equity bank limited_strong franchise, 14.6% potential upsiide, buy, high valuation risk2

8/14/2019 Equity Bank Limited_Strong Franchise, 14.6% Potential Upsiide, BUY, High Valuation Risk2

1/40

EQUITY BANK LTDStrong franchise, 14.6% upsidepotential, BUY, high valuation risk

We initiate coverage on Equity Bank Limited (Equity Bank, the companyor the Bank) with a BUY recommendation, amid caution on high valuationrisk. In our opinion:

The bank has a strong retail franchise but valuation risk is high.

Recent high growth rates compound forecasting risks. Our potential

total return is 14.6%.

Currency risk will compound risks to foreign investors.

Source: Company Reports, I-Net, Legae Calculations

African

Mar

kets

Peter Mushangwe

Zandisile Mabuya+27 11 551 [email protected]

Initiating ReportInitiating ReportInitiating Report

November 25, 2009

Fig 1: Salient Information

Persharedata 2006 2007 2008 2009F 2010F 2011F

Sharesoutstanding,mn 2720 2750 3660 3660 3660 3660

EPS,Ksh 0.28 0.69 1.07 0.98 1.11 1.57

DPS,Ksh 0.2 0.2 0.3 0.3 0.3 0.5

BVPS,Ksh 0.8 5.4 5.3 6.3 7.2 8.4

Valuation

P/E 15.6 21.7 16.4 14.2 12.6 8.9

P/BV 5.7 2.7 3.3 2.2 2.0 1.7

DividendYield 4.3% 1.3% 1.7% 2.1% 2.4% 3.4%

ROE 34.2% 12.7% 20.0% 15.6% 15.6% 18.6%

ROA 3.8% 3.6% 5.0% 3.3% 3.2% 3.9%

CAMELratios 2006 2007 2008 2009F 2010F 2011F

C:Total capital/TRWA 14% 59% 38% 30% 29% 29%

C:Equity/Loans 20.1% 68.3% 44.2% 33.0% 31.3% 30.7%

A:NPL/Loans 5.2% 4.5% 5.7% 5.9% 6.0% 6.0%

A:Provisions/Loans 1.4% 0.9% 1.7% 1.3% 2.0% 3.0%

M:Cost/Income (ex.provisions) 63.3% 59.8% 52.3% 56.7% 56.6% 50.9%

M:Efficiencyratio 67.3% 59.4% 60.4% 63.2% 66.3% 64.1%

E:NIM 8.7% 5.8% 9.6% 8.8% 8.6% 9.6%

E:Fee&Comm/OperatingIncome 55.3% 52.6% 47.5% 40.6% 45.5% 46.4%

L:Loans/Deposits 66.9% 69.2% 87.8% 96.6% 92.7% 92.7%

L:GvntSecurities/TotalLoans 15.1% 62.0% 10.0% 7.7% 6.4% 5.4%

Tradingdata&Forecastreturns EquityBankunderperformstheNSE20,YTD

CurrentPrice,Ksh 14.0

FairValue 15.7

52Weekrange low,12:high19

MarketCap,US$mn 695

Sharesoutstanding,mn 3,660

Av.Dailytradedvalue,US$ 350,500

Forecastprice

return 12.5%

Forecastdiv.yield 2.1%

Forecasttotalreturn 14.6%

ImpliedP/Eratio,X 16.0

ImpliedPBV,X 2.5

0.3

0.40.5

0.6

0.7

0.8

0.9

1

1.1

Kenya20

Equity

Fair Value: Ksh15.75

BUY


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Page 1 of 40

Contents page

Executive Summary 2

1. Industry Analysis (vs. Equity Bank) 51.1 Profitability, funding and competition 51.2 Industry capital and credit risks 14

2. Company Analysis 182.1 Why micro? 182.2 A comment on 3Q09 performance 202.3 Liquidity, concentration and interest rate risks analysis 222.4 Out of Kenya 24

3. Financial Analysis and Valuation 253.1 Financial analysis and forecasts 25

3.2 Valuation and recommendation 31

4. Appendix 1: Company Profile 345. Appendix 2: Governance and management 35


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Page 2 of 40

Executive Summary

We initiate with a BUY, high valuation risk: We initiate coverage of Equity

Bank, [Bloomberg EQBNK.KN; I-Net, KE.EQBK] with a BUY with a high

valuation risk recommendation. Equity bank trades on 14.3X 2009 Legae

EPS, but the P/E ratio declines to 8.9X, Legae EPS by 2011. We use the

Discounted Future Earnings (DFE) method with a terminal value (TV) of

Ksh66.4bn. We obtain the TV by capitalising the book value (BV) and

earnings. We assign a 60%:40% weight to the earnings and BV respectively.

The cost of equity (CoE) is 18.3%. We obtain a fair value per share of

Ksh15.75. The current share price is Ksh14. With a dividend yield of 2.1%,

the total return improves to 14.6%. Our fair values implied P/E ratio is 16X.

Caveat on potential return: Sources of the high risk are 1) that the potential

return provides modest real return for local investors which can negatively

affect the local demand; 2) the currency risks for foreign investors which

could significantly reduce potential return. A shilling depreciation of 10% will

reduce the US$ return to 3.1%. The shilling reached its worst level of

81.4/US$ in March 2009 and is currently trading at 74.3/US$. In our view,

global recovery and increase in risk tolerance are supportive of a strong local

currency; 3) the historical high earnings growth rates increase forecasting

risks; and 4) weaker economic growth than we anticipates.

The industry is competitive but profitable: The Kenyan banking industry is

competitive, but still shows strong profitability growth. There are 43

registered commercial banks in Kenya. The top 5 enjoy half the market

share on both deposits and loans. Industry profit increased from

Ksh5bn in CY2002 to Ksh43bn in CY2008, a CAGR of 43%. The

industrys net interest margin (NIM) is strong at an average of 7.9% since

CY2003. The before tax ROE averaged 18% in CY2008. The industry

revenue is dominated by net interest income, which to an extent is an

indication of higher interest rate spreads. In our view, the high industry

growth rate masks competition intensity in the short to medium term

as banks can still grow revenues without taking business away from

each other.

Equity Banks historical performance has been exceptional but we

expect headwinds in 2009: Equity Bank is one of the supreme growth


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Page 3 of 40

stories in Kenya in our view. In CY2004, the bank had customer deposits of

Ksh5.1bn. Customer deposits grew by a 4-year CAGR of 77%. By 3Q09,

customer deposits were Ksh65.7bn. The banks loan portfolio

responded accordingly, rising from Ksh3.1bn in CY2004 to Ksh58.1bn

by 3Q09. Profit before tax ascended from a mere Ksh218mn in CY2004 to

Ksh3.9bn in FY2008.

CAMEL ratios are strong: In our view capital is abundant, and we do not

foresee pressures to the capital adequate ratios (CAR). Sector total capital is

Ksh142,554bn for CY2008. For Equity bank in particular, its CAMEL ratios

are strong. Total capital/Total Risk Weighted Assets (TRWA) is 38% in

CY2008 although we expect it to decline to 29% by CY2011. The Banks

NPL ratio is below industry average at 5.7% in CY2008. Management has

controlled the efficiency ratio from 67.3% in CY2006 to 60.4% in CY2008.

We expect it to revert to 64.1% by CY2011 mainly due to expansion effects.

Industry liquidity is plentiful, with a loan/deposit ratio (LDR) of less than

100%. For Equity Bank, the LDR is 87% (CY2008).

Equity Bank seeks to diversify sovereign risk and boasts of an

entrepreneurial board and management: We expect the banks growth to

be supported by its regional expansion. Already the Ugandan acquisition

contributes about 11% of interest income. We also rank the board and

management highly, having built a strong brand in Kenya over the past 5years. Presence across the region should provide strategic value in terms of

mergers and acquisitions (M&A).

Acquisition and currency risks could cause headwinds in the short

term: As the bank diversifies, ability to obtain fair prices on acquisitions and

the associated currency risks could negatively affect the share price in the

short-term. We are yet to witness how the management integrate its

Ugandan acquisition and the resultant effect to income and costs on a

sustained basis. With the capital markets recovering, acquisitions will

become pricey. However, the low intangible assets/total assets ratio (only

2%) is impressive in our opinion.

What goes up comes down:We have reduced our growth forecasts on

both loans and deposits quite significantly and there is little

congruency with historical growth rates/performance. We have reduced

growth rate in deposits and customer loans by 17pp and 44pp respectively


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Page 4 of 40

for CY2009 from CY2008 growth rates. Our growth forecast does not

compare favourably against historical performance. For example, in CY2008,

loans went up by 102% while customer deposits rose by 60%.

Why restrained forecasts relative to history?: Our subdued growth

forecasts (still very high, but relatively weak compared to history) are

motivated by 1) the fact that Equity bank is already one of the big banks,

with a market share of between 6% and 6.5% on both deposits and loans.

