Photo by DEMOSH

So far, we’ve scoped out bank stocks in Nigeria and Ghana, analyzing their profitability, growth, risk, and value to separate the bargains from the bunk.

Now it’s time to turn to Kenya, East Africa’s largest economy. Ten banks call the Nairobi Securities Exchange home. All of them possess different strengths and weaknesses.

Let’s put them through our ranking exercise to help determine which ones merit a more detailed analysis.

1. Profitability

If you’re in the market for a bank stock, chances are you’d prefer one that actually makes money.

Return on Assets (ROA) measures how effectively management deploys the assets under its control. I’ve calculated ROA as after-tax profits from continuing operations divided by average assets. Then, because bank earnings can be inconsistent, I averaged the ROA from the most recent five fiscal years.

To calculate a score, I divided the range between the most profitable bank and the least profitable one into deciles. The banks with ROAs in the highest decile were awarded 10 points. Those in the lowest decile scored just one point.

Here’s how they stacked up:

Bank	Return on Assets (5-Year Average)	Score
Equity Bank (EQBNK.KN)	3.45%	10
Barclays Bank of Kenya(BCBL.KN)	2.86%	8
Standard Chartered Bank of Kenya (SCBL.KN)	2.54%	7
Co-operative Bank of Kenya (COOP.KN)	2.00%	5
NIC Bank (NICB.KN)	1.96%	5
National Bank of Kenya (NBKL.KN)	1.96%	5
Kenya Commercial Bank (KNCB.KN)	1.86%	5
Diamond Trust Bank (DTKL.KN)	1.58%	4
Housing Finance Company (HFCL.KN)	0.89%	1
CFC Stanbic (CFCB.KN)	0.77%	1

2. Growth

Profitability is great, but Africa’s best banks are constantly growing their assets. They’re tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.

To measure which banks are growing the fastest, I simply annualized the growth of each bank’s total assets over the most recent five fiscal years.

Here’s what I found:

Bank	Asset Growth (5-Year Annualized)	Score
Equity Bank (EQBNK.KN)	57.86%	10
Diamond Trust Bank (DTKL.KN)	37.74%	7
CFC Stanbic (CFCB.KN)	30.05%	5
Kenya Commercial Bank (KNCB.KN)	29.01%	5
Housing Finance Company (HFCL.KN)	28.40%	5
NIC Bank (NICB.KN)	24.83%	4
Co-operative Bank of Kenya (COOP.KN)	23.88%	4
Standard Chartered Bank of Kenya (SCBL.KN)	15.15%	2
National Bank of Kenya (NBKL.KN)	13.71%	2
Barclays Bank of Kenya(BCBL.KN)	7.25%	1

3. Asset Quality

A bank’s challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather uncreditworthy customers. When these customers default, the loans must be written down to zero – a bad thing for profitability AND growth.

One of my favorite ways to measure a bank’s asset quality is to determine how much of the loan portfolio isn’t performing as planned. I do this by dividing non-performing loans by total loans. A lower ratio implies a lower degree of risk in the bank’s loan book.

Look here to see which banks are Kenya’s most conservative lenders:

Bank	Non-Performing Loan Ratio	Score
Diamond Trust Bank (DTKL.KN)	1.06%	10
Standard Chartered Bank of Kenya (SCBL.KN)	1.07%	10
CFC Stanbic (CFCB.KN)	1.98%	9
Equity Bank (EQBNK.KN)	2.86%	7
National Bank of Kenya (NBKL.KN)	4.26%	4
Co-operative Bank of Kenya (COOP.KN)	4.76%	3
NIC Bank (NICB.KN)	4.81%	3
Barclays Bank of Kenya(BCBL.KN)	5.53%	2
Kenya Commercial Bank (KNCB.KN)	6.15%	1
Housing Finance Company (HFCL.KN)	6.26%	1

4. Value

Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Kenya can end up losing you money if the price you pay for it is too dear.

When evaluating bank stocks, I take a close look at price/book ratios. Book value is simply the difference between a bank’s assets and its liabilities. Stocks with low price/book ratios generally have less downside risk. The lower a price/book ratio gets, the less risk there is of the bank disappointing the market and the greater potential there is for it to outperform expectations.

I prefer the price/book ratio over the price/earnings ratio for bank stocks. Why? Because bank earnings can be erratic. Thus, the P/E ratio for a bank coming off a particularly good or bad year will be skewed. Assets, on the other hand, are much less volatile and relatively easy for an accountant to value.

Bank	Price/Book Ratio	Score
CFC Stanbic (CFCB.KN)	0.56	10
Housing Finance Company (HFCL.KN)	0.74	10
NIC Bank (NICB.KN)	1.24	7
Kenya Commercial Bank (KNCB.KN)	1.59	6
Diamond Trust Bank (DTKL.KN)	1.69	5
Equity Bank (EQBNK.KN)	2.19	3
Co-operative Bank of Kenya (COOP.KN)	2.29	2
Standard Chartered Bank of Kenya (SCBL.KN)	2.34	2
Barclays Bank of Kenya(BCBL.KN)	2.41	2
National Bank of Kenya (NBKL.KN)	2.70	1

5. Dividend Yield

Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stock’s share price. Therefore, most banks won’t raise dividends beyond a level they believe they can sustain.

Bank	Dividend Yield	Score
Kenya Commercial Bank (KNCB.KN)	7.79%	10
Barclays Bank of Kenya(BCBL.KN)	6.95%	8
Standard Chartered Bank of Kenya (SCBL.KN)	6.51%	8
Housing Finance Company (HFCL.KN)	5.69%	7
Equity Bank (EQBNK.KN)	4.94%	6
Co-operative Bank of Kenya (COOP.KN)	2.86%	3
National Bank of Kenya (NBKL.KN)	2.01%	1
CFC Stanbic (CFCB.KN)	1.91%	1
Diamond Trust Bank (DTKL.KN)	1.70%	1
NIC Bank (NICB.KN)	1.59%	1

Ranking the Banks

Now let’s put all the scores together and count them down from worst to first.

10. National Bank of Kenya – Oh my. This 44-year-old bank doesn’t appear to be aging well. It’s put together a decent ROA of 1.96% over the past five years, but that is the only highlight. A small dividend, anemic asset growth, and high relative price put it at the bottom of the chart. If anyone knows of any redeeming qualities for NBK, please post them in the comments.

9. Co-operative Bank of Kenya – Co-operative Bank occupies one of the most distinctive buildings in the Nairobi skyline, but it failed to make much of an impression in the showdown. It’s been profitable, but its shares are relatively expensive at 2.3x book value.

8. NIC Bank – NIC Bank sports one of the lowest price/book ratios of this bunch at 1.24. But it’s also miserly with its dividend. The shares yield a sector-worst 1.59%. This may reflect the bank’s intention to add more branches to its network at home and elsewhere in the region. It’s re-investing profits in expansion instead of returning them to shareholders. Potential investors should note the bank’s intention to raise additional capital from the market later this year.

7. Barclays Bank of Kenya – BBK’s eceptional profitability and generous dividend will prove tempting to many investors, but its growth rate is the slowest of the sector. Factor in a relatively large bad loan book, and this “blue chip” fails to break into top tier status.

6. Housing Finance Company - This mortgage lender trades at just 74% of its book value, and it offers a substantial dividend, but its profitability pales next to that of its peers, and its non-performing loan ratio is one of the sector’s highest. Still, speculators may want to consider the company’s recent announcement that it will construct 162 new housing units in eastern Nairobi, funded partially out of its own reserves. This could be a very profitable investment considering the capital city’s shortage of affordable housing.

5. CFC Stanbic - It doesn’t seem to be making great use of its asset base, and it pays only a token dividend, but CFC Stanbic is one of Kenya’s more conservative lenders, and it’s available at an attractive 0.56 price/book ratio. Perhaps worth a closer look given its plans to expand into Southern Sudan. Investors should note however that the bank is preparing for a rights issue.

4. Diamond Trust Bank – An impressively solid loan portfolio coupled with surprisingly rapid growth would put DTB near the top of the rankings if it weren’t for its ho-hum dividend yield. The bank is conserving its capital to fund additional expansion. It also plans to raise more money from the market. DTB has already developed an impressive regional footprint, which includes Tanzania, Uganda, and Burundi.

