August 2013 kampala seminar
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Here are the key considerations regarding your options: - Option 1 allows you to receive the money today and use it immediately for your needs or to invest elsewhere. However, receiving it today means it will not grow over time through interest or returns. - Option 2 delays your receipt of the money for 3 years. However, if invested wisely over that time, the money could grow substantially through interest and returns. Assuming a conservative annual return of 10%, your Ushs. 100,000 would be worth over Ushs. 135,000 in 3 years. - The future value of money is generally greater than its present value due to the power of compound interest and returns over time. Delaying receipt allows capital to accumulate
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August 2013 kampala seminar
- 1. Investment Management Seminar Protea Hotel- Kampala 22nd August 2013
- 3. Case Study Crane Lions E.A. Limited
- 5. Pensions Management Structure Fund Members and Pensioners Pension Fund Trustees (Fiduciary Responsibility) reports reports Administration (Members’ records, etc.) Genesis Kenya (Investment Management) reports Custodian (Holds assets of Scheme)
- 6. Fund Management Professional management of client assets based on a set of pre-determined objectives and requirements.
- 7. Trustees Responsibilities in Investment Management (a) Define objectives: Assess and quantify risk profile of scheme funds Set out return profile based on the anticipated return in various asset classes Determine liquidity requirements over a long period of time
- 9. Risk Definition The uncertainty that an investment may not earn its expected rate of return.
- 10. 9 rules of risk management . . . There is no return without risk Be transparent Seek experience Know what you don’t know Communicate Diversify Show discipline Use common sense Return is only half the equation
- 11. Return Definition Earnings from investments, e.g. dividend income interest income rental income capital appreciation
- 12. Liquidity Definition The ease with which one can sell an asset at the expected price.
- 13. Contd…Trustees Responsibilities in Investment Management (b) Establish an investment strategy to meet objectives Aim to optimize returns: maximum returns at an appropriate level of risk Diversification of assets to minimise risks Select investments that produce returns even in inflationary conditions Investments to be reasonably marketable and acceptable
- 14. Contd…Trustees Responsibilities in Investment Management (c) Other considerations for Client Regulatory environment Custody or safety of assets Overall expenses associated with the account Cash flow requirements (retrenchment / restructuring) Discretionary or non-discretionary investment management
- 15. Contd…Trustees Responsibilities in Investment Management (d) Guidelines to Investment Manager: The Client allocates assets between different asset classes based on the risk/return profile The allocation takes into consideration expected returns, risk profile and liquidity
- 16. Returns, Risk Profile and Liquidity of various Asset Classes Asset Class Potential Return VH Risk Profile Liquidity VH VH VH VH VL Property H H L Equities H M M International equities H H H T- Bonds M/L VL M Deposits/ T-Bills M/L VL VH L VL VH Derivatives Property Development Cash in Bank VH - Very High, H-High, M- Medium, L-Low, VL-Very Low
- 18. Decision Making Process Investment Policy Risk control / Compliance Asset Allocation Research Stock Selection Portfolio construction
- 19. Formulating an Investment Policy
- 20. The need for a policy statement To understand and articulate investor goals To set standards for evaluating portfolio performance through inclusion of benchmarks To protect the client against unsuitable investments Governance policies are understood and implemented Compliance with the prevailing legislation Ultimately, constructing a policy statement is mainly the Trustees responsibility.
- 21. Contents of an IPS Brief client description Purpose of establishing policies and guidelines Duties and investment responsibilities of parties involved Statement of investment goals, objectives and constraints Considerations to be taken into account in developing the Strategic Asset Allocation Investment strategies and styles Portfolio rebalancing guidelines Schedule for review of investment performance as well as the IPS itself
- 22. Investment Objectives Risk Objective: Investor’s willingness to take risk Investor’s ability to take risk How much risk is the investor both willing and able to bear Return Objective: Tied to primary objective e.g. to ensure member’s save enough to cater for retirement needs (DC) or ensure scheme assets cover scheme liabilities (DB) How much return does the investor want? How much return does the investor need to meet objective? Specific return objective (quantify)?
- 23. Investment Policy Specifies: Investment objectives Investment (time) horizon Risk tolerance Taking into account: Members age profile Liquidity requirements Economic scenario Diversification Statutory requirements
- 24. Investment Constraints Time horizon: time period associated with the investment objective Liquidity: investors need for cash over the investment time horizon. May be anticipated or unanticipated. Regulatory and Legal Considerations: external factors imposed by regulator that must be followed (RBA investment guidelines) Taxation: Tax issues that need to be concerned (taxexempt) Unique Circumstances: internal factors that may constrain portfolio choices e.g. ethical or social considerations?
- 26. The Asset Allocation Decision Most important decision in the policy statement Asset allocation accounts for 90% of portfolios return over time Asset allocation involves two decisions: What asset classes should be considered for investment? What normal or policy weights should be assigned to each eligible asset class?