Further organic market penetration should now grow at a slower rate; 2) the

fact that Equity bank already holds 48% of accounts in the system

(CY2008). Management indicate that they now have 4.1mn accounts, which

represents about 52% of total system accounts. 3)the bank has little room

to improve its cost/income ratio. The cost/income ratio for CY2008 is

52%. We estimate it to rise this year to 57%. This is still better than industry

average estimated at 62% (ex-provisions). As a result there is little room in

the medium term (up-to 2011), in our view, for the bank to enhance earnings

by cutting costs; and 4) our assumption that regional earnings

contribution will not be instant. While we expect the regional expansion to

support earnings in the long-term, we do not expect material growth

contribution in CY2010 and CY2011. Investment in systems and human

resources should negatively affect earnings and ROE.

Possible catalysts for stronger out-performance: In our opinion, EquityBank is a strong franchise with strong fundamentals. We are primarily

concerned with the valuation risk (i.e. our fair value provides low real return).

Possible catalysts for out-performance in our view are 1)continued higher

earnings growth rate than our expectations. As we highlight before, we

materially reduced our forecast growth rates; 2) lower company specific

premium on the discount rate due to higher liquidity. Institutional interest

on the stock remained strong even in a quieter 1H09. 3) possible share

strength by association. In our report, Fixed Income dominating, but we

expect a rebound in equities, October 16 2009; we reasoned our

expectations of a rebound in Kenyan equities between now and 1H10. The

share may show a stronger recovery along with the market.


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Page 5 of 40

1. Industry Analysis (vs. Equity)

1.1 Profitablity, funding and competition

Below we provide an analysis of the Kenyan banking sector, and where necessarywe make comparisons against Equity Bank. We note the following:

Favourable factors are supportive of growth on both the asset and

liability side of banks balance sheets, industry ROE is robust: We note

that the Kenyan banking sector still produce significant profit growth. In

CY2008 banking sector profit before tax rose to Ksh43bn from Ksh14.7bn in

CY2004. Profitability is supported by strong growth in deposits and banking

assets as penetration increases to the areas outside main cities and to the

rural areas. Average industry ROE, based on profit before tax is 18% (see

Fig 4-9) and only 4 banks on the top 30 had negative ROEs in CY2008.

In our view, loan growth is influenced by 1) loan penetration. Low

penetration in Kenya provide upside potential to the sector. We estimate the

loan/GDP at 30% and the deposit/GDP at 39%. Product development should

also support growth in deposits 2)per capita income. Granted, per capita

income is still low, and convergence with RSAs per capita income is not

conceivable at this stage, but the growth will support financial sector

development nonetheless. Increasing wealth levels, as indicated by risingper capita income which is estimated to reach US$1,410 by 2014 (IMF World

Economic Outlook, Oct.09) should support loan growth and 3) population.

Kenyas population is expected to reach 51mn by 2025, (World Population

Datasheet 2009) and this bode well for financial services demand. Bankable

population is estimated at around 15.1mn (about 39% of the population),

mainly composed of the employed and the self-employed. The positive

demographic outlook is a long-term theme in our outlook.

Fragmented sector intensifies competition: Our concern is the

sustainability of high industry ROE given the competition. There are 43

registered commercial banks in Kenya, although the market is dominated by

the biggest 15, which account for greater than 80% of the industrys assets

and deposits. The current high industry growth masks competition

intensity in the short- to-medium term. Banks can increase revenue

without necessarily taking business from each other. Smaller banks may


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Page 6 of 40

struggle if they choose to compete with bigger banks. Our view is that

smaller banks that cannot create reasonable economies of scale may die

over time.

Consolidation is not the theme for the Kenyan banking sector in our

opinion: While we concede that the industry is fragmented, we do not see a

wave of bank consolidation in the short term. Consolidation could be

necessary, but our view is that it will only come about if it is regulator-

induced. Unfortunately, we have not heard such comments or expectations

from the Central Bank of Kenya (CBK). Bigger banks would offer size and

scale and we would argue that bigger is better for Kenya.

System funding is plentiful: Funding risk is rising, as indicated by the

growing LDR, but it is still 27pp below 100%. The industry LDR rose from

42% in CY2003 to 73% in CY2008. In our opinion, when the LDR is below

100%, it provides the sector with capacity to absorb system-wide funding

shocks. Loan growth has been higher than deposit growth hence expanding

LDR. The industry surplus (i.e. industry deposits minus industry loans)

has reduced to Ksh207bn in CY2008 from Ksh245bn in CY2004. (see Fig

8). According to management Equity Banks long term LDR target is 80%.

Strong NIM nonetheless, but we see little room for improvements: The

interest spread and NIM remain in good shape, with savings and fixed

deposits attracting about 2%p.a and 4%p.a respectively while loans andadvances produce between 14%p.a and 15%p.a. Equity Banks average

cost of funds is 2.3% (according to management) versus the industrys

4.3%. (Total interest expense as a percentage of customer deposits plus

other money market deposits plusother liabilities is 1.5% for 3Q09). NIM

oscillates around 8%, and we do not foresee room for significant

improvements given the fragmentation of the industry. New current accounts

and saving accounts (CASA) penetration could sustain NIM going forward

but we believe improvements in industry NIM is muted provided the sector

structure and limited pricing power from bankers. (see Fig 5).

Interest income dominates industry revenue, and advances and loans

dominate industry assets: Interest and fee income charged on loans and

advances continue to contribute most of the revenue. About 70% of sectors

revenue is derived from the loans and advances asset class while income

from placements with other banks has continued to decline. Income from


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Page 7 of 40

government securities is fairly flat, and contributed about 20% of the

industrys revenue in CY2008. (see Fig 6). The domination of interest

income indicates the high interest spreads. As spreads narrow i.e.

lending rates coming down due to moral suasion or monetary policy

changes, banks revenues could come under pressure as we do not

foresee room to increase fees. Equity Banks model seeks to create more

revenue from transactional fees than interest income, hence its fee

income/total revenue is above industry average (Equity Bank = 47.5% vs.

Industry = 40% for CY2008).

Equity Bank has been progressively gaining market share on both

loans and deposits: Of interest to us are the gains that Equity Bank has

made in the market since conversion to a commercial bank. While the

industrys deposits have grown by a simple average of 15% from 2004 to

2008, Equity banks deposits have increased by a simple average of 72%.

Growth in deposits was still strong at 51% in CY2008. In our view, deposits

gathering strategies are important for loan-book growth, particularly in this

congested market. Equity Banks deposit market share increased from

1% in CY2004 to 6% in CY2008. The bank registered a strong growth in

assets as well. Assets went up to Ksh77.1bn in CY2008 from Ksh3.9bn in

CY2004. The bank has a reasonable portion of the industrys total

assets, now at around 6.5% from 1% in CY2004. (see Fig 3)

Equity Banks growth slowed in CY2008, and we expect it to continue to

grow below its 2004-2008 average. In CY2008 growth in both assets and

deposits has reduced by 48pp and 119pp respectively, but we are not

overly concerned as we do not expect growth to remain above 50%. Growth

in deposits and assets should still be supported by regional penetration in

the medium to long-term, and we would expect the banks earnings growth

rate to eclipse industrys average, at least up-to CY2011. Equity banks

deposit franchise (former Society members) remains strong. As at end of

3Q09, total customer deposits and total assets stand at Ksh65.7bn and

Ksh97.4bn in that order.

Equity banks ROE is above industry average: The industrys ROE is fairly

strong. The average before tax ROE of the industry is 18% for CY2008. Only

four banks had negative ROEs in CY2008. Equity Banks ROE (PBT CY08,


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Page 8 of 40

as per the Central Bank of Kenya) is 24% which is 33% above the

industry average, despite the decline in growth rate. (see Fig 9)

Fig 2: Strong growth in industry deposits and assets masks competition.

IndustrydepositsgrewbyCAGRof14.9%since2004vs.Equitybank's70.1% Industryassetsshowstronggrowth.CARG=19.4%since2004

Equitybank'sdepositsgrewtoKsh48.9bninCY2008 Equitybankcontinuetooutpacetheindustrygrowthrate.CAGR =81.4%

Weexpect industrydepositstohitKsh1trnbyCY2010aspenetrationincreases EquityBank'stotals assetshitKsh77bninCY2008

3,924

6,707

11,453

20,024

53,129

77,136

487,024

553,708

616,480

731,988

928,947

1,183,654

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2003 2004 2005 2006 2007 2008

Totalbankingassets

EquityBank

3,369

5,081

9,048

16,337

32,536

48,977

429,736

488,315

537,322

597,874

695,348

864,010

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2003 2004 2005 2006 2007 2008

Totalbankingdeposits

Equitybank

Source: Central Bank of Kenya, Legae Calculations

Fig 3: Equity Bank gained market share on both assets and deposits. The banks growth rate outsize industry.

Stronggrowthindeposits between2004and2007ledtomarketshareincreasingto6% Stronggrowthindepositsfueledassetgrowthoverthesameperiod

Growthin

2008

receded

from

99%

,but

still

very

strong

at

51%

Assets

grew

by

simple

average

of

85%

from

2004

vs.

industry's

20%

GrowthindepositsforEquityBankoutpacetheindustrygrowthrate,av.15%since2004 Marketshareontheassetsidegrewto6.5%in2008from0.8%in2004

71% 70.8%74.8%

165.3%

45.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2004 2005 2006 2007 2008

Industry

EquityBank

Marketshare(RHS)

51%

78%81%

99%

51%

0%

1%

2%

3%

4%

5%

6%

0%

20%

40%

60%

80%

100%

120%

2004 2005 2006 2007 2008

Industry

EquityBank

Marketshare(RHS)



10/40

Page 9 of 40

Fig 4: Interest spreads are health. Declining interbank rate could hurt bigger, more liquid banks that have more assets in the interbank market.