3. Kenya Commercial Bank – KCB takes more risks in its lending than DTB, as demonstrated by its 6.15% NPL ratio, but it also currently offers one of the juiciest dividends on the Nairobi Securities Exchange. This is in spite of an ambitious regional expansion drive which shows no signs of letting up. It’s apparently on the lookout for an acquisition in Uganda.

2. Standard Chartered Bank of Kenya - SCB hasn’t been one of this group’s fastest growers, but it compensates for this with a conservative loan book and generous dividend. It’s not cheap at 2.3x book value, but you’re paying for quality here. And regional expansion is in the cards. Management is exploring the possibility of a rights issue to help fund new operations in South Sudan and Rwanda.

And the Winner Is ….

1. Equity Bank - Perhaps unsurprisingly, the hands down winner is Equity Bank. Incredibly rapid growth paired with excellent profitability make this an incredibly attractive bank. Foreign investors have already discovered it and now own roughly 43% of outstanding shares. I’ve considered buying some many times over the years, but always thought it looked a tad expensive. It’s proven me wrong again and again. It may soon be easier than ever to own a piece of this dynamic operation. The CEO remarked recently that the bank may soon cross-list in London, New York, or South Africa.

Bank	ROA Score	Growth Score	NPL Score	P/B Score	Yield Score	Total Score
Equity Bank (EQBNK.KN)	10	10	7	3	6	36
Standard Chartered Bank of Kenya (SCBL.KN)	7	2	10	2	8	29
Kenya Commercial Bank (KNCB.KN)	5	5	1	6	10	27
Diamond Trust Bank (DTKL.KN)	4	7	10	5	1	27
CFC Stanbic (CFCB.KN)	1	5	9	10	1	26
Housing Finance Company (HFCL.KN)	1	5	1	10	7	24
Barclays Bank of Kenya(BCBL.KN)	8	1	2	2	8	21
NIC Bank (NICB.KN)	5	4	3	7	1	20
Co-operative Bank of Kenya (COOP.KN)	5	4	3	2	3	17
National Bank of Kenya (NBKL.KN)	5	2	4	1	1	13

What Do You Think?

Does Equity Bank deserve to be head and shoulders above the rest of the field? Which bank stock do you think is the best bargain? Let me know your thoughts in the comments!

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]

Related Articles

How to Invest in Kenyan Stocks

Three Innovative and Profitable Kenyan Banks

Photo by Lafarge Zambia

The World Bank estimates that Africa needs to spend $93 billion per year on infrastructure in order to sustain economic growth. Currently, it invests less than half that amount.

The continent needs power plants, roads, bridges, and housing. And all of these require cement.

That’s right. Cement companies may be the best way for investors to leverage an African infrastructure boom.

I’ve ranked ten of Africa’s largest cement stocks on the basis of growth, profitability, leverage, value, and dividend yield. Let’s take a look at which one offers the most solid value.

1. Growth

If you’re going to invest in cement, you’ll want to find a company with a rock solid record of sales growth. Cement is pretty much a commodity, so whoever can sell it cheapest will likely be the winner. And to sell cement cheap, you’re going to need volume and lots of it.

The chart below shows the long-term sales growth of sub-Saharan Africa’s nine most prominent cement stocks. I’ve given each of them a score by dividing the range between the fastest grower and the slowest one into deciles. I award companies in the highest decile 10 points. Those in the lowest receive just one.

Company	Exchange	Revenue Growth (Five-Year Annualized)	Score
Lafarge Zimbabwe (LAFARGE.ZH)	Zimbabwe Stock Exchange	32.44%*	10
Athi River Mining (ARML.KN)	Nairobi Securities Exchange	25.72%	8
Lafarge Zambia (LAFARGE.ZL)	Lusaka Stock Exchange	25.51%	8
Cement Company of Northern Nigeria (CCNN.NL)	Nigerian Stock Exchange	16.90%	5
Bamburi Cement (BMBC.KN)	Nairobi Securities Exchange	16.83%	5
Dangote Cement (DANGCEM.NL)	Nigerian Stock Exchange	11.54%*	3
Lafarge WAPCO (WAPCO.NL)	Nigerian Stock Exchange	9.60%	2
Pretoria Portland Cement (PPC.SJ)	Johannesburg Stock Exchange	7.81%	2
Ashaka Cement (ASHAKACE.NL)	Nigerian Stock Exchange	4.38%	1
* two-year annualized

2. Profitability

Sales growth won’t do a company much good if it can’t earn a decent profit on each bag of concrete it sells. So, when evaluating cement stocks, the net profit margin is a hugely important metric. The fatter a company’s margin is, the more money it will have to expand its operations, and the longer it will make money for its shareholders.

Here’s how they ranked:

Company	Exchange	Net Profit Margin	Score
Dangote Cement (DANGCEM.NL)	Nigerian Stock Exchange	53.31%	10
Lafarge Zambia (LAFARGE.ZL)	Lusaka Stock Exchange	21.70%	3
Ashaka Cement (ASHAKACE.NL)	Nigerian Stock Exchange	17.19%	3
Cement Company of Northern Nigeria (CCNN.NL)	Nigerian Stock Exchange	16.56%	3
Bamburi Cement (BMBC.KN)	Nairobi Securities Exchange	16.33%	3
Athi River Mining (ARML.KN)	Nairobi Securities Exchange	14.06%	2
Lafarge WAPCO (WAPCO.NL)	Nigerian Stock Exchange	13.61%	2
Pretoria Portland Cement (PPC.SJ)	Johannesburg Stock Exchange	11.53%	1
Lafarge Zimbabwe (LAFARGE.ZH)	Zimbabwe Stock Exchange	7.04%	1

3. Leverage

Next, we introduce a risk metric to our analysis. The Debt/Equity ratio simply measures the relative percentage of debt a company maintains on its balance sheet.

The lower the ratio – the less dependent the company is on external financing. A lower ratio implies that a company has more options available to it when it figures out how to fund expansion. Conversely, a high ratio may mean a firm is over-extended.

This is extremely important in the cement business where firms must spend big sums on new production plants in order to grow. Companies with high debt loads will find it more difficult to access cheap capital.

Take a look at the following table to see which companies’ balance sheets are on the firmest foundations.

Company	Exchange	Debt/Equity Ratio	Score
Lafarge Zambia (LAFARGE.ZL)	Lusaka Stock Exchange	0.22	10
Bamburi Cement (BMBC.KN)	Nairobi Securities Exchange	0.39	10
Dangote Cement (DANGCEM.NL)	Nigerian Stock Exchange	0.76	10
Cement Company of Northern Nigeria (CCNN.NL)	Nigerian Stock Exchange	0.79	10
Ashaka Cement (ASHAKACE.NL)	Nigerian Stock Exchange	0.80	10
Lafarge Zimbabwe (LAFARGE.ZH)	Zimbabwe Stock Exchange	1.10	9
Lafarge WAPCO (WAPCO.NL)	Nigerian Stock Exchange	1.72	8
Athi River Mining (ARML.KN)	Nairobi Securities Exchange	2.36	7
Pretoria Portland Cement (PPC.SJ)	Johannesburg Stock Exchange	5.72	1

4. Value

All of the above performance metrics mean very little if the share is already priced for perfection. So, if we’re going to rank the best stocks in the industry, we need to introduce an element of value to the equation.

I’ve used the humble price/earnings ratio here. It’s far from perfect, but it’s quick and convenient, and, I believe, adequate for this initial stage of analysis.

Company	Exchange	Price/Earnings Ratio	Score
Cement Company of Northern Nigeria (CCNN.NL)	Nigerian Stock Exchange	2.69	10
Ashaka Cement (ASHAKACE.NL)	Nigerian Stock Exchange	6.56	8
Lafarge Zambia (LAFARGE.ZL)	Lusaka Stock Exchange	8.39	7
Bamburi Cement (BMBC.KN)	Nairobi Securities Exchange	10.04	6
Lafarge Zimbabwe (LAFARGE.ZH)	Zimbabwe Stock Exchange	13.75	3
Dangote Cement (DANGCEM.NL)	Nigerian Stock Exchange	14.96	3
Lafarge WAPCO (WAPCO.NL)	Nigerian Stock Exchange	15.85	2
Athi River Mining (ARML.KN)	Nairobi Securities Exchange	16.88	1
Pretoria Portland Cement (PPC.SJ)	Johannesburg Stock Exchange	18.29	1

5. Dividend Yield

I always like to include dividends in my analysis because they are tangible evidence of a company’s ability and willingness to reward its shareholders. It’s also an important value metric — the lower the share price, the higher a stock’s yield.

