UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
DEPARTMENT OF FINANCE
FINANCIAL MANAGEMENT
MASTERS OF BUSINESS ADMINISTRATION

COURSE; FN 601

COURSE INSTRUCTORS; Dr M.D. Baisi

GROUP PARTICIPANTS

NAME REG NO COURSE

BUDODI JACQUELINE 2018-06-00987 MBA
MEMBA MIRIAM D 2018-06-00044 MBA
KASUWI HADIJA 2018-06-00017 MBA
IGNACE GODIAN 2018-06-00014 MBA
NTOMOLLAH BARAKA R 2018-06-01219 MBA

1
A : HISTORICAL BACKGROUND
Kenya group limited was established in the year 1896 (123 years ago) in zanzibar which operates
in the banking industry to provide financial services. The bank was opened by the national bank
of India to facilitate them to handle their businesses at the port of Mombasa, it then moved to
Nairobi in 1904 which has become the headquarters ever since. In 1957 Grindlays bank merged
with the National bank of India to form the National and Grindlays bank, when Kenya got its
independence the government acquired 60% of the bank and in 1970 the government acquired
100% of the bank in the effort of bringing commercial services to the people of Kenya and
therefore renamed it Kenya commercial bank (KCB). In 1972 KCB acquired savings and loan
Kenya Ltd for mortgage financing.
In 1988 KCB became public where 20% of the government shares where sold in the initial public
offerings of the Nairobi securities exchange (NSE), by 2010 the government had reduced its
ownership to 17.31%.
The KCB bank now operates in various countries in the Africa great lakes region. The bank was
incorporated in Dar es salaam Tanzania in 1997 with now about 14 more branches across the
whole Tanzania. In 2006 KCB extended its operations to South Sudan, and in 200the bank
opened their first branch in Uganda with now about 14 branches across the whole of Uganda. In
2008 KCB extended its operations to Rwanda by opening a branch at Kigali with now about 11
branches all over the country. The bank then extended to Burundi in the year 2012
KCB Subsidiaries. No of branches
KCB Burundi 5
KCB bank Kenya 200
KCB bank Rwanda 14
KCB bank South Sudan 10
KCB bank Tanzania 14
KCB bank Uganda 15

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B: OWNERSHIP

The KCB Group Plc. Board of Directors (“Board”) is committed to high standards of corporate
governance and its corporate governance framework supports its long term Performance and
sustainability projects and enhances shareholder value and protects the interests of all its key
stakeholders. The Group believes that good corporate governance is based on a set of values and
behaviors that underpin day-to-day activities; provide transparency and fair dealing; and promote
financial stability and healthy economic growth that can deliver better outcomes for the Group’s
stakeholders and help its customers get ahead.

KCB Group regularly reviews its corporate governance arrangements and practices and ensures
that the same reflects the developments in regulation, best market practice and stakeholder
expectations.Each year, the regulators in Kenya, and indeed in the countries in the region in
which the Group operates, have continued to enhance the regulatory and risk management
Guidelines. The Group continuously embraces the changes and remains at the forefront in
adopting best practices in corporate governance and risk management in the rapidly evolving
financial markets and business landscape.

The Board and management of the Group continue to comply with the Corporate Governance
Guidelines as prescribed by the Central Bank of Kenya being the primary regulatory authority of
the Group and KCB Bank Kenya Limited as well as the Capital Markets Authority Code of
Corporate Governance Practices for Issuers of Securities to the Public, 2015

The Group Chairman is responsible for the strategic leadership of the Board and is pivotal in
creating conditions for the overall effectiveness of the Board. He promotes an open environment
for debate and ensures all Directors are able to speak freely and contribute effectively. The
Group Chairman plays a pivotal role in fostering constructive dialogue between shareholders, the
Board and management at the Annual General Meeting and other shareholder meetings. The
Board, in the Board Charter, delegates responsibility for the day-to-day management of the
business to the Group Chief Executive Officer.
The Group Chief Executive Officer in turn delegates aspects of his own authority to members of
the Group Executive Committee. The scope of, and limitations to, these delegations are clearly