- 27. The Asset Allocation Decision A 3 stage process: 1. Strategic Asset Allocation: Long term apportionment of funds between various asset classes 2. Tactical Asset Allocation: Short term movements away from desired long term asset allocation aimed at taking advantage of relative price movements 3. Stock Selection: Allocation of an investment within an asset class
- 28. Asset Allocation - an example Asset Class East African Equities Government Securities Corporate Instruments Bank Deposits Offshore Investments Property Cash Total SAA 30% 45% 5% 2% 7% 10% 1% 100% TAA 25-35% 35-60% 5-15% 0-10% 5-15% 0-30% 0-5%
- 29. Asset allocation – Pension Schemes 100 7 90 3 11 4 0 3 14 3 7 3 1 14 12 5 3 4 2 5 14 16 7 2 4 3 15 1 6 80 18 70 43 36 58 62 43 60 66 49 64 49 65 60 50 51 67 51 40 30 20 47 50 38 40 30 34 22 10 26 36 30 23 15 0 Equities Bonds Property 32 Other Source: Mercer European Asset Allocation 2011, Forbes Sep 2011 survey Other : European (cash, hedge funds, currency funds, private equity), Kenya (Offshore ) 25
- 31. Economic Considerations Factors that will impact investment environment: Politics State of the economy (Macro) • GDP growth • Economic policies • Interest rates • Inflation Financial markets Social issues
- 32. In addition . . . Other factors affect macroeconomic policy Political climate Natural phenomena Global factors
- 33. Investment Manager’s Stock Selection Selection within various asset classes (Micro, bottomup analysis): Equities: All shares quoted on the NSE Fixed Income Securities: Government Bonds, Corporate Bonds, Debentures, Treasury Bills, Commercial Paper, Bank deposits International Investments: Equities, Bank deposits, Fixed income securities, Property Property: Residential, Commercial, Industrial, undeveloped land
- 34. Stock Selection Fund manager executes and selects stocks within various asset classes: Equities: Companies quoted on the East African stock exchanges. Company approach or sectoral approach? Bonds: Corporate or Government, Floating or Fixed, Tenure Deposits: Which banks? Offshore: Direct investment or mutual fund? Equity, Bond or balanced fund?
- 35. Cash EADB, AFDB Barclays, 1% Stanbic, Stanchart Deposits Corporate bonds 4% 5% Offshore Equity 10% Fund, Bond Fund, Balanced Bonds Fund 50% BATU, STanbic Uganda, Uganda Clays, NVL, DFCU , EABL, KQ Equity 30% Duration (2 year, 3 year , 10 year) Fixed/Floating Corporate/Government
- 36. Genesis Research Process Capital Market Expectations Economic factors (Macro) Asset Allocation Security Selection Property Interest Bearing • Location and amenities • Mortgage and housing demands • Government borrowing requirements • Monetary and Fiscal Policies • Exchange rate analysis Offshore • Country Research • Financial Statement Analysis Equity • Company visits Economic growth trends Demographic trends and rate of urbanisation Money supply growth and inflation Detailed credit analysis Global Fiscal and monetary trends Global industry outlook Plant visits Market Information
- 37. Decision Making Process Investment Policy Asset Allocation Stock Selection Portfolio construction
- 38. Portfolio Construction Aim to optimise the overall risk-return profile of the investment portfolio identify the risk and return characteristics of the portfolio’s constituents combine stocks to maximise returns at the given risk level Diversification - risk reduces with the number of investments held
- 39. Decision Making Process Investment Policy Asset Allocation Risk control / Compliance Stock Selection Portfolio construction
- 40. Risk Control Strict monitoring of client guidelines and investment operations RBA investment guidelines Exposure to any one bank Weighting in any individual stock Regular investment controls audit – (AAF – 01/06) Best practice systems and compliance functions Professional indemnity Separation of investment management from custody and administration functions
- 41. Decision Making Process Investment Policy Risk control / Compliance Research Asset Allocation Stock Selection Portfolio construction
- 43. Quiz 1. How long did the Hundred Years War last? 2. Which country makes Panama hats? 3. From which animal do we get cat gut? 4. In which month do Russians celebrate the October Revolution? 5. What is a camel's hair brush made of? 6. The Canary Islands in the Pacific are named after what animal? 7. What color is a purple finch? 8. Which country are Chinese gooseberries from? 9. What is the color of the black box in a commercial airplane? 10. How long was the 30 year war?
- 44. Quiz - Solns 1. How long did the Hundred Years War last? 116 years, from 1337 to 1453 2. Which country makes Panama hats? Ecuador 3. From which animal do we get cat gut? From sheep and horses 4. In which month do Russians celebrate the October Revolution? November. The Russian calendar was 13 days behind ours. 5. What is a camel's hair brush made of? Squirrel fir. 6. The Canary Islands in the Pacific are named after what animal? Dogs; The Latin name was Insularia Canaria - Island of the Dogs 7. What color is a purple finch? Crimson 8. Which country are Chinese gooseberries from? New Zealand 9. What is the color of the black box in a commercial airplane? Orange 10. How long was the 30 year war? Thirty years. From 1618 to 1648
- 45. What is a Fixed Income Instrument Fixed income refers to an investment which obligates the borrower/issuer to make payments on a fixed schedule: the number and amounts of payments may be variable. If an issuer misses a payment on a fixed income security, the issuer is in default and the payees can force the issuer into bankruptcy.
