By JULIUS ALAGBE
The past few years have been rather challenging for Ecobank Transnational Incorporated (ETI), the Pan-African bank’s Holding company with presence in about 36 African countries. Experts say that its travails are self-inflicted and will required a deliberate long term strategy and concerted action to bury the ghost of its past which has continued to haunt its present.
The Ecobank brand scorecard, they said suffered major setback due to lack of transparency in its reporting of the asset quality, poor credit origination and monitoring, leadership squabbles and ambitious acquisition of Oceanic bank.
In the past few years, ETI was exposed to poor corporate governance, turbulent succession plan and a myriad of corporate contradictions that complicated its governance stance which reflected in the internal management of the Group. Its trading performance has been on a constant slide over the past few years pointing to a persisting challenge it is yet to completely overcome. With total assets that closed financial year 2018 at N8.223 trillion or $22.582 billion there is a monster the new team is yet to be able to tame – high cost to income.
At the end of financial year 2018, the group cost to income ratio settled at 61.5% compare with 61.8% in 2017. Though, it declined but slow when compare with size of the group balance sheets and operational performance. What this means is that the group is burning more than 61% of its revenue to settled operational overheads. This make the profit conversion, which is the amount of the earnings that the group was able to convert to profit or free cash flow.
But the new management team is upturning the past anomalies in the administration of the bank and the numbers have started coming up. In June, 2018 Moody’s assigned B2 first time issuer rating on ETI, reflecting increased confidence at the time. There have been signs of commitment to improve profitability, and boost investors’ perception of the bank and consequently improve shareholder value.
Mr. Ade Ayeyemi, the Group Chief Executive Officer said, “Our financial performance in 2018 was remarkable in many ways and reflected the meaningful and significant progress that we have made against the priorities that we set in our ‘Roadmap to Leadership’ strategy.
Moody, an international agency, observed that the ratings reflected the Group’s stable funding and liquidity profile, expansive geographic and business diversification, aswellas recovering profitability.
“These strengths are balanced against the Group’s high – but potentially moderating – asset risks and modest capital buffers, which are largely legacy issues that the bank’s new management is pro-actively addressing as part of a broader strategic plan. The new strategy also introduces digitalization and cost-cutting initiatives.
CardinalStone Partners noted that following the economic down-turn that exposed the weakness of the Group, ETI’s management has shown resolve to strategically reposition the Group for profitability.
A year ago, Moody said the ratings reflected ETI’s deposit-based funding structure with customer deposits accounting for 71% of total assets as of June 2018, and with limited reliance on riskier short-term market funding. ETI’s deposits have historically proved stable, while the bank also has access to longer-duration market funding, which helps to support its liquidity management and better match the duration of its assets and liabilities.
At the end of financial year 2018, deposits from customers increased by $733 million, or 5%, to $15.936 billion. This was excluding the impact of FX translation, deposits increased by $2.0 billion. The increase was driven by Corporate and Investment Bank and Commercial Bank, where deposit growth was driven by strong customer engagements especially through digital products and channel offerings.
Earnings on the rise
In 2018, the Group recorded a significant improvement in its earnings generating capacity, supported by the new management team’s focused strategy and reorganisation initiatives that have led to cost cutting and lower provisioning requirements.
Adeyemi said; “We delivered a 51% growth in profit before tax to $436 million and generated a return on tangible equity of 21%. Our cost-of-risk of 2.4% was an improvement on 2017 and demonstrated the progress that we have made addressing credit quality issues and enhancing internal control processes”.
Analysis of the Group’s financials shows that profit for the year surged to N102.168 billion in 2018 as against N69.9 billion in 2017. It was also observed that non-interest income accounts for significant chunk of the its revenue pattern which seems to have been sustained. In dollar terms, net interest income at the Group level declined by 5% but the effect was managed with 5% increase recorded in non-interest income year on year.
This resulted from massive investment at the digital front, as ETI is up-scaling with strong investment in digital infrastructures to enhance service delivery and increase profitability.
In the results presentation document, the Group CEO said; “we continued to invest in the technology platforms to accelerate our shift from ‘physical’ to ‘digital’ and we are supporting our customers with digitally innovative products to enrich their engagements with Ecobank.