3
documented and cover areas such as operating expenditure, capital expenditure and investments.
These delegations balance effective oversight with appropriate empowerment and accountability
of senior executives. To adequately undertake responsibilities in the day-to-day management of
the business, in line with the authority delegated by the Board, management committees have
been established. The management committees include the Executive Management Committee
(EXCO), the Assets and Liabilities Management Committee (ALCO), the General Management
Committee (GMC) and the Group Operational Risk and Compliance Committee (GORCCO).

C: BUDGETING

Budgeting is fundamental to every project management. It is imperative because it is a means to

ensure that desired organizations objectives are met. This is also accomplished by exercising
control over scares resources. Strategically, for an organization to run effectively, there are four
critical factors: organizations objectives of where it intends to go, plans or how it intends to
accomplish such objectives, coordination or whether individual plans fit in the overall
organization objectives and control or whether operation relating to that period. With this,
budgeting and budgetary control are the devices that an organization makes use of for all these
purposes.

Budgeting is an integral part of planning and coordinating, it is becoming increasingly important.

While control is comparing where you are supposed to be so that corrective action can be taken
when there is a deviation. When there is no plan, there is no control.

It is almost for an organization to exist and survive without some sort of budget. To be without
one is like a ship without cores, cross along while being unaware of how far of the route it is or
which rock it is likely to hit, only luck can save it from a catastrophic end and misadventure.

Individuals in their private affairs employ the use of budgets in their day to day activities. The
practice of budgeting and its control is now established on a world-wide basis and it's still
growing rapidly.

In general terms, a budget is a plan. It also forms the standard with which to measure the actual
achievement of people, departments, firms and even governments.

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A budget can be viewed as the plan of the dominant individuals in an organization expressed in
monetary terms and subject to the constraint imposed by other participant and the environment
indicating how the available resources may be utilized to achieve whatever the dominant
individuals agree to be the organization's priorities.

It is one thing to plan a budget using the best project figures; it is another thing to ensure that the
process of establishing the budget is both highly efficient and effective; in accomplishing the set
objectives. Thus, the simple term is basically what budgetary control entails.

All of this is necessitated by the economic concept of Scarcity. Though “scarcity” is a relative
term, it is right to note that resources are scarce, consequently, they serve as constraints to
management, in terms of materials, manpower, money and time. Resources must however be
utilized in order to achieve an organization's primary and secondary objectives, (that of profit
maximization and survival, growth, market share etc.) .However budgeting as a tool of planning
and control expressed in financial terms, based on predetermined objectives must represent what
is likely to happen after a careful balance has been stuck between the ambition of management
and the constraints facing the business.

D: INVESTMENT ANALYSIS

KCB bank is heavily invested in sub Saharan countries with operating activities in Kenya,
Tanzania, Uganda, Burundi, Rwanda and South Sudan. KCB invested in banking activities
across those economies this expose the company into various risks. Business operations are not
free from risks which may arise internally or externally, for KCB below are potential risk may
encounter its operations.

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Categories of risks exposure

Market risk

Operational risk

Risks

Information risk
Compliance
risk

Credit risk

Market risk

KCB is facing potential risk of loss of earnings or economic value due to sudden shifts in
financial and economic factors.

Interest risk

Banks are exposed in interest rate risks, when there is adverse shift of interest rate on long term
assets. When interest rate rises bank experience loss of economic value because assets value
decrease more than liabilities value. Interest rate is the risk that the future cash flows of financial
instruments will fluctuate because of changes in the market interest rates. Interest margin
maydecrease as a result of such changes but may increase losses in the event that unexpected
movement arises.

Foreign exchange risk

Currency depreciation in both countries of operation exposed the company in a risk of decline its
economic value due to exchange rate losses. Example in 2017 Kenyan shillings depreciated by
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0.65%. Foreign currency risk arises from non-trading assets and liability position denominated in
currencies other than the functional currency of the respective entity. The adverse fluctuation in
foreign currency exchange may result transactions loss.

