event: kcb forward guidance date: 21 january 2015 … · event: kcb forward guidance date: 21...

Event: KCB Forward Guidance

Date: 21 January 2015

Time: 14:00

21 January 2015

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Speakers:

› Mr David Kitheka – Head Investor Relations, KCB

› Mr Joshua Oigara – CEO, KCB

› Mr Charles Lang’at – Acting CFO, KCB

› Mr Paul Russo – HR Director, KCB

› Mr Samuel Makome – MD Kenya, KCB

› Mr Avi Mitra – Chief Information Officer, KCB

› Ms Cyndia Nguli – Investor Relations Manager, KCB

START OF TRANSCRIPT

Operator Good day ladies and gentlemen and welcome to the Kenya Commercial Bank forward

guidance conference call. All participants will be in listen-only mode and there will be an

opportunity to ask questions after today’s presentation. If you should need assistance during

the conference please signal an operator by pressing star and then zero. Please also note

that this conference is being recorded. I would now like to turn the conference over David

Kitheka. Please go ahead.

David Kitheka Good morning. Good afternoon. Good evening. This is the KCB team wishing you a happy

new year 2015. This is the first time we are talking. The reason for this call is to give you

our 2015 forward guidance on where we think this part of the country, the region, the world

is going, and more specifically what KCB envisions for itself in the next 12 months.

With me in the room I have our group CEO, Joshua Oigara, I have our group HR Director,

Paul Russo, I have our Chief Business Officer Kenya and Managing Director Kenya, Mr

Samuel Makome, our Chief Information Officer, Avi Mitra, our Acting CFO, Charles Lang’at,

and our Investor Relations Manager, Cyndia Nguli. Without further ado I would like to hand

over the call to our CEO, Joshua Oigara, who will take us through a short presentation, and

then we can have a few minutes for questions and answers. Thank you.

Joshua Oigara Thank you very much David. I want to wish all of you a happy new year. For those waking

up, a good morning, and for those for whom the day is gone, good evening. Usually we start

a little bit by speaking about the macro-economic environment, which you know extremely

well. You have been following this very closely over the last year. You will see 3% looking

at the [unclear] bank statistics, a growth of GDP of 3% for 2015. Obviously there are different

scenarios. The strengthening of the US market, the challenges of the euro zone today,

inflation, oil prices coming lower.

It is a mixed bag depending on how you look at it, but we see an opportunity for progress in

East Africa and Africa generally. The Sub-Saharan Africa growth forecast is not so different

from what you have seen before, 5.5% growth for 2015. Strong growth in most markets.

Tanzania at 7%. This is a not a new number. It has been there for the last year. Uganda at

6.5%, Rwanda at 6.8%, Kenya predicted at 6% or slightly higher. The last confidence index

showed that Kenya will grow beyond 6%. Burundi growing at 4.3% and another area which

is not growing as much is South Sudan.

Generally East Africa remains a strong point of growth in the medium term. Inflation has

been well managed below 6%. Kenya is coming well within the target. Kenyan inflation is

now at 6.03%, well within the target of 10.5%. Uganda is 6.5%, Tanzania 5.5%, Rwanda at

5% and Burundi at 5.4%. Over time there has been an orchestration in terms of the macro-

economics for this market over the last five years. So this is a [unclear] of strong momentum

for most of our markets where we are.



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If you think about our currency, I know there have been questions asked around the

weakening. If you are looking at the top 20 currencies in the continent what we have seen

is the shilling depreciated by 4.5% against the USD for the last nine months. Definitely 4.5%

has been a significant devaluation compared to other markets. If you look at the Cedi, if you

look at Uganda for instance, there is a huge devaluation. We appreciate there has been a

strengthening of the USD against most global currencies in the last year. It’s a new year to

watch. But I wouldn’t say the 5% devaluation has been a major change from the previous

year in 2014.

If you look at other currencies obviously coming under a lot of pressure in the first half. But

if you take a Kenyan example for instance oil costs or energy import costs today is about

40% of our foreign imports. You know what has happened with energy costs or [unclear].

We don’t import [unclear] in any way in East Africa. We import heavy fuels, white fuels, black

fuels, which means the [unclear] effect is maybe 25% or 30% at most. Our refinery was

closed more than a year ago. You don’t see the full impact, but we feel that this [unclear]

for customers across the East African market. We are all net importers of oil today in East

Africa, except South Sudan.

I will speak about the reference rate. Obviously from the central bank point of view we see

consistently the central bank rate of 8.5%. We just had our meeting with the central bank

last week on Friday. The [unclear] that we spoke about last time with the third quarter results

and also from the half year results, a slight change, 60 basis points down from last year.

Today perhaps 45% to 50% of the loans have been priced on the reference rate since last

year. But banks are [unclear] the pricing on their facilities for customers reference rates,

and we may have seen some impact in terms of reduction of the margins, but overall I would

say that consistently we are all learning how to use the new benchmark in the market. It is

made of two aspects, and I think I have explained that before. I can answer some questions.

So nothing new. Across the region most central banks have responded and set some targets

for themselves for the last one year, and that will continue in the future. A few other trends

of course in our market. As you know there are a billion mobile phones on the continent. So

far we have seen close to 130 million smartphones on the continent. Kenya is not an

exception. Close to 90% of our people have got phones today and penetration is picking up

to 96%. You are looking at our population. We have the youngest population in this part of

the world. The average age is 18 to 20. You can imagine the possibilities of the future of our

market.

Social media and digital platforms. Nairobi is the ninth across the world [inaudible]

compared to Lagos, compared to Cairo. And that is a big part in engaging the product

portfolio and multi channels the bank is going to adopt in the future. Energy is a key driver

for this economy. There is positive upside which has not been factored into economic

expansion for GDP growth this year. If you look at the PPP partnerships between

infrastructure, energy, ports, airports, it is growing much faster. You have seen the railway

project. You have seen road projects, airport projects, you have seen new roads coming up.

