REPORT CONTENT MAP

THE RIGHTS ISSUE: | Purpose of Rights Issue | Case Study on Rights Issues | Useful Tips

BUSINESS OVERVIEW: | Bank History | Subsidiaries | ESOP | Products and Services | 2007 Financials

BUSINESS STRATEGY: | Overall Strategy | Products & Services | Savings & Loans | Regional Strategy

FIVE FINANCIALS: | Balance Sheets | Income Statements | Cash Flows Statements | Selected Financials

CONCLUSION: | POSITIVES: Why You Should Buy? | NEGATIVES: Why You Should Stay away?

Related Links

PURPOSE OF KCB 2008 RIGHTS ISSUE:

• The purpose of the Rights Issue is to raise funds for the growth and expansion plans of KCB. KCB Bank intends to:
• Grow the business locally by increasing the lending portfolio, opening up 40 new branches as well as setting up 50 new ATMs.
• Boost core capital and prudential ratios. The Bank intends to maintain adequate capitalization to fund both local and regional expansion while meeting prudential guidelines. The CBK guidelines exclude investment in subsidiaries in the determination of core capital (the investment is deducted from capital to arrive at the core capital). The core capital to weighted assets ratio was 15.7% in 2006 and 13.6% in 2007 against the statutory minimum of 12%.
• 2.3 Grow the business regionally by boosting the Bank’s presence in Tanzania, embark on additional investments in Uganda and Southern Sudan as well as establish a presence in Rwanda and Burundi.

WHAT IS A RIGHTS ISSUE?
A rights issue is a way for a listed company to raise funds from its shareholder and the public. Rather than take on debt from a bank, a publicly listed company can instead ask its shareholders to buy more new shares from it to provide extra capital. The transaction involves the company giving existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings. KCB is offering a one to nine (1:9) rights issue, meaning an existing shareholder can buy one extra share for every nine currently held. The price of the newly issued shares price is usually set below the prevailing market price (a discount). For KCB the new shares are fixed at Ksh.25 per share.

The rights issue gives shareholders the right to buy the additional shares, but not the obligation. So the rights are often transferable, allowing the holder to sell them on the open market. Thus each right has a value on the market. A shareholder can take up all, some or none of the rights on offer.

In most cases the company seeking funds through a rights issue may be aiming to expand its operations or making a takeover in the industry. But in some rare cases, some companies use rights issue to improve their indebted balanced sheet (geared). But the reasons for issuing the rights is usually detailed in the prospectus send to all its shareholders and posted in the public media for investor wishing to buy from the open market to read

At the moment KCB has sent a provisional allotment letter and an Information Memorandum to all its current shareholders, with allotment letter detailing each shareholder’s entitlement while the Information Memorandum contains the company profile and other details. The bank has also issued an official announcement which has a timetable for the various stages of the process.

CASE STUDY: A RIGHTS ISSUE
Assume an investor/shareholder is holding 1,000 shares of KCB and the current market price of the shares is Ksh.30 (so the value of the holding is ksh.30,000.00) while the rights issue of one to nine (1:9) has been announced with a subscription price for the new shares set at Ksh.25. the investor has now 111 new shares he need to decide on what to do with. The investor has the following options to exercise:

Option I: Taking up the rights
If the investor decides to take up the 111 new shares at a price of Ksh.25 each, the shareholder would need ksh.2,777.80 to purchase the rights. He will need to take up these rights before they go ex-right on July 11, 2008. This will help him keep is original holding of X% that he had before the rights issue.

Once the shares go ex-rights, meaning that anyone buying KCB shares no longer has the right to buy the new shares, then the share price (the ex-rights share price) will be calculated (theoretically, assuming all things being equal) as follows:

Total value of investment ksh.30,000.00 + ksh.2,777.80
_______________________ = _________________ = Ksh.29.50
Total number of shares held 1,000 + 111

The prospect of extra shares for a listed company usually has a dilutive effect on the share price. But the ex-right price also depends with the information accompanying a rights issue. Information over why the capital is to be raised will be taken into account and if the raised in the issue is going to be put to really good use, then the share price may rise, and vise versa.