Liquidity risk

KCB as other banks exposed in liquidity risk due to nature of its operations. To enhance liquidity
it depends on customer deposits and other short term facilities. Bank should ensure it is in
position to meet financial obligations in normal or stressed condition to avoid extra costs which
may be incurred on seeking short term finance and maintain company reputation. KCB bank
maintains a portfolio of short term assets made up with short term liquid investment securities,
loans and interbank facilities to ensure it is sufficiently liquid

Also KCB monitors its liquidity ability by conducting several scenario test under normal or
stressed changes in market condition. They use ratio of net assets to customer deposits to
measure liquidity

Country risk

KCB is exposed to country risk due to its operation may be affected by the changes occurred in
those countries which may be political or economic. Example KCB is operating in South Sudan
where they are politically unstable hence the bank operation is heavily affected by business
collapse and slow growth in economy.

Credit risk

Risk associated with collateral on loans and advances. Bank issues loan based on mortgage value
or asset rely on assessed value at the time of issuing loan. In the course of loan life time the asset
may be impaired or destroyed hence this will expose the bank to a risk as the loan may be
partially or totally unsecured. Under this circumstance if happened the lender unable to pay back
the loan bank may only recover from the sale of collateral at the market price available or not
recovered at all.

Bank enters into credit commitment by issuing bank guarantees and letter of credit to their
customers and commit to pay on behalf in case of they failed to pay with specified time .This

7
kind of commitment expose bank in the same way as loans. KCB consider all of credit risk
exposures such as counterparty default, geographical and sector and put controls to manage risks.

Operational risk

This is the risk which has direct or indirect loss arising from operational process, personnel,
technology, and infrastructure and from external factors such as legal and regulatory requirement
changes.

Risk management

KCB put in place the risk management strategies which assist to mitigate the impact of various
risks posed to the organization. Also ensure regular monitoring of KCB’s profile risk against
approved risk limits. The risk management strategy designed to cover both operational, market,
credit, information and compliance risk.

Risk management process

Risk Risk
Risk Mitigation Risk monitoring
identification assessment & reporting

KCB Group manages market, liquidity and country risks to ensure business units do not expose
the bank to unacceptable losses beyond the approved risk appetite and maximize return on risk
adjusted capital. It has put in place mechanisms and systems to help to identify complexities
arising from globalization of financial services, together with growing sophistication of financial
technology, expansion into different geographies among others to insulate or reduce losses that
may result thereof.

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KCB Group performance

KCB have experienced a continuous growth on its net profit over the past five year. The key
factors for success are continuous products expansion and innovation. The customer base
increased to 17.4 Million across the region.

Below is a snap shot of company’s profitability for past five years

Table of Net profit

Year 2014 2015 2016 2017 2018

Net profit(Ksh in 16,849 19,623 19,723 19,704 23,995
millions)

Net income growth chart

9
 KCB GROUP NET PROFIT CHART
30,000

23,995
25,000
19,623 19,723 19,704
20,000 16,849

15,000

10,000

5,000 2014 2015 2016 2017 2018

0
1 2 3 4 5

Net profit growth chart

From 2014 to 2018 KCB Group has recorded the increase of net profit by 42% this shows a good
trend on investment made across the countries. In 2017 there is a slight drop in profit made by
0.096% compared to profit made in 2016 due to political situation experienced in Kenya and
Rwanda due to general elections. The market pessimistic affected business operations, interest
rates, inflation and currency depreciation. In 2018 the company’s performance bounced bank and
experienced the growth 22% compared to 2017.