- 46. Determinants of the payments/ receipts from a Fixed Income Investments The principle Interest rates- the key determinant Prevailing macroeconomic factors eg Inflation & Currency stability The Central bank’s base lending rates Tenor The issuer risk profile
- 47. Key Risks Investing in Fixed income Inflationary risk – that the buying power of the principal will decline during the term of the security Interest rate risk – that overall interest rates will change from the levels Duration risk: That a changes in the yields will impact the value of securities. Default Risk– that the issuer will be unable to pay the scheduled interest payments due to financial hardship Reinvestment risk – that the purchaser will be unable to purchase another security of similar return upon the expiration of the current security Political risk – that governmental actions will cause the owner to lose the benefits of the security Event risk – the risk that externalities will cause the owner to lose the benefits of the security
- 48. Classification of Fixed Income Instruments Key classifications are by: • Issuer: Corporate eg banks, and Government • Tenor: short term commercial papers & bills, Longer term bonds and notes.
- 49. Product Range Products Bank Deposits Treasury bills & Commercial paper Debentures, Treasury & Corporate Bonds
- 50. Bank Deposits Placed with banks or financial institutions Pricing depends on prevailing market rates. Key types: Term or call
- 51. Treasury Bills and Commercial Paper Treasury Bills: A promissory note issued and fully guaranteed by the government • Short-term • 91, 182 and 364 day T-bills • Priced discount to par
- 52. Commercial Paper Commercial Paper: A promissory note issued in bearer form by a company with a good credit rating. • • • • • • • For institutional investors Priced at a margin to Tbill Secured or unsecured Private placement Discount to par CMA approval Short-term
- 53. Treasury and Corporate Bonds Bond: Long-term debt securities issued either by government or corporate entity • • • • • Interest either floating, fixed or “Zero Coupon” > 1 year (longest 17 years in Uganda) At a discount, premium or par Full or partial redemption Can be traded on the NSE
- 54. Treasury and Corporate Bonds Additionally for corporate bonds…. • • • • • Usually targets institutional investors Public or private placement Secured or unsecured Priced at a margin Listed/Unlisted
- 55. Uganda Debt Market Ushs Billions 235 2,485 Corporate Bonds Government Bonds
- 56. Corporate instruments in the market SECURITY NAME TENURE VALUE(BN) EXPIRY DATE AFDB BOND EAST AFRICAN DEVELOPMENT BANK CORPORATE BOND PTA BANK BOND 17 125 2/1/2022 10 14 20 40 12/19/2012 11/3/2016 STANBIC BANK BOND STANDARD CHARTERED BANK CORPORATE BOND 14 27 9/1/2016 10 23 12/1/2016
- 57. Why issue Corporate bonds at all? Direct borrowing from investors Advantage to issuers • Lower cost vs loans • Greater range of lenders • Length of loan suited to borrower Advantage to Investors • Higher return • portfolio diversification
- 58. The Future Increased resort to debt markets for infrastructure development, restructuring, etc Cheaper alternatives to overdraft - Asset liability matching.
- 60. Proposition: CONGRATULATIONS!!! You have won Ushs. 100,000.00. Please choose the option you would prefer: 1. Receive it today 2. Receive it 3 years from today
- 61. Time value of money Money has a time value because of the opportunities for investing it at some interest rate Future value: How much money invested today for a period of time at a certain rate will be worth in the future Present value: How much money needs to be invested today at a certain rate in order to realize a specific amount in the future
- 62. Time Value of Money.. Present Value 0 Future Value 1 2 3 Years Option A 100,000 Option B 100,000 – interest 100,000 + Interest 100,000
- 63. future values: compounding COMPOUNDING: FV in n years = 100 × (1+r)n e.g., Sh100 at 14.5% 1 year: 100 × (1+0.145)1 = Sh114.50 2 years: 100 × (1+0.145)2 = Sh131.10 3 years: 100 × (1+0.145)3 = Sh150.11 Power of compounding considered eighth wonder of the world – Albert Einstein
- 64. present values: discounting DISCOUNTING PV of receipt in n years = 100 ÷ (1+r)n e.g., interest rate of 14.5% 1 year: 100 ÷ (1+0.145)1 = Sh87.34 2 years: 100 ÷ (1+0.145)2 = Sh76.28 3 years: 100 ÷ (1+0.145)3 = Sh66.62
- 65. Bond terminology . . . 4 key features: 1. 2. 3. 4. principal / nominal investment coupon maturity yield
- 66. principal this is the amount of the bond held and is the sum to be repaid at maturity (‘nominal’ value of the investment)
- 67. coupon 1. 2. 3. 4. 5. Interest rate on the principal amount Paid at regular intervals until maturity The coupon rate will generally reflect the interest rates that prevailed at issue date Coupon is fixed for the life of the bond Return measure : easier to compute return to maturity as rate is fixed and known
- 68. Maturity Date in future on which the investors principal will be repaid. Bond that matures in one year more predictable than one that matures in 30 years. Therefore the longer the time to maturity, the higher the interest rate.
