Peter Mushangwe

Zandisile Mabuya Stanbic Uganda: Recommendation

+27 11 551 3675
peterm@legae.co.za reiteration – BUY, 27% potential return
1. The opportunity 
We reiterate our BUY recommendation on Stanbic Uganda (SBU.UG) with a
target price of UGX194 by end of 1H10. The sources of opportunity include:

October 23, 2009 • The stagnant share price: SBU share price has oscillated around
UGX155 before being stagnant at UGX160 for the whole month of
September ‘09. The share price rebounded soon after our initiating
report, but we see continued good value especially given our
expectations of ROE of greater than 40%. In our opinion SBU.UG is a
quality asset with a strong market share. The stable price provides an
entry point because we interpret it as a “price weakness”.
• Potential upside risk on the UGX/US$ exchange rate: The local
currency has recovered against the US$ from the weakest exchange
rate of UGX2,295 per US$ in May 2009 to UGX1,882 per US$.
Exports of goods and services continue to increase, rising to
US$3.84bn from US$3.43bn last year. This improved the trade
balance, hence the recovery of the shilling. In the long-term, oil
extraction will augment US$ supply in the economy, supporting the
local currency.

Fig 1: Price performance does not fully factor earnings growth expectations in our view.
200 80%
The share price has not factored in the upside risk of the economic  Despite a colossal 56.2% capital gain since our initiation, YTD return is 
190 recovery not excessive, US$ returns
180 60% 56.2%

170
160 40%
150
140 20% 11.8%
130 3.2%
‐42.2% ‐9.8%
120 0%
12‐Moths

Since initiation, May 5
Since Jan 2008

YTD

3‐months

110
100 ‐20%
January‐09

February‐09

March‐09

April‐09

May‐09

June‐09

July‐09

August‐09
October‐08

November‐08

September‐09
December‐08

‐40%

‐60%

Source: USE, Bloomberg, Legae Calculations

• Valuation: the bank trades at an implied P/E ratio of 8.3X (1H09) and
trailing P/E ratio of 10.5X (FY08). Our forecasts indicate a forward P/E
ratio of 6.3X by CY2012 yet we expect ROEs to be sustained at an
average of 43% over the same period. The implied P/E ratio does not
compare favourably against history, as well as against the justified P/E
ratio that come up to 15.7X and 11.9X respectively, using a CoE of
20.7%, average growth rate of 14% and dividend payout ratio of 70%.
Our 27% potential return comprise of an expected capital gain of
21.3% and a dividend return of 6%. The bank has a strong record of
dividend payment. The interim dividend is payable on 30 October
2009.

2. Key catalyst–FY09 results early next year 
We consider the bank’s fundamentals to be strong and the key catalyst for a
price appreciation will be the FY09 results to be released early next year.
The 1H09 set of results indicated strong profitability growth. Net interest,
fees and commission, and net profit went up by 30%, 10% and 40%
respectively. We expect Net Interest Income (NIM) to improve to 10.1% from
9.2% before declining to 8.4% in CY2012. ROE should be supported by the
leverage and should remain high (>35% upto CY2012). We expect the EPS
to go up by 24.8% to UGX19.1. We do not see material sector systematic
risks going forward. We do not perceive significant adverse regulatory risks.
SBU’s performance could surprise and will be supported by:
• Strong mortgage lending performance: We believe SBU is best
positioned to exploit the mortgage market, which to an extent is in its
infancy. The bank raised UGX30bn to support its Tier 2 capital, and
also to carry its mortgage lending business (long-term lending). The
bank still has biggest market shares on both asset (lending) and
liability (deposits) side of the balance sheet. The mortgage lending
book is only 6% of the total loan book, and in our view, the bank has
room to grow this business segment.
• Improvement in asset quality: We expect bad loans and write-offs to
increase beyond normal this year, but the formation of non-performing
assets will come down as the economy picks up. In our opinion, this
downward trend should start 4Q09. Consumer credit risks should
dissipate as well. Presenting 1H09 set of results, management

Page 2 of 6
 indicated that the personal lending book took the biggest credit strain.
Personal and business lending make up 40% of the total loan book.
Despite our view that the personal loan book may take a longer period
to recover than the business segment, the bank stand to benefit from
reversal in the provisions in 2010.
• Strong trading income: In spite of the economic recovery, volatility in
currency markets remains high relative to history. Currency trading
dominates the bank’s trading income. Trading income went up by 62%
to UGX16.7bn (1H09) from UGX10.2bn in 1H08. We expect trading
revenue to continue to show strong growth on the back of higher
volatility of the shilling (see fig 5).