The company’s performance is mainly attributable to management efforts in creating and

investing in new business lines like internet banking and synchronization of mobile banking
activities. The operation performance has led to the increased productivity over the time. The
management decisions to expand their operations in various economies seek to tape the
opportunities available in expanding banking industries. The company efforts to reduce non-
performing loans reduces the loss resulted from bad debts. Over the time management put in
strategies which ensure there is value addition in the business and customer satisfaction. From
2014 the customer base increased in 2018. The expansion of services like opening new branches
ATM, POS and Agents enable easy availability of the service

KCB Shareholding portfolio

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KCB is a listed company in both Nairobi and Dar es Salaam stock exchange. It has total number
of 3,066,063487 equity shares.

Composition of shareholders

No of
shareholders No of shares % shareholding
Permanent sec to the Treasury of
Kenya 1 537,378,947.00 17.53%
Local Institutional Investors 5,330 987,099,095.00 32.19%
Local Individual Investors 147,849 835,859,333.00 27.26%
Foreign Investors 655 705,726,112.00 23.02%
Total 153,835 3,066,063,487.00 100%

Its equity shares are public traded shares, currently in Nairobi one share is traded at Ksh 39.5 In
past five years it experienced a significant growth its total equity; in 2014 equity was about Ksh
75,654million and by 2018 equity was Ksh 113,611million.The current cost company cost of
equity is 13.77%.

Its earning per share increased over time from Ksh 6.43 in 2017 to Ksh7.83 in 2018 this shows
the significant increase its share value.Dividend per share in 2018 was Ksh 3.50 an increase of
16.7% compared to previous year.This shows there was increase in profitability of the company
from Ksh 19.7B in 2017 to Ksh 24.B in year 2018 increase by 22%.

Is it profitable to invest in KCB?

Based on company’s profitability growth over the time and increasing share capital value KCB is
growing faster and has promising trend on return on investment. Buying of KCB shares under
current condition there is reasonable assurance of receiving high dividend play out.

The earning per share and Dividend per share has witness growth from year to year, example
from 2017 dividend per share was Ksh 3.0 and in 2018 Ksh 3.50 per share. Due to company’s

11
good financial results over the years its share price at stock exchange market has increase over
the time.

Basing on return from investment ratio, it shows the company has good trend on invested capital,
in 2017 ROE was 19.5% and in 2018 22% this signify the company has an increased return on
share invested.

Currently KCB announces its intention to acquire National bank of Kenya (NBK), this will
expand its capability and probably can increase its profitability in future

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E: FINANCIAL DECISIONS

Capital Structure Choices

Current Financing Mix in KCB books

Share capital/ Equity

Share range No. of Shares held %

shareholders
1 to 5000 125,072 200,153,731 6.53
5,001-50,000 26,666 280,001,951 9.13
50,001-100,000 779 53,485,447 1.74
100,001-1,000,000 923 274,721,730 8.96
1,000,001 and above 300 2,257,700,628 73.64
Total 153,740 3,066,063,487 100.00

Reserves Kshs Millions

Retained earnings 85,056
Share Premium 21,647

Debt Finance Ksh Millions

Maturing within one year 1,506
Maturing after one year, but within five years 10,756
Maturing after 5 years 10,185
Total 22,447

Source: Footnotes to statement of financial position

The capital structure of KCB Group has a mixture of debt and equity finance. However, the trend
from 2014 to 2018 shows the capital structure is dominated by equity finance as indicated in the
table below

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Year 2018 2017 2016 2015 2014

Debt (Book value) 22,447 14,785 22,982 20,129 12,734

Equity (Book value) 113,661 105,965 96,566 81,254 75,634

Source: KCB Financial statements

KCB has been using both debt and equity to raise funds for its operating and capital
expenditures. For example, 2018 it had debt worth of Ksh 22,447 Million and total equity of Ksh
113,661 Million. The debt to equity ratio based on market value of equity was 15.64% indicating
KCB in not highly geared