That is a big chance for us to take advantage. In fact, I would say that we don’t lack

opportunity to build businesses today in partnership with [unclear].

The diaspora remittances, up 5%, play a strong part, almost $140 million. And that is a big

contribution on a monthly basis for the last year. Our market share actually for diaspora

remittances has increased from a low of 4% to 9% if you look at the end of last year because

we are doing more work targeting diaspora customers across Central America, North

America, the Middle East and also Australia. Overall it is a good opportunity as a platform

in the market despite what we see. A benefit of lower oil prices for African markets, who are

net importers, is that these markets depend on oil, [inaudible] market for Kenya.



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And secondly what we see for the group, I think in the last five years now we have been

very consistent about the direction our business is going today. We have just finalised our

plan for the next five years in the last year. And we are building around the same platform.

I will speak about that very shortly. Ultimately the big goal for the group in the next few years

is to use the different channels we have in our business to simplify the world of our

customers and enable their progress in the different businesses that they have.

In our market in East Africa simplification is going to be the way to go to build technology,

mobile digital payments and get customers onto alternative channels across each and every

site that we have in Kenya. So that is going to be a key [unclear] across our team, across

our business in six countries where we are. We have a few more countries in the next three

to five years, none of them this year. Building our processes, enhancing our turnaround time

using technology. And I will give you a good example. Last year we got in a mobile lending

product out of our mobile banking, what is called M-Benki. Today customers apply for the

loans on their phones. Today it is [unclear] and we have in excess of 100,000 new loans in

the period of five months. It would take us two or three years to do that in the past.

So although the loans are micro, the maximum loan value today is 10,000 Kshs, in terms of

the ability to deliver loans to our customers in the last year on the mobile channel will

transform the [unclear], grow the business opportunity for us, get better margins for

ourselves, we can [unclear] business partnership across the market. And that is on the back

of our partnership with Safaricom that you remember last July [unclear] and the next phase

of our partnership is coming through this year in the last quarter and you will be seeing a

formal communication by the end of the first quarter.

So I would say clear value for us in our business in terms of our customers. We have last

year improved our level of customer experience in terms of engagement. We‘ve been able

to build today 150 customer experience or contact centres able to handle in excess of 3,000

to 4,000 calls per day. We were rated as one of the top banks in social media in Africa.

There is a function happening in Nigeria this month. Engaging on social media, on Twitter,

on Facebook, on WhatsApp. So that is the nature of our younger generation customers in

our business. I’m impressed that we see that as a core part of integrating our businesses

and growing our customer profile in the future.

The average age for our customers today is 32 to 33. We have new customers of the age

of 23 to 24. Again that is a key part of growing our future growth opportunities for our

business. And for me I see a good chance of enhancing our business products in our

market, not only in Kenya but also in Uganda, in Rwanda, in Tanzania, in Burundi and in

South Sudan despite the difficulties in that market.

I will speak a little bit about the areas we want to focus on, specifically on our customer

experience, talking about the top five goals for the group this year and going into next year.

In terms of our customer satisfaction and enhancing the experience level our goal is to reach

85%. Last year it was 80%. We were coming from a low of 70%. That is a key part for us.

We believe we need to deliver a better customer experience, building our brand for our

customers today, enhancing the internal perceptions as well. 90% of our customers [sic] will

be able to say I love working for this organisation and I’m able to succeed in the social

transformation of the organisation.

In terms of enhancing our community on financial inclusion, I promised a year ago that we

were able to service a million customers on mobile banking. You will be seeing the numbers

shortly in February, and I can assure you that we have achieved our target in mobile

banking. We have a big ambition in the coming year to be able to grow our mobile banking

customers by an additional 3 million to 5 million. It’s a good number. Our growth in agency

banking, we have targeted to reach 10,000 and that is completely on track. We see

ourselves building an additional [unclear] customers on our mobile banking platform.



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Being able to enhance our [unclear] programme. We launched with Safaricom last year on

our SME. The rate is for one million SMEs by the year 2015. This is running. And also

increasing access to home loans, which we haven’t grown as fast as we wanted this year.

We’ve got a new product in the market. You know we launched our 5% mortgage loan in

the market last year. We signed up close to 5,000 new mortgages on this product. But it is

still a drop in the ocean today. It is not big numbers we are talking about. In the next five

years we think there is a chance to build a million mortgages in the East African market, not

just KCB alone but all the organisations focussed on building home loans across the lending

market in Kenya.

Focussing on looking at our [unclear] product we launched four years ago. On our [unclear]

agenda we have partnerships with training institutions, [unclear] institutions across the

region to build a new product. [Unclear] is our own brand, mobile-driven. You open an

account on your phone, get your exams on your phone, and then pay through the mobile

phone in partnership with M-Pesa. I think that for me is a new entry in our agenda.

Traditionally we were seen as a more mature bank. But our average age today shows that

we are bringing in more customers who are younger in our platform.

On digital payments, cash payments, transport payments and acquiring we are the largest

acquiring institution in East Africa today. We have a new partnership with MasterCard today

and Visa. On online banking we have launched our new product with the transport sector.

That is a key part. [Inaudible segment] an area we want to focus on. Cashless transport,

cashless [unclear] and money remittances as a key part of funding our non-funded income

in the next year.

We will continue to invest in our national businesses. Last year I think the area we didn’t do

as well was South Sudan. I explained that earlier in the year. Our insurance business is

doing well. Our new investment banking is doing well. We don’t see ourselves expanding

into a new country, but we are going to consolidate our businesses that we are running in

the markets that we are today.

In terms of investment in technology, investment for us is just refreshing of the core. We are

already prepared today to run any single solution for our customers from our platform we

have today. We have a new CIO who joined the bank last year. And one of the key

capabilities today is a robust IT platform. And you can tell that we’ve been able to achieve

the most efficient cost to income ratio, way below the target we set last year. I remind you

we set that 55% [?].