Company	Exchange	Dividend Yield	Score
Cement Company of Northern Nigeria (CCNN.NL)	Nigerian Stock Exchange	8.98%	10
Bamburi Cement (BMBC.KN)	Nairobi Securities Exchange	6.90%	8
Ashaka Cement (ASHAKACE.NL)	Nigerian Stock Exchange	6.70%	8
Pretoria Portland Cement (PPC.SJ)	Johannesburg Stock Exchange	4.31%	5
Lafarge Zambia (LAFARGE.ZL)	Lusaka Stock Exchange	3.19%	4
Dangote Cement (DANGCEM.NL)	Nigerian Stock Exchange	2.62%	3
Lafarge WAPCO (WAPCO.NL)	Nigerian Stock Exchange	1.70%	2
Athi River Mining (ARML.KN)	Nairobi Securities Exchange	0.89%	1
Lafarge Zimbabwe (LAFARGE.ZH)	Zimbabwe Stock Exchange	0.00%	1

A Winner Comes Out of the Mix

Now, let’s put all of the above scores together to see which cement stock wins on aggregate.

9. Pretoria Portland Cement – It figures that the most accessible of Africa’s cement stocks also ranks as its least attractive. PPC may dominate the South African market, but it also operates on the thinnest profit margin, carries the most debt, and demands the dearest price. Blechh… Next!

8. Lafarge WAPCO – Lafarge’s Nigerian subsidiary is Sub-Saharan Africa’s third largest cement company in terms of production capacity, but that doesn’t necessarily make it a bargain. The company’s balance sheet is relatively strong, but that’s about all it has going for it. I don’t care to spend 16x earnings on a company when its much stronger domestic competitor, Dangote, trades for just 15x earnings and yields nearly a percentage point more.

7. Athi River Mining – Kenya-based Athi River is growing aggressively with expansion projects in Rwanda and Tanzania, and its balance sheet is strong, but it commands one of the highest earnings multiples of any of its peers and pays a paltry dividend. There are better bargains out there.

6. Lafarge Zimbabwe – Like Athi, Lafarge Zim is growing quickly as Zimbabwe makes tentative steps toward normalcy, but its shares aren’t cheap, and there will be a high degree of political risk as long as Mugabe remains in office. I’ll pass.

5. Dangote Cement – The heavyweight champion of Africa’s cement industry, Dangote’s produces much, much more than any other company. So its revenue growth is relatively low due to the law of large numbers. It may be fairly priced at 15x earnings, but its astounding profit margin, clean balance sheet, and ambitious growth plans make it worth a close look.

4. Ashaka Cement – An intriguing stock, Ashaka’s got a solid balance sheet, an attractive dividend yield, and a cheap price. It hasn’t grown very quickly, but it did recently announce plans to expand production. Investors may be spooked by recent Boko Haram attacks near the company’s home base.

3. Lafarge Zambia – There’s not much to dislike about Zambia’s biggest cement company. It’s put together an excellent record of sales growth, carries little debt, and sports a reasonable earnings multiple. About the only drawback to the stock is its relatively anemic dividend yield.

2. Bamburi Cement - Kenya’s largest cement producer offers a tempting dividend yield and strong growth prospects at a reasonable price. Very much worth a close look.

And the Winner is …

1. Cement Company of Northern Nigeria – This little gem may not have the strongest growth record of sales growth and its profit margin certainly isn’t as wide as giant Dangote, but CCNN has little debt, a juicy dividend, and an eye-popping earnings multiple of less than 3! I’m scratching my head as to why it’s so cheap. Two possibilities are the company’s intention to come to the market for expansion capital and the instability caused by Boko Haram in the north of the country.

Company	Growth Score	Profitability Score	Debt/Equity Score	P/E Score	Yield Score	Total Score
Cement Company of Northern Nigeria (CCNN.NL)	5	3	10	10	10	38
Bamburi Cement (BMBC.KN)	5	3	10	6	8	32
Lafarge Zambia (LAFARGE.ZL)	8	3	10	7	4	32
Ashaka Cement (ASHAKACE.NL)	1	3	10	8	8	30
Dangote Cement (DANGCEM.NL)	3	10	10	3	3	29
Lafarge Zimbabwe (LAFARGE.ZH)	10	1	9	3	1	24
Athi River Mining (ARML.KN)	8	2	7	1	1	19
Lafarge WAPCO (WAPCO.NL)	2	2	8	2	2	16
Pretoria Portland Cement (PPC.SJ)	2	1	1	1	5	10

What Do You Think?

What criteria do you think would be helpful to consider when analyzing a cement stock? Which one do you think will perform the best over the next year? Let us know your thoughts in the comments!

Further Reading

Ranking Africa’s Best Telecom Stocks

How to Invest on the Nigerian Stock Exchange

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]

Photo by World Bank

It’s not necessary to open an African brokerage account to add a bit of the continent to your portfolio. Here are five companies that are making big bets on Africa and conveniently trade on the New York Stock Exchange.

Marriott International (MAR.US)

(P/E Ratio: 32.3; P/B Ratio: N/A; Dividend Yield: 1.3%)

Marriott is betting on tourist and business travelers’ continued demand for upscale accommodation across Africa. The hotelier opened a facility in Benin last year and plans to open more in Rwanda, Kenya, Ghana, Nigeria, Cameroon, and South Africa by 2016. This will double its Middle East and African hotel count, bringing it to a total of more than 70.

Marriott earned $19 million from the Middle East and Africa in 2011, representing nearly 10% of the company’s net income.

Kraft Foods (KFT.US)

(P/E Ratio: 16.7; P/B Ratio: 2.1; Dividend Yield: 3.0%)

Food and beverage purveyor, Kraft Foods, said that it recorded strong sales growth from South Africa during the first quarter of 2012. Unfortunately, it provided no more specifics than that.

But the company is clearly positioned for rapid growth on the continent. It bought the popular Cadbury brand in 2010 and employs 3800 staff in ten African operations. Its geographic reach includes South Africa, Kenya, Zimbabwe, Nigeria, Ghana, Botswana, and Swaziland. It recently constructed a large chocolate factory in South Africa, a chocolate drink facility in Nigeria, and will soon complete a sugar-free gum plant in Botswana.

Kraft’s sub-Saharan revenue has grown more than 10% each year since 2009.

American Tower (AMT.US)

(P/E Ratio: 50.8; P/B Ratio: 7.7; Dividend Yield: 1.2%)

American Tower owns and operates wireless communication towers throughout the world. In the past two years, it’s made a sizable investment in Africa. It started by purchasing a network of towers in South Africa, shortly followed by the acquisition of some more in Ghana, and rounded things out by buying a bunch in Uganda. It now owns more than 4000 wireless towers on the continent.

Thus far, management has shed little light on how profitable these towers have been apart from remarking that they have outpaced expectations. The company anticipates that leasing demand will remain strong as the wireless operators seek to build out their coverage areas. In the first quarter of 2012, African towers constituted almost 13% of the company’s international total. The international segment generated $106 million in operating profits during the quarter, a 51% increase from the prior year.

SPX (SPW.US)

(P/E Ratio: 15.7; P/B Ratio: 1.8; Dividend Yield: 1.3%)

Industrial conglomerate SPX has a long history in South Africa and supplies the country with everything from parts for coal-fired power plants to margarine processors. It employs roughly 400 South African citizens at its manufacturing facility.

The country has performed very well for SPX in recent years. South African sales have doubled to more than $281 million since 2009. That represented 5.2% of group revenue in 2011.

But the company’s African clientele isn’t limited to South Africa. In February, it announced that it had won a contract to supply condensing units for a Kenyan geothermal project.

Cummins (CMI.US)

(P/E Ratio: 11.2; P/B Ratio: 3.4; Dividend Yield: 1.5%)

Engine distributor, Cummins, scored a nice new contract last month to supply Zimbabwe’s second-largest mobile phone operator with 159 generator units. The gensets will power wireless towers.

But the deal came too late to reinforce Cummins first quarter African sales. The company’s profits from the region were depressed by high expansion costs, which narrowed the EBIT margin from 13.9% to 12.1%. Political unrest in Nigeria also put a damper on the segment’s results.

Even so, the company’s African sales totaled $36 million during the quarter — a 24% increase over last year. Cummins’ African sales account for just shy of 5% of its distribution segment’s total revenue.