Trade Off on Debt versus Equity

Looking at the advantages and disadvantages of debt, and KCB specific characteristics yields the
following:
Tax Benefit.
Interest on debt are tax deductible, but cash flow to equity are generally not. The higher the
marginal tax rate, the greater the benefit. However, KCB is getting tax benefit from the effective
tax rate at 30% on debts allowable by tax authority.
Added Discipline of Debt
KCB is a widely held firm. While institutional stockholders own a significant percentage of the
firm, no individual stockholder or institution is large enough to have much say in management.
The firm has significant cash flows and should gain from the use of debt.
Bankruptcy Risk
KCB earnings are not so volatile due to reduction of non-performing loans and increase in
interest income which contribute to cash flows being stable. The bankruptcy risk should be low,
given this factor and the size of the company
Agency Costs
Actions that benefit equity investors may hurt lenders. The greater the potential for this conflict
of interest, the greater the cost borne by the borrower as higher interest rate or more covenants.
Future Flexibility
Using the available debt capacity today will mean the firm cannot borrow tomorrow. Losing the
flexibility can be disastrous if other sources of finance are shut off. For the case of KCB this may
not be case since it still has the capacity to borrow in the future if such need may arise.

14
Tradeoff between debt and equity
It is clear KCB does not have too much debt compared to equity. However, it has significantly
increased its debt by 51% from 2017 (ksh 14,895mil) to (ksh22,447 mil) in 2018

A Qualitative and Quantitative Judgment

Based upon this trade off, we would expect KCB to have significant debt capacity. It has
potentially large benefits from debt such as tax benefits and added discipline also it has the cash
flows to sustain the debt without significant bankruptcy and agency costs. KCB current debt ratio
is still too low 15.64% (22,447/22447+113,661)

Optimal Capital Structure

Current Cost of Capital / Financing Mix
To estimate the current cost of capital, we used the market value of equity and estimated market
value of debt from the earlier section on hurdle rates. Using the market value of equity of Ksh
121,107 Million, the market value of debt of Ksh 22,447 million, the cost of equity of 13.77%
(based upon the bottom-up beta) and the after-tax cost of borrowing of 9.45%, we estimate a cost
of capital as follows:
Capm= Rf + Bj (Rm-Rf)
Cost of Equity (Ke) = 12.80% +1.39* (13.50%-12.80%) = 13.77%
Cost of debt (kd)= pre -tax cost of debt *(1-tax)
Kd= 13.50%* (1-0.3) = 9.45%
Wacc= Ke (Mve) * Mvd * kd(1-t)/Mve+ Mvd
(13.77%*121,107) +(22,447*13.50%*0.7%)/ (121,107+22,447)
Wacc=13.10%

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Costs of Capital at Different Financing Mixes
We estimated the costs of equity and debt at different debt ratios — using betas for costs of equity and estimated ratings for costs of
debt.
Cost of Capital Calculations amounts in Ksh millions
D/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%
D/E 0.00% 11.11% 25.00% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00% #DIV/0!
Debt 0 14,355 28,711 43,066 57,422 71,777 86,132 100,488 114,843 129,199
Cost of 13.66% 13.73% 13.81% 13.92% 14.06% 14.26% 14.57% 15.07% 16.07% 19.09%
equity
Cost of 9.49% 9.49% 9.49% 9.49% 9.84% 9.92% 10.05% 10.05% 10.05% 10.36%
debt
Cost of 13.66% 13.30% 12.95% 12.59% 12.37% 12.09% 11.86% 11.56% 11.26% 11.23%
Capital
0 0 0 0 0 0 0 0 0 1
Value 140,108 142,292 144,546 146,872 148,324 150,228 151,870 154,026 156,243 156,429
(perpetual
growth)

Based upon the objective of minimizing the cost of capital, the optimal debt ratio for KCB was 90%.

