreit
11% 16%
Other Transport Capitalmarket 27%
Fig 50: Credit risk - Naira-NPLs improving; Lost loans increased to 40%
80 70 60 51 50 40 30 20 10 0 4Q09 1H10 FY10
NPLs
100% 68 64 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Substandard
Doubtful
Lost
34%
40%
24% 33%
42% 27%
2009
2010
Page 52 of 87
Fig 51: Deposit structure - Strong retail franchise

Time 100% 90% 80% 50% 70% 60% 50% 40% 30% 50% 20% 10% 0% 4Q09 1Q10 2Q10 3Q10 4Q10 44% 36% 26% 26% 5% 0% 4Q09 1Q10 2Q10 3Q10 4Q10 56% 64% 74% 74% 30% 25% 20% 15% 10% 24% DemandandSaving 50% 45% 41% 40% 35% 35% 30%
Retail/Totaldeposits
47%
Fig 52: ROE decomposition - We expect ROE to recover to ~11% by Fy13 vs. managements guidance of higher teens. Economic spread remain negative
Interestreceived/InterestEarningAssets Assetyield Interestpaid/InterestBearingLiabilities Costofliabilities:Int.expense/Liabilities Netinterestspread NetInterestMargin VolumeofIBL:IBL/TA Liabilitycomposition:liabilities/TA Interestexpense:Interestexp./TA Tradingincome/TotalAssets Fees&Commission/TotalAssets Assetrotation:Totalrevenue/TotalAssets Operatingexpenseratio:Op.expense/TA Provisions/Loans PreTaxROA less Tax/TotalAssets ROA Totalassets/Equity ROE less CoE Economicspread 2006 9.4% 6.6% 2.9% 2.4% 6.6% 6.5% 71.6% 86.1% 2.1% 0.2% 3.2% 8.0% 5.5% 0.1% 2.4% 0.7% 1.8% 7.2 12.8% 19.6% 6.7% 2007 13.8% 7.9% 3.7% 3.4% 10.1% 8.9% 75.4% 83.4% 2.8% 0.3% 3.4% 9.4% 5.9% 0.7% 2.8% 0.6% 2.2% 6.0 13.3% 19.6% 6.2% 2008 7.9% 5.7% 2.8% 2.4% 5.2% 5.2% 71.4% 81.3% 2.0% 0.4% 2.9% 7.6% 4.3% 0.8% 2.6% 0.5% 2.0% 5.3 10.9% 19.6% 8.6% 2009 16.8% 11.4% 7.2% 6.3% 9.6% 9.0% 73.2% 83.2% 5.3% 0.5% 3.4% 10.5% 6.1% 3.6% 0.9% 0.1% 0.8% 6.0 4.5% 19.6% 15.0% 2010 15.4% 11.1% 3.6% 3.3% 11.8% 11.6% 76.6% 82.0% 2.7% 0.6% 2.9% 12.5% 7.8% 3.8% 0.8% 0.6% 0.2% 5.6 1.2% 19.6% 18.3% 2011F 14.5% 10.9% 4.5% 4.0% 10.0% 9.8% 77.7% 86.4% 3.5% 0.4% 2.4% 10.2% 6.0% 3.2% 1.0% 0.3% 0.7% 7.4 5.1% 19.6% 14.4% 2012F 14.5% 10.8% 4.0% 3.6% 10.5% 10.2% 79.3% 87.0% 3.2% 0.4% 2.4% 10.5% 6.0% 3.0% 1.5% 0.5% 1.1% 8.0 8.7% 19.6% 10.9% 2013F 14.3% 10.4% 4.0% 3.6% 10.3% 9.9% 79.7% 87.4% 3.2% 0.5% 2.6% 10.3% 6.0% 2.4% 1.9% 0.6% 1.3% 8.7 11.3% 19.6% 8.2%
Page 53 of 87

Balance sheet: Our salient assumptions on the balance sheet are 1) deposits will grow by 25% in FY11 and 20% in FY12 and FY13; and 2) the LDR will increase to 75% in FY11 and FY12 (i.e. contained growth as NPLs are still high), before increasing to 80% in FY13. Income statement: We reduced the yield on interest earnings assets to 14.5% for FY11 and FY12. For FY13 we reduce it further to 14.3% on increasing competition. We also raise the interest expense/interest earning liability to 4.5% for FY11, 4% for FY12 and FY13. We decided to err on caution despite our positive outlook on the banks cost of deposits. We also cut the provisions/loans ratio as we expect improvement in credit quality.
Fig 53: Salient assumptions - We increase cost of deposits despite a strong retail franchise; We cap LDR at 80%
Interestincome/IEA Interestexpense/IBL Feeandcommissionincome/Loans Feeandcommissionexpense/Loans Foreignexchangeincome/TA Tradingincome/TA Underwritingprofit/TA Investmentincome/TA Otherincome/TA Operatingexpense/TA Provisionforloanlosses/Loans Depositgrowth LDR 2005 11% 4% 12% 0% 0% 0% 0% 0% 0% 6% 2% n/m 53% 2006 9% 3% 9% 0% 0% 0% 0% 0% 0% 6% 0% 86% 54% 2007 13.8% 3.7% 10.9% 0.2% 0.3% 0.0% 0.0% 0.6% 0.0% 5.9% 2.2% 46.6% 46.4% 2008 7.9% 2.8% 7.8% 0.1% 0.3% 0.1% 0.0% 0.5% 0.0% 4.3% 2.0% 92.8% 57.3% 2009 16.8% 7.2% 8.6% 0.4% 0.4% 0.0% 0.2% 0.2% 0.1% 6.1% 8.6% 11.2% 61.1% 2010 15.4% 3.6% 6.0% 0.2% 0.3% 0.2% 0.1% 0.2% 0.1% 7.8% 7.8% 14.5% 71.4% 2011F 14.5% 4.5% 5.5% 0.2% 0.3% 0.1% 0.0% 0.0% 0.0% 6.0% 7.3% 25.0% 75.0% 2012F 14.5% 4.0% 5.5% 0.2% 0.3% 0.1% 0.0% 0.0% 0.1% 6.0% 6.5% 20.0% 75.0% 2013F 14.3% 4.0% 5.5% 0.2% 0.3% 0.1% 0.0% 0.0% 0.1% 6.0% 5.0% 20.0% 80.0%
Primary valuation and CoE: Our primary valuation implies potential upside risk of 43% to the current price. We apply a CoE of 19.55% (leaner balance sheet could mean high cost of funds, relative lower CAR, and higher growth = higher cost of capital). The ROE adjusted for excess equity is an uninspiring 6.2%. Our Adjusted PBVR is <1X, and we apply a 1.2 multiple to FY11 book value. Even applying a 1X PBVR to our FY11 book value estimate, we see upside potential of >20%. This gives us strong conviction in our BUY recommendation. Our FY11 target price shows 45.8% potential gain, BUY: Our FY11 TP of NGN8.75 which is 45.8% above the current price. For our DFE method, we capitalise the FY13 book value by 1X. Diamond bank is currently trading at trailing PBVR of 0.89X, and a forward PBVR of 0.8X.
Page 54 of 87
Diamondbank 5,988.90 116,460.97 640,991.09 15.0% 18.2% 96,148.66 20,312.31 5.1% 6.2% 3% 19.55% 0.32 1.20 30,633.75 115,378.40 20,312.31 135,690.70 14,475 9.37 6.00 56.2%
Page 55 of 87

Interestincome Interestexpense Netinterestincome Feeandcommissionincome Feeandcommissionexpense Netfeecommissionincome Foreignexchangeincome Otherincome Operatingincome Operatingexpense Provisionforloanlosses Profitbeforetax Taxation Profitaftertax BalanceSheet LoansandAdvances Totalassets Customerdeposits Totalliabilities Totalequity RWAsequivalent Growthrates Interestincome Interestexpense Netinterestincome Feeandcommissionincome Feeandcommissionexpense Netfeecommissionincome Foreignexchangeincome Otherincome Operatingincome Operatingexpense Provisionforloanlosses Profitbeforetax Taxation Profitaftertax BalanceSheet LoansandAdvances Totalassets Customerdeposits Totalliabilities Totalequity RWAsequivalent 2006 14,854 4,612 10,242 7,279 168 7,110 481 65 17,933 12,315 172 5,445 1,468 3,977 80,560 223,651 148,563 192,629 31,022 127,571 43% 43% 43% 41% 26177% 37% 72% 14% 41% 47% 80% 55% 46% 58% 89% 71% 86% 75% 49% 76% 2007 25,335 9,025 16,310 10,987 164 10,823 947 70 30,295 19,047 2,240 9,008 1,921 7,087 100,972 320,950 217,737 267,696 53,254 173,747 71% 96% 59% 51% 3% 52% 97% 8% 69% 55% 1200% 65% 31% 78% 25% 44% 47% 39% 72% 36% 2008 35,725 12,379 23,346 18,765 326 18,439 1,906 199 47,733 26,711 4,808 16,214 3,393 12,821 240,449 625,670 419,708 508,414 117,256 410,981 41% 37% 43% 71% 99% 70% 101% 183% 58% 40% 115% 80% 77% 81% 138% 95% 93% 90% 120% 137% 2009 77,825 35,831 41,993 24,458 1,274 23,184 3,033 423 71,875 41,349 24,623 5,903 730 5,173 285,345 682,078 466,890 567,640 114,438 505,698 118% 189% 80% 30% 291% 26% 59% 113% 51% 55% 412% 64% 78% 60% 19% 9% 11% 12% 2% 23% 2010 66,176 16,293 49,883 17,777 529 17,248 1,909 524 74,200 46,565 22,862 4,773 3,444 1,329 294,228 594,795 412,032 487,710 107,085 462,434 30% 35% 93% 51% 39% 51% 2% 50% 75% 55% 8% 139% 182% 116% 3% 9% 15% 10% 1% 6% 2011F 94,122 30,187 63,935 21,245 773 20,473 2,581 412 88,355 51,794 28,005 8,556 2,567 5,989 386,280 863,234 515,040 745,984 116,461 640,991 42% 85% 28% 20% 46% 19% 35% 21% 19% 11% 22% 79% 25% 351% 31% 45% 25% 53% 9% 39% 2012F 109,476 32,248 77,228 25,494 927 24,567 3,164 517 106,777 61,001 30,130 15,646 4,694 10,952 2013F 126,991 39,028 87,962 32,633 1,187 31,446 3,978 681 125,852 73,460 29,666 22,726 6,818 15,908
463,536 593,326 1,016,689 1,224,334 618,048 741,657 884,933 1,069,911 126,463 140,399 774,477 975,080 16% 7% 21% 20% 20% 20% 23% 25% 21% 18% 8% 83% 83% 83% 20% 18% 20% 19% 9% 21% 16% 21% 14% 28% 28% 28% 26% 32% 18% 20% 2% 45% 45% 45% 28% 20% 20% 21% 11% 26%
Page 56 of 87
3.3 First Bank: FY11 NGN15.08, HOLD