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]

Photo by George Appiah

Last week we crunched the numbers of some Nigerian banks, analyzing their profitability, growth, risk, and value to separate the gems from the junk.

I hope you got as much of a kick out of the exercise as I did, because we’re going to do the same thing again today. Only this time, we’ll be covering eight of the largest banks from Nigeria’s neighbor to the west — Ghana.

Remember that this quick and dirty survey of the industry is only the first stage of analysis. It’s intended to separate the contenders from the pretenders – not to provide me with a buy decision.

With that said, let’s put eight of the Ghana Stock Exchange’s biggest banks through their paces.

1. Profitability

If you’re in the market for a bank stock, chances are you’d prefer one that actually makes money.

Return on Assets (ROA) measures how effectively management deploys the assets under its control. I’ve calculated ROA as after-tax profits from continuing operations divided by average assets. Then, because bank earnings can be inconsistent, I averaged the ROA from the most recent five fiscal years.

To calculate a score, I divided the range between the most profitable bank and the least profitable one into deciles. The banks with ROAs in the highest decile were awarded 10 points. Those in the lowest decile scored just one point.

Here’s how they stacked up:

Bank	Return on Assets (5-Year Average)	Score
Standard Chartered Bank Ghana (SCB.GN)	2.84%	10
Ecobank Ghana (EBG.GN)	2.70%	10
UT Bank (UTB.GN)	2.19%	7
SG-SSB (SGSSB.GN)	2.18%	7
Ghana Commercial Bank (GCB.GN)	1.57%	4
CAL Bank (CAL.GN)	1.57%	4
HFC Bank Ghana (HFC.GN)	1.42%	4
Ecobank Transnational (ETI.GN)	0.81%	1

2. Growth

Profitability is great, but Africa’s best banks are constantly growing their assets. They’re tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.

To measure which banks are growing the fastest, I simply annualized the growth of each bank’s total assets over the most recent five fiscal years.

Here’s what I found:

Bank	Asset Growth (5-Year Annualized)	Score
UT Bank (UTB.GN)	75.04%	10
CAL Bank (CAL.GN)	38.82%	5
Ecobank Transnational (ETI.GN)	37.41%	5
Ecobank Ghana (EBG.GN)	33.63%	4
HFC Bank Ghana (HFC.GN)	32.12%	4
Ghana Commercial Bank (GCB.GN)	24.03%	2
Standard Chartered Bank Ghana (SCB.GN)	22.62%	2
SG-SSB (SGSSB.GN)	18.10%	1

3. Asset Quality

A bank’s challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather uncreditworthy customers. When these customers default, the loans must be written down to zero – a bad thing for profitability AND growth.

One of my favorite ways to measure a bank’s asset quality is to determine how much of the loan portfolio isn’t performing as planned. I do this by dividing non-performing loans by total loans. A lower ratio implies a lower degree of risk in the bank’s loan book.

Look here to see which banks are Ghana’s most conservative lenders:

Bank	Non-Performing Loan Ratio	Score
Ecobank Ghana (EBG.GN)	0.66%	10
HFC Bank Ghana (HFC.GN)	4.15%	8
Ecobank Transnational (ETI.GN)	5.47%	7
SG-SSB (SGSSB.GN)	8.15%	5
CAL Bank (CAL.GN)	9.70%	4
Standard Chartered Bank Ghana (SCB.GN)	10.00%	4
UT Bank (UTB.GN)	13.90%	1
Ghana Commercial Bank (GCB.GN)	15.00%	1

4. Value

Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Ghana can end up losing you money if the price you pay for it is too dear.

When evaluating bank stocks, I take a close look at price/book ratios. Book value is simply the difference between a bank’s assets and its liabilities. Stocks with low price/book ratios generally have less downside risk. The lower a price/book ratio gets, the less risk there is of the bank disappointing the market and the greater potential there is for it to outperform expectations.

I prefer the price/book ratio over the price/earnings ratio for bank stocks. Why? Because bank earnings can be erratic. Thus, the P/E ratio for a bank coming off a particularly good or bad year will be skewed. Assets, on the other hand, are much less volatile and relatively easy for an accountant to value.

Bank	Price/Book Ratio	Score
Ecobank Transnational (ETI.GN)	0.66	10
CAL Bank (CAL.GN)	0.67	10
SG-SSB (SGSSB.GN)	0.91	10
HFC Bank Ghana (HFC.GN)	1.07	9
UT Bank (UTB.GN)	1.76	7
Ghana Commercial Bank (GCB.GN)	2.01	7
Ecobank Ghana (EBG.GN)	2.66	5
Standard Chartered Bank Ghana (SCB.GN)	4.25	1

5. Dividend Yield

Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stock’s share price. Therefore, most banks won’t raise dividends beyond a level they believe they can sustain.

Bank	Dividend Yield	Score
CAL Bank (CAL.GN)	10.83%	10
SG-SSB (SGSSB.GN)	9.76%	10
Ecobank Ghana (EBG.GN)	7.89%	8
Standard Chartered Bank Ghana (SCB.GN)	5.95%	6
Ecobank Transnational (ETI.GN)	5.71%	6
HFC Bank Ghana (HFC.GN)	4.89%	5
Ghana Commercial Bank (GCB.GN)	3.68%	4
UT Bank (UTB.GN)	0.00%	1

Winner, Winner, Chicken Dinner!

Now let’s put all the scores together and count them down from worst to first.

8. Ghana Commercial Bank – There’s not an easy way to spin this. Venerable GCB got smacked around by its younger smaller cohorts. It performed relatively well in Price/Book ratio, but considering that 15% of its loan book is shaky, I wouldn’t bother paying 2x book value for it.

7. Standard Chartered Ghana – Easily the most profitable bank in Ghana, SCB commands a very high price tag. It’s Price/Book ratio is well above 4! But a relatively juicy dividend may lure some cautious investors.

6. UT Bank – The industry’s fastest grower is well worth watching, especially if it cleans up its assets and initiates a dividend. Until then, it remains one of the riskier banks in the group.

5. Ecobank Transnational – This fast-grower with continent-wide reach is trading at a very attractive valuation. It’s only weakness in the showdown was its low ROA, which is likely a by-product of its rapid expansion.

4. HFC Bank – A nearly pristine loan book combined with a reasonable P/B ratio gave this obscure bank a solid showdown performance. But its relatively low ROA and growth rate kept it out of serious contention.

3. CAL Bank – A sky-high dividend yield and a P/B ratio that suggests that its accountant believes it’s worth 50% more than the stock market does put this small bank in the upper echelon. Its small size kept it out of second place.

2. SG-SSB – This bank is profitable, cheap, and pays a very attractive dividend. But the subsidiary of Societe Generale doesn’t seem to have an eye for growth.

1. Ecobank Ghana – The local subsidiary of ETI, Ecobank Ghana’s strengths are its profitability and squeaky clean loan book. It doesn’t have much potential for geographic expansion, but it’s not huge and has room to spread its wings in Ghana’s rapidly expanding economy. Factor in a reasonable P/B ratio and a dividend yield of nearly 8%, and I think this bank merits a very long look.

Bank	ROA Score	Growth Score	NPL Score	P/B Score	Yield Score	Total Score
Ecobank Ghana (EBG.GN)	10	4	10	5	8	37
SG-SSB (SGSSB.GN)	7	1	5	10	10	33
CAL Bank (CAL.GN)	4	5	4	10	10	33
HFC Bank Ghana (HFC.GN)	4	4	8	9	5	30
Ecobank Transnational (ETI.GN)	1	5	7	10	6	29
UT Bank (UTB.GN)	7	10	1	7	1	26
Standard Chartered Bank Ghana (SCB.GN)	10	2	4	1	6	23
Ghana Commercial Bank (GCB.GN)	4	2	1	7	4	18

What Do You Think?

Does Ecobank Ghana deserve to be head and shoulders above the rest of the field? Which bank stock do you think is the best bargain? Let me know your thoughts in the comments!

[Disclosure: As of publication date, I am long CAL Bank and Ghana Commercial Bank.]

Related Articles

How to Invest on the Ghana Stock Exchange

Ghana’s Booming Banks

Photo by Jeff Attaway

Index investing sure is popular these days. You’ve got your small-cap indexes. Your large-cap indexes. Growth indexes. Value indexes. Country indexes. Bond indexes. Any slight affinity among a group of securities seemingly results in some sort of new index ETF.