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Firm Value at Optimal

To estimate firm value at the optimal debt, we estimated the Ksh savings we would have from
moving from the current cost of capital of 13.10% to the cost of capital at the optimal (8.28%),
and converted it into present value terms:

Firm Value before the change = 121107+22447= Ksh 143,554

WACCb = 13.10% Annual Cost = Ksh 143,554*13.10%= Ksh 18,805.57 million

WACCa =11.23% Annual Cost Ksh 143,554*11.23%= Ksh 16,121.11 million

WACC = 1.87% Change in Annual Cost = Ksh 2684.45 million

Assuming an implied growth rate (of 9.62%) in firm value over time,

Increase in firm value = 2,684.45 million * 1.0962 / (0.1123-0.0962) = $ 182776.03

Change in Stock Price = 182,776.03/3066 = 59.61per share

Implied Growth Rate

The implied growth rate is based upon the assumption that the market value of KCB as a
company reflects a market expectation of future growth. To estimate it, we used the following
perpetual growth formula
Firm value Today =FCFF(1+g)/(WACC-g)
Substituting today’s market value for KCB as a firm (debt + equity) of Ksh 143,554 million, the
free cash flow to the firm of Ksh 36,081.30 million and the current cost of capital of 13.10%, we
solved for the expected growth rate of 9.62%.
In summary, we are arguing that increasing debt ratio to the optimal will increase the stock price
approximately ksh 43.70 per share, which translates into a 4.2 % change in the current stock
price of Ksh 39.50. This is also based upon the assumption that the stock repurchase will occur at
the higher price (thus, allowing investors who sell their stock back to the firm to also share in the
spoils).
Constraints
I. Operating Income Variability: What If Analysis
We examined the sensitivity of the optimal debt ratio to changes in the operating income.
Looking at the change in operating income by using a worst case scenario drop in the operating
income of 40% ( Ksh 21782). The optimal debt ratio with this lower operating income was 30%

17
Change in Tax rate: What If Analysis
We observed another constraint in change in tax, we assumed a drastic reduction of tax to 10%
form 30%, which impacted the tax benefit of debt finance. This resulted to optimal debt ratio of
10%.
Both the operating income worst-case scenario and the tax rate suggest to us that KCB excess
debt capacity is not an artifact of just a good operating year. The analyses present a powerful
argument that KCB is under levered and should use more debt in its financing mix.
Mechanics of Moving to the Optimal
A Path to the Optimal
The Right Financing for KCB Group based on segments
Intuitive Analysis
Project Project Cash Flow Type of Financing
Characteristics
Retail banking incorporating banking Debt should be long- term
services such as customer with mix current because
current accounts, savings KCB has branches in
and fixed deposits to different counties
individuals
Corporate banking incorporating banking Debt should be long term
services such as current with mix current because
accounts, fixed deposits, KCB has branches in
overdrafts, loans and other different counties
credit facilities both in local
and foreign currencies.
Mortgages incorporating the provision Debt should be long- term
of mortgage finance with mix current because
KCB has branches in
different counties
Treasury operates the Group’s funds Debt should be long term
management activities with mix current because
KCB has branches in
different counties
Trade finance and forex The Group also participates Debt should be long term
business in investments in Treasury with mix current because
Bills and Bonds from the KCB has branches in
Central different counties
Banks

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Overall Recommendations on Financing Mix
Based upon our analysis of KCB, we would recommend that KCB issued debt
 with an average duration of approximately 7 years and more
 in a mix of currencies, with the foreign currencies used reflecting, as closely as possible,
the mix of clients for banking services, and the mix of revenues from other business
segments
 in a mix of fixed and floating rate debt

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F: DIVIDEND POLICY

Our stakeholders are the individuals, groups of individuals or organizations who impact on
ourBusiness or are affected by our business. As a Group, we appreciate that there are different
Clusters of stakeholders groups and have prioritized those with whom we have a direct
relationship and Communicate to regularly. Our stakeholders include investors, employees,
customers, regulators, government, suppliers, the media, civil society and communities. We are
committed to working with all of our stakeholders – understanding their expectations and
interests, creating opportunities for making our business better, and helping us achieve our vision
to be the bank that defines great customer experience. We offer a variety of ways for
stakeholders to contact us and let us know their needs and concerns. This communication
includes collection of stakeholder feedback and dissemination of information from the groups.