Strong franchise that looks fully valued Brief company profile: First Bank is the biggest and oldest
bank in Nigeria with history dating back to 1894. It listed on the NSE in 1971 as Standard Bank of Nigeria before changing the name to First Bank in 1979. In 2005, it acquired MBC International. It commands a market share of ~16.3% on the assets side (3Q10) and ~14.2% on the deposits. In CY04, First Bank was #2 bank with a market share of 10.8% of system assets, trailing Union banks 11.1%. While other banks are looking more to regional and SSA expansion, First bank seems to be keen to consolidate its position in Nigeria as the premier bank. Management targets a market share of 20%. The bank boasts a branch network of 619 branches. In line with the CBN proposed guidelines, First banks management indicated to us that they will pursue a Holding Company structure which will house its nonbanking subsidiaries. CAMEL analysis: As is the case with most of the Nigerian banks under our coverage, the CAMEL indicators are strong. We note the following: Capital: First Bank carries sufficient capital with FY10 CAR of 20.4% (1Q11 CAR 19.3%) vs. a risk CAR of 15% and regulatory requirement of 10%. The banks capital is predominantly Tier 1. Tier 1 CAR is a respectable 16.8%. The banks leverage ratio is also low at 6.8X (FY10) although we expect it to increase slightly and breach 7X. Asset quality: First Bank shows strong asset quality relative to peer. The NPL ratio at 7.7% for FY10 was one of the preeminent. (7.3% for 1Q11). The bank has been relatively conservative as indicted by the 5-yr average LDR of 72% (FY05-FY09). Even at the peak of the margin loans and other share-backed loans problems, First Banks exposure was only 6% of its total loan book, according to management. The bank has sold ~NGN31bn NPLs to the CBN which we expect to show a further improvement in the NPL ratio for 2Q11. The coverage ratio for the bank has been consistently >60%. For FY10 the coverage ratio was 84%. Given that lost loans only make up ~32% of the banks NPLs, this is a very plausible coverage ratio, in our view. The bank took the 1% general provision in FY10 despite the CBN waiver. The coverage ratio increased to 87% as the lost loans/NPL ratio increased to 41% in 1Q11. First banks loan book is relatively more diversified with the Top 4 sectors constituting 49% of the loan book. The tenor of the loans is also predominantly short-term which aid credit and liquidity risk management (see Fig 57).
Page 57 of 87
Management/Efficiency: While the cost/income ratio does not differ materially from the system average at ~60%, First banks non-interest income contribution to operating income is lower at an average of ~30%. In fact for 1Q11, non-interest income revenue was only 25% of the banks operating income. Non-interest income has grown by a CAGR of 22% vs. a 34% for interest income and 56% for loans and advances between FY05 and FY10. We would have expected the bank to capitalise on its footprint to generate transactional business and the related fee income. In terms of the cost/income ratio, cost rationalisation that resulted in a decline in the banks staff members should bode well for the cost/income ratio going forward. The centralisation of the branch operations in order to enhance economies of scale should also result in some efficiency benefits. Earnings/Profitability: First bank has consistently produced a positive ROA since CY05. The ROE which declined to 1% in CY09 recovered to 9.4% in FY10 (ROaE increased to 15.5% for 1Q11). NIM has also shown a rebound from a decline in CY09 to reach 7% for FY10. Management expect the widening asset spread to enhance the NIM at most and support the NIM at current levels at worst. We expect the economic profit to turn positive by FY13. (see decomposed ROE on Fig 61) Liquidity: First banks liquidity profile is not impeccable. While the LDR is 80% (both FY10 and 1Q11), the liquidity ratio is low 32%, (1Q11) only 2pps above the required statutory liquidity ratio of 30%. This could put a holdback to RWAs expansion although the banks strong deposit franchise could be exploited to mobilise deposits and employ the deposits in government securities and/or interbank market. The deposits structure looks strong with current and savings accounts representing ~70% of total deposits. (see Fig 60).
Fig 56: CAMEL ratios - Strong CAMEL ratios on average
C:Leverage A:Provisions/Loans M:Cost/Income M:NII/Operatingincome E:NIM E:ROA E:Profit/Deposits E:ROE L:Loans/Deposits L:Liquidassets/Deposits
2005 9.5 0.5% 60.5% 57.3% 7.8% 2.8% 4.0% 26.6% 37% 81%
2006 9.6 0.6% 61.5% 53.5% 6.7% 2.5% 3.4% 24.0% 39% 73%
2007 10.6 0.2% 61.8% 55.8% 6.3% 2.1% 3.1% 22.0% 36% 80%
2008 4.3 0.4% 54.7% 68.8% 7.4% 2.4% 5.2% 10.4% 67% 109%
2009 7.0 1.9% 59.2% 75.1% 5.9% 0.1% 0.4% 1.0% 80% 44%
2010 6.8 0.9% 65.5% 68.3% 7.0% 1.4% 2.3% 9.4% 79% 45%
2011F 7.3 0.7% 60.6% 68.2% 7.6% 1.8% 2.9% 12.8% 80% 46%
2012F 7.8 0.5% 54.8% 65.8% 7.3% 2.3% 3.9% 17.6% 85% 48%
2013F 7.4 0.5% 48.7% 65.6% 7.4% 2.6% 4.4% 19.3% 85% 44%
Page 58 of 87
Fig 57: Credit risks - Loan portfolio is diversified; real estate and retail worst performers...
Sectoralexposure
FinanceandInsurance
NPLexposure
4% 4% 6% 26% Realestateconstruction Retailers 8% Residentialrealestate Oil&gasservices Other 12% General Oil&gasdownstream 24% 13% Capitalmarket Commercialproperty 3%
2% 3% 3% 4% 5%
1% 2% 14%
Oilandgasservices Oilandgasdownstream General manufacturing
13% 6%
Generalcommerce Government ITC
6% 13% 9% 9% 9%
Personalprofessional Realestateconstruction Others ResidentialRealestate Commercialrealestate Capitalmarket Oilandgas(upstream)
Fig 58: ...but loan book dominated by shorter term loans aiding credit risk and liquidity management
Loantype
10.3% 14.2% 2% 11%
Age
12.7%
Overdraft Termloans Commercialpapers Moneymarketlines 62.8% 88% 030days 3160days >61days
Page 59 of 87
Fig 59: NPL structure - Lost loans/NPL ratio increasing

Substandard 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 20% 24% 30% 20% 35% 36% 44% 39% 23% 33% 30% 45% 53% Doubtful Lost
27% 41%
32% 41%
29%
Fig 60: Deposit structure - Savings and current accounts dominate.

Current 100% 8.8% 90% 80% 31.5% 70% 60% 50% 40% 30% 20% 10% 0% 0% 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 40.0% 38.8% 38.2% 40.8% 42.0% 42.6% 19.7% 27.5% 29.1% 28.0% 26.7% 27.3% 24.9% 8.8% 13.7% 15.2% 12.2% 18.0% Savings Term Domiciliary 21.1% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 9% 9% 4Q09 25% 14% 15% 9% 1Q10 14% 16% 9% 2Q10 14% 16% 10% 3Q10 15% 17% 10% 4Q10 16% 21% 25% 24% 23% 23% 23% 35% 37% 37% 36% 36% 34% >12months 612months 36months 13month 030days
18.9%
16.0%
19.0%
17% 10% 1Q11
Page 60 of 87
Fig 61: REO decomposition - We expect economic profit by FY13

Interestreceived/InterestEarningAssets Assetyield:Interest/Totalassets Interestpaid/InterestBearingLiabilities CostofLiabilities:Interestexpense/Liabilities Netinterestspread NetInterestMargin VolumeofIBL:IBL/TA Liabilitycomposition:liabilities/TA Interestexpense:Interestexp./TA Assetrotation:Totalrevenue/TotalAssets Operatingexpenseratio:Op.expense/TA Provision/Totalassets PreTaxROA less Tax/TotalAssets add/less Exceptionalitems/TotalAssets ROA Totalassets/Equity ROE less CoE Economicspread 2005 10.1% 7.7% 2.6% 2.0% 8.1% 7.8% 70.6% 89.4% 1.8% 10.3% 6.3% 0.5% 3.6% 0.8% 0.0% 2.8% 9.5 26.6% 18.3% 8.3% 2006 8.9% 6.6% 2.2% 1.8% 7.1% 6.7% 72.8% 89.6% 1.6% 9.3% 5.7% 0.6% 2.9% 0.7% 0.3% 2.5% 9.6 24.0% 18.3% 5.7% 2007 9.2% 6.6% 2.6% 2.3% 6.9% 6.3% 79.7% 90.6% 2.1% 8.2% 5.0% 0.2% 2.9% 0.6% 0.2% 2.1% 10.6 22.0% 18.3% 3.7% 2008 10.1% 7.6% 3.3% 2.7% 7.4% 7.4% 62.0% 77.0% 2.1% 8.1% 4.4% 0.4% 3.3% 0.7% 0.2% 2.4% 4.3 10.4% 18.3% 7.9% 2009 10.0% 7.5% 4.2% 3.5% 6.5% 5.9% 71.5% 85.7% 3.0% 5.9% 3.5% 1.9% 0.5% 0.4% 0.0% 0.1% 7.0 1.0% 18.3% 17.3% 2010 10.1% 7.5% 3.1% 2.7% 7.4% 7.0% 74.8% 85.2% 2.3% 7.7% 5.1% 0.9% 1.7% 0.4% 0.1% 1.4% 6.8 9.4% 18.3% 8.9% 2011F 9.8% 8.1% 3.3% 2.9% 6.8% 7.6% 77.4% 85.9% 2.5% 8.2% 5.0% 0.7% 2.5% 0.8% 0.0% 1.8% 7.3 12.8% 18.3% 5.5% 2012F 9.5% 7.9% 3.3% 2.9% 6.6% 7.3% 78.2% 86.9% 2.5% 8.2% 4.5% 0.5% 3.2% 1.0% 0.0% 2.3% 7.8 17.6% 18.3% 0.7% 2013F 9.5% 7.9% 3.3% 2.9% 6.6% 7.4% 77.3% 86.5% 2.5% 8.2% 4.0% 0.5% 3.7% 1.1% 0.0% 2.6% 7.4 19.3% 18.3% 1.0%
Page 61 of 87