It’s got me feeling a little bit left out.

So, today I’m launching the Investing In Africa Index.

Why A New Africa Index?

Numerous African indexes already exist. Do we really need another?

Yes. Because apart from the Market Vectors Africa ETF (AFK), the S&P Emerging Middle East & Africa (GAF), and the MSCI South Africa Index (EZA), no other African equity indexes are accessible to small, retail investors like me.

Moreover, the existing index funds tend to be heavily focused on mining stocks, which I just really don’t like very much.

There is a gap in the market for an index that focuses on the growth of the African middle class — not on the fortunes of foreign mining firms.

Selection Criteria

Here’s the criteria for inclusion in the index.

1. Headquartered in Sub-Saharan Africa – The IIA Index is comprised solely of companies based in Africa. Why? Companies that call Africa home tend to employ more local people and to re-invest profits within the region.
2. Trades on a US stock exchange – The Index will include only companies that trade on the NYSE, Nasdaq, or on the OTC Board. This is because it is intended to be easily replicable by US investors. All index constituents must be available for trade through a U.S. discount broker like ETrade or Schwab.
3. Average daily trade volume exceeds $100,000 over past three months – This limits the index to only the most liquid of African ADRs and shares. Small investors should have no problem buying or selling immediately at market price.
4. No mining or energy stocks – There are lots of African mining ADRs out there, but in my view, mining companies have not done a great job of sharing the industry’s benefits equitably. The Investing In Africa Index will focus on the rise of the African consumer, not the amount of ore dug up from under the continent’s surface.

Any stock that meets all four of these criteria as of the last trading day of the year will be added to the index. Conversely, any index constituents that fail to measure up will be removed.

What Companies Comprise the IIA Index?

After applying the above criteria, we were left with the nine stocks below.

Company	Ticker	Industry	Headquarters	Exchange	Ratio (ADR:Ordinary)
Mr. Price	MRPZY.PK	Retail	South Africa	OTC	1:2
MTN	MTNOY.PK	Wireless	South Africa	OTC	1:1
Murray & Roberts	MURZY.PK	Construction	South Africa	OTC	1:1
Naspers	NPSNY.PK	Media	South Africa	OTC	1:1
Net 1 UEPS	UEPS	Technology	South Africa	Nasdaq	N/A
Shoprite	SRHGY.PK	Retail	South Africa	OTC	1:2
Standard Bank	SBGOY.PK	Banking	South Africa	OTC	1:2
Tiger Brands	TBLMY.PK	Food	South Africa	OTC	1:1
Woolworths	WLWHY.PK	Retail	South Africa	OTC	1:10

As you can see, the index is currently over-exposed to the Rainbow Nation. My hope is that, as time goes by, ADRs from other sub-Saharan countries will meet the index’s inclusion criteria.

How Is Index Performance Calculated?

This is an unweighted index. All members of the index carry an equal weight no matter what size they are or what their share price is.

Thus, the index’s performance is calculated as though an equal amount was invested in each member of the index. It is an average of the percentage return of all member stocks.

How Has the Index Performed So Far?

The Investing In Africa Index has already put up some very impressive numbers since the beginning of the year. Here’s how it measures up to the S&P500 and the big Africa-focused ETFs.

Index	YTD Return (Jan 1 - May 6, 2012)
Investing In Africa Index	22.4%
Market Vectors Africa Index ETF (AFK)	14.6%
S&P Emerging Middle East and Africa ETF (GAF)	11.8%
iShares MSCI South Africa Index (EZA)	10.7%
S&P500 Index (SPY)	9.6%

Not too shabby, eh?

What Do You Think?

Is this index useful as a way to track the performance of easily accessible African stocks? What are your thoughts on mining stocks? Do they merit inclusion in the index? Let us know your thoughts in the comments!

[Disclosure: I am long on UEPS, AFK, GAF, and EZA.]

Photo by Erik (HASH) Hersman

Nothing symbolizes the African renaissance better than the mobile phone. It represents technological advancement, deepening connectivity, and economic inclusion. Unfettered by outdated fixed-line infrastructure, Africa is at mobile technology’s bleeding edge — pioneering everything from mobile payments to crowd-sourcing.

So, African telecom stocks get a lot of attention. Companies like MTN, Sonatel, and Safaricom are followed by investors across the globe.

While enthralled by the impact they have on African economies, I am dubious of these companies as investments.  Competition within the industry is intense. So intense, in fact, that most participants’ seem to be in a race to the bottom — each company lowering its prices in an attempt to win market share.

But that’s not to say there aren’t a few gems among the lot. I’ve ranked six of the most prominent stocks in the industry on the basis of growth, profitability, leverage, value, and dividend yield. Let’s take a look at which ones fared best.

1. Growth

If you’re going to invest some of your hard-earned money in a telecom stock, you’ll want to invest in one with a consistent record of sales growth. In an industry as competitive as this one, a company that focuses on tending its own small garden will soon be overrun by larger, more aggressive peers.

The chart below shows the long-term sales growth of sub-Saharan Africa’s six telecom stocks. I’ve given each of them a score by dividing the range between the fastest grower and the slowest one into deciles. I award companies in the highest decile 10 points. Those in the lowest receive just one.

Company	Exchange	Revenue Growth (Five-Year Annualized)	Score
Econet Wireless (ECWH.ZH)	Zimbabwe Stock Exchange	32.69%*	10
Telekom Networks Malawi (TNM.MW)	Malawi Stock Exchange	22.07%	6
MTN Group (MTN.SJ)	Johannesburg Stock Exchange	18.76%	4
Safaricom (SAFCOM.KN)	Nairobi Securities Exchange	17.32%	4
Vodacom Group (VOD.SJ)	Johannesburg Stock Exchange	11.43%	1
Sonatel (SNTS.BC)	BRVM	9.78%	1
* two-year annualized

2. Profitability

High-earning, urban consumers are the most lucrative market demographic for wireless companies. Unfortunately, this low-hanging fruit has already been picked. Wireless companies need to offer new services and creative pricing plans in order to avoid seeing their profit margins squeezed into oblivion.

So, when evaluating wireless stocks, the net profit margin is a hugely important metric. The fatter a company’s margin is, the more money it will have to expand its operations, and the longer it will make money for its shareholders.

Here’s how the big six ranked:

Company	Exchange	Net Profit Margin	Score
Econet Wireless (ECWH.ZH)	Zimbabwe Stock Exchange	26.40%	10
Sonatel (SNTS.BC)	BRVM	21.48%	8
MTN Group (MTN.SJ)	Johannesburg Stock Exchange	16.44%	5
Vodacom Group (VOD.SJ)	Johannesburg Stock Exchange	13.45%	3
Telekom Networks Malawi (TNM.MW)	Malawi Stock Exchange	10.60%	1
Safaricom (SAFCOM.KN)	Nairobi Securities Exchange	9.80%	1

3. Leverage

Next, we introduce a risk metric to our analysis. The Debt/Equity ratio simply measures the relative percentage of debt a company maintains on its balance sheet.

The lower the ratio – the less dependent the company is on external financing. A lower ratio implies that a company has more options available to it when it figures out how to fund expansion. Conversely, a high ratio may mean a firm is over-extended.

Here’s how they stacked up:

Company	Exchange	Debt/Equity	Score
MTN Group (MTN.SJ)	Johannesburg Stock Exchange	0.96%	10
Safaricom (SAFCOM.KN)	Nairobi Securities Exchange	0.96%	10
Telekom Networks Malawi (TNM.MW)	Malawi Stock Exchange	1.06%	9
Econet Wireless (ECWH.ZH)	Zimbabwe Stock Exchange	1.13%	8
Sonatel (SNTS.BC)	BRVM	1.49%	2
Vodacom Group (VOD.SJ)	Johannesburg Stock Exchange	1.60%	1

4. Value

All of the above performance metrics mean very little if the share is already priced for perfection. So, if we’re going to rank the best stocks in the industry, we need to introduce an element of value to the evaluation.

I’ve used the humble price/earnings ratio here. It’s far from perfect, but it’s quick and convenient, and, I believe, adequate for this initial stage of analysis.