We are very keen on building on our partnerships that we have with partnerships like

government on payments, on big projects, on the energy sector, on the transport sector, on

the railway sector. We are also keen on enhancing our relationship with the largest

telecommunications business today in Kenya, which is Safaricom. And that will be a key

driver of our performance as well going forward in terms of using the largest mobile company

to enhance value for our customers going forward. I am very excited about what we are

already seeing from our investment and partnership with Safaricom. I am very proud about

that partnership.

So we continue working with Safaricom. We continue working with the largest retail store in

the market called Nakumatt. We are working with the county governments in Kenya, the

central government as well, enhancing our SME and micro banking business. We will

continue to see that growing our non-funded income to close the gap and margins on large

customers.

Our new sector, oil & gas, is a more medium-term sector. Really in this year we are not

seeing complete conversion of that into new opportunities for our market. Bancassurance,



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we are looking much stronger. We are building more capabilities, investing in more

insurance companies, and you will see that happening in the first half of the year. But our

Bancassurance business is growing at 3% to 4% this year compared to the figures I gave

in September. When we discuss the full year numbers we will see a better performance.

And I think for me it is a natural captive business today without even going out to sell this

and launch it officially. We expect to do that in June of this year.

The KCB Capital, which is our investment banking, is up and running. There are a couple

of projects they are running on. We have also just recently gotten a license to do

stockbroking in the market. We have also got a new license to do [unclear] in the market.

So we are prepared for that new business line. The international business, again the

question for me has been bringing efficiency. I’ve seen very good progress in Tanzania,

very good progress in Rwanda. But very good progress and performance.

Excellent performance on non-performing loans in the last year, in line with the target we

gave you last year. So I think we will be more aggressive again in terms of our non-

performing loans going forward in 2015. Good progress in our corporate business as well

as our market business in Tanzania. The [unclear] business in Rwanda has turned around.

We are looking at new offices in Ethiopia and Dubai. We have been very much focussed on

Somalia and that market. We haven’t always said we are not ready yet in that market. Our

Islamic market proposition is something we are really considering.

In terms of our guidance for our growth I gave you some guidance last year and we are not

too far away. Our ROA is in the range of 44.2%. Our ROE is [unclear] and our cost to income

is 48%. NPL at 5.5%. And if I’m going too fast I can answer questions later on. Our [unclear]

reached 40% plus, cost to income ratio at 25%. We see a slight increase in our cost of

funding, up 3.5% to 4%. An increase in our net interest margins, 9.5%, cost of risk at

[unclear], loans to deposits 80% to 85% [unclear] beyond 20% to 25%. Loans and advances

at 15%, customer [unclear] 15%, PBT [unclear] double digit growth in excess of inflation.

So overall the guidance is still on the same level we saw last year, delivering strong double

digit growth. We saw that for nine months for last year when we announced. And that gives

you the view that we continue remaining stronger in the organisation in line with the

technology plan we put in place. So overall before you ask questions I would say it is exciting

time for our market. I said the same thing last year. I said the same thing in 2013. Because

we see tremendous opportunity across each and every of our markets where we operate

today.

The only outlier I would say is the South Sudan market where we have seen some

reductions in performance in 2014. We see an election process coming up this year. I think

you can ask the question, how are the elections going to go during the year. But our

business has continued to remain solid despite not growing our loans and advances strongly

by Q3. I think the market remains cautious for ourselves especially with an election process

coming through. But our business in Tanzania, our business in Uganda, our business in

Rwanda, our new Bancassurance business, I think remains a significant [unclear] our

growth going forward.

So overall I would say it is a strong guidance for us again this year. We will communicate to

you in the next month on our performance last year. But you can see that from our quarter

three results. And I will now hand back to you to be able to take some questions which we

could answer. Thank you very much.

Operator Thank you sir. Ladies and gentlemen, at this time if you would like to ask a question please

dial star and then one on your touchtone phones, or if you decide to withdraw your question

please dial star and then two. Our first question comes from Adesoji Solanke from

Renaissance Capital. Please go ahead.



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Adesoji Solanke Hi. Good afternoon. Thank you for this conference call. I’m actually not sure, you rushed

through the guidance. Can you kindly repeat all of them again?

Joshua Oigara Thank you. We will share them again with you, but let’s look at our view on return on assets.

We said we are looking at 4.2%. Return on equity we said we are looking at 26% or 27%.

Our cost to income ratio was about 48%. Last year I think we gave a guidance of 50%. Our

NPL ratio was 5.5%. Our non-funded income was 40%. And our cost of funds was 3.5% to

4%. Our net interest margin at 9.5%. Our cost of risk at 1.5%. And debt to equity we are

looking at raising that up to 25% this year. Our growth on assets or advances was at 15%.

Our growth on customer deposits was 15% to 16%. And our growth in terms of profit, we

are looking at double digits, 15% to 20%. And our expense growth is going to be within

inflation. Is that clear now?

Adesoji Solanke Yes, that was excellent. Thank you. I just want to know about your margins. Are you

basically getting better margins in 2015? And what exactly is driving this? You have already

said costs should be higher by about 50 basis points from 3.5% to 4%.

Joshua Oigara Yes. I think the shift in our business, as I said earlier to you, is that we were looking at

building our SME business and our micro business last year. This is what we are continuing

to see. I mean the margins haven’t come down if you look at a year on year basis for nine

months. I think the introduction of the reference rate has given customers more

transparency today to be able to negotiate. But if you are looking at our small and medium

enterprises and micro enterprise business we are actually in a position today…there is not

a significant increase in our costs today. Now, why we are looking much more at cost, we

still want to maintain 3.2% which is where we have been today, which is what the bank is

working on. What we see in the market is for us a chance to see a slight increase in our

cost of funds. But the internal target for me is still our guidance which we are looking at

today at 3.2%. So I gave you 4%, but really internally we are working on a figure of a

traditional 3.2%.

Adesoji Solanke Okay. So margins should improve because of the growth in the SME business.

Joshua Oigara Correct. There is a shift in our business in terms of the contribution of the large business,

the medium business and the micro business in the group. You are absolutely right.