Balance sheet: We model deposit growth rate of 17.5% for FY11 and 20% thereafter. We cap the LDR at 85% given the low liquidity ratio. Income statement: We enlarge the interest income/interest earning assets to 10.5% (net inter-bank market lender) and we also increase the interest expense/interest paying liabilities to 3.3%. (on competition) These, however, compare favourably against history. We reduce the provisions/loans ratio to 1.5% for FY11 and 1% for FY12 and FY13.
Fig 62: Salient assumptions - We cap LDR at 85%; increase asset yield slightly on rising interest rates
Interestandsimilarincome/IEA Interestandsimilarexpense/IBL Feeandcommissionincome/Loans Feeandcommissionexpense/Loans Foreignexchangeincome/TA Trusteeshipincome/TA Incomefrominvestments/TA Otherincome/TA Operatingexpenses/TA Shareofprofit/lossfromassociates/TA Provisionforloanlosses/Loans Depositgrowth LDR 2005 10.1% 2.6% 10.4% 0.0% 0.3% 0.0% 0.5% 0.9% 6.3% 0.0% 2.0% n/m 37% 2006 8.9% 2.2% 9.8% 0.0% 0.2% 0.0% 0.7% 0.6% 5.7% 0.0% 2.2% 35.3% 39% 2007 9.2% 2.6% 10.4% 0.0% 0.3% 0.0% 0.1% 0.7% 5.0% 0.0% 0.9% 33.2% 36% 2008 10.1% 3.3% 5.3% 0.0% 0.1% 0.0% 0.0% 0.8% 4.4% 0.0% 1.3% 17.1% 67% 2009 10.0% 4.2% 2.6% 0.0% 0.2% 0.0% 0.1% 0.0% 3.5% 0.1% 3.8% 92.3% 80% 2010 10.1% 3.1% 3.9% 0.0% 0.4% 0.0% 0.0% 0.0% 5.1% 0.1% 1.9% 7.7% 79% 2011F 11.0% 3.3% 3.5% 0.0% 0.4% 0.0% 0.0% 0.5% 5.0% 0.0% 1.5% 17.5% 80% 2012F 10.8% 3.3% 4.0% 0.0% 0.4% 0.0% 0.0% 0.5% 4.5% 0.0% 1.0% 20.0% 85% 2013F 10.8% 3.3% 4.0% 0.0% 0.4% 0.0% 0.0% 0.4% 4.0% 0.0% 1.0% 20.0% 85%
Primary valuation and CoE: Our Adjusted PBVR model indicates minute upside risk of 1.5%. Our CoE for First bank is 18.30% and the ROE post excess equity adjustment is 15.3%. Our Adjusted PBVR is <1X, (0.84X) hence our employment of the 1.2X PBVR to FY11 book value. The low Justified PBVR is a result of a poorer ROE relative to CoE. FY11 TP of NGN15.08 shows limited upside, HOLD: Our potential capital gain is 11.7%. The DFE value is NGN17.16 after we employ a 1.1X multiple to the FY13 Book value for the TV calculation. Our FY11 TP indicates an implied PER of 14.7X which we believe shows fair valuation.
Page 62 of 87
FirstBank 49,035.18 382,975.04 2,134,399.02 15.0% 17.9% 320,159.85 62,815.19 12.8% 15.3% 8% 18.30% 0.84 1.20 267,951.80 384,191.82 62,815.19 447,007.01 32,632 13.70 13.50 1.5%
Source: Company reports, Bloomberg, Legae Securities
Page 63 of 87

Interestandsimilarincome Interestandsimilarexpense Netinterestincome Netfeeincome Foreignexchangeincome Otherincome Totalnoninterestincome Operatingincome Operatingexpenses Profitbeforeprovisions Provisionforloanlosses Profitbeforetaxation Taxation Profitaftertax Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities Ordinarysharecapital TotalEquity RWAsestimates Growthrates Interestandsimilarincome Interestandsimilarexpense Netinterestincome Feeandcommissionincome Feeandcommissionexpense Netfeeincome Foreignexchangeincome Otherincome Totalnoninterestincome Operatingincome Operatingexpenses Profitbeforeprovisions Provisionforloanlosses Profitbeforeexceptionalitems Profitbeforetaxation Taxation Profitaftertax Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities TotalEquity RWAsestimates 2006 40,743 10,040 30,703 17,445 1,202 3,551 26,697 57,400 35,285 22,115 3,985 19,849 4,450 15,399 177,303 616,824 448,915 552,547 2,619 64,277 321,852 12% 17% 10% 35% NM 35% 14% 13% 28% 18% 20% 15% 64% 8% 18% 25% 16% 43% 31% 35% 31% 29% 41% 2007 58,431 18,193 40,238 22,587 2,289 6,278 31,892 72,130 44,566 27,564 2,006 23,574 5,191 18,383 2008 116,717 31,569 85,148 24,576 952 12,769 38,576 123,724 67,707 56,017 6,105 47,214 10,674 36,540 2009 2010 162,041 174,040 65,884 52,578 96,157 121,462 28,064 45,055 4,128 10,160 859 733 31,869 56,461 128,026 177,923 75,841 116,530 53,921 62,889 40,624 21,590 13,297 43,188 8,396 9,777 4,901 33,411 2011F 226,801 70,052 156,749 47,691 11,145 14,190 73,072 229,821 139,318 90,503 20,453 70,050 21,015 49,035 2012F 282,654 90,370 192,283 69,492 14,223 16,009 99,792 292,075 160,005 132,070 17,385 114,685 34,406 80,280 1,738,505 3,555,660 2,045,299 3,091,195 16,316 456,879 2,724,960 25% 29% 23% 46% 49% 46% 28% 13% 37% 27% 15% 46% 15% 64% 64% 64% 64% 28% 28% 20% 29% 19% 28% 2013F 329,602 104,815 224,787 83,380 16,699 17,924 118,097 342,884 166,992 175,892 20,862 155,030 46,509 108,521 2,086,205 4,174,802 2,454,359 3,609,638 16,316 561,498 3,258,276 17% 16% 17% 20% 40% 20% 17% 12% 18% 17% 4% 33% 20% 35% 35% 35% 35% 20% 17% 20% 17% 23% 20%
217,454 466,096 1,078,452 1,143,614 1,363,533 884,604 1,528,234 2,174,058 2,305,258 2,786,352 598,177 700,182 1,346,573 1,450,567 1,704,416 801,221 1,176,380 1,862,788 1,964,633 2,394,494 5,238 9,945 14,504 16,316 16,316 83,383 351,854 311,270 340,626 382,975 457,020 875,700 1,678,153 1,765,641 2,134,399 43% 81% 31% 29% NM 29% 90% 77% 19% 26% 26% 25% 50% 41% 19% 17% 19% 23% 43% 33% 45% 30% 42% 100% 74% 112% 9% NM 9% 58% 103% 21% 72% 52% 103% 204% 95% 100% 106% 99% 114% 73% 17% 47% 322% 92% 39% 109% 13% 14% NM 14% 334% 93% 17% 3% 12% 4% 565% 73% 72% 21% 87% 131% 42% 92% 58% 12% 92% 7% 20% 26% 61% 88% 61% 146% 15% 77% 39% 54% 17% 47% 211% 225% 16% 582% 6% 6% 8% 5% 9% 5% 30% 33% 29% 6% 69% 6% 10% 1836% 29% 29% 20% 44% 5% 70% 62% 115% 47% 19% 21% 18% 22% 12% 21%
Page 64 of 87
3.4 GT Bank: FY NGN19.89, BUY