Company	Exchange	P/E Ratio	Score
Econet Wireless (ECWH.ZH)	Zimbabwe Stock Exchange	3.85	10
Sonatel (SNTS.BC)	BRVM	7.69	7
Safaricom (SAFCOM.KN)	Nairobi Securities Exchange	10.34	5
MTN Group (MTN.SJ)	Johannesburg Stock Exchange	12.59	3
Telekom Networks Malawi (TNM.MW)	Malawi Stock Exchange	13.21	3
Vodacom Group (VOD.SJ)	Johannesburg Stock Exchange	15.80	1

5. Dividend Yield

I always like to include dividends to my analysis because they are tangible evidence of a company’s ability and willingness to reward its shareholders. It’s also an important value metric — the lower the share price, the higher a stock’s yield.

Company	Exchange	Dividend Yield	Score
Sonatel (SNTS.BC)	BRVM	12.43%	10
Safaricom (SAFCOM.KN)	Nairobi Securities Exchange	5.88%	5
MTN Group (MTN.SJ)	Johannesburg Stock Exchange	5.57%	5
Vodacom Group (VOD.SJ)	Johannesburg Stock Exchange	5.06%	5
Telekom Networks Malawi (TNM.MW)	Malawi Stock Exchange	3.78%	4
Econet Wireless (ECWH.ZH)	Zimbabwe Stock Exchange	-	1

Dialing Up a Winner

Now, let’s put all of the above scores together into one composite.

Heavyweights like Sonatel and Vodacom offer impressive yields, but they seem to be scraping the bottom of the barrel when it comes to growth.

Safaricom and TNM, meanwhile, are trying to keep aggressive competitors at bay by lowering their prices, which is constricting their profit margins.

MTN is a strong performer across all metrics, but investors already know its story very well, and, thus, it doesn’t appear to be a screaming bargain at this price.

So, I must declare Zimbabwe’s Econet Wireless the winner of Africa’s Telecom Stock Showdown. Keep in mind, however, there’s an added degree of risk to this stock because of Zimbabwe’s tumultuous political environment and Robert Mugabe’s adversarial relationship with foreign investors. So please consider this as a jumping off point for your analysis — not necessarily a “buy” recommendation.

Company	Growth	Net Margin	Debt/Equity	P/E Ratio	Yield	Total
Econet Wireless (ECWH.ZH)	10	10	8	10	1	39
Sonatel (SNTS.BC)	1	8	2	7	10	28
MTN Group (MTN.SJ)	4	5	10	3	5	27
Safaricom (SAFCOM.KN)	4	1	10	5	5	25
Telekom Networks Malawi (TNM.MW)	6	1	9	3	4	23
Vodacom Group (VOD.SJ)	1	3	1	1	5	11

What Do You Think?

Did the results surprise you? Are there other criteria you would add to the Showdown? Would you change the weights to some indicators? Is my method madness? Let me know your thoughts in the comments!

Further Reading

Stock Showdown: Ranking Nigeria’s Best Bank

How to Invest on the Zimbabwe Stock Exchange

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]

Photo by World Bank

Much has been made of Africa’s rapid economic growth. And it truly is remarkable. The IMF projects that seven African economies will grow faster than 8% this year, and six of the top ten fastest-growers economies in the world will come from the continent.

The table below lists the IMF’s projected GDP growth for the home countries of 10 of Africa’s most prominent stock exchanges. I’ve included the United States, too, just for kicks.

Note that the growth figure is a weighted average of the IMF’s forecast for each year between now and 2017. Because predictions are generally less accurate the further you look into the future, the more distant years are weighted less than those that will soon be upon us.

Africa’s Rapid Growth

Country	Projected GDP Growth (2012 - 2017)
Zambia	7.90%
Ghana	7.54%
Côte d'Ivoire	7.13%
Nigeria	6.77%
Kenya	5.75%
Uganda	5.34%
Namibia	4.19%
Botswana	4.03%
Mauritius	3.91%
South Africa	3.30%
United States	2.57%

Those are some pretty impressive growth rates, aren’t they? Especially when viewed in comparison with the United States.

Based on the above, it would be tempting to conclude that we should all be opening Zambian brokerage accounts.

Unfortunately, investing solely on the basis of growth forecasts often ends in disappointment. Rapid economic growth doesn’t necessarily translate into awesome stock market returns. In fact, studies show there is no correlation between the two.

Just look at China. According to the IMF, China’s economy expanded by a cumulative 64.8% over the past five years. So, if stock market returns were correlated with GDP growth, the China 25 Index should have knocked the lights out during that time frame. Instead, it only managed an anemic 13.1% (2.5% annualized).

So, we need to temper our excitement over growth rates with a keen focus on value.

To do so, I’ve put together average Price/Earnings ratios for ten of sub-Saharan Africa’s most important stock exchanges in the table below. The ratio is an average of the 10 largest domestic companies traded on each exchange. I’ve also included the S&P500 for giggles.

African Stocks’ Deep Value

Exchange	Price/Earnings Ratio (Avg 10 Largest Stocks)
Namibian Stock Exchange	8.30
Botswana Stock Exchange	9.95
Nairobi Securities Exchange	10.11
Uganda Securities Exchange	10.49
Ghana Stock Exchange	11.04
BRVM (Côte d'Ivoire Stocks Only)	12.04
Lusaka Stock Exchange	12.37
Stock Exchange of Mauritius	13.23
Nigerian Stock Exchange	13.94
Johannesburg Stock Exchange	15.51
S&P 500	16.09

Namibia looks pretty cheap, doesn’t it? You can pretty much buy $1 dollar’s worth of Namibian earnings for half of what a dollar’s worth of S&P500 earnings costs. In fact, even after years of relative stagnation, the S&P500′s P/E ratio remains higher than every single African index.

But Namibia and Botswana may be cheap, in part, because they just aren’t growing very quickly.

So to get a true sense of where investment opportunity lies, we need to combine value’s yin with growth’s yang.

To do that, I simply divided the above P/E ratios by the GDP growth rates of their respective home countries. The resulting Price/Earnings/Growth ratios are listed below.

Putting Growth and Value Together

Exchange	Price/Earnings/Growth Ratio
Ghana Stock Exchange	1.46
Lusaka Stock Exchange	1.57
BRVM (Côte d'Ivoire Stocks Only)	1.69
Nairobi Securities Exchange	1.76
Uganda Securities Exchange	1.97
Namibian Stock Exchange	1.98
Nigerian Stock Exchange	2.06
Botswana Stock Exchange	2.47
Stock Exchange of Mauritius	3.39
Johannesburg Stock Exchange	4.70
S&P 500	6.26

Based on this quick analysis, the Ghana Stock Exchange offers the most compelling opportunities for Africa investors thanks to its combination of deep value and rapid economic growth.

Does this sound right? Let us know which market you think offers the best overall value in the comments!

Further Reading

How to Invest in Ghana

How to Invest in Zambia

How to Invest on the BRVM

Photo by André Silvestre

If you’ve ever taken a look at the stocks listed on an African market, you likely noticed that they tend to be dominated by banks. Quite often, banks are the exchange’s largest, most liquid shares.

There’s a lot of number-crunching to be done when deciding which bank to buy. You could spend days buried in balance sheets if you cared to.

It’s for this reason that I spend considerable time coming up with quick and easy ways to evaluate the relative attractiveness of bank stocks.

The method I walk through here scores banks in five key areas: profitability, growth, asset quality, value, and dividend yield.

Please note that this method is only the first stage of analysis. It’s intended to separate the contenders from the pretenders – not to provide me with a buy decision.

With that said, let’s put it to work on 12 of the Nigerian Stock Exchange’s biggest banks. Let the showdown begin!

1. Profitability

If you’re in the market for a bank stock, chances are you’d prefer one that actually makes money. So, I took the liberty of screening out all the banks that failed to produce a positive average return on assets (ROA) over the past five years.

ROA measures how effectively management deploys the assets under its control. I’ve calculated ROA as after-tax profits from continuing operations divided by average assets. Then, because bank earnings can be inconsistent, I averaged the ROA from the most recent five fiscal years.

To calculate a score, I divided the range between the most profitable bank and the least profitable one into deciles. The banks with ROAs in the highest decile were awarded 10 points. Those in the lowest decile scored just one point.