- 69. Yieldlearn that a bonds price … New investors are surprised to fluctuates over its life. Yield is the return you want from the bond Not to be confused with coupon which is the promised return.. Yield impacts price of the bond and hence the cost..
- 70. bond valuations
- 71. Bond valuation/pricing the market value of a security may be calculated as the present value of the future expected cash flows
- 72. Cashflows Assume you have a three year annual pay bond, with a nominal value of 100 paying a coupon of 14.5%. Cashflows arising out of this are : • Year 1 : Shs 14.5 • Year 2 : Shs. 14.5 • Year 3: Shs 14.5 + 100 = 114.5
- 73. Fixed coupon bond valuation Therefore present value of future cashflows: 1st year receipts => C1 ÷ (1+r) 2nd year receipts => C2 ÷ (1+r)2 3rd year receipts => (N+C3) ÷ (1+r)3 C: coupon that is set when the bond is issued r: prevailing market rate on a similar maturity bond (a.k.a yield) C and r may be the same (if interest rates are stable) or different (if rates are volatile)
- 74. fixed coupon bond valuation Present value of the bond therefore is the sum of the present value of each years future cashflows i.e.: Ptoday = C1/(1+r) + C2/(1+r)2 + (C3+N)/(1+r)3
- 75. bond valuation Using our 3 year bond that pays an annual coupon of 14.5%. The bond’s price (P) when interest rates ( r ) are: r=13.5% C= 14.5% and N= 100 P = 14.5/1.135 + 14.5/1.1352 + 114.5/1.1353 = 102.34 r=14.5% C= 14.5% and N= 100 P = 14.5/1.145 + 14.5/1.1452 + 114.5/1.1453 = 100.00 r=15.5% C= 14.5% and N= 100 P = 14.5/1.155 + 14.5/1.1552 + 114.5/1.1553 = 97.74
- 76. bond valuation Conclusion : there is an inverse relationship between bond prices and interest rates If C < r, Price < 100 (Discount) If C=r , Price = 100 (Par) If C > r, Price >100 (Premium) Premium or discount adjust coupon to prevailing market rates and present an opportunity for capital gains or losses
- 77. bond prices and interest rates 14.5% fixed coupon 103 102 101 price 100 99 98 97 96 95 13.5 14.5 interest rates / yield (%) 15.5
- 78. the yield curve
- 79. the yield curve Plots relationship between bond yields and their maturities higher risk => higher return Yield on longer bonds should be higher than that on shorter bonds longer maturity results in higher risk which, in turn, results in higher returns expectations
- 80. yield (%) the normal yield curve 30 25 20 15 10 5 0 2 6 10 14 18 22 maturity (years)
- 81. yield (%) the inverted yield curve 30 25 20 15 10 5 0 2 6 10 14 18 22 maturity (years)
- 82. using the yield curve Used to determine specific yield ( r ) for a certain maturity Yield enables bond to be valued Investment and trading strategies => high/low yield Yield curve changes as interest rates change Yield curve can be inverted; this means short term yields exceed longer term ones
- 83. 0.00% 30 Year 25 Year 20 years 15 Years 12 Years 11 Years 10 Years 9 Years 8 Years 7 Years 6 Years 5 Year 4 Years 3 Years 2 Years 1 Year 6… 3… Kenya Treasury Curve 25.00% 20.00% 15.00% 31-Dec-09 31-Dec-10 10.00% 31-Dec-11 9-Mar-12 5.00%
- 85. Bond prices – Accrued interest
- 86. Bond prices Interest paid to buyer on coupon payment date 1 Apr 1 Jan 1 Jul Bond sold Interest accrued by seller not earned
- 87. Clean vs. dirty prices Accrued interest : Interest earned up to sale date but not received Clean Price: price of the bond without the accrued interest as at sale date Dirty Price: price of bond with the accrued interest as at sale date
- 88. clean vs. dirty prices In developed markets, prices are quoted ‘clean’ When accrued interest is added to the clean price you obtain the ‘dirty’ price Quoting clean prices helps investors determine the impact of interest rate changes on bond prices by removing the accrued interest element, you are able to see the increase or decrease in prices.
- 89. clean prices and dirty prices investor buys a 10% coupon bond 89 days after last coupon was paid for a dirty price of Sh104.44. dirty price Sh104.44 less accrued interest = (89÷365)× Sh10 Sh2.44 clean price Sh102.00 30 days later bond sold at a dirty price of 106.26 dirty price Sh106.26 less accrued interest = (119÷365)× Sh10 Sh3.26 clean price Sh103.00
- 90. clean prices and dirty prices Total gain: 106.26-104.44 = 1.82 Capital gain: 103 - 102 = 1 Accrued interest: 3.26 - 2.44 = 0.82 Bond returns are from capital gains (or losses) and interest income Aspect of capital gains and losses: • new trading and investment strategies • increased secondary market trading/activity
- 92. What is equity? Ownership interest in a company in the form of common stock or preferred stock.