0%

2%

4%

6%

8%

10%

12%

14%

16%

Sep05

Nov05

Jan06

Mar06

May06

Jul06

Sep06

Nov06

Jan07

Mar07

May07

Jul07

Sep07

Nov07

Jan08

Mar08

May08

Jul08

Sep08

Nov08

Jan09

Mar09

May09

Jul09

Lending

Savings

Deposit

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Sep

05

Nov

05

Jan

06

Mar

06

May

Jul06

Sep

06

Nov

06

Jan

07

Mar

07

May

Jul07

Sep

07

Nov

07

Jan

08

Mar

08

May

Jul08

Sep

08

Nov

08

Jan

09

Mar

09

May

Jul09

91DayTB

Interbank

Lending


Fig 5: Industry profitability rose significantly between 2002-2008. NIM is appealing at an average of 7.9%

IndustryprofitabilityrosetoKsh43bnfromKsh5bninCY2002 Net interest marginfairlystaticaround8%,withanaverageof7.9%

Growthinprofitabilitywentdown by11ppinCY2008,butisstillabove20%

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2002 2003 2004 2005 2006 2007 2008

PBT,Kshmn

Growth,LHS 7.5%

6.5%

8.2%8.5%

8.2%8.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2003 2004 2005 2006 2007 2008



11/40

Page 10 of 40

Fig 6: Net Interest income dominated banks revenues, supported by interest and fees from loans and advances

Netinterestincomecontributesthemost.Fees contributes25% Interestandfeesfromloansandadvances contributethemost

Interestfrom

placements

with

other

banks

continues

to

decline

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008

Advances

Placements

GvntSecurities

Other

59%25%

10%5%

NetInterestIncome

Fees&Commissions

ForeignExchange

Other


Fig 7: Population growth is supportive of demand for financial services, but per capita income has a long way to converge with RSAs

AftercatchingupwithRSAin2025,Kenya'spopulationwillexceedRSA'sby2050 Kenya'sGDPpercapitaisrising,butstillalongwaytocatchupwithRSA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

50

100

150

200

250

300

350

400

450

500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009F

2010F

2011F

2012F

2013F

2014F

KenyaGDP,LHSUS$bn

SouthAfrica

GDP,

LHS,

US$bn

Kenyapercapita,US$

SouthAfricapercapita,US$

38

51.3

65.2

48.3

51.5

54.8

0

10

20

30

40

50

60

70

2008 2025 2050

Kenya

SouthAfrica

Source: Population Datasheet, IMF, Legae Calculations


12/40

Page 11 of 40

Fig 8: Industry funding surplus has declined but LDR is still


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Page 12 of 40

Competition in perspective: The competition on both the asset (chasing

revenue) and the liability (chasing funding) is intense. Top 5 banks enjoy

market shares of 51.5%, 52% and 51% on asset, advances and deposits

correspondingly. South Africa has a higher concentration, with the Top 5

banks accounting for greater than 70% of the market share (both assets and

deposits). The higher competition level and lower per capita GDP provide an

unfavourable industry risk profile in the long-term.

Declining inter-bank rates could hurt liquid, bigger banks: Bigger banks

tend to be more liquid, and thus depend less on the inter-bank market for

funding. Equity bank is one of them. The falling interbank rate should hurt

bigger banks NIMs as they tend to have more assets than liabilities in the

interbank market. As inter-bank rates rise, the reverse would apply due to

benefits from higher interbank placement rates. The question to investors

would be how soon will interbank rates take a rebound? Currently, liquidity is

abundant, with the market often in surplus. Reserves were about Ksh168bn

for the week ending 20 Nov. 09. As demand for loans soar due to recovery,

the position of the market liquidity could turn to negative, raising interbank

rates, positively affecting NIM.

Fig 10: Equity Bank is #6 largest bank by advances and deposits.

Equityranks

#6,

with

a

marketshare

of

6.5%

on

loans

and

advances

The

bank

ranks

#6

again

on

the

deposits

side,

with

a

marketshare

of

5.7%

17.1%

12.6%

8.4%

7.0%

6.9%6.5%

4.8%

4.2%

4.1%

4.0%

3.2%

1.5%

1.4%

1.4%

17.0%

Barclays

KBC

CooperativeBank

CFCStanbic

Stanchart

EquityBank

NIC

Commercial BoA

I&MBank

DiamondTrust

Citibank

PrimeBank

NBK

BankofBaroda

Others

14.6%

12.7%

8.9%

7.6%

7.1%5.7%

4.8%

4.1%

4.0%

3.8%

3.6%

3.3%

1.8%

1.7% 16.4%

Barclays

KBC

Stanchart

CooperativeBank

CFCStanbic

EquityBank

CommercialBoA

NIC

NBK

DiamondTrust

Citibank

I&MBank

Prime Bank

BankofBaroda

Others



14/40

Page 13 of 40

Fig 11: Top 5 banks enjoy half the market share in deposits as well as in loan and advances

51.5% 52.0% 51.0%

83.3% 82.7% 83.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Assets Advances Deposits

Top5

Top15



15/40

Page 14 of 40

1.2 Industry capital and credit risks

Industry capital position is strong, risks to capital are manageable: We

do not expect significant Capital Adequacy Ratio (CAR) pressures, except

for banks that may focus more on regional expansion. Equity Bank is one of

the banks with a regional expansion programme. Overall, the Kenyan

banking system has sufficient capital in our opinion. In CY2008, the

industrys Equity/TA ratio stood at 13%.

Equity banks capital position is healthy: The core capital/TRWA ratio

increased from 18% in CY2007 to 20% in CY2008. The core capital-to-

deposit ratio remains fairly static at 15% due to the rising deposits which

diluted the rising capital (Ksh-terms). Sector core capital ascended by 13.5%

from Ksh111,241bn in CY2007 to Ksh126,265bn in CY2008. Total capital

increased by a higher rate of 19.8% to Ksh142,554bn.

As at end of CY2008, Equity bank was the second best capitalised bank

in Kenya in terms of total capital/TRWA ratio with a ratio of 40.8%. The

sectors average total capital/TRWA ratio is 23.2%. The minimum statutory

required is 12%. In our view, the excess capital provides the bank with

ample room to assume more credit risks by growing its loan book . (see

Fig 12-13).

Credit risks ascended in CY2008, and we expect further deterioration in

CY2009, but write-backs could benefit banks starting in 2H10: Credit

risks increased in CY2008, with the downward trending NPLs figure showing

a recovery from Ksh41.6bn to Ksh48.2bn. As a percentage of loans, the ratio

however continued to decline although our view is that this year an upturn

could occur. For Equity Bank, the gross NPL ratio went up from 5.8% in

CY2008 to 7.3% in 3Q09. (see Fig 14-15). We are sceptical of possible

write-backs in 1H10, but we are confident that starting 2H10 industry profit

should expand on write-backs. We should highlight the risks, and in our

opinion 1) the weaker demand for agro-exports in EU and US, 2) lower

tourists arrivals due to the recession and political risks 3) reduced internal

demand due to unemployment and lower remittances in CY2008 and 4)

higher inflation rate all point to weaker top line growth for major sectors of

the economy hence default risk increases.


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Page 15 of 40

GDP recovery is the catalyst as it is negatively related to NPL

formations. While reduced NPL formation will be provoked by corporate

earnings recovery, we remain concerned with the consumer segment. The

agriculture sector could take longer to add to their payroll until when

convinced of the growth path. As a result, joblessness may remain high and

retrenchment in spending could continue. In addition, a reasonable number

of individuals in Kenya have exposure to the equity market which has

declined since CY2007. It is also important to highlight that according to

management, 60% of the loan book is unsecured. However, credit

monitoring is firm and collection methods are efficient. This supports the

banks NPL ratio that is below sector average. The recovery rate is 20% and

management expects it to improve in the long term.

Loan restructuring should positively affect NPLs in CY2010. In CY2008,

NPL in Ksh-terms went up. In 3Q09, gross NPL ratio for the bank recovered

from a falling trend. When loan repayments are under pressure, restructuring

is often natural for banks. The current phase of loan restructuring should

reduce pressure on provisions in CY2010.

Fig 12: Industrys capital position is strong in our view

8%

0%

5%

10%

15%

20%

25%

2002 2003 2004 2005 2006 2007 2008

capital/deposits

corecapital/TRWA

Minimumstatutory ratio

Source: Central Bank of Kenya, Legae Calculation


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Fig 13: Equity bank stands out as one of the best capitalised banks in the sector

EquityBank'scorecapitalofKsh19.9bnrankssecondtoBarclays Totalcapital/RWAishighat40.8%.Thereisroomtogrowtheloanbook

Corecapital

is

Ksh14.3bn

Capital

risks

is

low

for

Equity

bank.

