Report to Shareholders
Dear Shareholders, It is with great pleasure that we present to you, on behalf of the Board and Management of CDSC, the company’s performance for the year ended 31st December 2017.
The year 2017 was challenging, characterised by depressed economic activity due to drought and low activity at the bourse as the country entered an electioneering period, prolonging to the third quarter of the year. The NSE 20 and the NASI defied the political climate and the negative investor sentiments to record decent returns in 2017, gaining by 16.5% and 28.4% respectively.
Similarly, for CDSC, the year turned out to be a fairly stable one with the Group posting a pre-tax profit of Kshs. 86.2 million compared to Ksh. 21.5* million recorded in 2016 (*Kshs. 87.6 million before the provisions made for deposits held at Chase Bank). Transaction levies rose by 25% to Kshs. 276.9 million from Ksh. 220.8 million in 2016, reflecting a slight improvement in market performance and the first full year of levies charged at the revised rate of 0.08%. This is reflected in the improvement of the total revenues collected that stood at Kshs. 335.6 million for 2017 compared to Kshs. 289.6 in the previous period.
Expenses increased from Kshs. 189 million in 2016 to Kshs. 219 million, mainly driven by the M-Akiba expenses and increases in staff costs.
CDSC’s Capital base increased by 12% to Kshs. 494.7 compared to Kshs. 440.5 in 2016, with the retained earnings also posting an increment of 16.1% from Ksh. 267 million to Ksh. 310 million in the period under review.
A total of 248,843 deals settled through the CDS system compared to 300,454 in 2016, signaling some higher value transactions leading to equity turnover of Kshs. 171.4 billion at the close of the year 2017, representing a 17% improvement from Kshs. 147 billion recorded at the close of the year 2016. Corporate bonds turnover declined slightly by 1.2% to stand at Kshs. 429.4 billion compared to Kshs. 434.7 billion same period in 2016.
At the close of 2016, we had a total 1,527,834 active CDS accounts, as compared to the 1,150,270 active accounts recorded at the close of 2017; this reduction was occasioned by the data cleanup exercise.
In 2017, Unclaimed Financial Assets Authority (UFAA) and EFG Hermes Kenya joined the list of Authorized Central Depository Agents bringing the total number of approved CDA’s to forty two (42).
This performance has been achieved against a backdrop of global GDP growth of 3.6%; 2.64% growth in sub-Saharan Africa; while in East Africa the GDP growth declined slightly to 5.4% compared to 6.1% in 2016.
The Kenyan economy achieved a growth rate of 4.9% compared to 5.9% in 2016, while average inflation was up by 1.7% to 8% in 2017 as a result of the prolonged drought early in the year that affected the agricultural sector.
M-Akiba Mobile Traded Bond
In 2017, CDSC in partnership with the National Treasury and other stakeholders launched the first fully mobile-traded government bond dubbed M-Akiba. The offer was in two tranches with the first tranche of Ksh. 150 million acting as a pilot to measure key metrics including systems functionality, market demand and client feedback. The pilot issue was over-subscribed two days to the close of the offer. The second issue was floated in June with a value of Kshs. 1 billion. As at the close of the primary offer the government had raised Kshs. 247.8 million, a 24.8% subscription rate.
CDSC and NSE are working with the National Treasury to review the performance of the first two issues and identify areas for improvement, while at the same time looking at the cost structure of the product to ensure that M-Akiba is self sustaining.
CDSC Registrars – our fully owned subsidiary company recorded a decline in profits to a loss of Ksh.7.8 million in 2017 from a profit of Kshs. 1.2 million in 2016, largely attributable to tax provisions made following a tax health check performed in 2017.
In 2016, the Board approved the sale of a 30% stake in CDSC Registrars to Escrow Financial Group. The transaction was concluded in March 2018 and Escrow Group has been given a management contract. We believe this new partnership will hasten the unlocking of the full potential of the registry business, both locally and regionally.
CDSC Guarantee Fund (GF)
The Guarantee Fund was established pursuant to the Central Depositories Rules, 2004, and is governed by the CDSC Operational Rules and the Guarantee Fund Procedures.
In 2016, to segregate the assets of the Guarantee Fund from those of CDSC, the Guarantee Fund was registered as a trust and the process of creation of a board of trustees is currently underway. The main purpose of the Guarantee Fund is to mitigate against settlement failure. All trading participants deposit amounts to the Guarantee Fund based on their trading volumes, which ensures that their settlement obligations are met at all times.
In 2017, the Fund recorded a surplus of Kshs. 76.4 million bringing its total assets to Kshs. 822.7 million compared to Kshs. 746.3 million in 2016.
CDSC’s 2016-2020 strategy is now in its third year of implementation. Key areas of focus are (a) CPMI IOSCO compliance, (b) the implementation of a new technology platform, which will enable the introduction of new products such as securities lending and borrowing and intraday trading, and (c) fulfillment of CDSC’s role under the Capital Markets Master Plan (CMMP), including the single CSD project to create one settlement platform in Kenya to ensure a very efficient and cost effective trading environment for our capital markets.
Risk management has always been a high priority in CDSC but we are significantly upgrading our capability in anticipation of the move into a new operating environment under the new CDS system. This is a key milestone towards achieving recommendations of the CPMI IOSCO Principles for Financial Market Infrastructures, the Capital Markets Master Plan, the regulatory requirements spelt out under the Conduct of Business (Market Intermediaries) Regulations as well as the company’s Strategic Plan.
CDSC conducts regular reviews of her corporate governance practices to ensure adherence to the highest standards. As is the practice since the year 2015, the Board underwent a board evaluation in March 2017 where the overall score was 87%. This was an improvement from the 2016 score of 85%, an indication of the Board’s unwavering commitment to continually serve and steer the company.
Mr. Nkoregamba Mwebesa, who had served the board diligently since 2009, exited at the beginning of 2017, having left SBG Securities to take on a new role as the Managing Director for Stanlib Investments. Mr. Mwebesa represented the Capital Markets Challenge Fund. At the Board Level, his wealth of experience in the financial services sector and his counsel will be greatly missed; He however continues to serve in the Audit Committee and the Finance and Staff Committee. On behalf of the board I wish to express our appreciation to Mr. Mwebesa for his committed service to the board and to further thank him for accepting to continue to serve on our committees.
On behalf of the board, please join me in welcoming Mrs. Aida Kimemia – Nesbitt who has joined the Board as a representative of the Capital Markets Challenge Fund, replacing Mr. Mwebesa. Mrs. Nesbitt is an independent investment professional with a focus on sustainable development in Africa. She has broad experience in corporate finance, project finance, general management and corporate governance, locally and internationally. We look forward to tapping into her extensive experience, skills and knowledge as we work together in the governance and stewardship of CDSC. This also improved the board’s gender diversity putting us on course towards achieving the one-third gender rule that has been widely accepted as best practice for board composition.
In conclusion, as the Chairman, I wish to thank my fellow directors for their effective oversight and counsel throughout the year. On behalf of the board, I would like to extend my gratitude to the management and staff under the stewardship of Mrs. Rose Mambo, the Chief Executive, for their hard work and commitment in creating shareholders value while enhancing our customer experience. We are now a stronger brand because of you, through the combined efforts of board and management. To our customers, partners and stakeholders, we thank you for the confidence you have shown in our systems as we work towards better services and market relevant products.