- 93. Common vs. Preferred Stock Common stock Get dividends depending on profit the company makes Capital appreciation of stock value Voting rights Preferred stock Receive cash dividends before common stock holders Pre-determined dividend rate Takes precedence over common stock in case of liquidation
- 94. Common Stock Common Shareholder's Six Main Rights Voting power on major Issues e.g. electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation during AGMs. 2. Ownership in a proportional interest of the company 3. Right to transfer ownership 4. Dividend entitlement 5. Opportunity to inspect corporate books and records 6. Suing for wrongful acts 1.
- 95. Investing in Stocks Why do corporations issue common stock? To raise money to start or expand a business To help pay for ongoing business expenses They don’t have to repay the money Dividends are not mandatory In return for investing in the company, stockholders have voting rights.
- 96. Why Do Investors Purchase Stock? Income from dividends Capital appreciation of stock value Returns usually provide a hedge against inflation
- 97. Types of Stock Investments Blue chip stock Safe investment in strongest and most respected companies. Generally attracts conservative investors. Low risk, consistent dividends E.g.. EABL, Bamburi Cement Income stock higher than average dividends E.g.. BAT, SCBK.
- 98. Types of Stock Investments Growth stock earns above average profits low or no dividends Profits reinvested in company E.g. Safaricom, Equity Bank
- 99. Types of Stock Investments Cyclical stock follows business cycles of advance and declines in the economy E.g. Kenya Airways Defensive stock remains stable even if the economy is declining E.g. Utility stocks (KPLC, Umeme)
- 100. Stock Selection - Equities How do you pick shares? Penny stocks Products you consume? Hot tip? Gut feel? Herd mentality? Recommendation from broker/advisor? IPO ? Research?
- 101. Stock picking strategies Fundamental Analysis Technical Analysis Relative valuation techniques
- 102. Fundamental Analysis Is a good company equivalent to a good stock?
- 103. Fundamental Analysis Goal : to get the intrinsic value of a stock ie. What a company is really worth, not what it’s trading at. How to get intrinsic value: get the company’s future cashflows/profits and discount them to today’s value.
- 104. Fundamental Analysis Assumes people are rational - nobody would buy a stock for more than its future discounted cashflows. So why are stocks volatile? Many people do not view stocks as representation of future cashflows, rather view it as trading vehicle Greater fool theory… Fundamental analysis therefore considered more of a long-term strategy
- 105. Fundamental Analysis Involves: Quantitative Qualitative Management interviews and site visits Discussions with competitors, suppliers, customers, regulators, policy makers etc. Position in global and local context + 5-year cashflow projections on proprietary database Apply risk-adjusted discount rate Determine intrinsic value by discounting forecast free cashflow
- 106. Fundamental Analysis Dependent on understanding company well Review model and assumptions as and when new information becomes available Subjective to a degree (2 analysts may have differing opinions based on assumptions made) Key is to improve your understanding of what impacts the company – Experience helps
- 107. Bank analysis
- 108. 1. History & background of company Primary business: Accepting deposits from the public for the purpose of lending or investment (to derive interest income) and other financial/transactional services (to derive noninterest/fee income). Management : BOD, top management – experienced, well qualified to run a bank. Shareholding: Main shareholder will be key decision maker. Is that shareholder competent enough to do so? Company’s vision/strategic plan: Realistic? Achievable? Would it give a competitive edge?
- 109. 2. Industry Life Cycle Stabilization and Maturity Mature Growth (Average growth) (growth decelerating) Pioneering (moderate growth) Deceleration of growth and decline Rapid growth Time
- 110. Contd…Industry Life Cycle ♦ ♦ ♦ ♦ ♦ Pioneering phase: Start up phase. Limited growth and low or negative profit margins. Demand is low and companies faced with substantial developmental costs. Rapid accelerating growth: markets develop for the products and demand grows rapidly. Limited competition among the few firms in the industry and income growth and margins are high and accelerating. Mature growth phase: Growth still above normal but ceases to accelerate. Competitors enter the market and profit margins start to decline. Market maturity: Longest phase. Industry growth rate approach the average growth rate of the economy. Fierce competition produces slim profit margins, and ROE becomes normal. Decline: Demand shifts away from the industry. Growth of substitutes products causes declining profit margins.
- 111. 3. Economic Trends Forces of economic trends Cyclical changes • Arise from changes in business/economic cycles – economic slowdown affected loan and deposit growth, rise in NPLs; reversing now with economic pick up. Structural changes • Occurs when an industry/company undergoes major change in how it functions e.g. privatisation, use of IT, use of agents, etc. Consumer sentiments and politics/legislation also affect economic trends and hence business cycle
- 112. Structural Economic Changes Interest rates – impact of interest rates on banking industry High interest = higher margins but also higher defaults and lower demand for loans. Interest rate fluctuations play a huge role in a bank’s profitability thus banks seek ways to generate more fee-based services (more in their control). Net interest margins (net interest/interest bearing assets) comes under pressure with intense competition or low interest rate environment as banks must reduce rates to lure more customers.