Superior ROE deserves premium valuation Brief company profile: Guaranty Trust Bank was incorporated
and licensed as a commercial bank in 1990. It commenced operations in 1991 so it is one of the new generation banks. The bank listed on the NSE in 1996 and in 2007 it also listed its Global Depositary Receipts on the London Stock Exchange. As at 3Q10, Guaranty bank was #4 bank in Nigeria by assets (market share ~7.6%) and # 5 biggest bank by deposits (market share ~5.9%). The bank has 187 branches and operates in Gambia, Ghana, Liberia, Sierra Leone and United Kingdom in addition to Nigeria. CAMEL Analysis: The primary CAMEL ratios are indicated on Fig 65. We emphasize the following: Capital: The CAR as at FY10 was 20.8%. We believe this is a strong capital position being >5pp higher than risk capital of 15% and double the required CAR. Leverage ratio was also low at only 5.5X. We think solvency risks are remote. Asset quality: Asset quality deteriorated in CY09. GT Banks NPL ratio ascended to 12.3% from 1.7% in FY08 before a reduction to 6.8% in FY10. The coverage ratio worsened in CY09 due to the lower level of lost loans/NPL ratio. It has rebounded to >100% and management indicate that they will maintain higher coverage ratios. Having sold a small portion of its NPLs in CY10, we believe GT Bank has capacity to sell more and reduce its NPL ratio significantly. Our concern is, however, the less diversified loan book especially when compared to other Top 4 banks. The top 4 sectors comprise 68% of the banks loan book. The Oil and gas sector represent 28% of the loan book. However, the Oil and gas contribution to NPLs is only ~3% which indicates better risk management (given that most for most banks, the Oil and Gas sector NPL contribution is high) and/or ability of the bank to attract quality assets in the sector. Management: GT Bank is the most efficient bank in our universe. The cost/income ratio (our calculation) has been consistently below the system average of 60%. We expect it to improve from FY10s 52% to average 47% in our forecast period. Fee and commission income has higher contribution to the banks operating income when compared to the system, although in CY10 it degenerated to ~30%. We expect nonfunded income to pick pace as asset growth recover. Alongside Access bank, GT Bank is the only bank to have managed to grow operating income greater than operating expense between CY05 and CY10, thus supporting widening JAWS/benefiting from operating leverage. Earnings/profitability: The banks NIM is strong despite the strong exposure to the corporate sector on the asset side. For FY10, the NIM went up to 8.2% (vs. an average of 6.5%
Page 65 of 87
between FY05 and FY10). The banks technological platform has seen efficiency, and a best-in-class ROA, hence GT Bank is the only bank to create economic value between CY05 and CY10. The bank has a strong corporate franchise. Only 8% of its Profit before tax is from the public and retail segment; and 85% of its loan book loan book is exposure to institutional and commercial borrowers. However, retail deposits make up 37% of deposits (see Fig 68). The efficient use of deposits is indicated by the high profit/deposits ratio. According to management, penetration to retail segment is controlled and retail loans are to a large extent backed by salaries. The strategy to penetrate the retail segment is through ring-fencing the employees of the banks corporate clients. We except GT Bank to create economic value from this year onward. Liquidity: The banks liquidity ratio is high at 49%. With a LDR of 80%, GT Bank has significant opportunities for RWAs expansion. The deposits structure is also ideal.
Fig 65: CAMEL ratios - Efficiency reflected by low cost/income ratio
C:Leverage A:Provisions/Loans M:Cost/Income M:NII/Operatingincome E:NIM E:ROA E:Profit/Deposits E:ROE L:Loans/Deposits L:Liquidassets/Deposits
2005 5.4 0.6% 56.6% 48.0% 5.9% 2.9% 5.6% 16.0% 67.9% 98.6%
2006 8.4 0.6% 52.0% 53.0% 5.6% 2.8% 4.0% 23.5% 39.0% 88.5%
2007 9.7 0.2% 54.0% 52.4% 4.9% 2.7% 4.5% 26.4% 39.3% 98.4%
2008 4.5 0.5% 49.6% 56.1% 6.4% 2.9% 5.8% 13.0% 79.0% 82.0%
2009 7.0 3.5% 45.6% 65.7% 9.6% 2.2% 3.5% 15.5% 82.5% 43.6%
2010 5.5 0.7% 52.9% 68.1% 8.2% 3.3% 5.0% 18.2% 78.0% 57.3%
2011F 6.5 0.6% 46.6% 68.0% 8.4% 4.1% 6.0% 26.8% 80.0% 50.4%
2012F 2013F 7.0 7.4 0.6% 0.6% 47.0% 48.2% 68.2% 67.2% 8.4% 8.2% 4.1% 3.9% 6.0% 5.6% 28.6% 28.8% 80.0% 85.0% 51.3% 41.6%
Source: Company reports, Legae Securities Fig 66: Solvency - High CAR and liquidity ratios; High coverage ratios as well.
80% CAR 70% 70% 60% 52% 50% 44% 40% 30% 20% 10% 0% Feb07 Feb08 Dec08 Dec09 Dec10 17% 28% 22% 26% 21% 60% 40% 2% 20% 0% Feb07 Feb08 Dec08 Dec09 Dec10 0% 4% 54% 49% 120% 100% 80% 6% 8% 140% Liquidityratio 200% 180% 160% 10% Coverageratio NPLratio,RHS 12% 14%
Page 66 of 87
Fig 67: Credit risk - Poor loan book diversification by sector relative to other Top 4
exposure
2% 2% 3% 4% 4% 4% 6% 6% 19% 6% 10% 11% 23%
NPLdistribution
Oilandgas Manufacturing Generalcommerce ICT Realestate General Construction Transportation Capitalmarkets Education Governemnet Financeandinsureance Other 8% 12% 13% 8% 8% 3% 3% 5% 8% Construction Generalcommerce 32% General ICT FinanceandInsurance Capitalmarkets Realestate Agriculture&fishing Oilandgas Others
Fig 68: A premium corporate banker; deposits dominated by retail but they contribute only 1% of profit.
Instituional
Comercial
Retail
Publicsector
Deposits
32%
20%
37%
11%
Loans and advances
60%
25%
12%
3%
PBT
73%
19%
1% 7%
0%
20%
40%
60%
80%
100%
Page 67 of 87
Fig 69: ROE decomposition: We expect a rebound in ROE and economic profit this year
Interestreceived/InterestEarningAssets Assetyield:Interest/Totalassets Interestpaid/InterestBearingLiabilities Costofliabilities:Int.expense/Liabilities Netinterestspread NetInterestMargin VolumeofIBL:IBL/TA Liabilitycomposition:liabilities/TA Interestexpense:Interestexp./TA Assetrotation:Totalrevenue/TotalAssets Operatingexpenseratio:Op.expense/TA Loanlosscharge/Totalassets PreTaxROA less Tax/TotalAssets add/less Exceptionalitems/TotalAssets ROA Totalassets/Equity ROE less CoE Economicspread 2005 10.5% 8.4% 6.4% 4.4% 4.0% 5.9% 56.4% 81.7% 3.6% 9.9% 5.6% 0.6% 3.7% 1.0% 0.3% 2.9% 5.4 16.0% 18.6% 2.6% 2006 8.9% 7.0% 3.5% 3.0% 5.4% 5.6% 74.4% 88.1% 2.6% 8.3% 4.3% 0.6% 3.4% 0.7% 0.1% 2.8% 8.4 23.5% 18.6% 4.9% 2007 8.4% 6.6% 3.7% 3.0% 4.7% 4.9% 73.4% 89.7% 2.7% 7.4% 4.0% 0.2% 3.2% 0.5% 0.0% 2.7% 9.7 26.4% 18.6% 7.8% 2008 9.4% 7.0% 4.0% 2.9% 5.4% 6.4% 57.2% 77.8% 2.3% 8.4% 4.2% 0.5% 3.7% 0.8% 0.0% 2.9% 4.5 13.0% 18.6% 5.6% 2009 14.5% 11.2% 5.2% 4.6% 9.3% 9.6% 72.7% 82.0% 3.8% 11.3% 5.1% 3.5% 2.6% 0.4% 0.0% 2.2% 7.0 15.5% 18.6% 3.1% 2010 11.2% 9.7% 3.5% 3.2% 7.7% 8.2% 75.3% 81.7% 2.6% 10.5% 5.5% 0.7% 4.2% 0.9% 0.0% 3.3% 5.5 18.2% 18.6% 0.4% 2011F 11.5% 10.0% 3.5% 3.2% 8.0% 8.4% 77.5% 85.4% 2.7% 10.7% 5.0% 0.6% 5.1% 1.0% 0.0% 4.1% 6.5 26.8% 18.6% 8.2% 2012F 11.5% 10.0% 3.5% 3.1% 8.0% 8.4% 77.2% 86.4% 2.7% 10.6% 5.0% 0.6% 5.0% 1.0% 0.0% 4.1% 7.0 28.6% 18.6% 10.0% 2013F 11.5% 9.7% 3.5% 3.2% 8.0% 8.2% 78.6% 87.0% 2.7% 10.4% 5.0% 0.6% 4.8% 0.9% 0.0% 3.9% 7.4 28.8% 18.6% 10.3%
Page 68 of 87

Balance sheet: For our balance sheet, the key assumptions are 1) deposit growth of 25% for FY11, 20% for FY12 and 15% for FY13; and 2) A LDR of 80% for FY11 and FY12 and 85% for FY13; Income statement: We have increased the interest income/Interest earning assets to 11.5% (vs. 11.2% for FY10) and maintain it at that level for our forecast period. We also sustain the interest expense/interest bearing liabilities at 3.5% and the fee commission/total assets ratio at 3%. We cut the loan losses/loans ratio to 1.1% for FY11 and FY12 before reducing it further to 1% on our expectations of credit risks improvements in the system.
Fig 70: Salient assumptions - Deposit growth is lower to history; Cap LDR at 85%
Interestincome/IEA Interestexpense/IBL Feeandcommissionincome/TA Feeandcommissionexpense/TA Netforeignexchangeincome/TA Underwritingprofit/TA Incomefrominvestments/TA Otherincome/TA Operatingexpense/TA Loanlossexpenses/Loans Diminutioninotherassets/Loans Exceptionalitems/TA Depositgrowth LDR 2005 10.5% 6.4% 4.1% 0.0% 0.4% 0.0% 0.1% 0.6% 5.6% 1.8% 0.0% 0.3% 0.0% 68% 2006 8.9% 3.5% 3.4% 0.0% 0.3% 0.0% 0.0% 0.1% 4.3% 2.1% 0.0% 0.1% 123.6% 39% 2007 8.4% 3.7% 2.8% 0.0% 0.2% 0.0% 0.1% 0.5% 4.0% 0.6% 0.0% 0.0% 36.5% 39% 2008 9.4% 4.0% 3.2% 0.0% 0.0% 0.0% 0.2% 0.3% 4.2% 1.4% 0.0% 0.0% 23.8% 79% 2009 14.5% 5.2% 2.9% 0.2% 0.6% 0.1% 0.4% 0.0% 5.1% 6.4% 0.3% 0.0% 87.3% 82% 2010 11.2% 3.5% 3.0% 0.3% 0.4% 0.1% 0.1% 0.0% 5.5% 1.4% 0.0% 0.0% 11.4% 78% 2011F 11.5% 3.5% 3.0% 0.3% 0.5% 0.0% 0.0% 0.2% 5.0% 1.1% 0.0% 0.0% 25.0% 80% 2012F 11.5% 3.5% 3.0% 0.3% 0.5% 0.0% 0.0% 0.2% 5.0% 1.1% 0.0% 0.0% 20.0% 80% 2013F 11.5% 3.5% 3.0% 0.3% 0.5% 0.0% 0.0% 0.2% 5.0% 1.0% 0.0% 0.0% 15.0% 85%
Primary valuation and CoE: GT Banks Excess Equity Adjusted PBVR is 3.77 after we apply a CoE of 18.55% and the ROE adjusted for excess equity. (39.7% vs. CoE of 18.55%). We apply this ratio to our FY11 Book value estimate to establish a FY11 NGN20.84 i.e. 28.7% above the current price. FY11 TP is NGN19.89, upside potential 22.9%, BUY: Using the same weights of 60:40 to the PBVR and the DFE values we obtain a TP of NGN19.89 which provides sufficient upside potential for our BUY. We have applied a 2X multiple to the FY13 book value for our TV calculation. Our FY11 TP shows an implied PER of 12.3X which we believe is not excessive. In our view, the high PBVR is only indicative of the high ROE.
Page 69 of 87
GTBank 56,677.74 211,873.44 951,740.94 15.0% 22.3% 142,761.14 69,112.30 26.8% 39.7% 11% 18.55% 3.77 3.77 538,394.89 538,394.89 69,112.30 607,507.19 29,146 20.84 16.19 28.7%
Page 70 of 87