The rate of engagement, type of engagement and mechanism of engagement varies according to
each stakeholder group and the issue at hand. Most importantly, we are proactive in identifying
and responding to our stakeholders’ concerns and expectations.

KCB Group announced a Kshs. 9.2 billion total dividend payouts to shareholders for the 2017
financial year, signifying a sustained return to shareholders amid a tough operating environment.

During the 2017 Annual General Meeting (AGM) held in Nairobi on Friday, shareholders
approved a final Kshs. 2 dividend per ordinary share as recommended by the Board. This brings
to Kshs.3 the total dividend for the year, taking into account an interim dividend of Ksh 1 per
share paid out last October.

The dividend pot highlights the Bank's resilience in key performance measures, with capital,
liquidity and profitability remaining stable during the period.

KCB continues to provide consistent value to our shareholders through our robust business
model. This was catalyzed by the robust governance structure at the Group level which helped us
weather the myriad challenges and led to improved underlying performance for the business, said
KCB Group Chairman Ngeny Biwott.

The Bank's dividend policy, said the chairman, "is to maintain a dividend payout of up to 50 per
cent of profit after tax".

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The dividend will be paid on or about June 29, 2018 to shareholders on the register as of close of
business on April 30, 2018.

The Group reported a Return on Equity a measure of how much profit a company generates with
the money shareholders have invested of 19.5% in 2017, one of the highest returns of the banks
listed on the Nairobi Securities Exchange (NSE).

KCB maintained stable ratings, with Global Credit Ratings (GCR) affirming KCB's long term
and short-term national scale ratings of AA (KE) and A1+ (KE) respectively. Moody's Investor
Services expects KCB to maintain a strong performance in a difficult financial services sector
while S&P ratings agency affirmed the Banks' B+/B long and short-term rating with a stable
outlook, which mirrors that of the Sovereign.

These solid ratings have raised KCB's profile globally and improved the Group's standing among
like-minded financing partners. We are optimistic that tangible benefits will accrue to our
shareholders as we step up our cost management and accelerate innovation to achieve sustainable
growth in 2018 and beyond, said KCB Group CEO and MD Joshua Oigara.

We have put in place measures to overcome current market challenges by optimizing the existing
resources and increasing uptake of alternative channels by customers including mobile and
agency banking, • he said.

In 2017, KCB Group posted a net profit of Kshs19.7 billion, indicating a flat growth having
posted the same in 2016. The loan book and deposits expanded significantly by 10% to Kshs.
423billion and 11% to Kshs.500 billion respectively.

KCB said the Group's future outlook remains positive based on strong capitalization and
expectations of an economic rebound this year in its key markets.

21
G: VALUATION

When looking at the value of the firm two matters are of paramount importance, the intrinsic
value and the market value of the company. The market value of a publicly traded company like
KCB Bank can simply be obtained from the by the price of shares multiply by the number of
shares in the market.

Market value = Price of shares X number of shares outstanding

When considering the market value of a company we observe the price that a person has to pay
to become the owner of the company. Meanwhile the Intrinsic value of the firm is the
accumulation of value obtained from the assets in that particular company. It represents the
future expected profit of the company by discounting the cash flows of that company with the
respective rate as shown below,

Where;

E(Cf) = Expected cash flows

T = time

R = interest rate

V0 = present value

KCB is a publicly traded company that has its shares traded in Nairobi stock exchange market
(NSE), Dar es salaam stock exchange market (DSE), Uganda securities exchange market (USE)
and Rwanda stock exchange (RSE) With a total equity of Kshs 133,661,138,000 as reported in
the financial report of 2018. When valuing a bank, only what increases profit and decreases Risk
is what adds value to the bank. Most banks are considered stable dividend payers, therefore using
a simple dividend discount model could lead to undervaluation of that specific bank in case there
is restriction on the dividend payout ratio. The banking industry is highly regulated by the

22
Central bank the changes in the regulatory requirements can lead to high change in the value of
the Bank.

With KCB bank we will use dividend cash flow to discount the firm; this is because there is
difficult in identifying and separating the capital expenditure and working capital investments
when it comes to banks and dividends are the only tangible cash flows that we can observe

However, by using the dividend discounting we will adjust for the low growth periods to avoid
under valuation of the bank and the high growth period to adjust for over valuation.