- 113. Structural Economic Changes Demographics – this includes analysis of: Population growth Bankable population and penetration • 60% of bankable population have no access to financial services Globalisation/Liberalisation Entry of foreign banks
- 114. Structural Economic Changes Technology Improvement of products and services e.g Internet and mobile banking, etc greatly improve efficiencies Results in changes in capital expenditures as it provides incentive for competitive advantage - new IT platform
- 115. 4. Competitive advantage Threat of new entrants Industry Competitors Rivalry amongst competitors Threat from substitute products Substitutes Threat from buyers Suppliers Threat from suppliers Potential Entrants Buyer
- 116. Threat of New Entrants Depends on level of entry barriers and retaliation expectations of current industry players Threat low if barriers high and retaliation sharp Barriers Economies of scale (KCB, BBK, Equity) Product differentiation (products largely the same) Capital requirements (minimum capital requirement Kshs 1b) Access to distribution channels (ATM, branch network – KCB, BBK, Equity) Cost advantages due to learning curve, experience (one of the reasons Equity bought stake in HF)
- 117. Intensity of Rivalry Banking sector highly competitive 43 banks, over 550 branches Lack of differentiation/switching costs – moving banks/accounts very easy Intense competition good for customer but affects banks’ profitability High exit barriers Specialised assets Fixed costs of exit e.g. labour/severance costs Strategic interactions with other subsidiaries or related business Consolidation more common as a result.
- 118. Threat of Substitutes They limit the potential returns in an industry by creating price ceilings Non-banking institutions e.g M-Pesa, micro-finance institutions, co-operatives Banks now partnering with these institutions/offering products to these segments so as not to lose market share
- 119. Threat of Buyers Buyers are powerful if: Products and services from industry are standard and undifferentiated (traditional deposits and loans) Switching costs are low – easy to move your loan/account to another bank Buyer is price sensitive Buyer has full information on price and quality thus negotiating power (especially the case for large corporate clients)
- 120. Threat of Suppliers Suppliers e.g. human capital, systems & software (pose a threat if they raise prices, reduce quality of product or are scarce) Supplier is powerful if: For human capital, there is a shortage of skilled labour For systems and software suppliers: • Few suppliers available • Switching costs too high • Substitutes not available
- 121. 5. Financial Statement analysis Profit and Loss Statement Balance Sheet Statement Financial Ratio Analysis Trend Analysis
- 122. Make It Simple: What Drives Bank Earnings? Loan growth and mix Net interest margin Fees Provisions Op costs Leverage
- 123. Loan growth Net Loans & Advances 250,000 200,000 Kes '000 150,000 100,000 50,000 - 2007 2008 2009 2010 2011 KCB 64,278 93,522 93,522 148,113 198,723 BBK 105,346 108,086 93,543 87,147 99,072 EQT 21,836 44,194 63,378 78,302 109,652 STANBIC U 18,002 29,352 37,050 41,541 52,152
- 124. Net Interest Margin (NIM) Measures the net interest income earned by a bank relative to its interest bearing assets = (Total interest income – total interest expense) Total earning assets (loans+cash+govt secs)
- 125. Net interest margin Net Interest Margins 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 2008 2009 2010 2011 KCB 8.30% 8.20% 9.56% 8.49% BBK 9.17% 9.51% 10.01% 10.42% EQT 11.35% 11.63% 10.82% 9.21% STANBIC U 8.74% 9.40% 7.54% 9.67%
- 126. Fee (Non-interest) Income Fee Income/Total Income 49% 47% 45% 43% 41% 39% 37% 35% 2008 2009 2010 2011 KCB 46% 39% 36% 41% BBK 41% 37% 40% 38% EQT 48% 42% 47% 46% STANBIC U 40% 37% 40% 34%
- 127. Provisions Coverage ratio measures how much of a bank’s capital has been set aside to absorb estimated loan losses. = Total provisions on loans and advances Gross Non-performing Loans
- 129. Operating costs Cost/income ratio is an efficiency measure that reflects how a bank’s total costs are changing in relation to its total income = Total Operating Costs Total Income
- 130. Cost/Income ratio - Efficiency Cost Ratio 70.00% 65.00% 60.00% 55.00% 50.00% 45.00% 40.00% 2008 2009 2010 2011 KCB 55.74% 66.86% 61.05% 56.69% BBK 60.65% 59.33% 56.93% 51.62% EQT 52.34% 60.10% 51.00% 47.97% STANBIC U 52.24% 50.90% 63.87% 57.22%
- 131. Leverage Measures how much of a bank’s equity is used to generate assets. The higher the leverage, the greater the risk of losing your equity. Leverage = Total tangible assets Shareholder funds
- 133. Leverage Banks in advanced economies were extremely leveraged during financial crisis. Leverage figures as at June-08: Barclays plc – 61x Deustche Bank – 53x UBS – 47x Goldman Sachs – 26x CBK regulations – 12.5x maximum
- 134. 6. Management visits Objective: Establish strategy and vision of the company for the long term. Generate realistic forecasts of company earnings and cashflows. Clarifies assumptions and gives forum for discussion on various company issues of concern.