The

industry's

capital

risk

is

strong

as

well

5,000

10,000

15,000

20,000

25,000

30,000

City

Finance

Du

baiBan

k

Fide

lity

Giro

HabibBan

k

Cre

ditBan

k

Equatoria

l

Cons

olidated

FirstCommunity

G

uardian

Chase

ABCLtd

F

inaBan

k

BoALtd

Eco

ban

k

Deve

lopmentBan

k

G

ulfBan

k

Family

BoIndia

B

oBaro

da

Imperial

CBoA

NIC

Diamo

ndTrust

NBK

CFCstan

bic

Citiban

k

S

tanc

hart

Co

o

perative

KCB

Equ

ity

ban

k

Barc

lays

Corecapital

TotalCapital

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Chase

CB

oA

BoA

Ltd

FinaBan

k

Fide

lity

CFCstan

bic

NIC

Ecoban

k

Stanch

art

K

CB

Barclays

Conso

li

dat

G

iro

Fam

ily

BoBaro

da

Diamo

nd

Imper

ial

Equatorial

ABC

Ltd

Guard

ian

Co

operat

ive

Citiban

k

Du

baiBan

k

Cre

ditBan

k

Develo

pm

BoIn

dia

Gu

lfBan

k

N

BK

F

irst

Equity

ban

k

Ha

bibBan

k

Core/RWA

Total/RWA

Average,Total

Average,Core


Fig 14: NPL trend downwards, from Ksh70.7bn in CY2002 to Ksh48.2bn in CY2008. NPL/Loans ratio fell below 10% in CY2007.

Significantimprovementsincreditriskmanagement NPLs/Loansimprovedto7.3%in2008from8.7%in2007

NPLs(Kshterm)andprovisionswentdowndespiteaspikein2008 Currentriskaversionshouldimprovecreditriskmanagementprocesses

70,799

64,441

67,087

64,949

62,416

41,699

48,175

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2002 2003 2004 2005 2006 2007 2008

Loans

TotalNPLs

Provisions

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2003 2004 2005 2006 2007 2008

NPLs/Loans

Provisions/Loans



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Page 17 of 40

Fig 15: Gross NPL ratio for Equity bank shows a downward trend but recovered to7.3% in 2009

0%

2%

4%

6%

8%

10%

12%

14%

16%

2003 2004 2005 2006 2007 2008 2009

Source: Company reports, Legae Calculations


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2. Company Analysis

2.1 Why micro?

Equity banks main market segment is the micro-finance. The Banks model,through its widespread branch network, is to penetrate the lower mass marketsegment and the unbanked population. We expound the benefits.

Defensive: Micro-finance institutions (MFIs) in Africa often lend to defensive

industries such as food, education, shelter etc. MFI often do not play high

risk projects and the capital markets. This often makes their assets

defensive.

Higher NIM: MFIs NIMs are often high as a result of higher lending rates.Lending rates for smaller MFIs are above 30% p.a. in most countries. Bigger

MFIs tend to employ partial convergence of their lending rates with main-

stream commercial banks. Equity Banks prime rate in Kenya is 18% p.a,

and 28% p.a and 32% p.a in Uganda and Sudan respectively.

Longer-term liabilities: The reaction of small deposits to changes in market

liquidity conditions and monetary policies tend to be less than of the large

deposits from corporates. This makes the tenor of the liabilities longer. MFIs

also tend to borrow from developmental institutions with longer tenors, which

aid the asset-liability management.

Diversification: The small value of deposits and loans means that volumes

are important to profitability. Concentration risk is low due to the fact that

deposits and loans are spread over a number of small depositors and

borrowers.

In Kenya, individual/consumer market is becoming more important:

More importantly for Equity Bank, the consumer segment is gaining market

share of the credit market. As indicated below, individual lending doubled to

24% of total sector lending book in CY2008 from 12% in CY2003. (see Fig

16) As this segment becomes more important, the risk to MFIs is the

possible downscaling by main-stream commercial banks. More mainstream

commercial banks in Kenya are increasing focus on the bottom-end of the

pyramid, but our view is that Equity Bank is in a good position to defend its

market share. Infrastructure and system that can handle large volumes of

accounts at an optimal cost are key to gaining/defending market share.


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According to management, its centralised system has capacity to optimally

handle 35mn accounts.

The structure of the economy(ies) is supportive of Equity Banks

strategy: In our opinion, the SME, retail and the region are the most

under-penetrated segments and exposure to these segments should

offer value in the long-term. The biggest GDP contributor is agriculture, at

about 20%. SMEs in the agriculture sector, as well as other sectors of the

economy are widespread. In Uganda, and other East African countries such

as Rwanda, Tanzania and Burundi, SMEs are customary.

The Achilles heels: The SME sector comes with its own risks. SMEs capital

levels are often thin and expose them to bankruptcy risk, particularly during

times of receding demand. Compounded with poor governance chiefly due

to ownership domination by one individual and lack of institutionalisation,

access to working capital becomes difficult, negatively affecting returns.

Fig 16: Consumer sector borrowing is rising

Consumer sectorborrowingisrisingintheindustry Consumerlendingmakesup37%ofEquitybank'sloanbook

12% 13% 13%17%

19% 24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2003 2004 2005 2006 2007 2008

Corporate

Individual

Commercial

37.1%

19.2%2.6%

41.1%

Consumer

Corporate

Inside

Mortgages

Source: Central Bank of Kenya, Company Management, Legae Calculations


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2.2 A comment on Q309 performance

The banks 3Q09 set of results point to continued strong growth. Below wehighlight the salient features.

Fig 17: 3Q09 performance analysis

Growthrate

3Q09 2Q09 1Q09 4Q08 3Q09 2Q09 1Q09

Loansandadvances 58,143.95 53,802.67 48,236.57 44,193.75 8.1% 11.5% 9.1%

Depositsduefromlocalbanks 2,905.36 1,640.15 3,396.50 5,160.78 77.1% 51.7% 34.2%

Depositsduefrombanks,%ofIEA 4.0% 2.5% 5.5% 8.8% 59.4% 54.4% 37.9%

Customerdeposits 65,660.67 57,489.66 53,720.37 50,334.53 14.2% 7.0% 6.7%

Depositsduetolocalbanks 0.0% 0.0% 0.0%

InterestIncome 7,839.60 5,060.89 2,502.76 7,979.02 54.9% 102.2% 68.6%

Interestexpense (1,130.04) (709.42) (384.46) (1,362.23) 59.3% 84.5% 71.8%

NetInterest

income 6,709.56

4,351.47

2,118.30

6,616.79

54.2% 105.4%

68.0%

NIM 10.7% 7.7% 4.0% 13.6% 39.4% 90.9% 70.4%

Cost/Income 54.1% 52.1% 46.2% 54.5% 3.9% 12.8% 15.3%

Fees&Commission (loans&advances) 1,470.87 875.01 354.75 1,869.20 68.1% 146.7% 81.0%

Otherfeesandcommi ssi ons 2,775.09 1,797.23 826.50 3,281.10 54.4% 117.4% 74.8%

Foreignexchangetrading 149.97 110.38 8.43 754.41 35.9% 1209.2% 98.9%

Dividendincome 17.18 n/m 0.0% 0.0%

Otherincome 146.68 103.21 71.82 83.87 42.1% 43.7% 14.4%

OperatingIncome 11,269.34 7,237.29 3,379.80 12,605.37 55.7% 114.1% 73.2%

Fees&Commission,%ofOperatingIn. 38% 37% 35% 41% 2.0% 5.6% 14.5%

Corecapital 15,555.29 14,837.32 14,642.24 14,272.34 4.8% 1.3% 2.6%

TotalRiskWeightedAssets 68,346.59 61,815.50 54,155.35 48,833.99 10. 6% 14. 1% 10. 9%

Corecapital/totaldeposits 25% 27% 28% 29% 7.4% 3.6% 3.4%

Gross

NPL 4,464.40

4,233.06

3,851.66

2,754.75

5.5% 9.9% 39.8%SuspendedInterest 567.10 536.64 441.78 222.98 5. 7% 21. 5% 98. 1%

Nonperformingloans 3,897.30 3,696.42 3,409.88 2,531.77 5.4% 8.4% 34.7%

Provision 955.58 835.89 659.23 750.11 14.3% 26.8% 12.1%

NPL/Customerloans 6.7% 6.9% 7.1% 5.7% 2.4% 2.8% 23.4%

Source: Company Reports, Legae Calculations, IEA = interest earning assets

Revenue: Operating income went up by 56% in 3Q09, supported by

strong growth in fees and commission, which went up by 68%. Net

interest also shows a strong growth, jumping by 54% in 3Q09. Fees and

commission contribution to operating income went up slightly to 38% from

37% in 2Q09. The contribution has however declined when compared to

41% in 4Q08.