Adesoji Solanke So this SME business, you would like to take it from where to where?

Joshua Oigara Today it is not a significant part of our business. I think if you look at the year before I think

the guidance was 6% [?] of the group. If you double that business we will still be at 8%, 9%,

10% because we have a large big business portfolio in our books today. We announced last

year a target to grow a million new enterprises with Safaricom. That is running in the next

two years. That is one area where we focus in terms of growing the businesses. We have

enough facilities today. We have new partners working with us. We’ve got locally and also

enough international partners today. And we see ourselves being able to build up. Maybe I

will ask Sam just to add one comment. Sam runs the largest business for the group.

Samuel Makome Thank you. What I would say is that previously what we’ve had apart from the SME we did

have a big chunk of our growth coming out of corporate. What we have seen over the last

year is apart from the SME, micro and personal lending has also [unclear] when you look at

2014. So we are emphasising apart from our corporates and the retail end of our business

we are seeing now a lot more coming out of our activity with micro, SME, personal loans.

[Inaudible segment] coming out of our branch network. Gone are the days when the growth

was just in business geared towards corporates. We are seeing a lot more growth overall

on our retail portfolio. We have got very good growth for the last one year on SME and on



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the retail side we saw very good growth. The retail bank did extremely well in 2014. And our

energies are actually focussed in that trend.

Joshua Oigara Our SME numbers after the nine months we are talking about the business [unclear] 50%

on an annualised basis for small and medium enterprises. It does not mean that we are not

growing our corporate business because that is also very strongly growing. And I can

guarantee you that the opportunity to grow our corporate business in the market is

absolutely [unclear] this year and next year because of the big projects I talked about. Does

that answer the question that you had?

Adesoji Solanke Yes that does. I have another question actually. So last year you spoke quite a bit about

recoveries and the impact that had on improving your non-performing loan ratio. You said

last year you beat your target, which was I think 6%. Can you give an update on recoveries

at the bank and what the outlook for recoveries is for 2015?

Joshua Oigara I wouldn’t say at this meeting what our recovery has been, because we will discuss that in

February because we have a conference call a month from now. I believe that we still have

a significant part of outstanding loans. We were coming from 18 billion Kshs by the end of

2013. We do expect that we will have similar kinds of recoveries in 2015.

Adesoji Solanke Okay. If I look at the cost to income ratio, you are basically saying you expect to track

inflation in terms of cost growth. And the cost to income ratio you are targeting 48%. Is that

a function of cost or revenue in your view?

Joshua Oigara Just to remind, I think when we discussed this three years ago our cost to income ratio was

63.5% if you remember. By nine months we delivered 49.4%. So obviously I can guarantee

you that a significant part of cost we have actually removed within the group because of

technology, introducing multi channels, investing in a new way of centralisation. So overall

you are not going to see a significant push in the cost aspect. So it is more about revenue

growth and investment in channels, digitising our payments, our partnership with Safaricom

that we have today as a new channel. We will continue managing. I think 48% is a

comparatively competitive number in the market, not just in East Africa but across Central

Africa. So that is a good number that we are targeting today. The huge part has come

through in the last two and a half years. So our push is actually growing our level of income

and assets. And you have seen that in nine months already.

Adesoji Solanke Okay. I just have two final questions. You spoke about expanding to some additional

countries. I heard you mention Dubai. You mentioned Somalia, but you said you are not

really aggressive on that. Did I get it correctly?

Joshua Oigara I think we have always had these markets on the radar. But my guidance is that we are

strengthening our current businesses that we have in the region. We have always been

asked to set up an Islamic banking business in Somalia for the last two years. It makes

business sense but we are not really keen today. I won’t say specifically today that we won’t

go into the market. I think at the right time. We will consider that market very closely and at

the right time we will be able to give a communication. But we are not really, except where

we are setting up just a unit that seeks to look at our large corporate business in the Middle

East. It is not a large business. It is just focussing on our large clients who have already

today set up their original businesses based out of Dubai [unclear] the Islamic banking

business in East and Central Africa today. We have close to ten of our largest customers

already migrating to set up in Dubai. And we are looking at Ethiopia. Somalia is a question

that remains.

Adesoji Solanke So are you in consolidation more than expansion? The feedback is mixed.



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Joshua Oigara Let me just clarify for you. Because of the nature of the businesses we run we continue

strengthening the group businesses we are investing in today, but we are open for

opportunities in our business. It is not an either or actually. It’s a [unclear] question for our

business. And that is how we’ve run our business for the last five to six years.

Adesoji Solanke Okay. My final question is also around tax rate guidance and capital. You don’t give an

update on that for 2015.

Joshua Oigara Can you repeat the question? I didn’t get it.

Adesoji Solanke Tax rate. Are there potential changes on that line or still the 30% figure? And also in terms

of capital, given all the changes in Kenya over the last year is there any update from a

capital perspective for 2015, whether tier one or tier two?

Joshua Oigara I made a comment on that. I don’t think there is any change in the tax rate in our market,

not in East Africa. And you know the tax rate in East Africa is managing using the union that

we have. So I don’t see a major change there. You are definitely aware about the capital

gains tax. That is a new item. It doesn’t affect our corporate tax today. In terms of our capital

we are still ahead of our own target today. And you will see the final numbers sometime in

February. We have a buffer beyond the central bank buffer which has been set up, and we

are well within that. We have plans to raise capital, not in our plans for this year. And for

specific business objectives to build a new business we will not shy away from taking that

advantage in our business. But for now we don’t have that. Sean, are we still connected?

Operator Yes you are. I think we lost the previous caller. Let’s move on to our next question comes

from Sam Goodacre from Morgan Stanley. Please go ahead. Let’s move on to Ronak Gardia

from Exotix. Please go ahead. Ronak, you are live in the call.

Joshua Oigara Can you check again because they are not able to hear the caller asking the question.

Maybe we need to look again.