Here’s how they stacked up:

Bank	Return on Assets (5-Year Average)	Score
Guaranty Trust Bank (GUARANTY.NL)	2.04%	10
Stanbic IBTC Bank (IBTCCB.NL)	1.75%	9
Zenith Bank (ZENITHBA.NL)	1.33%	7
First Bank of Nigeria (FIRSTBAN.NL)	1.27%	7
Access Bank (ACCESS.NL)	0.85%	5
Fidelity Bank (FIDELITY.NL)	0.83%	5
Skye Bank (SKYEBANK.NL)	0.82%	4
Ecobank Transnational (ETI.NL)	0.81%	4
First City Monument Bank (FCMB.NL)	0.61%	3
United Bank for Africa (UBA.NL)	0.57%	3
Sterling Bank (STERLNBA.NL)	0.57%	3
Diamond Bank (DIAMONDB.NL)	0.01%	1

2. Growth

Profitability is great, but Africa’s best banks are constantly growing their assets. They’re tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.

To measure which banks are growing the fastest, I simply annualized the growth of each bank’s total assets over the most recent five fiscal years.

Here’s what I found:

Bank	Asset Growth (5-Year Annualized)	Score
Access Bank (ACCESS.NL)	40.18%	10
Ecobank Transnational (ETI.NL)	37.41%	9
Skye Bank (SKYEBANK.NL)	33.74%	8
Sterling Bank (STERLNBA.NL)	33.25%	8
Fidelity Bank (FIDELITY.NL)	31.20%	7
Stanbic IBTC Bank (IBTCCB.NL)	29.79%	6
Guaranty Trust Bank (GUARANTY.NL)	28.63%	6
First Bank of Nigeria (FIRSTBAN.NL)	27.03%	5
Zenith Bank (ZENITHBA.NL)	27.03%	5
Diamond Bank (DIAMONDB.NL)	22.44%	3
First City Monument Bank (FCMB.NL)	19.41%	2
United Bank for Africa (UBA.NL)	16.18%	1

3. Asset Quality

A bank’s challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather uncreditworthy customers. When these customers default, the loans must be written down to zero – a bad thing for profitability AND growth.

One of my favorite ways to measure a bank’s asset quality is to determine how much of the loan portfolio isn’t performing as planned. I do this by dividing non-performing loans by total loans. A lower ratio implies a lower degree of risk in the bank’s loan book.

Look here to see which banks are Nigeria’s most conservative lenders:

Bank	Non-Performing Loans/Total Loans	Score
First Bank of Nigeria (FIRSTBAN.NL)	2.63%	10
First City Monument Bank (FCMB.NL)	3.00%	10
Guaranty Trust Bank (GUARANTY.NL)	3.73%	9
Zenith Bank (ZENITHBA.NL)	3.99%	9
Sterling Bank (STERLNBA.NL)	4.80%	8
Ecobank Transnational (ETI.NL)	5.47%	8
Skye Bank (SKYEBANK.NL)	6.39%	7
United Bank for Africa (UBA.NL)	6.64%	7
Stanbic IBTC Bank (IBTCCB.NL)	7.00%	6
Access Bank (ACCESS.NL)	9.52%	4
Diamond Bank (DIAMONDB.NL)	10.95%	3
Fidelity Bank (FIDELITY.NL)	13.28%	1

4. Value

Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Nigeria can end up losing you money if the price you pay for it is too dear.

When evaluating bank stocks, I take a close look at price/book ratios. Book value is simply the difference between a bank’s assets and its liabilities. Stocks with low price/book ratios generally have less downside risk. The lower a price/book ratio gets, the less risk there is of the bank disappointing the market and the greater potential there is for it to outperform expectations.

I prefer the price/book ratio over the price/earnings ratio for bank stocks. Why? Because bank earnings can be erratic. Thus, the P/E ratio for a bank coming off a particularly good or bad year will be skewed. Assets, on the other hand, are much less volatile and relatively easy for an accountant to value.

Bank	Price/Book Ratio	Score
Fidelity Bank (FIDELITY.NL)	0.29	10
Sterling Bank (STERLNBA.NL)	0.37	10
Diamond Bank (DIAMONDB.NL)	0.38	10
Skye Bank (SKYEBANK.NL)	0.46	9
Access Bank (ACCESS.NL)	0.60	9
United Bank for Africa (UBA.NL)	0.68	8
Ecobank Transnational (ETI.NL)	0.71	8
First City Monument Bank (FCMB.NL)	0.83	7
First Bank of Nigeria (FIRSTBAN.NL)	0.96	6
Zenith Bank (ZENITHBA.NL)	1.17	5
Stanbic IBTC Bank (IBTCCB.NL)	1.58	3
Guaranty Trust Bank (GUARANTY.NL)	1.99	1

5. Dividend Yield

Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stock’s share price. Therefore, most banks won’t raise dividends beyond a level they believe they can sustain.

Bank	Dividend Yield	Score
Fidelity Bank (FIDELITY.NL)	10.29%	10
Access Bank (ACCESS.NL)	8.56%	9
Sterling Bank (STERLNBA.NL)	8.33%	8
First Bank of Nigeria (FIRSTBAN.NL)	7.42%	7
Guaranty Trust Bank (GUARANTY.NL)	6.89%	7
Zenith Bank (ZENITHBA.NL)	6.72%	7
Skye Bank (SKYEBANK.NL)	6.41%	6
Diamond Bank (DIAMONDB.NL)	6.12%	6
First City Monument Bank (FCMB.NL)	5.82%	6
Ecobank Transnational (ETI.NL)	5.34%	5
Stanbic IBTC Bank (IBTCCB.NL)	1.40%	1
United Bank for Africa (UBA.NL)	1.12%	1

Winner, Winner, Chicken Dinner!

Now let’s put all the above scores together. Perhaps unsurprisingly, blue-chips like GTBank and Stanbic IBTC posted good profitability, growth, and asset quality scores, but lagged far behind when comparing value and dividend yield.

Meanwhile, high-yielding, low-priced stocks like Diamond Bank and Fidelity Bank performed poorly in terms of profitability and asset quality.

Two banks, Access and Sterling, performed well enough on all five scales to post the highest scores. In fact, they tied with a composite score of 37!

But after all this hoopla, a draw would be anticlimactic, wouldn’t it? So, I decided to give the tiebreaker to the largest bank in terms of total assets. Why? Larger banks are generally less risky than smaller ones.

As of the end of 2011, Access Bank’s asset base totaled NGN1,634 billion (roughly $10.4 billion). Sterling Bank’s total assets are NGN504.4 billion (approximately $3.2 billion).

So we have a winner of my first ever Nigerian Bank Stock Showdown! Congratulations to Access Bank (ACCESS.NL)!

Bank	ROA Score	Growth Score	NPL Score	P/B Score	Yield Score	Total Score
Access Bank (ACCESS.NL)	5	10	4	9	9	37
Sterling Bank (STERLNBA.NL)	3	8	8	10	8	37
First Bank of Nigeria (FIRSTBAN.NL)	7	5	10	6	7	35
Ecobank Transnational (ETI.NL)	4	9	8	8	5	34
Skye Bank (SKYEBANK.NL)	4	8	7	9	6	34
Guaranty Trust Bank (GUARANTY.NL)	10	6	9	1	7	33
Zenith Bank (ZENITHBA.NL)	7	5	9	5	7	33
Fidelity Bank (FIDELITY.NL)	5	7	1	10	10	33
First City Monument Bank (FCMB.NL)	3	2	10	7	6	28
Stanbic IBTC Bank (IBTCCB.NL)	9	6	6	3	1	25
Diamond Bank (DIAMONDB.NL)	1	3	3	10	6	23
United Bank for Africa (UBA.NL)	3	1	7	8	1	20

What Do You Think?

Did the results surprise you? Are there other criteria you would add to the Showdown? Would you change the weights to some indicators? Is my method madness? Let me know your thoughts in the comments!

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]

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Photo by CIMMYT

Understated Zambia is quietly putting together one of the world’s most impressive records of economic growth. The Southern Arican nation’s GDP has grown in excess of 5.3% every year since 2003, and the IMF forecasts its economy will expand by 7.7% this year thanks to strong demand for its primary export — copper.

Zambian stocks have reflected this vibrant growth. The Lusaka Stock Exchange is Africa’s best performer over the past three years. Its main index surged 89.6% (US dollar terms) since March 2009.

So, how can global investors participate in this intriguing market?

Here’s a quick guide to opening a Zambian trading account and buying your first shares.

Zambian Stockbrokers

I emailed each of the six brokers who are licensed to trade on the Lusaka Stock Exchange. I asked them if they catered to foreign investors, how much they required to open an account, and what documentation was necessary. I found the two brokers listed below to be particularly helpful and responsive.