Interestincome Interestexpense Netinterestincome Feeandcommissionincome Feeandcommissionexpense Netfeeandcommission Netforeignexchangeincome Otherincome Totalnoninterestincome Operatingincome Operatingexpense Profitbeforecreditcosts Loanlossexpenses Diminutioninotherassets Profitbeforeexceptionalitems Exceptionalitems Profitbeforetax Taxation Profitaftertax Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities TotalEquity RWAestimate Growthrates Interestincome Interestexpense Netinterestincome Netfeeandcommission Netforeignexchangeincome Otherincome Totalnoninterestincome Operatingincome Operatingexpense Profitbeforecreditcosts Loanlossexpenses Profitbeforeexceptionalitems Exceptionalitems Profitbeforetax Taxation Profitaftertax Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities TotalEquity RWAestimate 2005 15,489 6,713 8,776 7,645 0 7,645 687 1,035 9,493 18,269 10,340 7,930 1,149 0 6,781 477 7,258 1,824 5,434 65,515 185,151 96,515 151,178 33,973 96,886 2006 21,600 8,043 13,557 10,584 0 10,584 981 310 12,015 25,572 13,300 12,272 1,784 0 10,489 283 10,772 2,182 8,590 84,201 308,411 215,774 271,852 36,558 125,972 39% 20% 54% 38% 43% 70% 27% 40% 29% 55% 55% 55% 41% 48% 20% 58% 29% 67% 124% 80% 8% 30% 2007 32,016 13,272 18,744 13,475 0 13,475 812 2,292 17,035 35,779 19,325 16,454 737 0 15,716 0 15,716 2,523 13,194 115,746 486,491 294,546 436,505 49,986 217,067 48% 65% 38% 27% 17% 639% 42% 40% 45% 34% 59% 50% NM 46% 16% 54% 37% 58% 37% 61% 37% 72% 2008 51,589 16,746 34,842 23,211 0 23,211 252 2,122 27,237 62,080 30,777 31,302 3,934 0 27,368 0 27,368 6,199 21,169 2009 119,589 40,540 79,049 30,883 1,617 29,267 6,036 0 41,345 120,393 54,903 65,490 35,954 1,573 27,963 0 27,963 4,276 23,687 2010 112,261 30,152 82,109 34,913 3,212 31,700 4,578 0 38,435 120,544 63,770 56,773 8,089 229 48,456 0 48,456 10,109 38,347 2011F 138,290 37,444 100,845 41,427 4,143 37,285 6,905 3,267 47,456 148,301 69,045 79,256 8,373 0 70,883 0 70,883 14,205 56,678 761,195 1,380,909 951,493 1,179,037 211,873 951,741 23% 24% 23% 18% 51% NM 23% 23% 8% 40% 4% 46% NM 46% 41% 48% 28% 20% 25% 25% 0% 24% 2012F 167,098 45,389 121,710 50,375 5,038 45,338 8,396 3,070 56,803 178,513 83,959 94,554 10,048 0 84,506 0 84,506 16,218 68,288 913,434 1,679,178 1,141,792 1,451,423 239,095 1,165,306 21% 21% 21% 22% 22% 6% 20% 20% 22% 19% 20% 19% NM 19% 14% 20% 20% 22% 20% 23% 13% 22% 2013F 184,690 52,237 132,453 56,986 5,699 51,288 9,498 3,733 64,518 196,972 94,977 101,994 11,161 0 90,833 0 90,833 17,271 73,562 1,116,102 1,899,547 1,313,061 1,651,894 255,185 1,418,360 11% 15% 9% 13% 13% 22% 14% 10% 13% 8% 11% 7% NM 7% 6% 8% 22% 13% 15% 14% 7% 22%
288,152 563,488 593,563 735,693 1,066,504 1,152,002 364,641 683,081 761,195 572,349 874,259 941,176 163,344 153,308 210,826 452,808 813,414 765,710 61% 26% 86% 72% 69% 7% 60% 74% 59% 90% 434% 74% NM 74% 146% 60% 149% 51% 24% 31% 227% 109% 132% 142% 127% 26% 2292% NM 52% 94% 78% 109% 814% 2% NM 2% 31% 12% 96% 45% 87% 53% 6% 80% 6% 26% 4% 8% 24% NM 7% 0% 16% 13% 78% 73% NM 73% 136% 62% 5% 8% 11% 8% 38% 6%
Page 71 of 87
3.5 UBA: FY11 PT NGN6.87, HOLD

If elephants could fly... Brief company profile: UBAs history dates back to 1948 when
the British and French Bank (BFB) commenced business in Nigeria. Upon independence BFB was taken over and UBA was formed. UBA later merged with Standard Trust Bank and Continental Trust bank to create UBA plc. In 2007, UBA acquired 7 smaller banks as part of the system consolidation that was initiated by the CBN. As at 3Q10, UBA was #3 bank in Nigeria, with a market share of ~11.2% of the system assets. By deposits, the bank was #2 with a market share of ~12.3%. The bank has 726 branches across Nigeria. UBA operates in 18 African countries. CAMEL analysis: Fig 73 below indicates the primary CAMEL ratio. We underscore the following: Capital: UBAs CAR ratio is strong at 17% (FY10 = 18%), providing a 3pps buffer to the risk capital of 15% (as per management discussion). Capital is predominantly Tier 1 and management indicate that they will widen the buffer by raising Tier 2 capital. With a leverage ratio on the higher end vs. the system average, we believe raising non-dilutive Tier 2 is good for ordinary shareholders. FY10 leverage ratio is 9X. Asset quality: UBAs NPL ratio deteriorated in FY10 from 7.9% in FY09 to 8.8% (vs. target NPL ratio is 5%). The coverage ratio increased to 81% from 69%, but mainly due to an increase in lost loans (from NGN29.4bn to NGN33.9bn) which requires full provision. We think management are committed to sound risk management and the selling of NPLs to AMCON (sold NGN24bn already) should also be positive to the banks credit profile. We also note that the banks loan book is fairly diversified across different sectors. The top 4 sectors make up 50% of the loan book, with the Oil and Gas industries taking up 16%. Management/Efficiency: The banks cost/income ratio went up by ~5pps to 75.2% from 69.5% (our calculation). Management target cost/income ratio is 65%, which in our view is still high. For FY10, the loans and advances shrunk from NGN643bn in FY09 to NGN629bn, leading to pressure on revenue, particularly interest income as interest rates in the interbank market collapsed. Fee and commission income contribution increased to 51% as it increased from NGN11.2bn to NGN13.7bn. We are concerned by the high cost/income ratio, but we believe the fee and commission income will continue to gain momentum as more transactional products (e-banking, mbanking products etc) are rolled out. We also believe the bank is well placed to create some risk assets this year. Earnings/profitability: We estimate the NIM at 6.7% (vs. management target of 8%). Historical NIM has been fairly muted when compared to the industry (except for FY09). Lack of clarity related to ex-Nigeria operations, whose contribution
Page 72 of 87
has started to look meaningful (13% in FY10) creates some earnings risks to our model. Nonetheless, we expect the ROA to recover to an average of 1.3% and average ROE of 14.2% in our forecast period. We do not expect economic spread to turn positive despite improvements. (ROE decomposition, Fig 77) Liquidity: The banks liquidity profile is ideal for strong risk assets growth. The LDR is the lowest in our coverage universe at 48% for 1Q10 (FY10 =50%) and a liquidity ratio of 43% (FY10 = 39%). The deposits structure is also attractive retail deposits making up 32% of total deposits. Inert deposits (i.e. savings and demand deposits) contribute 70% of the deposits in FY10 (see Fig 76). UBA carries excessive liquidity, in our view.
Fig 73: CAMEL ratios - Higher leverage ratio yet too much liquidity
C:Leverage A:Provisions/Loans M:Cost/Income M:NII/Operatingincome E:NIM E:ROA E:Profit/Deposits E:ROE L:Loans/Deposits L:Liquidassets/Loans
2005 12.9 0.0% 72.6% 48.5% 4.8% 1.8% 2.2% 23.4% 33.0% 83.1%
2006 18.1 0.6% 71.0% 48.4% 4.3% 1.3% 1.5% 23.7% 14.4% 89.0%
2007 7.1 0.3% 58.9% 55.8% 4.9% 1.8% 2.4% 12.8% 35.4% 80.4%
2008 8.6 0.2% 53.4% 58.6% 6.0% 2.5% 3.1% 21.0% 32.4% 71.2%
2009 8.3 2.5% 69.5% 63.2% 10.6% 0.5% 0.2% 4.0% 48.7% 46.6%
2010 9.0 1.1% 75.2% 51.2% 6.7% 0.0% 0.0% 0.4% 49.6% 39.0%
2011F 2012F 9.7 11.3 1.0% 1.0% 72.3% 70.5% 65.5% 65.0% 7.8% 7.9% 1.2% 1.2% 1.4% 1.4% 11.7% 14.0% 50.0% 55.0% 56.6% 47.0%
2013F 12.4 1.0% 68.4% 62.8% 7.7% 1.3% 1.5% 16.1% 60.0% 35.6%
Source: Company reports, Legae Securities Fig 74: Credit risks - Loan portfolio fairly diversified by sector
Industryexpsoure
4% 16% Oil&gas Consumer Governement Banking Manufacturing 7% 14% Telecoms Realestate 7% 10% 8% 9% 10% Generalcommunication Agriculture Transport Mortgage Other
4% 6% 6%
Page 73 of 87
Fig 75: International operations - Ex-Nigeria contribution is increasing