Operator I will try again. Ronak, if you are on the line please speak. There is no sign coming from

there. [Overtalking]. If you would like to ask a question please dial star one on your phone

now. We will just pause a moment to see if there is any build-up of questions again. Our

next question comes from Anne Kahure from SBG Securities.

Anne Kahure Good afternoon all. Can you hear me?

Joshua Oigara Afternoon.

Anne Kahure Fantastic. I have two or three questions. My first question would be, could you please repeat

your guidance on the advances and deposits for 2015?

Joshua Oigara Yes we said it is 15% for advances and 15% to 16% for our deposits.

Anne Kahure Okay. Fantastic. Thank you. My second question is actually on the deposit profile going

forward in 2015. When I was looking at your nine month numbers your fixed deposits had

actually grown quite steadily and I see you have now guided for cost of funds of between

3.5% and 4% even though your internal target is about 3.2%. I’m just wondering what kind

of competition are you seeing in the market in 2015 for deposits. It looks like across the

board banks are experiencing higher cost of funds.

Joshua Oigara I think this is really an issue from last year if you look at it from the second half of last year.

I mean overall I think we see a number of banks under a lot of pressure to be able to raise

deposits. We’ve seen quite some high rates in the last six months in the market. As I said

earlier in the first half we did release a number of expensive deposits into the market. But I



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think there is an opportunity to have a balance. And that continued. It [unclear] in the market.

There isn’t really any significant pressure that you have, but we also have a specific

retention strategy on a number of customers that we have, especially on the corporate side

by the nature of the business we do with them. So that pressure does run especially in the

second half, but then it tapers off in the first half and then picks up in the second half today.

And we are keen to see how that evolves in our market. We had a number of banks in the

market who were able to fund themselves differently. And Sam can answer this also for the

Kenyan market, just to see in terms of how we see that trend.

Samuel Makome Thank you Joshua. I think obviously because of the KBRR guidance banks are thinking very

seriously about how to respond to the pressure for high cost of fixed deposits. I think in the

past the corporates who have fixed deposit funds paid very high rates. But obviously banks

are also working very closely. You can’t have it where the borrowing rate goes down and

you have [unclear] of fixed deposits. So we are working very closely, but obviously the banks

are responding. If the rate did go down because the KBRR did go down, then the corporates

should be driving the fixed deposits up. So I think it is a year where we expect banks will be

pushing back a little bit more aggressively. Having said that internally for using Kenya we

believe with our kind of network we should not be heavily reliant on fixed deposits. We feel

that with the kind of network and other initiatives we have in terms of customer numbers, in

terms of our infrastructure, looking at the fact that we have a lot of initiatives that also will

drive lower-cost funds and more cost-effective funds, I think we are optimistic. So we do

realise that this growth in fixed deposits is a trend in 2015 we are working with very closely

with a view to having aligned intervention that ensures we are not a victim to the cost of

fixed deposits.

Anne Kahure Okay. Just maybe to add on to that, I’m curious to know, the kind of competition we are

seeing and the pressure on the deposit side, would you state that it is probably coming from

your tier two and tier three names? Because if you look at that lending rates are now pegged

to KBRR there is pressure to reduce interest rates across the board. So in my mind it doesn’t

seem like a sustainable situation across the market.

Samuel Makome I think it is cyclical. At the end of the year for instance some of the tier three and tier two

banks were trying to look at other things like non-deposit ratios. For them to deal with things

like loan deposit ratio [unclear] all sorts of expensive deposits. We believe that as a bank

we are not under the same kind of pressure given our network, given the fact that we do

enjoy other [unclear] funds. We have a flow coming in from government. It is not so much

the pressures that come up for every other bank. We are looking very critically at competing

for those kinds of funds. We want to take advantage of the kind of infrastructure we build,

partnerships we have. So I think we have a broader and a better option. But for somebody

who doesn’t have that kind of infrastructure, tier two or tier three, then you have to respond

for cyclical [?] reasons. Obviously the main thing is that ripple effect across the market for

everyone. But I think we are in a better position to respond. According to KBRR clearly it is

not sustainable for someone [inaudible segment] fixed deposit rate of 15% is just not

sustainable. So we have started correction, but some of these things are [unclear]. There is

also a learning curve and you start realising this does not make sense. You can’t respond

because of short-term reasons. So I think we expect a correction but we don’t want to be

victim to the market. We want to respond based on the capabilities that we’ve given.

Joshua Oigara Maybe I will add to what Sam has mentioned, maybe just to give you some correction. I

think you were asking about the tier two. I don’t think that is really the issue today because

that has been matched with the funding [?] positioning. What you see more is tier one. And

I think is what you need to look at much more closely. Tier two and tier three banks always

fund them in that position. We have seen in the last six months tier one banks, and I think

that is where we were more cautious, just to give you a specific answer.



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Anne Kahure Okay. All right. I have one more question if you will take it. My question is on your non-

interest income growth, and in particular what you had mentioned to do with financial

inclusion. So your mobile banking platform, your partnership with Safaricom with the SMEs

and the micro, and digital payments. Could you please give us a bit more colour on that,

given that you are expecting about 40% contribution?

Joshua Oigara Exactly. Remember that we were moving from 29% in 2013 to 35% in 2014 and 40% in

2015. And if we look at our climb in the last nine months we are actually on track. So I don’t

think there is… We probably will do better than that guidance actually. All initiatives are

running. A million customers on SME. The cashless payments we are running today. We

are targeting today to be able to access and reach digital payments, those 30,000 different

payment channels which is point of sale, both mobile and normal point of sale in the market.

[Inaudible segment] today. That is all running. We have been able to sign on the target we

had on our M-Benki. That was another new initiative we ran from last year. That is all

running. And we will continue to enhance the partnership that we have today with Safaricom

in digital payments and enhancing access of our customers to the mobile channel. We are

looking at increasing our number of banking agents from the current 10,000 which we have.

We are targeting to reach in excess of 20,000 in the first nine months of the year. That is

another complete deal in terms of enhancing transactions outside the current agents we

have.