Trading Costs

Commissions and fees amount to 1.375% of the total transaction value. This rate is standard across all brokers.

Opening a Zambian Brokerage Account

Now let’s walk through the process of opening an account with a Zambian stockbroker and buying your first shares.

Step 1: Complete the Broker’s Account Opening Form

After emailing a broker and requesting information on how to open an account, they will send you a blank account opening form. A sample form from Stockbrokers Zambia may be found in the above table. The form typically requires disclosure of your passport number or other ID number and your address.

If you would like to have dividends deposited directly into your trading account (and I recommend that you do), you should inform your broker of this at this time.

Step 2: Collect a Photocopy of Your Passport.

If you don’t have a valid passport, a copy of your driver’s license may suffice.

Step 3. Mail the Original Account Opening Form and Photocopy of Your Passport to Your Broker

You may email photocopies of all documents to your broker to get a head start on the account opening process, but they must eventually receive the original documentation. I recommend using a courier for this. It’s pricey but could save you a lot of grief in the event that the post office loses track of your documents.

Step 4. Wire Funds to Your Brokerage Account

After opening your trading account, your broker will provide you with its bank details so that you can fund your account. The most efficient way to do this is via wire transfer. If you haven’t sent an international wire before, I suggest that you take your broker’s bank details to your local bank branch and ask them to walk you through the process. They’ll make sure that your funds arrive securely. Note that most US banks charge about $25 for outgoing international wires.

Step 5. Submit a Trade Order

You’ve done your research and found a stock that you’d like to buy. What now?

All that needs be done is to submit a written trade instruction. Some brokers may have a special trade mandate form to complete, but, for others, a simple email may suffice.

Keep in mind that many shares listed on the Lusaka Stock Exchange are rather illiquid, so I advise specifying a limit price for all of your orders. This will help you avoid paying significantly more for your shares than you had intended to pay.

Your broker will then execute your trade and send you a contract note that specifies the buy or sell price, commissions, and fees. Settlement of share trades takes up to three business days after the trade date in Zambia, so if you’ve sold shares, don’t expect to receive the proceeds of a sale before then unless you’re willing to incur a penalty to settle the trade more quickly.

Mission Accomplished

Follow these steps and you’re all set to begin investing in Zambian stocks. That wasn’t too bad, was it?

The process of opening a foreign brokerage account can be confusing. If you found this walk-thru to be clear as mud, please don’t be shy. Post your questions in the comments, and I’ll do my best to get answers for them.

Further Reading

- How to Invest on the Botswana Stock Exchange

- How to Invest on the Ghana Stock Exchange

- How to Invest on the Nigerian Stock Exchange

- How to Invest on the Zimbabwean Stock Exchange

Photo by CIAT

Kenya investors don’t seem to like agriculture stocks, and I’m not sure I understand why.

Over the past five years, the Nairobi Stock Exchange’s benchmark NSE-20 Index lost 30.5% of its value. But each of the market’s eight agricultural stocks performed better than that. Much better. In fact, they actually posted a 41.8% gain during the same time frame.

Yet, today, they remain the NSE’s Rodney Dangerfields — they get no respect. Almost all of them presently trade for a fraction of their book value and less than seven times their trailing earnings.

Granted, agricultural stocks do have their risks. They are, to varying degrees, at the mercy of global commodity prices, the weather, and currency movements. And a proposed tax on tea exports has chilled the outlook for some companies.

But with the globe’s population growing and arable land becoming more scarce, I think the market’s pessimism is overdone.

Let’s take a closer look.

The five Kenyan stocks below put food on the table, and (at these valuations) possibly some big returns in investment portfolios, too.

Company	P/E Ratio	P/B Ratio	ROE	Debt/Equity Ratio	Dividend Yield
Kakuzi (KKZI:KN)	2.9	0.6	24.6%	42.4%	4.6%
Kapchorua Tea (KPTC:KN)	6.4	0.7	27.9%	54.6%	6.5%
Mumias Sugar (MSUG:KN)	4.6	0.6	31.3%	67.4%	8.1%
REA Vipingo Plantations (RVPL:KN)	2.0	0.6	42.9%	55.8%	7.2%
Williamson Tea Kenya (GWKL:KN)	2.4	0.6	28.8%	38.9%	5.7%

Kakuzi (KKZI.KN)

(P/E Ratio: 2.9; P/B Ratio: 0.6; Dividend Yield: 4.6%)

You could put together a pretty tasty breakfast consisting of nothing but produce from Kakuzi’s farms. It grows avocados, pineapples, macadamia nuts, and tea. The company also boasts herds of dairy and beef cattle.

The diversification has served the firm well. Over the past five years, it grew earnings at a 33.0% clip, allowing it to award a dividend increase for three out of those five years. It’s balance sheet is very strong. Kakuzi carries very little debt.

Yet the company trades at just 60% of its book value. What gives? Investors may be concerned about tea prices. Or they may be underwhelmed by Kakuzi’s 2011 earnings because they included an extraordinary gain resulting from the conclusion of a legal matter. Even so, after stripping out the one-time gain, the stock still trades at less than 4x earnings.

Kapchorua Tea (KPTC.KN)

(P/E Ratio: 6.4; P/B Ratio: 0.7; Dividend Yield: 6.5%)

The Kapchorua tea plantation sounds an idyllic place. Tucked into hills west of the Great Rift Valley, Kapchorua grows tea plants that receive worldwide acclaim for their full-bodied, floral flavor in forest-fringed fields. The operation is recognized for the fairness with which it treats its workers and carries the Fair Trade and Ethical Tea Production seals of approval.

Kapchorua earned KES282 million (roughly $3.4 million) over the past 12 months, which gives the stock a P/E ratio north of 6x. That’s actually on the high end for Kenyan agriculture firms.

Management has warned shareholders that it may have a tough time replicating recent performance due to higher fuel and labor costs.

Mumias Sugar (MSUG.KN)

(P/E Ratio: 4.6; P/B Ratio: 0.6; Dividend Yield: 8.1%)

Mumias is Kenya’s largest sugar producer, controlling 60% of the market. Management’s in the midst of diversifying its product mix to even out its vacillating, sugar-dependent earnings. It recently began burning sugar cane residue to produce electricity. In doing so, it produces enough energy to supply its own requirements and to deliver 26MW of much needed power to Kenya’s national grid. It also plans to produce ethanol and bottle water later this year. Both projects will provide an immediate boost to company profits.

These efforts cost money, but management has succeeded thus far in keeping its debts to less than 70% of equity. The Global Credit Company just rated Mumias’ long-term debt at “A+”.

We covered Mumia’s generous dividend last month. The share price has risen since then, but it still yields a sweet 8.1%.

REA Vipingo Plantations (RVPL.KN)

(P/E Ratio: 2.0; P/B Ratio: 0.6; Dividend Yield: 7.2%)

REA Vipingo is Africa’s largest producer of sisal, a natural fiber used to make rope and twine. It employs 3000 people at seven estates across Kenya and Tanzania that produce 19,000 tons of the stuff. Nearly all of it is exported through via REA’s own export company in Mombasa. The company is also diversifying into vegetable production.

High sisal prices and good weather helped the company to record profits in 2011. Earnings rose 553% over the previous year.

Fortune may have been smiling on REA Vipingo last year, making a repeat performance unlikely, but you’d think the market would agree that the company is worth more than 2x last year’s earnings and 60% of its book value.

Williamson Tea Kenya (GWKL.KN)

(P/E Ratio: 2.4; P/B Ratio: 0.6; Dividend Yield: 5.7%)

Williamson is one of Kenya’s largest tea companies. It is the parent company of Kapchorua and produces a range of specialty, fair trade teas for sale in the United Kingdom and elsewhere around the globe.

Williamson has strung together an impressive record of profitable years. In the most recent period, earnings spiked 76% thanks to the sale of a Nairobi property. Management keeps a very tidy balance sheet. Total debt comes in at less than 40% of equity.

Ironically, the most recent earnings report from the fair trade tea purveyor bemoans rising labor costs. Management won’t get much sympathy from me in this regard. Profits have increased nearly 18x since 2003. Even so, the company trades for a pittance at just 2.4x trailing earnings.

Conclusion

I believe all five of these stocks are priced at levels to outperform the market over the medium term. They’re profitable, carry manageable levels of debt, and produce basic commodities that are in more demand with each passing year.

What do you think? Am I lost in the weeds on this one? Let me know in the comments!

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]