Margins: NIM went up to 10.7% in 3Q09 from 7.7% in 2Q09. Compared to

4Q08, NIM has declined by 2.9pp. NIM of 10.7% is still higher than the

industrys average. For 4Q09, falling interbank rates could negatively

affect NIM for the bank as it is a net lender in the inter-bank market. In


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Page 21 of 40

fact, Equity Bank has no deposits from other banks, but has placement with

local banks that constitute 4% of the banks total interest earning assets. We

are impressed by the fact that the bank has managed to increase operating

profit in 3Q09 without increasing credit risks significantly. (i.e. net interest

income increased by 54.2%, loans and advances went up by 8% and NPLs

went up by 5.4%)

Costs: Operating costs minus provisions went up by 53% in 3Q09 to

Ksh7.1bn. The growth rate has however gone down by 54pp from 103% in

2Q09. The bank recorded a cost/income ratio of 62.6%, which is 8.4pp

below the industrys average of 71%. Our cost/income ratio (ex. provisions)

is 54%. Management is confident that the LT cost/income ratio will

fluctuate around 48%.

Profitability: The bank reported strong ROE and ROA for Q309 at 27%

(annualised) and 6.5% respectively. Operating income went up by 55.7%.

Fees and commission income continue to show strong growth. According to

management, 32/112 branches in Kenya are not profitable chiefly because

they were recently opened.

Customer deposits and loans and advances: Customer deposits

increased by 14% in the quarter. However, loans and advances increased

by a lower rate of 8%. Management highlighted to us that drought negatively

affected loan demand from farmers.

Capital: Core capital enlarged 5% to Ksh15.5bn. Core capital as a

percentage of deposits remain healthy at 25%, notwithstanding the fact that

this is deterioration from 2Q09s 27%. This is 3X above the minimum

required of 8%.

Credit risks: NPLs went up in Ksh-terms to Ksh3.9bn from Ksh3.7bn in

2Q09. As indicated already gross NPL ratio (i.e. including suspended

interest) shot up to 7.2%. However, the NPL ratio declined slightly to 6.7%

from 6.9% in 2Q09. The rising gross NPL ratio indicates the heightened

credit risks for Equity Bank in particular and for the sector in general.Provision rose by 14% to Ksh955.6mn in 3Q09.


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2.3 Liqudity, concentration and interest rate risksanalysis

We assess the banks liquidity and interest rate risks. Overall, we note that therisks are low and manageable. We make a note of the following:

Equity banks business is predominantly retail funded. Wholesale funds

are more expensive (despite the recent decline of the interbank rate). More

importantly wholesale funds are more volatile hence the liquidity risk is

heightened. Concentration risk also tends to be higher for banks that rely

heavily on the wholesale market. In our point of view, Equitys non-

dependence on the wholesale market is an invaluable positive to 1) lower

cost of funds hence positive impact on NIM, and 2) lower liquidity riskas retail deposits are stickier than interbank deposits.

The bank is not under pressure to raise deposits to fund its loan book.

63% of the assets are loans but liquid assets which we defined to consist

cash and securities, balances due from CBK, government securities and

funds due from local and foreign banks is sizeable at Ksh25.3bn, making up

26% of the balance sheet. In our view, Equity bank has ample cash

resources to expand its loan book without putting itself under funding

pressure. Put simply, the funds could be redeployed to loan should the

bank deems it fit.

The banks cash assets are 6% of interest earning assets, CY2008 and

we expect it to rise marginally to 6.3% in CY2009. Government securities

(local and foreign) and balances due from CBK add up-to Ksh6.88bn in

CY2008. We anticipate these liquid assets to rise to Ksh8.965bn in FY2009,

largely due to a slower growth in the loan book. The bank also has

substantial liquidity in securities for dealing which stand at Ksh7bn in

3Q09.

In summary we like that fact that Equity Bank: 1) is not excessively

leveraged, as of now, 2) does not depend on short-term interbank market

and 3) has minimal, if not immaterial dependence on external debt market

(deposits from foreign banks is less than 1% of total assets).

The caveat however is the rising loans/deposits ratio. Equity banks

loans/deposits ratio in 3Q09 is 88%. We expect it to close CY2009 at 96%.

As the loans/deposits ratio rises above 100%, the bank will need to rely on


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Page 23 of 40

external borrowing. The low industry LDR, however, mitigates the risk as the

bank can expand its interbank market activities.

Fig 18:In our view, the bank has ample liquidity to deploy to loans

Inourviewthebankhasampleliquiditytodeploytoloans andlowercostCASAshouldcontinuetosupportdeposits

4.912.78

12.297

0.676

2.905

1.815

58.143

Cash

BalancesduefromCBK

GovernmentSecurities

ForeignBills

Duefromlocalbanks

Duefromforeignbanks

Loansandadvances

0.4%

8.6%

2.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CASA Termde posits Inte rbankdeposits

%ofTotaldeposits

Costoffunds,RHS

Source: Company reports, Company management, Legae Calculations

Concentration risk: Diversification of deposits is important in liquidity

management. On the other hand, diversification of loans is important to

management of credit risks, particularly default risk. Management could not

provide us with the concentration profiles, but we assume that due to the

smaller number of depositors and borrowers, concentration risk is low.

Interest rate risk: Management could not provide us with the current (3Q09)

funding gaps to enable us to carry out a gap analysis. However, they

indicated that interest rate risk is low in their view. They also highlighted that

the average tenor of their loan book is 60 months. This could make the

balance sheet liability sensitive (i.e. rate sensitive liabilities greater

than rate sensitive assets in various time buckets and cumulatively for

a year.) despite the stickiness of deposits. Rising interest rates would

therefore be unconstructive to the banks balance sheet.


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2.4 Diversification: Out of Kenya

Management indicated that Equity bank will expand into the region. Already, thebank has footprints in Uganda and Southern Sudan.

Uganda: The bank acquired 100% of Uganda Microfinance Limited in 2008.

The acquired is now a wholly owned subsidiary. Consequently, Uganda

Microfinance was licensed as a commercial bank by the Bank of Uganda.

Uganda Microfinance will continue to build its franchise in the micro-finance

segment rather than fight for market share against more established

commercial banks. The acquired has 327,062 accounts and contributes 11%

of the Groups interest income. In our view, Uganda holds significant growth

prospects in this segment.

Southern Sudan: Expansion into Southern Sudan also took effect in 2008. A

branch was opened in Juba, Southern Sudan and a Chief Operating Officer

was dispatched to the region. As shown below, the Office has 3,487

accounts.

Where else from here? Management indicated that the bank intends to

establish presence in all members of the East African community. The

members of the East African community include Tanzania, Uganda, Rwanda

and Burundi, in addition to Kenya and Uganda.

Fig 19 : Loan yields are higher in Sudan and Uganda

4100

327

3

18%

28%

32%

0%

5%

10%

15%

20%

25%

30%

35%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Kenya Uganda Sudan

Customers,000,LHS

Loanyield

Source: Company management, Legae Calculations


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3. Financial analysis and Valuation

3.1 Financial Analysis and Forecasts

What goes up comes down: We have reduced growth rates for both loans

and deposits by noteworthy margins. Our rationale is premised on 1) the

fact that Equity bank is now one of the major banks in Kenya, and

market share penetration should now grow at a lower rate. We do not

expect high organic growth in Kenya 2) Equity bank closed CY2008 with

3mn accounts. This represents 49% of the total sector accounts. On its

website, the bank declares it now has 4.1mn accounts. (this is 52% of

accounts in the system). Further market share acquisition of the banked

population should be impeded although the bank can grow by penetrating

the bankable population; 3) little room for further improvements in the

cost/income ratio. The basic way to increase earnings by reducing costs

could prove difficult for Equity Bank. The banks cost/income ratio is already

below industry average. In our view, this ratio could only improve as a result

of the denominator increasing, and not the numerator being reduced; and 4)

our expectations of muted contribution from regional expansion in the

short-term. Investment in systems, branch network (14 were opened in

Uganda) and human resources should be unhelpful to earnings in the short-

to medium term. The bank has one branch in Southern Sudan.

CAMEL analysis: Below we provide select ratios that give us an indication

on CAMEL strength. The capital position is strong in our view, with

equity/loan ratio of 44.2% in CY2008 and our expectation of 33% in CY2009.

Asset quality as indicated by NPL ratio is fair. The NPL ratio in CY2008 was

better than the industry average and we expect CY2009s 5.9% to be better

than the industrys 8%. Cost to income ratio in CY2008 is 52%, which again

is better than the industrys estimate of 62% (ex-provisions). NIM fluctuates

around the industrys average at 9.6% in CY2008 and we expect it to reduce

to 8.8% in CY2009. As we already mentioned, liquidity risks are also

manageable in our view. Government securities/total loans ratio is 10% in

CY2008 but we estimate it to decline to 7.7% in CY2009. Overall, Equity

Banks CAMEL ratios are strong.


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Page 27 of 40

Efficiency: The basic measures of staff productivity, assets/employee and

the deposits/employee show a stable improvement from CY2004 despite

deterioration in CY2008. The banks efficiency ratio is still fairly high, 5pp

above our preferred 55%. However, managements ability to reduce it from

79% in CY2004 to 60% in CY2008 is a great achievement in our view. We

expect the efficiency ratio to rise slightly to 63% in CY2009.