- 135. 7. Company valuation Objective: Determine the intrinsic value of the company – determining the future cashflows attributable to the shareholder, discount them to the present. Company valuation models used Discounted Cashflow Model (DCF) Discounted Dividend Model (DDM) Relative valuation - price/earnings (P/E), price to book (P/B)
- 136. Concluding remarks "Absent a lot of surprises, stocks are relatively predictable over ten to twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide."
- 138. Why choose a diversified international strategy?
- 139. “To avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify. If you search worldwide, you will find more bargains and better bargains than by studying one nation. You also gain the safety of diversification” Sir John Templeton Retired Founder Templeton Asset Management
- 140. 1. Hedge against local currency depreciation Currencies: Less exposure to one currency - Uganda shilling:members overseas consumption or expatriates Exposure to currency risk (where it is an advantage)
- 141. USH vs US Dollar – last 6 years Steady depreciation of currency over a number of years but in 2011 a very sharp depreciation in H2. Weekly QUGX= Line, QUGX=, Bid(Last) 18/03/2012, 2,475.00 03/09/2006 - 15/07/2012 (NBO) Price /USD 2,700 2,600 2,500 2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 1,600 .12 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2006 2007 2008 2009 2010 2011 2012
- 142. Risks Exchange rate or currency risk Transaction risk - shilling value of receipts and payments Translation risk - foreign currency denominated assets and liabilities Economic risk Buy Original Price Amount Investment (US$) Pricipal principal amount plus 2% (Ushs) interest 100,000,000 2,500 40,000.00 40,800.00 Sell (i) 114,240,000 2,800 40,000.00 Sell (ii) 89,760,000 2,200 40,000.00 Gain/Loss 40,800.00 Ush Ush Ush 40,800.00 Ush Ush Ush $ 800.00 12,000,000 2,240,000 14,240,000 (12,000,000) 1,760,000 (10,240,000)
- 143. Costs and Other Risks Other: Dealing costs Information and communication costs (investment, travel or language considerations) Taxation (double taxation) Political, e.g., nationalisation without adequate or delayed compensation, changes (or lack of) in government, policy reversals Regulatory capacity - impact on market efficiency, reporting standards, investor relations
- 144. Diversify “The only investors who shouldn’t diversify are those who are right 100% of the time.” Sir John Templeton Retired Founder Templeton Asset Management
- 145. 2. Diversification reduces risk Markets: Diversification away from reliance on the fortunes of the Kenyan economy Improved diversification of the portfolio to take in overseas markets - eggs in more baskets
- 146. 3. Wider range of investment opportunities Industrial Sector: Investment in sectors not available in Uganda, e.g., pharmaceuticals, transport, telecommunications, etc.
- 147. More opportunities worldwide Africa v. Rest of the World Africa market Cap < 1% of World market Cap
- 148. Why Global Diversification? If you’re seeking the best possible investments, why place limits on where to look for them? By limiting a portfolio to US stocks, an investor would ignore: 8 of the world´s 10 largest automobile companies 7 of the world´s 10 largest consumer durables companies 6 of the world´s 10 largest energy companies 8 of the world´s 10 largest materials companies Source: MSCI Perspective as of December 31, 2006. Ranked in terms of market capitalization. Not all of these companies may meet Templeton Global Fund´s investment criteria.
- 149. International Investments Greater opportunities than domestic markets World market capitalisation (MSCI index) Africa: 0.5% - 1% (where does that put East Africa?)
- 150. Real GDP Growth Rates
- 151. Real GDP Growth Rates
- 152. World Map - Population
- 153. World Wealth – 1960 V 2015
- 154. GDP PER CAPITA GAP Bank deposits Money market and fixed income instruments (government and corporate) Equity Property Derivatives RBA rules stipulate a 15% limit on overseas investment
- 155. Contd…Investment Universe Bank deposits Money market and fixed income instruments (government and corporate) Equity Property Derivatives
- 156. Conclusion A well diversified investment portfolio enables investors to: Reduce local currency and market risk Opens up more opportunities Earn more consistent returns A well diversified investment discipline provides exposure to: Different investment perspectives Professional investment expertise A spectrum of styles, convictions and market perspectives
- 158. Why plan your finances? To ensure you have a nest egg when out of a job/emergency. To continue with the same standard of living before and during retirement. Peace of mind. Financial freedom - get out of the rat race.
- 159. What is your net worth? ASSETS Kshs Cash Current/Savings account Life Insurance Employment pension plan Investment portfolio (shares, bonds, property, etc) Personal property (car, house, shamba, etc) Business Total Household assets LIABILITIES Credit card balance Bank loan Sacco loan Mortgage balance Other debts Total Household liabilities NET WORTH (Total assets - Total liabilities)
- 160. Exercise Are your finances in order? Take your age 40 Divide it by 10 4 Multiply by your annual gross salary 1m The result should equal your net worth 4m
- 161. Are your finances in order? If greater you are a “positive accumulator of wealth” If lower you are an “under accumulator of wealth”
- 162. Net worth: Assets - Liabilities The aim is to have a positive net worth, and keep it growing. Your net worth is part of what you will draw on to fulfill your financial objectives and help you through a financial crisis. Review your net worth annually to monitor your financial health.