Option II: Pre-empt the rights
In a case where the investor doesn't take up any of the rights he has, the investor will remain holding 1,000 shares at a theoretical ex-rights price of approximately Ksh.29.50. The total holding value will be: 1,000 shares at Ksh.29.50 = Ksh.29,500. The investor will therefore loose Ksh.500.

However, all is not lost to an investor who doesn’t want to buy the rights. Rights are usually tradeable, meaning you can buy and sell them through a broker, just like ordinary shares. Each right will be worth (in theory) the difference between the subscription price and the ex-rights share price; in this case: Rights price = Ksh.29.50 - Ksh.25 = Ksh.4.50. in reality the rights price may be more or less. In the case of KCB the rights are currently trading at Ksh.9.90.If the cost of trading is ignored, by selling the 111 rights, the investor will recoup his Ksh.1,098.90.

The investor can also let the rights issue lapse. And at the end of the process, KCB will take all the lapsed rights and sells them. Any money raised is returned to the shareholders who let their rights lapse. The disadvantage of this approach is that the price could move against you in the meantime. If the share price had fallen to Ksh.26 for example, the rights price would be Ksh.1.00 and the total amount received would be Ksh.111.00.

Option III: Swallowing your tail

An investor can also sell part of his rights and use the proceeds to take up his remaining rights. In our case the investor could have sold 80 rights at Ksh.9.90 and raised Ksh.792.00. This would have enabled him to buy the remaining 21 shares he was entitled to at a cost of Ksh.25 each. This process is known as swallowing your tail.

New Investors (not current KCB shareholders)
For new investors who are interested in the rights or even current shareholders who wish to buy more shares than he has been allocated they may have to wait until the rights start trading on the open market for them to buy them. In this case the rights price is usually above the discounted price of the new shares. Thus if an investor buys that rights at Ksh.9.90 per right on the open market, then when they finally stop trading he will need to add Ksh.25.00 for every new share, hence paying Ksh.34.90 per share. New investors are usually subject to the demand of the rights on the market and it may end up being expensive for them to buy into a right issue. If the rights or so ‘hot’ the current shareholders may not sell their rights and thus no shares will be available for new investors.

The purchasing and selling of rights is done just like ordinary shares, through a broker and thus anybody wishing to trade will need to go through their brokers.

Useful Tips

• When dealing with rights issues, an investor should not take up rights if the share price has fallen below the subscription price. It would be cheaper to buy the shares on the open market than through the rights issue.
• A rights issue by a highly geared company intended to strengthen its balance sheet is often a bad sign.
• Rights issues to fund expansion can be regarded somewhat more optimistically, but shareholders/investors should be careful to do their due diligence because management may be empire-building at their expense.
• Buy into a rights issue by getting a loan from a bank is equally as bad as using a loan to finance once investment into an IPO. Just like IPO’s, rights issue get oversubscribed.

KCB BUSINESS OVERVIEW

KCB offers a wide range of banking, financial and related services. To serve its customers, the Bank provides a range of retail and commercial banking services, including a variety of checking, savings and other interest-bearing accounts. The Bank's business lending services focus on secured loans and lines of credit, construction loans and customized asset financing programs. Its consumer lending services focus on personal loans, credit cards; debit cards; and investment advisory services through the branch network, as well as through alternative delivery channels, such as automated teller machines (ATMs) and internet banking. The company reports their financial results into their three main business segments; retail & corporate banking, asset finance, and other. The Asset Finance segment offers a range of asset financing services, including staff car loan schemes, distributor vehicle loan schemes and school bus schemes.

KCB provides its loan solutions to a range of customers in the following sectors; wholesale & retail, real estate, business services, agriculture, social community & personal services, manufacturing and transport & communication. It receives deposits from a range of customers including; mortgage finance companies, commercial banks, non-bank financial institutions, co-operative societies, insurance companies, non-profit institutions and individuals and private enterprises. The Other Services segment operates primarily in areas, such as foreign exchange transactions, custodial services and insurance premium finance. The company also offers saving and deposit products, investment and insurance, electronic banking, and payment services. As of October 15, 2007, it had a network of 6 branches and 8 service centers in 3 cities in Kenya, 19 NIC-owned ATM’s and approximately 110 Pesa Point owned ATMs across Kenya. NIC is based in Nairobi, Kenya.