Fig 22: Efficiency has increased, but CY2008 presented difficulties, asset/employee and deposit/employee KShmn

DepositperemployeedeclinedslightlyinCY2008 EfficiencyratiohighlightsEquitybank'ssuccess

12.7 13.0

14.8

22.0

18.0

9.610.2

12.113.0

11.5

5.0

10.0

15.0

20.0

25.0

2004 2005 2006 2007 2008

Assets/Employee

Deposits/Employee

0.79

0.72

0.67

0.59 0.60

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

2004 2005 2006 2007 2008



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Salient assumptions

Our major assumptions on our forecasts are detailed below:

Interest income: We assume that interest income from loans and advances

will grow by 36% in CY2009, receding to 20% for CY2010. The interest

income recovers to 30% for 2011. Interest income from government

securities will grow by -20% in CY2009.

Interest expense: We grow interest expense for customer deposits by 37%

in CY2009 before it jumps by 85% in CY2010. We estimate that interest due

to local banks placements will remained low as Equity bank is a net lender in

the interbank market.

Fees and commission: We estimate the fee and commission line item will

register a 6% reduction in CY2009. This is a result of lower deal flow,

particularly on the loan side which has only gone up by 8%. The growth

however recovers in CY2010 and CY2011.

Costs: The cost /income ratio slides down from 56.7% in CY2009 to 50% in

CY2011. The decline in cost/income ratio is not a result of declining costs,

but rather the increasing income. We increase staff costs by 25% in CY2009,

35% and 20% for CY2010 and 2011 respectively. Regional expansion will

push costs by a higher rate than revenue in the short-term. We increased

loan loss provision by 85% in CY2010. Consequently total operating

expenses went up by 16% (revenue 11%) in CY2009 and 30% in CY2010

(revenue 24%).

Loans and advances: We grow loans and advances by 58% for CY2009

and 20% for CY2010 and CY2011. This notable reduction is motivated by

our expectations of a muted SME loan demand, lower IPO financing and

possible tightening in the lending criteria.

Deposits: Our deposits growth forecasts reduced steeply from historical

growth rates to 43%, 25% and 30% for CY2009, CY2010 and CY2011 in

that order.

Profitability: We expect NIM to decline to 8.8% in CY2009 before it goes

down to 8.6% in CY2010 and recovers to 9.6% in CY2011.


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Income Statement Forecast

The major risks

Bad loans and loan loss provision could take a higher spike than anticipated;

Income from regional operations could grow higher than expected; and

Dividends payout ratio could be modest than our forecasts as the bank build

up capital for its regional expansion.

Fig 23: Equity Banks Earnings model

InterestIncome 2006 2007 2008 2009F 2010F 2011F Growthrates 2007 2008 2009 2010 2011 CAGR(0611)

Loansandadvances 1,435.7 2,512.4 6,175.5 8,383.5 10,047.3 13,061.5 Loansandadvances 75% 146% 36% 20% 30% 55.5%

GovernmentSecurities 103.1 545.5 1,540.6 1,231.2 1,236.9 1,236.9 Government Securities 429% 182% 20% 0% 0% 64.4%

Placementswithbanks 95.7 196.7 262.9 150.8 188.8 141.6 Placementswithbanks 105% 34% 43% 25% 25% 8.1%

Other Other 0% 0% 0% 0% 0% 0.0%

Interestincome 1,634.5

3,254.6

7,979.0

9,765.5

11,473.0

14,440.0

Interest

income 99% 145% 22% 17% 26% 54.6%

InterestExpense Interestexpense

Customerdeposits 118.1 244.6 552.3 755.8 1,354.3 1,625.1 Customerdeposits 107% 126% 37% 79% 20% 68.9%

Placementsfrombanks 6.0 2.6 22.8 14.2 14.1 14.1 Placementsfrombanks 56% 768% 38% 0% 0% 18.9%

Otherinterestexpense 2.6 247.3 787.1 697.1 687.0 568.6 Otherinterestexpense 9394% 218% 11% 1% 17% 193.6%

Totalinterestexpense 126.6 494.5 1,362.2 1,467.2 2,055.4 2,207.9 Totalinterestexpense 290% 175% 8% 40% 7% 77.1%

NetInterestIncome 1,507.8 2,760.1 6,616.8 8,298.3 9,417.6 12,232.1 NetInterestIncome 83% 140% 25% 13% 30% 52.0%

Fees&Commission onloans 366.1 883.3 1,869.2 1,765.0 2,511.8 3,516.5 Fees&Commission onloans 141% 112% 6% 42% 40% 57.2%

Otherfees&co mmi ssi on 1, 430. 2 1,948.9 3,281.1 3,524.4 4,990.4 6,613.5 Otherfees&commission 36% 68% 7% 42% 33% 35.8%

Foreignexchangetrading 23.3 147.4 754.4 180.0 269.9 350.8 Foreignexchange trading 533% 412% 76% 50% 30% 72.0%

Dividendincome 17.2 Dividendincome 0% 0% 0% 0% 0% 0.0%

Othernoninterestincome 44.0 83.0 83.9 177.5 95.2 119.1 Othernoninterestincome 89% 1% 112% 46% 25% 22.0%

Totalnonfeeincome 1,863.6 3,062.5 5,988.6 5,664.1 7,867.3 10,600.0 Totalnonfeeincome 64% 96% 5% 39% 35% 41.6%

OperatingIncome 3,371.4 5,822.6 12,605.4 13,962.4 17,285.0 22,832.1 OperatingIncome 73% 116% 11% 24% 32% 46.6%

Loanlossprovision (133.13) 25.34 (1,019.63) (904.09) (1,674.55) (3,014.18) Loanlossprovision 119% 4124% 11% 85% 80% 86.6%

Staffcosts (942.96) (1,453.47) (2,937.86) (3,681.87) (4,970.52) (5,964.62) Staffcosts 54% 102% 25% 35% 20% 44.6%

Directors'costs (15.70) (16.09) (16.66) (20.95) (25.14) (25.14) Directors'costs 3% 4% 26% 20% 0% 9.9%

Rentalcharges (102.28)

(181.87)

(375.43)

(537.38)

(644.85)

(709.34)

Rental

charges 78% 106% 43% 20% 10% 47.3%

Depreciation (242.55) (357.51) (649.38) (874.73) (1,049.67) (1,207.12) Depreciation 47% 82% 35% 20% 15% 37.8%

Amortization charges (37.32) (65.67) (99.78) (117.72) Amortization charges 76% 52% 18% 0% 0% n/m

Otheroperatinge xp ens es ( 794. 61) (1,409.51) (2,518.46) (2,687.57) (3,090.71) (3,708.85) Otheroperatingexpenses 77% 79% 7% 15% 20% 36.1%

Totaloperatinge xp en se s ( 2, 268. 55) (3,458.78) (7,617.19) (8,824.31) (11,455.44) (14,629.26) Totaloperatingexpenses 52% 120% 16% 30% 28% 45.2%

Profitbeforeexceptionalitems 1,102.88 2,363.82 4,988.18 5,138.10 5,829.53 8,202.84 Profitbeforeexceptionalitems 114% 111% 3% 13% 41% 49.4%

Exceptionalitems 14.70 34.08 55.28 Exceptionalitems 0% 132% 62% 100% 0% n/m

Profitbeforetax 1,102.88 2,378.52 5,022.26 5,193.38 5,829.53 8,202.84 Profitbeforetax 116% 111% 3% 12% 41% 49.4%

Taxation:currenttax (333.99) (454.28) (1,062.60) (1,593.90) (1,748.86) (2,460.85) Taxation: currenttax 36% 134% 50% 10% 41% 49.1%

Deferredtax (15.51) (33.96) (49.40) Deferredtax 119% 45% 0% 0% 0% n/m

Profit/(Loss) 753.38 1,890.28 3,910.26 3,599.48 4,080.67 5,741.99 Profit/(Loss) 151% 107% 8% 13% 41% 50.1%

Source: Company Reports, Legae Calculations


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Page 30 of 40

Balance Sheet

The major risks

Deposits could grow at a lower rate than predicted. This will negatively affect

the loan book growth and the resultant revenues; and

Loans and advances could grow at a slower rate, irrespective of the

development on deposits. A higher liquid balance sheet would compress

revenue due to squashed interest income.