- 163. Planning for Retirement START EARLY
- 164. Planning in your 20s Bad news is, you’re probably always broke and have negative net worth. Good news is, so are most of your friends. Better news is, time is on your side. So get your act together now. Start your saving discipline early – commit 10-15% of your salary. Let the power of compounding work for you. Number of years 5 10 15 20 25 30 Principal 60,000.00 120,000.00 180,000.00 240,000.00 300,000.00 360,000.00 10% Return 77,440.00 204,840.00 414,470.00 759,370.00 1,326,830.00 2,260,490.00 Interest 17,440.00 84,840.00 234,470.00 519,370.00 1,026,830.00 1,900,490.00
- 165. Planning in your 30s The bad news is, this age decade has the highest proportion of people in debt. The good news is, not all debt is bad, so learn now to use it wisely for future gain e.g. buying a plot, mortgage, advancing your education, etc. Don’t let living costs run your life. Make hard choices about your lifestyle and spending habits. Build an emergency fund – 3 to 6 mths of living expenses. Limit your level of debt – up to 30% of net salary. Continue to save through your pension plan – AVCs!
- 166. Planning in your 40s Bad news is, it’s make or break – little time left for mistakes. Continue to build your wealth, control your debt and look toward retirement. Let’s guage your progress: Your income and wealth is up, so is your debt, but your net worth should be positive. And you’re getting more serious about your retirement.
- 167. Planning in your 40s Your accumulated pension benefits are probably still not sufficient. Therefore: Make your retirement savings your top goal – put every available shilling away for your retirement. Start paying off your debts. Be very wary on taking on more debt than you can easily repay at this time in your life.
- 168. Planning in your 50s Checklist: You’re probably in your peak earning years You’re paying down debt, and your wealth is higher than in your 40s. But dangers abound: Losses on pension balances from market volatility High debt levels, illness, disability, lay-offs that can cripple your finances. Poor planning, no insurance, boomerang kids (adult children who come back home) are added risks.
- 169. Planning in your 50s Consider the following: Work – even after retirement, work has social, emotional as well as economic benefits. Despite your obligations, saving for retirement should still be your top priority. Get a good medical cover. Schedule complete medical check-ups annually. Life insurance. Accelerate your debt repayments. Children – unless they’re still in school or disabled, they should not be relying on you.
- 170. Planning in your 60s Know your retirement date, don’t let HR surprise you. Plan where you are going to live and the cost implications/savings. Include medical costs – medical insurance in your 60s is expensive, but a must. Draw up a retirement budget. Rule of thumb – you will need 70-80% of your pre-retirement income to live comfortably. Review your pension options – annuity, lump-sum, income draw down, etc. You must have a will by now. Enjoy!
- 171. PILLARS OF PLANNING FOR RETIREMENT
- 172. SAVE Start saving as soon as you can. Treat your savings as a necessary expense e.g. rent Have a savings plan: 10-15% of salary Save as much as you can in your pension scheme - you save on taxes and can’t access your benefits easily. Build an emergency fund from your savings in a separate bank account worth 3-6 months worth of living expenses to cater for an emergency/out of job situation. Pay your major periodic expenses on a monthly basis e.g. school fees. Have a good medical cover in case of large, unforeseen medical expenses.
- 173. INVEST What can you invest in?
- 174. What can you invest in? Shares Interest bearing assets e.g. bank deposits, treasury bonds International investments Property Consider your risk profile, return expectations, and liquidity requirements
- 175. How do I invest?
- 176. Formal Plans Staff retirement benefits scheme Personal pension plans Unit Trusts
- 177. Informal Savings Plans Investment Clubs Social networks Personal savings Personal investments Business
- 178. When investing in the stock market Arm yourself with knowledge of the company (past performance, future strategies, dividend policy, etc). Expect short-term fluctuations and learn to ride the wave. Resist the lure penny stocks - Cheap is expensive! Adopt a long-term perspective. Be greedy when others are fearful and fearful when others are greedy.
- 179. When investing in land/property Location Infrastructure in the area - availability of water, electricity, etc Security in the area Proximity to shopping centre, road, social amenities, etc Legal status of the property
- 180. DEBT MANAGEMENT
- 181. WHY DO WE GO INTO DEBT? We spend more than we earn We want to have what the neighbour /colleague/friend has The lure of easily attainable loans We borrow to pay back other loans GOOD DEBT Debt for investment, future financial gain e.g. business, education, property, etc BAD DEBT Debt for consumables/expenses
- 182. GET OUT OF BAD DEBT!!!! HOW?
- 183. Managing Debt Plan before you borrow. Maximum 1/3 of net pay in loan repayments Thou shalt not covet - don’t borrow for things you desire but don’t need. Avoid borrowing on consumption items Live within your means. Avoid a ‘saviour’ mentality - Save yourself and your family first!!!
- 184. JOURNEY TOWARDS FINANCIAL FREEDOM It starts with the person in front the mirror
- 185. The sad statistics Very few retirees live comfortably Dependent on relatives 47% Working 31% Financially independent 6% PLAN TO BE IN THIS SEGMENT Dependent on pension 16%
- 187. Q & A session