Revenuebygeography
100% 10% 90% 80% 70% 60% 50% 90% 40% 30% 20% 10% 0% 2009 2010 1Q11 75% 2009 2010 1Q11 80% 87% 82% 85% 90% 13% 18% 95% Nigeria exNigeria 100%
Depositsbygeography
Nigeria
exNigeria
Fig 76: Deposit structure - Strong retail franchise with high demand/savings deposits
Depositstructure
11%
contribution
14% 29% 20% 16% 17% 23% Time Demand Savings Other 40%
2%
Corporate 32% 55% Retail Commercial Publicsector
41%
Page 74 of 87
Fig 77: ROE decomposition - We expect a recovery in ROE, but economic profit should remain negative
Interestreceived/InterestEarningAssets Assetyield:Interest/Totalliabilities Interestpaid/InterestBearingLiabilities Costofliabilities:Int.expense/TLiabilities Netinterestspread NetInterestMargin VolumeofIBL:IBL/TA Liabilitycomposition:liabilities/TA Interestexpense:Interestexp./TA Assetrotation:Totalrevenue/TotalAssets Operatingexpenseratio:Op.expense/TA Diminutionofassets/Totalassets PreTaxROA less Tax/TotalAssets less Excpetionalitems/TotalAssets ROA Totalassets/Equity ROE less CoE Economicspread 2005 6.3% 5.8% 1.7% 1.5% 3.1% 4.8% 82.5% 92.2% 1.4% 9.0% 6.5% 0.0% 2.5% 0.6% 0.0% 1.8% 12.9 23.4% 18.6% 4.9% 2006 8.1% 6.5% 3.5% 3.2% 1.4% 4.3% 87.9% 94.5% 3.0% 7.2% 5.1% 0.6% 1.4% 0.1% 0.0% 1.3% 18.1 23.7% 18.6% 5.1% 2007 8.0% 6.2% 2.9% 2.8% 2.3% 4.9% 81.7% 85.9% 2.4% 6.8% 4.0% 0.3% 2.5% 0.3% 0.3% 1.8% 7.1 12.8% 18.6% 5.8% 2008 9.2% 7.0% 3.0% 2.8% 3.4% 6.0% 81.6% 88.3% 2.5% 7.7% 4.1% 0.2% 3.4% 0.4% 0.5% 2.5% 8.6 21.0% 18.6% 2.5% 2009 15.9% 11.5% 4.7% 4.4% 6.8% 10.6% 82.4% 87.9% 3.9% 12.1% 8.4% 2.5% 1.2% 0.3% 0.5% 0.5% 8.3 4.0% 18.6% 14.5% 2010 11.2% 7.3% 3.5% 3.3% 4.4% 6.7% 83.9% 88.9% 2.9% 8.5% 6.4% 1.1% 1.0% 0.2% 0.8% 0.0% 9.0 0.4% 18.6% 18.1% 2011F 11.5% 9.3% 3.5% 3.3% 4.7% 7.8% 84.4% 89.3% 3.0% 9.7% 7.0% 1.0% 1.7% 0.5% 0.0% 1.2% 9.7 11.7% 18.6% 6.9% 2012F 11.5% 8.7% 3.3% 3.0% 5.2% 7.9% 84.6% 90.2% 2.7% 9.2% 6.5% 1.0% 1.7% 0.5% 0.0% 1.2% 11.3 14.0% 18.6% 4.6% 2013F 11.5% 8.3% 3.3% 3.0% 5.2% 7.7% 84.4% 90.9% 2.7% 8.8% 6.0% 1.0% 1.8% 0.5% 0.0% 1.3% 12.4 16.1% 18.6% 2.5%
Page 75 of 87

Balance sheet: We model deposit growth rates of 15% for FY11, 20% for FY12 and 15% for FY13. We increased the LDR to 55% for FY12 and to 60% for FY13. Income statement: We increase our interest income/interest earning assets slightly to 11.5% (net lender in the inter-bank market) for FY11 before cutting it to 11% for the remaining period. We expect some growth in loans and advances this year. We normalise our fee income/total assets at 2.5% for FY12 and FY13. We also reduce our operating expense/total assets ratio and the loss/loans ratio as we expect employee productivity to pick up and the asset quality to recover on improvement in the system and economy improves.
Fig 78: Salient assumption - We normalise asset yields at 11.5%; LDR capped at 60%
Interestandsimilarincome/IEA interestandsimilarexpense/IBL Feeandcommissionincome/TA Foreignexchangeincome/TA Trusteeshipincome/TA Incomefrominvestments/TA Otherincome/TA Operatingexpense/TA Diminutioninassetvalues/Loans Lossontradingsecurities/TA Shareofprofit/lossinassociate/TA Shareofprofit/lossinJV/TA Exceptionalitems/TA Depositgrowth LDR 2005 6.3% 1.7% 3.4% 0.2% 0.0% 0.0% 1.1% 6.5% 0.1% 0.0% 0.0% 0.0% 0.0% n/m 33.0% 2006 8.1% 3.5% 2.9% 0.2% 0.0% 0.0% 0.7% 5.1% 5.1% 0.0% 0.0% 0.0% 0.0% 271.8% 14.4% 2007 8.0% 2.9% 2.4% 0.3% 0.0% 0.0% 0.3% 4.0% 1.2% 0.0% 0.0% 0.0% 0.3% 18.8% 35.4% 2008 9.2% 3.0% 2.5% 0.2% 0.0% 0.1% 0.3% 4.1% 0.6% 0.0% 0.0% 0.0% 0.5% 47.2% 32.4% 2009 15.9% 4.7% 3.2% 0.7% 0.0% 0.2% 0.3% 8.4% 6.3% 0.2% 0.0% 0.0% 0.5% 6.6% 48.7% 2010 11.2% 3.5% 3.1% 0.6% 0.0% 0.4% 0.1% 6.4% 2.9% 0.0% 0.0% 0.0% 0.8% 1.7% 49.6% 2011F 11.5% 3.5% 2.5% 0.5% 0.0% 0.0% 0.3% 7.0% 2.5% 0.1% 0.0% 0.0% 0.0% 15.0% 50.0% 2012F 11.5% 3.3% 2.5% 0.5% 0.0% 0.0% 0.3% 6.5% 2.3% 0.1% 0.0% 0.0% 0.0% 20.0% 55.0% 2013F 11.5% 3.3% 2.5% 0.5% 0.0% 0.0% 0.3% 6.0% 2.0% 0.1% 0.0% 0.0% 0.0% 15.0% 60.0%
Primary valuation and CoE: Our PBVR adjusted for excess equity is 0.7X; hence we apply our arbitrary 1.2X to FY11 book value. Our CoE is 18.55% and the excess equity adjusted ROE is 12.2%. This valuation shows upside risk of 9.3% at a FY11 TP of NGN6.85. FY11 TP NGN6.88, constrained upside risk, HOLD: Our FY11 TP of NGN6.87 shows limited potential gain of 9.6% hence our HOLD recommendation. Our FY TP provides an implied PER of 266X, but our forward PER (on the current price) is ~6X. If the earnings fail to recover, and with the noise around the African operations, the share price momentum will be greatly limited. We apply a 1X ratio to the FY13 book value for our TV estimation and our DFE value is NGN6.90.
Page 76 of 87
UBA 20,622.54 187,771.53 1,126,421.47 15.0% 16.7% 168,963.22 18,808.31 11.0% 12.2% 6% 18.55% 0.66 1.20 111,172.70 202,755.87 18,808.31 221,564.18 32,335 6.85 6.27 9.3%
Page 77 of 87

2005 14,456 3,490 10,966 8,413 11,633 22,599 16,403 6,196 40 6,156 0 6,156 1,599 4,557 2006 57,693 26,954 30,739 25,367 32,754 63,493 45,111 18,382 5,571 12,811 0 12,811 1,261 11,550 2007 73,724 28,649 45,075 29,047 35,733 80,808 47,581 33,227 3,702 29,525 4,161 25,364 3,923 21,441 2008 116,448 41,355 75,093 42,422 53,058 128,151 68,475 59,676 2,616 56,815 8,786 48,029 7,204 40,825 2009 177,848 59,659 118,189 50,075 68,877 187,066 130,067 56,999 38,176 13,662 7,025 6,637 4,262 2,375 2010 2011F 117,745 170,231 46,969 54,295 70,776 115,936 50,852 45,744 67,441 61,127 138,217 177,063 103,981 128,082 34,236 48,981 18,213 18,216 15,885 29,461 12,666 0 3,219 29,461 2,621 8,838 598 20,623 2012F 2013F 191,852 207,158 60,360 68,867 131,492 138,291 54,891 62,735 70,941 81,929 202,434 220,221 142,717 150,563 59,716 69,658 21,640 24,132 36,198 42,949 0 0 36,198 42,949 10,859 12,885 25,338 30,064 961,783 2,195,651 1,748,696 1,979,502 194,484 1,486,186 13% 11% 13% 20% 16% 14% 11% 22% 19% 23% NM 23% 23% 23% 32% 20% 20% 21% 4% 1,206,600 2,509,382 2,011,000 2,281,549 203,064 1,883,945 8% 14% 5% 14% 15% 9% 5% 17% 12% 19% NM 19% 19% 19% 25% 14% 15% 15% 4%
Interestandsimilarincome interestandsimilarexpense Netinterestincome Feeandcommissionincome Noninterestincome Operatingincome Operatingexpense Incomebeforeprovisions Diminutioninassetvalues Profitbeforetaxandexceptionalitem Exceptionalitems Profitbeforetax Taxation Profitaftertax
Balancesheet LoansandAdvancestocustomers 67,610 Totalassets 250,783 Customerdeposits 205,110 Totalliabilities 231,340 TotalEquity 19,443 RWAestimates 100,661 Growthrates Interestandsimilarincome interestandsimilarexpense Netinterestincome Feeandcommissionincome Noninterestincome Operatingincome Operatingexpense Incomebeforeprovisions Diminutioninassetvalues Profitbeforetaxandexceptionalitems Exceptionalitems Profitbeforetax Taxation Profitaftertax Balancesheet LoansandAdvancestocustomers Totalassets Customerdeposits Totalliabilities TotalEquity
109,896 320,406 431,410 606,616 628,811 728,623 884,137 1,191,042 1,673,333 1,548,281 1,617,696 1,829,749 762,574 905,806 1,333,289 1,245,650 1,267,171 1,457,247 835,302 1,022,964 1,478,052 1,361,452 1,438,270 1,633,603 48,835 168,078 195,281 186,829 179,426 187,772 283,636 551,292 855,345 1,061,865 1,184,367 1,126,421 299% 672% 180% 202% 182% 181% 175% 197% 13828% 108% NM 108% 21% 153% 63% 253% 272% 261% 151% 28% 6% 47% 15% 9% 27% 5% 81% 34% 130% NM 98% 211% 86% 192% 35% 19% 22% 244% 58% 44% 67% 46% 48% 59% 44% 80% 29% 92% 111% 89% 84% 90% 35% 40% 47% 44% 16% 53% 44% 57% 18% 30% 46% 90% 4% 1359% 76% 20% 86% 41% 94% 41% 7% 7% 8% 4% 34% 21% 40% 2% 2% 26% 20% 40% 52% 16% 80% 51% 39% 75% 4% 4% 2% 6% 4% 45% 16% 64% 10% 9% 28% 23% 43% 0% 85% NM 815% 237% 3349% 16% 13% 15% 14% 5%
Page 78 of 87
Zenith Bank: FY11 TPNGN21.76, BUY