Fig 2: Economic recovery will prompt recovery in bad loans. Falling NPLs will spur profitability

GDP growth GDP per GDP, CA balance, CA balance, %

Year Inflation, %
rate,% Capita, US$ US$bn US$ bn of GDP
2000 5.4 254.88 16.82 5.8 -0.4 -6.5
2001 5.2 232.59 18.10 4.5 -0.2 -3.6
2002 8.7 239.35 19.99 -2.0 -0.3 -4.6
2003 6.5 245.86 21.75 5.7 -0.3 -4.7
2004 6.8 284.99 25.91 5.0 0.0 0.1
2005 6.3 320.07 25.86 8.0 -0.1 -1.4
2006 10.8 333.52 29.59 6.6 -0.3 -3.4
2007 8.4 385.28 32.99 6.8 -0.4 -3.1
2008 9.0 454.57 36.75 7.3 -0.5 -3.2
2009 6.0 471.70 39.92 14.2 -0.9 -5.5 Expected strong 
2010 6.0 486.75 42.95 10.8 -1.0 -5.7 GDP growth and 
2011 6.8 505.89 46.51 5.8 -0.9 -5.1 lower inflation 
2012 7.0 532.31 50.65 5.3 -0.9 -4.6 rates will bode 
2013 7.0 560.96 55.26 5.9 -1.0 -4.6 well for banking 
2014 7.0 580.34 60.28 5.7 -1.0 -4.5 stocks

Source: IMF WEO October ‘09, MoF Uganda, Legae Calculations

Page 3 of 6
Fig 3: Interest rate spread is still strong but we expect it to shrink in the long-term
25%

20%

The interest spread 
Savings deposits
15% Time deposits
remains strong , but we 
Lending
expect it to shrink in the 
long‐term due to 
10% increased competition 
and continued moral 
suasion from BoU for 
5% lower lending rates

0%
Jun‐07

Aug‐07

Oct‐07

Apr‐08

Jun‐08

Aug‐08

Oct‐08

Apr‐09

Jun‐09

Aug‐09
Dec‐07

Feb‐08

Dec‐08

Feb‐09
Source: BoU, Legae Calculations

Fig 4: The more expensive fixed deposits are dominating the liability side. This will compress
interest spreads and NIM in the long-term.
2,150.0 

Demand deposits
1,950.0 
Time deposits

1,750.0 

1,550.0  The "more 

expensive" time 
deposits are 
1,350.0 
becoming more 
popular .  This will 
1,150.0  negatively affect  
interest spreads
950.0 

750.0 
Jul‐07
Aug‐07
Sep‐07

Nov‐07

Feb‐08

Apr‐08
May‐08

Jul‐08
Aug‐08
Sep‐08

Nov‐08

Feb‐09

Apr‐09
May‐09

Jul‐09
Jun‐07

Oct‐07

Dec‐07
Jan‐08

Mar‐08

Jun‐08

Oct‐08

Dec‐08
Jan‐09

Mar‐09

Jun‐09

Source: BoU, Legae Calculations

Page 4 of 6
Fig 5: This 100-day historical volatility of the UGX/US$ rate increased and remained fairly
high. This should sustain strong growth in trading income
10%

9%

9%

8%

8%

7%
Dec‐08

Aug‐09

Oct‐09
Apr‐09
Nov‐08

Jan‐09

Feb‐09

May‐09

Sep‐09
Jun‐09

Jul‐09
Mar‐09

Source: Bloomberg, Legae Calculations

Fig 6: SBU is the most traded stock on the Uganda Securities Exchange

BATU
BOBU
DFCU
SBU's external
EABL liquidity is highest 
EBL on the USE, with a 
JHL turnover of 
UGX9.8bn  ( about 
KA US$5.3mn) YTD
KCB
9,873.17 
NVL
SBU
UCL

Source: Uganda Securities Exchange, Legae Calculations

Page 5 of 6
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