Fig 24: Equity Banks Balance Sheet model

Assets 2006 2007 2008 2009F 2010F 2011F Growthrates 2007 2008 2009 2010 2011 CAGR(0611)

Cash 1,545 3,015.01 3,652.14 4,906.92 5,397.61 7,016.89 Cash 95% 21% 34% 10% 30% 35.3%

Balances due fromCBK 923 2,138.35 2,468.49 2,786.22 2,925.53 2,925.53 Balances due fromCBK 132% 15% 13% 5% 0% 26.0%

GovernmentSecurities 1,651 13, 542. 94 4, 329. 66 5,314.09 5,314.09 5,314.09 GovernmentSecurities 720% 68% 30% 0% 0% 26.3%

Foreigntreasury

bills

88.77

67.70

67.70

67.70

Foreign

treasury

bills 0% 0%

24% 0% 0% 0.0%

Placementswithlocalbanks 1,786 4,105.15 5,160.78 2,905.36 2,905.36 2,905.36 Placementswithlocalbanks 130% 26% 44% 0% 0% 10.2%

Placementswithforeignbanks 459 2,786.25 1,162.11 1,815.85 1,815.85 1,815.85 Placementswithforeignban ks 507% 58% 56% 0% 0% 31.7%

Securitiesfordealing 8,145.45 6,987.15 6,987.15 6,987.15 Securitiesfordealing 0% 0% 14% 0% 0% 0.0%

Taxrecoverable 13.31 10.79 Taxrecoverable 0% 0% 19% 0% 0% 0.0%

Loansandadvances 10,930 21,836.44 44,193.75 69,772.74 83,727.28 100, 472. 74 Lo an sandadvances 100% 102% 58% 20% 20% 55.8%

Investmentsecurities 30.21 30.21 30.21 Investmentsecurities 0% 0% 0% 0% 0% 0.0%

Balances due fromGroupcos Balances due fromGroupcos 0% 0% 0% 0% 0% n/m

Investmentinassociates 441.83 1,155.56 1,192.42 1,192.42 1,192.42 Investmentin associates 0% 162% 3% 0% 0% n/m

Investmentinsubsidiaries 51.00 1.10 1.10 1.10 Investmentin subsidiaries 0% 0% 98% 0% 0% n/m

InvestmentinJV Investmentin JV 0% 0% 0% 0% 0% n/m

Investmentinproperties 11 11.27 11.27 11.27 11.27 11.27 Investmentin properties 0% 0% 0% 0% 0% 0.0%

Property&Equipment 1,465 2,602.88 4,824.26 6,315.74 6,315.74 6,315.74 Property&Equipment 78% 85% 31% 0% 0% 33.9%

Prepaidlease 4 4.15 4.10 5.28 5.28 5.28 Prepaidlease 0% 1% 29% 0% 0% 4.9%

Intangibleassets 161 224.34 1,465.43 1,853.44 1,853.44 1,853.44 Intangibleassets 39% 553% 26% 0% 0% 63.0%

Deferredtax Deferredtax 0% 0% 0% 0% 0% n/m

Retirementbenefitasset Retirementbenefitasset 0% 0% 0% 0% 0% n/m

Otherassets 1,089 2,420.66 2,110.73 6,349.76 9,524.64 11,905.80 Otherassets 122% 13% 201% 50% 25% 61.3%

Totalassets 20,024 53,129 78,837 110,326 128,075 148,821 Totalassets 165% 48% 40% 16% 16% 49.4%

Liabilities

Balancesdue

to

CBK

Balances

due

to

CBK 0% 0% 0% 0% 0% n/m

Customerde posi ts 16,336.73 31,535.52 50,334.53 72,226.74 90,283.43 108,340.11 C us to me rdeposits 93% 60% 43% 25% 20% 46.0%

Placementsdue tolocalbanks Placementsdue tolocalbanks 0% 0% 0% 0% 0% n /m

Placementsdue toforeignbanks 53.32 0.90 31.43 31.43 31.43 Placementsdue toforeignbanks 0% 98% 3396% 0% 0% n/m

Othermoneymarketdeposits Othermoneymarketdeposits 0% 0% 0% 0% 0% n/m

Borrowed funds 485.45 4,521.39 6,463.14 7,816.54 7,034.89 5,979.65 Borrowed funds 831% 43% 21% 10% 15% 65. 2%

Balances due togroupcos Balances due togroupcos 0% 0% 0% 0% 0% n/m

Taxpayable 147.03 209.04 513.73 2.68 5.36 5.36 Taxpayable 42% 146% 99% 100% 0% 48.4%

Dividendspayable 1.01 1.01 1.01 Dividendspayable 0% 0% 0% 0% 0% n/m

Deferredtaxliability 10.92 44.88 94.14 92.58 94.43 94.43 Deferredtaxliability 311% 110% 2% 2% 0% 54.0%

Retirementbenefitliability Retirementbenefitliability 0% 0% 0% 0% 0% n /m

Otherliabilities 843.36 1,848.44 1,892.57 7,115.70 4,415.04 3,497.27 Otherliabilities 119% 2% 276% 38% 21% 32. 9%

Totalliabilities 17,823 38,213 59,299 87,287 101,866 117,949 Totalliabilities 114% 55% 47% 17% 0% 45.9%

Shareholders'Funds

Paidupcapital 452.82 1,811.05 1,851.39 1,851.39 1,851.39 1,851.39 Paidupcapital 300% 2% 0% 0% 0% 32.5%

Sharep re mi um/ di scou nt 480. 36 10,543.04 12,161.02 12,157.31 12,157.31 12,157.31 Sharepremium/discount 2095% 15% 0% 0% 0% 90.8%

Revaluationreserve 1.20 12.13 (349.32) 119.99 Revaluationreserve 907% 2981% 134% 100% 0% 100.0%

RetainedEarnings 1,085.48 1,754.07 4,455.47 7,397.43 10,253.90 14,273.29 RetainedEarnings 62% 154% 66% 39% 39% 67.4%

Statutoryreserves 252.91 308.42 433.36 722.27 866.72 Statutoryreserves 0% 22% 41% 67% 20% n/m

Proposed

dividends 181.13

543.39

1,110.83

1,079.84

1,224.20

1,722.60

Proposed

dividends 200% 104%

3% 13% 41% 56.9%Totalshareholders'funds 2,200.99 14,916.58 19,537.80 23,039.31 26,209.06 30,871.30 Totalshareholders'funds 578% 31% 18% 14% 18% 69.6%

TotalLiabilitiesandEquity 20,024 53,129 78,837 110,326 128,075 148,821 TotalLiabilitiesandEquity 165% 48% 40% 16% 16% 49.4%

Source: Company Reports, Legae Calculations


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Page 31 of 40

3.2 Valuation and recommendation

Valuation

We use the Discounted Future Earnings (DFE) method to estimate the

banks value. Theoretically, the DFE method is often employed when future

earnings are expected to be significantly different from the recent past. It is

our view that Equity Banks future earnings growth rate will become anaemic

and lose likeness to the recent high growth rates. The DFE method captures

the present values of the near term earnings, and capitalises the terminal

value (normalise earnings). This provides a way to capture the near term

growth differentials.

We estimated the CoE as 18.3%, being 10-year Kenya Government bond

yield of 11.84%; equity risk premium of 5.5% and company specific risk

premium of 1.0%

We assign a BUY, with caution of high valuation risk on the stock. The

upside potential return provides little real return to local investors.

Fig 25: Discounted Future Earnings model

2008 2009F 2010F 2011F TerminalValue

Earnings 3,910.26 3,599.48 4,080.67 5,741.99

Terminal Value n/a n/a n/a n/a 66,429.7

TotalEarnings 3,910.26 3,599.48 4,080.67 5,741.99 66,429.66

PresentValueofEarnings 3,539.50 3,391.94 4,034.54 46,676.05

Value 57,642.03

Pershare

value 15.75

ImpliedPER 16.01

Currentprice 14.00

CapitalGain 12.5%

DividendYield 2.1%

Totalreturn 14.6%

Numberofshares 3660

CostofEquity 18.3%

Terminal ValueCalculation

Bookvaluecapitalization Earningscapitalization

CY2011Equity 30,871.3 IndustryaveragePER 10.4

CY2011Assets 148,820.5 EquityBankpremium 30%

IndustryEquity/Assets 0.14 AdjustedcapitalizationPER 13.5

NormalizedEquity 20,819.8

ExcessEquity 10,051.5 CY2011Earnings 5,742.0

PER 13.5

NormalizedEquity 20,819.8 CapitalizedEarnings 77,797.5

IndustryaveragePBV 1.9

Capitalization

of

Normalized

Equity 39,326.4

Excessequity 10,051.5

CapitalizedBookvalue 49,377.8

Weight 40% 60%

ConcludedTerminal Value 66,429.66

Weassign

a60:40

weight

to

TV

values

fromearningscapitalisationandPB

methodstoarriveataweightedTVof

Ksh66.4bn. OurCoEof18.3%isnot

excessiveinouropinion. Ourcapitalisation

(exit)PERof13.5Xisfairat30%aboveindustryaverage.Thetotalreturnof14.6%

providesimmaterialrealreturninourview.



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Page 32 of 40

High valuation risk, relative to peers: Guilty as charged

The current price is 13.1X 2008 EPS, and 14.3X Legae 2009 EPS. Duringthe bull periods, such multiples are hardly demanding, but in light of the

current market conditions, the PER looks excessive. Some investors

compare the historical P/E ratio to the historical multiple, but our view is that

focusing on historical P/E ratio could make us miss the crucial point our

expectation of a material change in the growth rate going forward.