Our core holding from the Tier 1 banks Brief company profile: The bank was incorporated and
licensed to carry out banking business in 1990 as Zenith International Bank. In 2004, the name changed to Zenith Bank plc, and it listed on the NSE through an IPO in the same year. Zenith bank is #2 by asset and #2 by deposits with market shares of ~11.9% and ~11.7% respectively (3Q10). The bank has 315 branches in Nigeria and has operations in Ghana, Sierra Leone, Gambia and the UK. CAMEL analysis: We believe Zeniths superior franchise is indicated by its strong CAMEL ratios (see Fig 81) We draw attention to the following: Capital: The bank has a strong capital position, the highest in our coverage with a CAR ratio of 36% (1Q11; FY10, 33%; 29% for the bank). Leverage is low at only 5X yet capital is mainly Tier 1. (99.7% of capital is Tier 1). In our view, Zenith is carrying excessive capital and is well placed to create risk assets within our forecasting period. (see Fig 82). Asset quality: This is another 1st position for Zenith. The NPL ratio of 5.4% (1Q11; 5.9% FY10) is the best in our coverage universe, and possibly in the system. (see Fig 83). The loan portfolio is the most diversified with no single sector making up >10%. The Top 4 sectors in FY10 represented 39% of the loan book. At variance to system, the banks loan book is principally made up of term loans (61% for FY10 from 46% in FY09). We believe that in a system dominated by over-draft type of products, Zenith is exploiting its higher liquidity and most probably gaining a pricing advantage in the term loans market. (see Fig 83). Management/Efficiency: The banks cost/income ratios 5year average is 64% (Legae calculation). However, we have seen a vast improvement in the ratio in 1Q11 at 56.5% and management indicated that there are cost cutting measures ongoing that are likely to drive the ratio further down. Noninterest income is ~40% of the banks operating income which is more in line with the system. Foreign exchange trading income has receded massively due to a more stable NGN, but we expect investment in ICT platform to drive efficiency in service delivery and spur fee and commission income growth. We believe the bank has a strong management team. Earnings/Profitability: The banks NIM and ROA are strong with an average of 6.5% for the former and 2% for the latter between FY05 and FY10. These strong profitability indicators were achieved in a period the bank maintained strong capital and liquidity levels. The efficiency in deposit use reflected by the high profit/deposit at an average of 3%. We expect operating income to grow by a CAGR of 25% vs. a 21% growth
Page 79 of 87
in operating costs, and thus open up JAWS. In the short-term, the higher percentage of term loans could adversely affect profitability, especially if the loans are longer-dated as there are no opportunities to re-price them with rising rates. However, we expect economic spread to narrow to a minute -1% by FY13 as ROE continue to improve (see ROE decomposition on Fig 86). Liquidity: With a LDR of 56% for 1Q11 (54% for FY10) and a liquidity ratio of 63% (56% for the bank), Zenith bank carry excessive liquidity. We note that managements risk management is centred on credit and liquidity risks, hence the aversion to run down the buffers, but we also notice that management has flexibility to grow its risk assets. The deposit structure is also supreme, with demand and savings deposits making up 63% of total deposits. In our view, the high liquidity levels combined with the high capital levels provide management with abundant room create risk assets and support the NIM and ROA.
Fig 81: CAMEL ratios - Strong CAMEL indicators with headroom for growth
C:Leverage A:Provisions/Loans A:Coverageratio M:Cost/Income M:NII/Operatingincome E:NIM E:ROA E:Profit/Deposits E:ROE L:Loans/Deposits L:Liquidassets/Deposits
2005 8.7 1.7% 62.0% 58.9% 6.6% 2.2% 3.1% 18.9% 52.5% 77.3%
2006 6.5 1.2% 105.1% 65.5% 56.2% 5.6% 1.9% 2.9% 12.2% 50.8% 91.7%
2007 8.4 1.4% 99.7% 63.7% 58.8% 5.9% 1.9% 3.0% 16.1% 45.4% 90.6%
2008 5.2 2.1% 105.0% 56.8% 55.4% 6.1% 2.9% 4.4% 15.0% 38.3% 99.1%
2009 4.9 6.9% 96.7% 60.2% 58.2% 8.6% 1.2% 1.8% 6.1% 59.5% 59.9%
2010 5.2 2.7% 90.0% 64.3% 60.2% 6.3% 2.0% 2.8% 10.3% 54.1% 63.7%
2011F 6.1 2.8% 80.0% 57.7% 62.6% 7.4% 2.3% 3.3% 14.2% 60.0% 62.5%
2012F 7.2 3.2% 80.0% 59.4% 60.9% 7.0% 2.1% 3.3% 15.2% 65.0% 66.7%
2013F 8.1 3.5% 80.0% 59.1% 59.4% 7.0% 2.1% 3.5% 17.3% 70.0% 67.5%
Source: Company reports, Legae Securities Fig 82: Solvency - High CAR, capital dominated by Tier 1
37%
CAR(bank)
100.0% 0.2%
Tier1
Tier2
35% 99.5% 33% 99.0% 98.5% 99.9% 98.0% 29% 97.5% 27% 98.0% 97.0% 96.5% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2006 2007 2008 98.2% 2.0% 1.8%
0.5%
0.3%
31%
99.5%
99.7%
25%
2009
2010
Page 80 of 87
Fig 83: Credit risk - NPL ratio is the best-in-class...

7%
NPLratio
6%
6.5% 5.9% 5.40%
NPLsectordistribution,FY10
2% 2% 7% 18% 3% 4%
Generalcommerce Oil&gas Transportation Capitalmarket Manufacturing
5% 4% 6% 3% 2.0% 2% 1.4% 1.1% 1% 12%
16%
Financeandinsurance Realestateanconstruction Communication Consumercredit Agriculture
0% 2006 2007 2008 2009 2010 1Q11
14%
16%
Other
Fig 84: ...and the loan book is well diversified

Loanbookstructure09vs.10(CY10broken) Sectoralexposure
0% 3% 10% 5% 36% 46% 49% 61% Otherloans Overdrafts Termloans 9% 8% 8% 7% 7% 10% 4% 5% 5% 10% 0% 1% 1% 1% 3% 3% 4% 4%
Education Otherpublicutilities Consumercredit Capitalmarkets Finance Othermanufacturing Agriculture Other Foodandagroprocessing FlourMills Power Cementmanufacturing Transportation Downstreamoilandgas Government Realestateandconstruction Upstreamoilandgas Otherloans Beveragesandtobacco Generalcommerce
Page 81 of 87
Fig 85: Deposit structure - The bank has strong deposit franchise
2009depositstructure
Savings Other Term Demand
2010depositstructure
8%
Savings
Other
Term
Demand
6% 11% 12%
18% 57% 63% 25%
Fig 86: ROE decomposition - Economic spread to close out by FY13
Interestreceived/InterestEarningAssets Assetyield:Interest/Totalassets Interestpaid/InterestBearingLiabilities Costofliabilities:Int.expense/T.Liabilities Netinterestspread NetInterestMargin VolumeofIBL:IBL/TA Liabilitycomposition:liabilities/TA Interestexpense:Interestexp./TA Assetrotation:Totalrevenue/TotalAssets Operatingexpenseratio:Op.expense/TA Badanddoubtfuldebtexpenseratio PreTaxROA less Tax/TotalAssets ROA Totalassets/Equity ROE less CoE Economicspread
2006 7.8% 6.1% 2.6% 2.0% 5.2% 5.6% 66.7% 84.6% 1.7% 7.8% 5.1% 0.2% 2.5% 0.6% 1.9% 6.5 12.2% 18.3% 6.1%
2007 8.4% 6.5% 2.9% 2.2% 5.5% 5.9% 68.0% 88.0% 2.0% 7.8% 5.0% 0.2% 2.6% 0.7% 1.9% 8.4 16.1% 18.3% 2.2%
2008 9.9% 7.8% 4.3% 3.7% 5.6% 6.1% 68.8% 80.6% 3.0% 8.6% 4.9% 0.6% 3.1% 0.2% 2.9% 5.2 15.0% 18.3% 3.3%
2009 15.1% 11.7% 6.9% 6.4% 8.2% 8.6% 72.9% 79.6% 5.1% 11.3% 6.8% 2.4% 2.1% 0.9% 1.2% 4.9 6.1% 18.3% 12.2%
2010 8.8% 6.7% 2.7% 2.3% 6.1% 6.3% 71.0% 80.8% 1.9% 8.0% 5.2% 0.2% 2.6% 0.7% 2.0% 5.2 10.3% 18.3% 8.0%
2011F 10.0% 7.3% 2.5% 2.3% 7.5% 7.4% 75.5% 83.8% 1.9% 8.7% 5.0% 0.3% 3.3% 1.0% 2.3% 6.1 14.2% 18.3% 4.1%
2012F 10.0% 7.3% 2.8% 2.5% 7.3% 7.0% 78.3% 86.3% 2.2% 8.4% 5.0% 0.4% 3.0% 0.9% 2.1% 7.2 15.2% 18.3% 3.1%
2013F 10.0% 7.2% 2.8% 2.5% 7.3% 7.0% 80.1% 88.1% 2.2% 8.5% 5.0% 0.4% 3.0% 0.9% 2.1% 8.1 17.3% 18.3% 1.0%
Page 82 of 87
Salient assumptions and Valuation