Anne Kahure Okay. Thank you for that.

Sam Makome I will just add something there. On the corporate side as well, as much as we’ve got margin

compression because of the market pressure and KBRR as you see, one of the things we

have decided to do and have been doing over the last one and a half years or so is to look

at exactly how much revenue we are getting in terms of NFR [?] from the corporates. So

before we were very heavily dependent on looking at the non-interest income number.

We’ve realised what we need to look at is the effective rate combining the NFI and [unclear].

So when you have a corporate because we now have internet banking, we now are looking

at trade banking, it is to ensure that effective if there is some margin compression of 1% or

2% to compensate for it with the NFR. I think that is another thing we are doing and one of

the things we are tracking very closely. So we are getting some traction in that direction and

we expect that this year it is really going to mature. So that also explains why we think the

NFI continues to become a bigger contributor. And that is why over time even though there

may be margin compression there is a [unclear] to ensure our non-funded income is actually

also growing proportionately. It is not just on the retail side but also a contribution on the

corporate side.

Anne Kahure Okay. Maybe one more question from my part on the mortgage business. You mentioned

about 5,000 new mortgages as of last year, though you expected higher. I’m curious to

know what challenges you are facing on that front. And then in addition to that, what is the

current contribution to your loan book and what are you targeting for 2015?

Joshua Oigara I think it is a long-term business. I think there are a number of initiatives we are running

under the cost of credit committee, the initiative set up by the banking sector, the central

bank, the minister of finance. So those are challenges around the mortgage lending area,

securitisation. That is work in progress. That hasn’t been finalised. We are working on that

as an industry. I think you also must bring in the question of supply of units in the market. It

is the biggest constraint today in terms of the uptake of the facility in the market. That is

what we want to focus on in terms of bringing new business in the market to enhance our

mortgages. There are no ready-made units available today, so that is the work we are doing

this year, next year. Perhaps we will achieve the goal for ourselves in the next two or three

years.

Anne Kahure All right. That’s it from me. Thank you.



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Operator Thank you very much. Our next question comes from Josh Lennon from Citigroup. Please

go ahead.

Josh Lennon Good afternoon.

Joshua Oigara Good afternoon to you.

Josh Lennon Could you please repeat your guidance on cost of risk and ROA? I couldn’t hear the

numbers.

Joshua Oigara Cost of risk at 1.5%.

Josh Lennon Okay.

Joshua Oigara ROE at 4% to 4.2%.

Josh Lennon And then a bigger picture question. How do you think about consolidation in the banking

space in East Africa and in Kenya? And how do you think the regulators think about

consolidation? There are a lot of banks down there.

Joshua Oigara A very good question you ask. I have a view I have expressed, but I would say overall that

that is really going to take place. It is just in terms of when. But that is an issue that is going

to take place. We don’t say a lot about what we see, but especially in our markets, in Kenya,

Uganda and Tanzania, it is something that is going to be looked at. There are different

regulators. The regulator in our main market is actually looking at this quite seriously. We

can always have another conversation with you if you want some specific inputs on what

the central bank is thinking.

Josh Lennon Sure. Thank you very much.

Operator Thank you, our next question is from Ronak Gardia from Exotix. Please go ahead.

Ronak Gardia Thanks for the information. Just a couple of questions. Firstly can you briefly mention what

your ROEs are in subsidiaries outside Kenya? And more importantly, when do you think

most of the subsidiaries will start meeting their cost of capital, and the process you are

putting in place to achieve that? Secondly, I think you spoke a lot about the migration of the

business going from more corporate-orientated to more an SME and micro enterprise focus.

Can you briefly talk about the risk management procedures you have put in place to take

on board that kind of business? Thank you.

Joshua Oigara A very good question. I am here with my group HR director on the SME side. There are a

lot of things about getting the team, getting the knowledge and competencies. And in terms

of the risk management that we have already been working on very closely in our business

for the last three years. So I mean my HR director can give comment around what we have

done on the team competency building on SME. You did ask me what we see in terms of

ROE of subsidiaries. Two things happened this year. This is the final stage of setting up our

non-operating holding company. That is going to be finalised in the first quarter of this year

in January or February. And that will change the way we look at national businesses from

today. We do a different set of [inaudible]. There are a number of them today which are

around 15%. We have some around single digits, 5%. And we have a target of three years.

Tanzania has done extremely well in the last year, and you will see the numbers when we

announce them. We struggled last year with the South Sudan market. There is a good

turning of our direction in terms of the businesses we have in terms of the ROE for each of

them. We will give you the final year results when we discuss them in the second week of

February when we announce our results. We are all on track. I think the holding company



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structure will enable us to [unclear] the capital for each of them and decide more capital,

less capital, if we are going to continue or not. We generally set up a target of four to five

years to achieve our 20% to 25% that we have in the [unclear] market. And Burundi is new.

Burundi has been struggling for many years. I think good progress from them. So we are

monitoring very seriously each and every

business. I mentioned earlier in the last two years our focus was on consolidation in each

of these businesses to achieve the right target ROE and also the right target ROA. I won’t

be able to give a specific outcome for each. I gave a warning notice that South Sudan was

slightly coming down in the last year because of the situation we had in the country. But the

other countries have been able to perform well. Let me ask my HR director to explain a little

bit on the issue about talent, capability and resources, building our risk matrix, and also I

will speak later on about our risk management framework.

Paul Russo Thank you Joshua. Just to assure you in terms of looking at the resourcing part of that

business, one, I think the market is not short of skills and resources to support that sector.

Two, given the experience of resources particularly in the Kenya business we’ve got a pool

of 4,500 experienced [unclear] in the market across the country. We’ve got a competency

framework that we are using for assessment and we’ve got partners within the market that

we have been working with in terms of capability development. And we have got a road map

in terms of how we are going to resource the business and scale it up as it grows. And in

doing so and in working with the business we are confident that we will correctly resource

and enable that side of the business. So we will either build or go and buy as relevant to the

right levels. Particularly on the issue of how we see the SME growing in terms of the risk

and [inaudible] our technology, that is a big part of how we evaluate, how we look, and how

we know the early warning signs today in terms of what could be going on with the sector.