HISTORY
KCB commenced operations in 1896 when its predecessor, the National Bank of India, opened a branch in the Coastal Town of Mombasa. In 1958, Grindlays Bank of Britain merged with National Bank of India to form The National and Grindlays Bank. In 1970, the Government of Kenya acquired 60% shareholding in National and Grindlays Bank and renamed it The Kenya Commercial Bank. In 1976, the Government of Kenya acquired 100% of the shares in the Bank, taking full control of the largest commercial bank in Kenya.

The Kenyan government started reducing its shareholding in KCB to 80% in 1988, 70% in 1990, 60% in 1996 and 35% in 1998. In June 2004 it offloaded a further 9% holding by renouncing its rights in a rights issue. The Government of Kenya however continues to remain a single major shareholder controlling 26.2% stake in the Bank.

KCB is primarily owned by institutional investors. Approximately 65% of the company is owned by Kenyan institutional investors, 33% by Kenya individual investors’ institutions and 2% by non-Kenyan investors. The company has a total of 152,618 shareholders and the top ten largest shareholders own approximately 46% of the outstanding stock. The Government of Kenya is the largest single shareholder and owns approximately 26% of the company followed by National Social Security Fund with 7% equity stake in KCB. The Chairman of the Board is Peter W. Muthoka (Some company directors hold interest in KCB shares) and the Managing Director is J.W Macharia.

EMPLOYEE SHARE OWNERSHIP PROGRAM

KCB plans to implement an Employee Share Ownership Program (“ESOP”), with a view to provide incentive to the executive management and staff of KCB to acquire shares in KCB through a trust based on annual performance appraisals. This is now a common initiative amongst public listed companies to ensure retention of staff and linkage of personal performance to enhanced shareholder value. The Annual General Meeting on 9th May 2008 has authorized the Board to set up an ESOP via the allocation of a maximum of 150,000,000 shares over a period of four years subject to regulatory approvals.

KCB’s SUBSIDIARIES

NIC Bank owns equity interest in several companies, which they define as subsidiaries. NIC subsidiaries are those companies in which the group either directly or indirectly has an interest of more than 50% of the voting rights or otherwise has power to exercise control over the operations. All the subsidiary companies have financial years ending 31 December. The subsidiaries are controlled by the NIC and have are consolidated into their financial statements and are all incorporated and domiciled in Kenya.

• Savings & Loans Kenya Limited – S&L. S&L is the oldest mortgage finance company in Kenya, established in 1949 as a branch of Savings & Loan Society, a private company registered in Tanzania. Savings and Loan Society converted to a limited company in 1962 and was acquired by KCB in 1972 to serve as the housing finance arm of the Bank, providing mortgage finance.
• KCB (Tanzania) Limited. KCB Tanzania was incorporated in April 1997 to provide a wide range of financial products to the emerging regional economies and facilitate cross-border trading following the revival of East African Co-operation.
• KCB (Sudan) Limited. KCB Sudan was incorporated in pursuance of the vision “to be the Best Bank in the Region”. KCB Sudan was launched in May 2006 and immediately commenced operations in Southern Sudan. Operations commenced with two branches - Juba and Rumbek - where impressive progress has already been made to command a greater share of government and NGO business.
• KCB (Uganda) Limited. KCB Uganda started business late November 2007. It is expected to help leverage on existing business in Sudan as Uganda is a key transit and trading partner with Sudan. KCB Uganda provides customers a wide range of innovative products and services including SME banking, corporate banking, personal banking, money transfers and mortgage financing.

KCB’s PRODUCTS & SERVICES

KCB’s principal activities are the provision of banking, financial and related services. To serve its customers, the Bank provides a range of retail and commercial banking services, including a variety of checking, savings and other interest-bearing accounts. The Bank's business lending services focus on secured loans and lines of credit, construction loans and customized asset financing programs. Its consumer lending services focus on personal loans, credit cards; debit cards; and investment advisory services through the branch network, as well as through alternative delivery channels, such as automated teller machines (ATMs) and internet banking.