Fig 26: Sensitivity analysis

CostofEquity

TV 13.0% 17.0% 18.3% 20.5% 22%

50,000

13.7 12.9 12.6 12.2 11.960,000 15.8 14.8 14.5 14.0 13.7

66,430 17.2 16.1 15.8 15.2 14.9

70,000 18.0 16.8 16.4 15.9 15.5

75,000 19.0 17.8 17.4 17.1 16.4

90,000 22.2 20.8 20.3 19.6 19.1

AtaTVofKsh90bnandagenerousCoEof13%,thefair

valueprovides58%upsidepotential. ATVofKsh90bnat

ourCoEprovidesupsidepotentialof45%.ApessimisticTV

ofKsh50bnandourCoE providea potentialcapitallossof

10%.RisingTVprovidesmassiveupisderisk

Source: Legae Calculations

Fig 27: Public market pricing. Equity banks share seems relatively expensive

Companyname Ticker

Marketcap

US$,mn

Price,

Ksh 12MHigh 12MLow ROE PER PBV DivY ie ld Y TD

Barclays BCBLKN 811 45 58 36 24.8% 10.5 2.6 4.5% 11.9%

EquityBank EQBNKKN 695 14 19 12 17.4% 13.3 2.3 2.2% 25.9%

KCB KNCBKN 602 20 24 15 17.7% 11.4 2.0 4.9% 14.7%

StanchartBank SCBLKN 533 146 166 129 33.5% 9.0 3.0 6.8% 8.8%

CooperativeBank COOPKN 429 8.8 10.35 6 17.4% 11.9 2.1 1.1% 12.0%

CFCStanbic CFCBKN 169 46 84 46 4.5% 14.5 0.7 0.6% 22.0%

DiamondTrust DTKLKN 148 68 77 45 17.2% 9.9 1.7 2.1% 5.6%

NICBank NICBKN 123 28 47 28 17.1% 8.2 1.4 2.6% 35.6%

NationalBank NBKLKN 91 34 44 28 22.5% 5.1 1.2 0.0% 21.5%

Median 17.4% 10.5 2.0 2.2% 15%

Average 19.1% 10.4 1.9 2.8% 18%

Maximum 33.5% 14.5 3.0 6.8%6%

Minimum 5% 5.1 0.7 0.0% 36%

ROEis


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Page 33 of 40

Share price performance and liquidity

Fig 28: Equity bank underperforms other banks on the NSE as well as the Kenya 20 Index on a YTD basis

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan0 9 Fe b09 Mar0 9 A pr09 May09 Jun0 9 J ul0 9 A ug09 Sep0 9 O c t09 Nov09

Stanchart

CFCStanbic

26%

22%

22%

15%

13%

12%

9%

6%

30% 25% 20% 15% 10% 5% 0%

Equity

CFCStanbic

HousingFinance

KCB

Kenya20

Cooperative Bank

Stanchart

DiamondTrust

Source: I-net prices as at 23.11.09, Legae Calculations,

Fig 29: External liquidity is growing, showing increasing institutional investors interest,Kshmn

50

100

150

200

250

300

350

Jan09 Feb0 9 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Oct09 Nov09

Dailytradedvalue

Averagedailytraded value

Daily tradedvaluehasbeenstreadly

increasingsinceJuly09.Thetrend

lineinrecentmonthsishigher thanthe average.YTD tradedvalueisKsh5.7bn(aboutUS$74.8mn)

Source: I-net, Legae Calculations


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Page 34 of 40

Appendix 1: Company Profile

Equity Bank is a licensed commercial bank in Kenya. Below we detail themilestones for the bank.

Registered in 1984 as Equity Building Society. The main business strategy

was to provide mortgage finance to the Societys members.

Converted to a commercial bank, Equity Bank Limited, in 2004. This allowed

the company to carry our banking activities. The bank focuses on SMEs and

consumer lending.

Listed on the Nairobi Stock Exchange in 2006, August. In 2007, Hellios EB

Investors acquired 24.5% shareholding of the bank.

In 2007 the Group acquired 20% of Housing Finance Company Kenya

(HFCK) a mortgage lender. Regional expansion was kick-started by the

100% Uganda Microfinance acquisition in 2008.

As at the end of CY2008, the major shareholders are tabulated below:

Fig 30: Major shareholders, number of shares before the share split.

Shareholders Numberofshares Percentage

HeliosEBInvestors 90,516,255 24%

BritishAmericanInvestment 41,910,289 11%

NelsonMuguku

Njoroge 22,545,255

6%

JamesNjugunaMwangi 19,898,505 5%

JohnKagemaMwangi 15,139,690 4%

EquityBankESOP 15,018,400 4%

AndrewMwangiKimani 10,928,040 3%

FortresssHighlandsLimited 10,101,000 3%

AiBNomineeA/CSolidusHoldings 9,011,400 2%

PeterKaharaMunga 6,469,379 2%

Othersharehodlers 128,739,489 35%



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Page 35 of 40

Appendix 2: Governance and Management

The Board

In our view, governance structure is critical for banks. Superior risk

management are essential for a bank to stand out and claim a premium

valuation in the capital markets.

Equity Banks board is made up of 11 members, with only Dr Mwangi being

an executive director. Dr Mwangi, who is a founding CEO, holds 4.32% of

the company. According to management, 2 board members represent

shareholders and 8 are independent directors.

Below we provide the profiles for members of the board.

Source: Company Reports, Legae Calculation

Fig 31: Directors profiles

Name Position Experience Qualification(s)

Mr.PMunga ChairmanImmenseexperienceinbothpublicandprivatesector.

Sitsonseveralboards.CertifiedPublicSecretary

MrBWairegi ViceChairmanManagingDirectorofBAIC.DirectorofAgriculture

Finance Corporation. CPA

DrJMwangi CEO Experienceinthebankingindustryfor19years PhDEntrepreneurship,CPA

MrJKi pnge tich NonExecutiveDirectorCEOofKenyaWildlife. PreviouslyMDofInvestment

PromotionCentre.B.Comm,Acc

Prof.Migot

AdhollaNonExecutiveDirector

PreviouslyPSofMoAgriculture. Vastexperienceasa

consultant

PhDSociologyof

Development

MrENzovu NonExecutiveDirector Vastexperienceasaconsultant. DirectorofKHITraining

BAEconomics

MrTLawani NonExecutiveDirectorCofounderofHeloisinvestmentPartners.Enormous

experienceasCorporateDevelopmentAnalyst.B.Engineering

BBSoyoye NonExecutiveDire ctor CofounderofHeloisInvestmentPartners. MBA,B.Engineering

MrFMuchoki NonExecutiveDirectorMDofContinentalBusinessSystem.Hehasvast

experienceasabusinessman.

DrEAlembi NonExecutiveDirectorSeniorlecturer,andauthorofnumerousarticlesand

books.PhD,MA

MrWDiouf NonExecutiveDi rector Managi ngPartnerofAfriCap. MBA,BScComputerScience

MsMWamae CompanySecretary13yearsexperienceinprivate practice.SheisCertified

PublicSecretary.LLB,CPS


37/40

Page 36 of 40

Below provide an overview of the various board committees namely the auditcommittee, the credit committee, risk management and governance, boardnomination and staff remuneration committee.

Credit committee: The committee is made up of four members. Mr Muchoki

chairs the credit committee. The other members of the committee are Mr

Nzovu, Prof Migot-Adholla and Dr Mwangi. We like the fact that a non-

executive director is the chairman of this committee.

Audit committee: The committee consists of three members. Mr Wairegi is

the Chair. The committee is entirely made up of non-executive directors,

which in our view is a credible position.

Risk Management & ALCO committee: The committee is made up of three

members. Mr Kipngetich chairs the committee.

Governance, Board nomination and Staff remuneration committee: The

board committee is made up of five members. It basically doubles up as a

nominating and compensation committee. Mr Soyoye is the chair and Dr

Mwangi is a member of the committee. Although he is outnumbered by non-

executive directors, this is a committee we would have suggested to be

made up of non-executive members only.

Our perception on governance: In our opinion, the board is strong and

largely independent. This could also explain the low levels of inside loans,

which in our view is often a prelude to diluted risk management procedures.The board is also highly qualified and boast of widespread experience

in various sectors of the economy. The size of the board at 11 is fair in

our view, and is above our minimum preferred of 7 members.

The Executive Management

We believe the management exhibit strong experience. The Executive

management is headed by Dr Mwangi. In our view the Executive management

possesses strong experience and qualifications. It is made up of 14 members. The

members profiles are provided below:

Gerald Warui, Director of Operations & Customer Services: He has over

14 years experience in banking. He worked for Fidelity Bank previously and

is a Certified Public Accountant;


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Page 38 of 40

field. He worked for CRDB, Central Bank of Kenya and Standard Chartered

Bank Kenya. He holds a Bachelor of Science in Mathematics and

Computers;

Peter Gachau, General Manager, IT: He possesses over 15 years

experience in IT. He worked for ABC Bank, ABN Amro among other banks

before joining Equity bank. He holds a Bachelor of Education; and

Bildard Fwamba, Head of Internal Audit: He has over 11 years auditing

experience. He previously worked for Central Bank of Kenya and the British

American Insurance Company. He holds a Bachelor of Commerce and is a

Certified Public Accountant.


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Legae Securities (Pty) LtdMember of the JSE Limited6-10 Riviera Road, Houghton, Johannesburg, South AfricaP.O Box 87277, Houghton 2041, Johannesburg, South AfricaTel +27 11 715 3700, Fax +27 11 715 3701

Web: www.legae.co.za email:[email protected]

Analyst Certification and DisclaimerI/we the author (s) hereby certify that the views as expressed in this document are

an accurate refection of my/our personal views on the stock or sector as covered

and reported on by my self/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.

equity bank limited_strong franchise, 14.6% potential upsiide, buy, high valuation risk2

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