Samuel Makome [?] Thank you. Just talking about the risk, as we are going to continue growing the corporate

book and we are going to continue to grow the SME and the micro areas, in terms of the

capacity that we have developed… Earlier on our CEO has mentioned about recovery. And

the reason that is helping us is we have a very strong resource [inaudible segment]

monitoring our [inaudible]. It has become a very strong process. And that ensures our

numbers have improved significantly in terms of our NPL. The other thing is that we have

also developed a unique tele-collection [?] which is very aggressive. So I think we are now

seeing a much better team in terms of what they are able to do, how they are able to monitor.

So that has been very significant. The other thing I would talk about is our credit scoring. At

the corporate level obviously we have developed probably the best in Kenya if I look around

the market. In terms of the credit scoring capacity we have internally and the models we are

using, that has now gone down even to the SME and even all the way to the micro.

So for instance even in terms of things like our mobile loan. At the moment when somebody

applies the CEO talked about how fast it is to do it. The reality is because we have already

credit scored a lot of our customers. Even when looking at the market, anybody [inaudible

segment] we have pre-scored data. So now the capacity in terms of scoring, in terms of

people, in terms of tele-collection has really improved significantly. And also our CRB data

has improved significantly. So the market capacity has also improved. So it is likely that

when you look at our SME and look at the CRB data you have a sense of what they are

doing. And of course now by having positive sharing of data. I think there are things that

have happened both externally but more importantly internally that are helping us to know

that we can now ramp up with the reduced risk. And clearly even from what we have seen

in the past one year it has definitely been [unclear].

Joshua Oigara Avi joined us with a lot of experience on technology, innovation and changing. He has a lot

of experience in the Indian market, the European market and American market. One of the

things we will do this year also is just an upgrade. It is not a major project. It is a medium

size project to enhance our future [unclear] today. There is a lot of capability that already



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Pg 13 of 16

exists, but [unclear]. And maybe Avi will add a little bit of comment before we take the next

question.

Avi Mitra Avi Thank you Joshua. Thank you everyone. I want to catch up on three things. Primarily

people, process and technology. The HR director mentioned that we are focussing on

building people. So in the area of technology we want to have a world-class [unclear] to

drive the business forward and also implement the world-class processes to reduce our cost

of ownership. And technology will drive the business forward. So towards the technology

side, as the CEO mentioned, we are upgrading our current infrastructure which will give us

a better business on our next five year strategy towards the core banking. And we are also

focussing on the jargon area that we keep on hearing from the market, which is social,

mobile, analytics and [unclear]. So we are looking at each of those areas and trying to find

a value for the business how we can apply those technologies in terms of benefitting the

business. We are also targeting our technology to the young population that the CEO has

mentioned in the East Africa area through mobile technology. And the other area is cashless

payments through our partnership. And overall we are looking at using technology as a

driver and enabler of the business to get efficiencies and reduce our cost of ownership

towards that.

Ronak Gardia Thank you. Sorry, if I may ask one final question, what percentage of your balance sheet is

now dollar denominated?

Joshua Oigara It is close to 24%.

Ronak Gardia Thank you. What risk is evolving in this segment of your balance sheet given the slight

weakness in the Kenya shilling?

Joshua Oigara The weakness of 4.8% in the last year may be seen as a weakness, but I think for us what

we continue looking for is whereas the shilling has been slightly weaker compared to the

dollar it has actually strengthened against the two other currencies we trade, which is the

Pound and the Euro. And I think the only thing we are looking at is whether customers could

actually be able to [unclear] finance in a different currency across our export customers in

the market. And we do have a Euro customer base. We do have Pound customers. And we

do have Yen [?] customers. For now from our point of view we don’t see the 4.8%

deterioration…across many currencies if you compare the top 20 currencies in the continent

I think we see it as an opportunity for us. Now, we may see more and more that most of our

exports are in dollars from our market. So it is not a big risk we are looking at today in Kenya,

but we are very much alert on what is happening on those currencies I mentioned about.

Ronak Gardia Thanks.

Operator Thank you. Our next question comes from Rita Wilson from Investec. Please go ahead.

Brent Malahay Can you hear me?

Joshua Oigara We can hear you. Go ahead.

Brent Malahay It’s Brent from Investec. You mentioned a number of initiatives that are very cost-light and

you mentioned your relationship with Safaricom. There seems to be with the move to SME

a more volume-reliant business going forward. And three, some of the initiatives you

highlighted was relatively capital light in terms of fee generation. You talked about

Bancassurance and other non-funded income. So given these initiatives where do you think

the ROE of the bank will be over the next three years?

Joshua Oigara That’s a very good question actually. Thank you very much for it. We have given a guidance

of 26% to 27% today but our ROE is also driven by one other aspect, the capital that we are



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holding today as a group, which is another part. If you look at it we have capital where we

are positioned today. But I think there is a chance as we drive those new channels of volume

then that increases our ROE. And we are talking about a 36 month cycle. Initially our

medium term goal is actually around 30%.

Brent Malahay Okay. Are you able to comment around the SMEs? You talked about the risk framework

that you have developed and improved. Just the volume aspect of SMEs versus corporates.

Are you comfortable that the banking platform can handle the volumes that will come

through?

Joshua Oigara We are confident. This is why we enhanced and built our competence so fast. Last year we

got in a very experienced CIO for the group. In terms of our core banking I can assure you

that we are building our system in this year to be able to handle in excess of 40 million

customers. In terms of transactions today we can handle comfortably 15 million transactions

on a daily basis without a problem. We are enhancing the capacity to handle more than

twice the transactions on a daily basis. So we are actually prepared for that within the same

framework today. And we have been working very closely in our relationship with Safaricom.