• RETAIL BANKING: Personal, Business, Western Union and Card Business
• CORPORATE BANKING
• TREASURY

KCB’s OVERALL STRATEGY:

Over the year, KCB faced some difficult time due to mismanagement and political interference. The bank has however since 2003 returned to profitability and is currently one of the most profitable banks in Kenya.

KCB’s vision is to become the leading bank in the East African region. The bank has been on thus been on an aggressive regional expansion strategy that has seen them open branches in all countries of the region. Currently the bank has five branches in Tanzania (3 in Dar-es-salaam, 1 in Arusha and 1 in Mwanza), one in Kampala – Uganda and one in Juba – Southern Sudan. There are extensive plans to move to Rwanda and Burundi.

KCB is also planning to open more branches in rural areas as part of its expansion program. The bank expects to have 60 branches and 50 more ATMs across the region by the end of this year, most of them in the rural areas. KCB has recorded consistent growth in both business volumes and profitability over the past five years leading to growing optimism among its stakeholders as to its future prospects.

In their bid to expand regionally the bank is planning to raise Ksh.5 billion through a rights issue. The bank’s shareholders will seek to increase its share capital from the current Ksh.2 billion to Ksh.2.4 billion by creating 400 million ordinary shares of Ksh.1.00 each. A consortium of Standard Investment Bank and Faida Investment Bank has been appointed transaction advisors. Walker Kontos and Ernst & Young will be the legal advisors and issue's reporting accountants respectively. 150 million of these newly created shares are expected to go to an Employee Share Ownership Scheme (ESOP) that the bank wants to introduce. The bank will also consider cross listing its shares in Tanzania and Uganda. If approved, the bank hopes to cross-list in the third or last quarter of the year. The bank has changed their website address from www.kcb.co.ke to www.kcbgroup.com to give it a more regional look.

At the NSE, KCB is one of the most liquid counters with millions of shares traded everyday. However it’s over expansion has stretched some of its financial ratios necessitating a further capital injection in the group. The banks lending capacity has been affected adversely. If this is not improved soon, it may give its competitors a chance to gain control of the banking sector’s lending business amidst shrinking interest in income margins.

On the whole, KCB is one of the strongest counters at the NSE and with increased profitability from the new branches in the region; the bank is poised for bigger things. If it manages to get a bigger share of both the Ugandan and Southern Sudan banking sectors, edging out Barclays and Stanbic Uganda, KCB will become the biggest bank in the region.

2007 FINANCIAL REVIEW
For the year ended December 2007, KCBs operating income increased by 22% to Ksh.14.1 Billion up from Ksh.11.5 Billion in 2006. The banks net interest income contributed Ksh.2.1 Billion, fees and commissions contributed Ksh.710 million, while incomes from foreign exchange transactions chipped in Ksh.839 million.

At the same time, the banks operating expenses rose by 20% to ksh.9.4 Billion from Kshg.7.8 Billion. This was mainly attributed to enhanced business activity, marketing, and improvement of customer service initiatives.

KCB’s Profit before tax, for the period under review, increased by 33% to Ksh.4.2 Billion up from Ksh.3.2 Billion in 2006. There was significant increase in profitability of the banks foreign subsidiaries which together contributed of 268 Million to the net profit. The banks net loans and advances to customers grew to Ksh.64.3 Billion in 2007 from ksh.45.3 Billion. Customer deposits went up by Ksh.17.2 Billion to Ksh.94.4 Billion from 77.2 Billion.

The bank proposed a final dividend payout of ksh.0.70, which represent a 17% increase over dividends awarded in 2006.

KCB PRODUCT & SUBSIDIARY STRATEGY

RETAIL BANKING STRATEGY

• Personal & Business: Continue to expand service outlets, Grow and optimize utilization of ATM network; Embed sales and customer centric culture; Grow business in value and volumes; Improve quality of MIS and effectively manage costs.
• Card: Strategy to retain demand driven cards; Pushing flagship cards (Gold, Classic, General Purpose, Payroll); Increasing penetration; Co-branding; Increasing quality of customer service.
• Western Union Increase market share; Establish dedicated counters in key branches.