A company is expected to grow when there is enough retained earnings to facilitate the growth.
When there is an increase in dividend payout ratio, it means that there is a subsequent fall in
retained earning which in return leads to a decline in growth of a firm. We are going to analyze
the growth of KCB bank by looking at the retained earnings ratios as provided in the financial
statements across 5 years (2014-2018) as seen in the data below

years 2014 2015 2016 2017 2018

Retained
earnngs 26.70% 30.50% 21.30% 20.50% 24.40%

RETAINED EARNNGS
Retained earnngs

30.50%
26.70%
24.40%
21.30% 20.50%

2014 2015 2016 2017 2018

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As observed in the chat and table above, we can see there is unstable growth in retained earning
that means that as we estimate the growth of the company using retained earning, we have
unstable growth with KCB bank. In 2015 there was high growth compared to all other years but
it fell drastically in 2016 from 30.5% to 21.3%, and we can observe there was even more decline
in retained earnings in 2017 which is followed by an increase in retained earnings in 2018 which
is a result of cost management and growth in net interest income, there was a decline in operating
expenses which was a result of lower cost staff and loan loss provisions. Therefore, we conclude
that KCB bank has shown patterns of unstable growth over the cause of 5 years as shown above.
Basing on the observed trend in the growth pattern it shows that this is a continual growth
pattern, because the banking industry is highly regulated and the daily changes in regulations
tend to cause the fluctuations in the operations of the bank and hence the unstable growth
patterns.

The bank has a total of total equity of 114 billion Kshs. The main factors driving the value of
KCB bank is the decline in government securities investments, which are the least paying
securities because of their low risk nature, also an increase in group asset portfolio by 6%,
increase in fixed and other assets by 40% and an increase in net loans and advances by 4% over
the last year has contributed greatly to the increase in value of the bank. There has also been an
improvement in in deposits by 9% and a decrease in liabilities by 16% which has greatly
contributed to the increase in value.

To further increase the value of the bank KCB can increase its investment in digital financial
services to make it easier for people to transact using their mobile phones and laptops without
having to visit the bank. The world today is moving towards digitalization hence by further
investing in improving the digital banking services it will increase the number of customers and
transactions which will in the end lead to increase in the value of the bank.

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REFERENCES

Adamodar (1997,June). A Corporate Financial Analysis of Disney .Retrieved from

https://www.people.stern.nyu.edu/adamodar/New_Home_Page/project/disney.htm

Adamodar.CF Project Resource Room. Retrieved from

https://www.people.stern.nyu.edu/adamodar/New_Home_Page/cfprojectresources.htm

https://ke.kcbgroup.com/media/financial_reports/KCB_IR_2015_-_Full_2.pdf

http://people.stern.nyu.edu/adamodar/pdfiles/papers/finfirm09.pdf

Kenya commercial bank (KCB) annual report 2018 retrieved from https://kcbgroup.com/wp-
content/uploads/2019/05/KCB-Group-Integrated-Report-and-Financial-Statements-2018.pdf

Kenya commercial bank (KCB) annual report 2017 retrieved from https://kcbgroup.com/wp-
content/uploads/2018/04/kcb-integrated-report-2017.pdf

Kenya commercial bank (KCB) annual report 2016 retrieved from

https://ke.kcbgroup.com/images/downloads/Integrated_Report_2016.pdf

Kenya commercial bank (KCB) annual report 2015 retrieved from

KCB 2018 group highlights retrieved from https://kcbgroup.com/wp-

content/uploads/2019/03/KCB-Group-FY-2018-Investor-Briefing-presentation.pdf

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