We have already started investing to be able to give us that capacity. That has been taken

care of and will be addressed in this year.

Brent Malahay Okay, great. Thank you.

Operator Thank you. Our next question comes from Francis Mwangi from Standard Investment Bank.

Francis Mwangi Thanks for hosting the call. I think two brief questions. Again I am understanding that you

cannot talk too much about 2014, but what could have been done better in 2014? And my

second question, looking in 2015, what are the possible key areas of concern that you have?

Thank you.

Joshua Oigara Francis, thank you for the question. It is very difficult to say last year. If I say what has been

done well you say, okay, what didn’t we do well. So I wouldn’t give an answer about last

year at this stage, Francis. But I do believe in our regular market definitely if you look at the

nine month numbers we saw not as much contribution as we expected in our international

business. Our Sudan [?] business did solidly well as we had anticipated but we were down

in Uganda. In terms of growth in our numbers, our investments, we have seen some

performance internally. Yes, we didn’t achieve the goals we had set for SME for September.

That is growing at 48%. We initially wanted to grow 50% by September. So there is some

effort there running. A question was asked earlier about our mortgage business. We

introduced fantastic products in the market but we had a challenge of supply, and that is an

area we are addressing today.

But the issues of where we could have done better, in the next one month we have a

conference call about our full year results. In terms of [unclear] we continue to see obviously

the bigger impact on the energy costs in our market, a significant impact on the euro zone

today, and that is a key market for our horticulture-driven export market, as you are aware

of. And we have a big [unclear] we continue to look into. In terms of capital adequacy I think

the banks have now passed that. I think most of the banks have complied last year, so that

is not a key issue for us. We have major projects which are coming up on infrastructure

which you are already aware about, plus bigger projects which perhaps we have not been

preparing adequately to be able to run. That I see as an issue to be able to address from

ourselves.

In terms of the policy on our loan book in terms of the risk we are carrying on our books, we

saw tremendous progress last year. And I think we had a fantastic run rate. We do have

some sectors which remain a concern going forward. Without mentioning names you

probably know some sectors. Maybe one sector, agriculture, for instance. There were



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concerns around the cyclical nature of early rains for this season for 2014, and you know

the impact of lower rain on inflation and food prices. This happened last in 2011. And that

is an issue we continue to monitor very closely. And that has an impact generally in terms

of what has happened in the past.

Overall I would say in terms of regulation that is behind us. We don’t see new ones coming

through. And we will continue today to develop clearly a better ability to continue to grow

our SME and micro businesses, which we have. We don’t think it will increase the cost of

risk actually. Our cost of risk has only been increased by one large corporates in the last

five years, and that is an area we have competency today. In fact we have built a team of

40 collectors today with expertise in the last year with our new Credit Director and the team.

So I would say we need to look at the Eurozone. We need to look at our inflation based on

whether we have good rainfall. I think that is an issue. We have seen good rain early, but

March is the real determinant for our market.

And overall we have been adequately capitalised. They want to increase capital adequacy

in the other countries. You are aware of Uganda, Tanzania and Rwanda. That is going to

happen. As a group we have already provided that in our forecasts for this year and next

year. I think Uganda comes on in June. We have got Uganda and Tanzania, and we do

have Rwanda coming on stream. Obviously they will remain [unclear] in our business going

forward. I will answer more questions for you last year in a month’s time.

Francis Mwangi Okay. Thank you.

Operator Thank you. Our next question comes from Adesoji Solanke from Rencap.

Joshua Oigara Please go ahead.

Adesoji Solanke This is Soji Solanke from Rencap. I just have two quick questions. Can you give an update

on the CFO process? Is that still ongoing or not? And the second question is on the

Safaricom partnership. If I recall on your nine months conference call the guidance was that

some big announcements were going to be made. Have I missed something here?

Joshua Oigara No, Adesoji, you haven’t missed anything. Actually you are right. That is on stream. We are

in the final stages. I think December was a bit low for us so we felt it wasn’t the right time.

We are at very advanced stages ourselves internally and Safaricom and ourselves are at

the next level of engagement in terms of products. That isn’t completed. We are actually

going to be able to do that in this quarter. We will make sure we let you know just before. I

went around on the last road show last November and that is on track. Perhaps in the month

of February there is going to be some communication from us. In terms of our CFO we are

seeking today the final candidates. We have actually opened up the recruitment

internationally. The candidates are coming out from Kenya, from the European market, from

the American market, from South Africa, from Australia. So we have opened up that. We

expect to finalise that process in the next 14 days and we should definitely have the CFO

appointed by the next time we announce our results. So you will have the CFO by the time

we announce our results in February.

Adesoji Solanke Okay. Great. Thank you.

Operator Thanks so much. Gentlemen, it appears there are no further questions. Do you perhaps

have any closing comments?

Joshua Oigara Thank you very much. We appreciate your time for coming and being able to listen to us.

We are excited about the opportunities that we have in our market, as we said before.

Fantastic opportunities. I know that we tend to look at it from a geo-political side and we

look at the elections coming in East Africa, whether it is in Tanzania or in Burundi or in



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Rwanda or in South Sudan. That is an area we have gone through before. We see areas

we continue to grow our business on, especially in alternative channels and bringing in new

aspects of our Bancassurance and our business across the tier. I am very excited personally

about working closely with our largest partner, which is Safaricom, in the last year. I am

extremely positive and excited about the new initiatives we are going to be able to bring in

soon this year in the market in terms of engaging their expertise and ours to build a

transformation around SME and micro enterprises, enhancing our mobile banking platform

and our customer [unclear]. So that will be exciting. We hope to speak to you again perhaps

in another one month’s time when we announce our results. Our Head of Investor Relations

will be in touch with you. The calendar is already out for investor relations this year. We

want to thank you very much for listening and trusting and believing in KCB. We hope to

see you and talk to you soon. Thank you very much. Have a good day, good evening and

good morning.

Operator Thank you for joining us. You may now disconnect your lines.

END OF TRANSCRIPT

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