CORPORATE BANKING STRATEGY

• Aggressive growth through high quality service delivery; Concentrating and focusing more on target sectors; Increasing product cross-selling with existing clients in Retail/Subsidiaries/ Treasury.

TREASURY STRATEGY

• Aggressively drive foreign exchange sales and marketing campaign; Introduce new hedging products; Manage the cost of funds within specific limits; Cross sell treasury products/services; Drive deposits mobilization; Implement aggressive investment strategy to maximize returns from bond portfolios; Diversify investment opportunities.

SAVINGS & LOANS KENYA LIMITED

According to KCB, the mortgage industry has benefited immensely from the turnaround in the economy. There is increasing demand for mortgage products and the government has initiated specific programs aimed at promoting housing in the country. The industry has also seen the emergence of cut throat competition with new players entering the market and offering very attractive incentives. It is estimated that the total mortgage market is approximately Kshs 20 billion with S&L controlling a sizable stake of this market.

To grow S&L's market share following is required: Retain leadership as a leading mortgage company in Kenya; Achieve and maintain a competitive edge in service delivery; Enhance the subsidiary image and exert its presence as a key player in the industry; Optimize use of assets and control costs; Introduce further efficiency in the processing of applications; Leverage KCB`s financial strength to grow its business; Introduce further cross-selling and introduce new products and services.

REGIONAL STRATEGY: (Extracted from Information Memorandum)

KCB Tanzania: This subsidiary has been in operation since 1997. With the injection of additional capital in 2006 and revamping of management the subsidiary is profitable. KCB has planned a number of initiatives including: Improve return on equity; Organic growth with roll-out of more branches; Increase market share and profitability by focusing on retail deposits; Special focus on retail banking, SMEs and local corporations; treasury leadership and performance; Improving risk management function; Improving internal controls environment; Expand product/service range; Expand ATM network; Continue brand awareness campaign; Reduce cost to income ratio.

KCB Sudan: There are challenging environment issues such as legal and regulatory framework, the banking industry is still at an infant stage and the economy appears to offer limited scope but there is future potential. KCB’s plan is to: Stabilize the business and grow number of outlets; Increase market share and profitability; Increase bank visibility and create more awareness; Improve range of product offerings.

KCB Uganda: The business commenced trading in November 2007. The key objective is to break even as soon as possible The Uganda subsidiary will help leverage KCB’s business in Sudan as Uganda is a key transit and trading partner. Some areas of focus will be further investment capital, more branches, enhanced human resources, increased corporate governance, introduction of new products and services, establishing new target markets, identifying new delivery channels and sourcing new customer deposits and offering more loans.

REASONS WHY INVESTORS SHOULD BUY KCB RIGHTS

• KCB has a very strong balanced sheet (its not geared)
• The funds raised through the issue will be put into good use i.e. expansion of the bank.
• The banks has been posting good profits with their 2008 Q1 pre-tax profits rising by over 83%
• As indicated in the theoretic ex-rights price above the price of the KCB shares may not fall below Ksh.30
• The small amount of rights on offer will not dilute the share price once the new shares start trading on the market on August 25.

REASONS WHY INVESTORS SHOULD IGNORE KCB RIGHTS

• The rights on offer are very little with already a big chunk of it going to the Employee Share Ownership Program (ESOP)
• There is a very big possibility of oversubscription which will leave you chasing after your refunds
• The rights issue discounted price of Ksh.25 is a bit over valued and the post rights price may be lower than that.
• he bank is facing very stiff competition from other industry players like Equity bank and Barclays.
• Although the Kenya government opted out of the issue, inclusion of foreigners and coinciding with the issuing of Safaricom refund will make the rights price on the market to be overvalued due to excess demand.

RELATED LINKS

• Information Memorandum
• Bankelele on Rights Issue
• KCB Website on Rights Issue
• Google on KCB Rights Issue
• Discussion on Stocks Kenya