Balance sheet: We have grown deposits by 20% for FY11, 17% for FY12 and 15% for FY13. We then apply a LDR of 60%, 65% and 70% for FY11, FY12 and FY13 correspondingly. Income statement: We increased our interest income/interest earning assets slightly to 10% (positive endowment benefit given the high CAR and liquidity, inter-bank lending rate to improve). We reduced the interest expense/interest paying liabilities to 2.5% for FY11 as we do not expect the bank to be aggressive in deposit mobilisation given the high liquidity levels. However, we increased it to 2.8% for FY12 and FY13.
Fig 87: Salient features: We increased the asset yield slightly; capped LDR at 70%
Interestincome/IEA Interestexpense/IBL Feeandcommissionincome/TA Foreignexchangeincome/TA Underwritingprofit/TA Trusteeshipincome/TA Investmentincome/TA Otherincome/TA Operatingexpenses/TA Badanddoubtfulexpense/Loans Extraordinaryitems/TA Depositgrowth LDR 2006 7.8% 2.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.1% 0.7% 0.0% 68.3% 50.8% 2007 8.4% 2.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.0% 0.6% 0.0% 61.5% 45.4% 2008 9.9% 4.3% 2.8% 0.3% 0.1% 0.0% 0.2% 0.4% 4.9% 2.3% 0.0% 87.4% 38.3% 2009 15.1% 6.9% 3.0% 1.2% 0.1% 0.0% 0.1% 0.3% 6.8% 5.7% 0.0% 1.3% 59.5% 2010 8.8% 2.7% 2.4% 0.6% 0.1% 0.0% 0.0% 0.0% 5.2% 0.6% 0.0% 12.3% 54.1% 2011F 10.0% 2.5% 2.5% 0.5% 0.1% 0.0% 0.1% 0.1% 5.0% 0.8% 0.0% 20.0% 60.0% 2012F 10.0% 2.8% 2.5% 0.5% 0.1% 0.0% 0.1% 0.1% 5.0% 1.0% 0.0% 17.0% 65.0% 2013F 10.0% 2.8% 2.5% 0.6% 0.1% 0.0% 0.1% 0.1% 5.0% 1.0% 0.0% 15.0% 70.0%
Justified valuation and CoE: Our Justified PBVR (adjusted for excess equity) is 2.6X. Our FY11 ROE adjusted for excess equity is a colossal 26% (vs. 14% unadjusted for excess equity) which is a appealing particularly considering that management should sweat more assets this year. The value using this method is NGN21.76 which shows potential capital gain in excess of 40%. Our CoE is 18.30%. FY11 TP NGN21.76, enough potential gain to BUY: Our FY11 TP is 21.76. We apply an exit PBVR of 2X to our FY13 book value for our TV estimation. The implied PER of our TP11 is 18X. Our forward PER and PBVR are 9.1X and 1.3X respectively. Both do not look excessive to us given the clarity of earnings outlook. We think Zenith bank should be the core holding from the Tier 1 banks in investors portfolios.
Page 83 of 87
Zenithbank 52,524.76 370,220.33 1,328,918.98 15.0% 27.9% 199,337.85 170,882.49 14.2% 26.3% 13% 18.30% 2.57 2.57 512,417.58 512,417.58 170,882.49 683,300.07 31,396 21.76 15.30 42.2%
Page 84 of 87

Interestincome Interestexpense Netinterestincome Feeandcommissionincome Foreignexchangeincome Otherincome Noninterestrevenue Operatingincome Operatingexpenses Profitbeforedoubtfuldebts Badanddoubtfulexpense Profitbeforetax Incometax Profitaftertax Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities Totalshareholder'sfunds RWAestimate Growthrates Interestincome Interestexpense Netinterestincome Feeandcommissionincome Foreignexchangeincome Otherincome Noninterestrevenue Operatingincome Operatingexpenses Profitbeforedoubtfuldebts Badanddoubtfulexpense Profitbeforetax Incometax Profitaftertax Balancesheet Loansandadvances Totalassets Customerdeposits Totalliabilities Totalshareholder'sfunds RWAestimate 2006 2007 37,295 63,625 10,463 19,039 26,832 44,586 0 0 0 0 0 0 20,927 31,255 47,759 75,841 31,298 48,333 16,461 27,509 1,307 1,832 15,154 25,676 3,665 6,897 11,489 18,780 199,708 608,505 392,864 514,705 93,801 261,970 63% 86% 55% NM NM NM 74% 63% 72% 48% 34% 65% 82% 61% 63% 85% 68% 76% 148% 65% 288,112 972,943 634,493 856,488 116,455 440,803 71% 82% 66% NM NM NM 49% 59% 54% 67% 40% 69% 88% 63% 44% 60% 62% 66% 24% 68% 2008 138,737 53,294 85,443 49,511 6,174 7,147 68,799 154,242 87,562 66,680 10,568 56,120 4,127 51,993 455,324 1,787,000 1,188,876 1,440,383 346,617 716,516 118% 180% 92% NM NM NM 120% 103% 81% 142% 477% 119% 40% 177% 58% 84% 87% 68% 198% 63% 2009 193,545 83,957 109,588 50,045 19,687 5,205 78,650 188,238 113,288 74,950 39,865 35,085 14,482 20,603 698,326 1,659,703 1,173,917 1,321,910 337,793 1,025,345 40% 58% 28% 1% 219% 27% 14% 22% 29% 12% 277% 37% 251% 60% 53% 7% 1% 8% 3% 43% 2010 127,265 35,719 91,546 46,180 10,823 726 60,602 152,148 97,769 54,379 4,353 50,026 12,612 37,414 713,285 1,895,027 1,318,072 1,531,466 363,561 1,134,832 34% 57% 16% 8% 45% 86% 23% 19% 14% 27% 89% 43% 13% 82% 2% 14% 12% 16% 8% 11% 2011F 165,128 42,649 122,479 56,500 11,300 2,260 73,265 195,745 112,999 82,745 7,592 75,155 22,547 52,609 949,012 2,259,982 1,581,686 1,893,882 370,220 1,328,919 30% 19% 34% 22% 4% 211% 21% 29% 16% 52% 74% 50% 79% 41% 33% 19% 20% 24% 2% 17% 2012F 2013F 209,300 251,761 61,846 76,718 147,454 175,043 71,822 87,072 14,955 21,757 2,873 3,483 94,541 119,426 241,995 294,469 143,645 174,144 98,350 120,325 12,029 14,897 86,324 105,432 25,897 31,630 60,427 73,802 1,202,873 2,872,896 1,850,573 2,479,945 398,494 1,710,219 27% 45% 20% 27% 32% 27% 29% 24% 27% 19% 58% 15% 15% 15% 27% 27% 17% 31% 8% 29% 1,489,711 3,482,889 2,128,159 3,067,771 427,436 2,134,985 20% 24% 19% 21% 45% 21% 26% 22% 21% 22% 24% 22% 22% 22% 24% 21% 15% 24% 7% 25%
Page 85 of 87
Disclaimer & Disclosure
Legae Securities (Pty) Ltd Member of the JSE Securities Exchange 1st Floor, Building B, Riviera Road Office Park, 6-10 Riviera Road, Houghton, Johannesburg, South Africa P.O Box 10564, Johannesburg, 2000, South Africa Tel +27 11 551 3601, Fax +27 11 551 3635 Web: www.legae.co.za, email: research@legae.co.za
Analyst Certification and Disclaimer I/we the author (s) hereby certify that the views as expressed in this document are an accurate of my/our personal views on the stock or sector as covered and reported on by myself/each of us herein. I/we furthermore certify that no part of my/our compensation was, is or will be related, directly or indirectly, to the specific recommendations or views as expressed in this document This report has been issued by Legae Securities (Pty) Limited. It may not be reproduced or further distributed or published, in whole or in part, for any purposes. Legae Securities (Pty) Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Legae Securities (Pty) Limited makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion herein are those of the author only and are subject to change without notice. This document is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment. Important Disclosure This disclosure outlines current conflicts that may unknowingly affect the objectivity of the analyst(s) with respect to the stock(s) under analysis in this report. The analyst(s) do not own any shares in the company under analysis.

Nigerian Banks - Atonement, Redemption and Resurrection - BUY Zenith - Diamond - Access - GT - HOLD First - UBA

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Nigerian Banks - Atonement, Redemption and Resurrection - BUY Zenith - Diamond - Access - GT - HOLD First - UBA

Diunggah oleh

Hak Cipta:

Format Tersedia

June 01, 2011

Peter Mushangwe Lawrence Madzwara +27 11 551 3675 peterm@legae.co.za

Summary and conclusions

1.1 Valuation and recommendations

Fig 1: Recommendation scorecard - Key positive catalysts favour our BUYs

Indicators & comments

Stocks that are likely to benefit

Adjusted PBVR > Current PBVR; Potential rerating in the upcycle;

Market share expansion

Acquisition/combinations with rescued banks at reasonable price; Organic deposits growth

Indicators & comments

Stocks that are likely to suffer

NPL overhang/NPL remain stubborn

Source: Company reports, Legae Securities

Fig 2: Valuations and recommendations

Source: Company reports, Bloomberg, Legae Securities. Prices as at c.o.b 27/05/11

Source: Company reports, Legae Securities

Source: Company reports, Bloomberg, Legae Securities, prices as at c.o.b 27/05/11

Fig 5: Credit ratings

Fitch BBBA-/B B/B+ AAB+ B+

Agusto & Co Bbbn/a A+ AAA A+ Aaa

GCR AA+ AA n/a AA/A1 n/a

Source: Company reports, company websites

1.2 ROE decomposition: Hope as system deals with legacy issues

Source: Company reports, Legae Securities

2005 2006 2007 2008 2009 2010

Source: Company reports, Legae Securities

1.3 CAMEL ratios analysis: Better sense of stability

Source: Company reports, Legae Securities

Source: Company reports, Legae Securities

Onlending facilities Otherliabilities

400,000 237,288 200,000 15,309 166,582

Source: Company reports, Legae Securities

1.4 Share price performance: GT Bank running away

Source: Bloomberg, Legae Securities

7 Zenith 6 Access 5 MSCIEMBanks(LC) 4 JSEBanks 3 First 2 UBA 1 Diamond 0

Source: Bloomberg, Legae Securities

Banking assets GDP Penetration

Profit Banking assets

Population Per capita income

Absolute per capita income still low at ~US$1,500

C urrent fragmentation and regulatory risks are a risk to ROA

Source: Legae Securities

Fig 16: Rising per capita income will be positive to penetration...

4.5 4.0 3.5

Source: IMF, Legae Securities

Commercialbankingassets Commercialbankingdeposits Privatesectorcredit

Source: CBN, Legae Securities

Source: CBN, IMF, Various Central banks, Legae Securities

Prudential Guidelines introduced in 1990

Banking dominated by British and French banks

Bank branches jumped from 40 in 1985 to over 2000 in 1992

Wema established in 1945, AC B in 1948

Universal banking to be abolished

Source: CBN Presentation, Legae Securities

0% 19601970 19711980 19811990 19912000 20012009

Source: CBN, Legae Securities

40% ReportedCAR RequiredCAR 30%

20% 60% 10% 80%

Source: CBN, Legae Securities

Source: Population Datasheet 2010, Legae Securities

Source: UN Population Division, Legae Securities

60% ROE ROA,RHS 50%