To meet a key goal of expanding financial services to the unbanked, we have increased the number of Xpress Points, our agency network, to about 14,000 and we plan to grow this number. Our cash management and trade finance products, such as, Omni and e-Trade, are providing our customers with the convenience and efficiency of executing their cross-border transactions across Africa”, he added.
Strong low cost deposits base has continued to impact the Group. The financials showed that the Group cost of funds at the end of financial year 2018 rested at 3.2%. This was as a result of low cost deposits mix which accounts for some 70% of the group total deposits.
Analysts also think there is improvement in risk management and credit monitoring since the new management took over the group. Apart from investment in infrastructure that would provide earnings sources for it, quality of reporting has significantly improved as well.#“We note that there is significant improvement in transparency given the quality of reporting in 2016 performance and the presentation on its investors call. In addition, management intends to commence a half year audit of its financial statements which we believe will significantly improve confidence”, Cardinalstone partners noted.
But with ETI reporting currency in the U.S. dollar, the high volatility of many African currencies due to the region’s economic dependence on commodities will continue to affect stability and predictability of earnings, CardinalStone Partners stated.
Management transfers legacy loans to SPV
As part of efforts to clean the house, CardinalStone stated that prior to the release of its financial results in 2016, ETI’s transferred cumulative impairment charges on bad loans which was aboutN282 billion, and its Nigeria loan portfolio has contributed about 76%to total impairments.
The special purpose vehicle, SPV, was expected to recover the total legacy loan portfolio worth $780 million. The portfolio was made up of impaired credit assets inherited from Oceanic Bank as well as other delinquent assets impaired as a result of the ongoing FX crisis and poor due diligence at origination.
In 2016, CardinalStone analysts noted that, of the $780 million legacy loans, ETI provided for $517 million of which $400million was completely written off.
Between 2013 and 2017,
In financial year 2013, ETI’s cost of funds was 3.1%, and then it moved up to 3.4% at the end of financial year 2014. Meanwhile, the Group’s cost to income ratio was 70.1% in 2013 before it was brought down to 65.4% in 2014.
On every share ranked for dividend, ETI earned N4.12 in 2014.This means that the Group has been accessing cheap funding, derived from its ballooned deposits but the its operations have been burning more cash as reflected in high cost to income ratio.
Then ETI’s shareholders fund increased by more than 255% between 2013 and 2014 on the back of shareholders confidence for strong stream of earnings. Then, return on average equity closed financial year 2014 at 20.18%. Group total assets rested at N4.5 trillion, having expanded by more than 25% from N3.599 trillion in 2013. Of the N4.008 trillion total liabilities in 2014, total deposits accounted for N3.513 trillion.
In 2015, the parent company blew an alarm. Ecobank Transnational Incorporated (ETI), parent company of the Ecobank Group released a statement which stated that profit for the year ended 2015, was expected to be materially lower than expected. In 2015, ETI recorded cost to income ratio that settled at 63.9% before it moderated at 61.1% in 2016 the same time when cost of funds berthed at 3.2%.
Total deposits moved from N3.559 trillion in 2015 to N4.773 trillion in 2016. From N502.9 billion in shareholders, the group recorded a 7% upsurge which shifted total equity size to N538 billion in 2016.Infinancial year 2016, the group had total assets worth N6.255 trillion, having expanded by more than 33% year on year from N4.694 trillion.
In financial year 2018,
ETI earned N5.57 on every share ranked for dividend in 2018 as against N3.81 in 2017. That represents 45.97% year on year raise. Its price to earnings ratio receded to 2.37 times from 4.71 times in 2017
The Group’s total assets expanded by 19.81% from N6.864 trillion in 2017 to N8.223 trillion at the end of financial year 2018; the total liabilities jerked up by 22.01%, thereby outpaced the growth in total assets.
The Pan-African bank holdings’ shareholders fund went down marginally to N660.073 billion from N664.657 billion in the preceding year. Its gross earnings rested at N773.338 billion in the financial year 2018. This was 1.27% above N763.633 billion it earned in 2017.
But, its interest earnings assets yielded lower in 2018 compare with the amount raked in at the end of financial year 2017. The numbers showed that ETI’s interest income was N475.144 billion followed a 1.21% drop against N480.94 billion in 2017.
Meanwhile, interest expenses rose 2.47% from N181.617 billion to N186.105 billion. This means that while it costs ETI N37.76 on every N100 income generated from interest earnings assets in 2017, the year 2018 saw an increase to N39.17.
At the operational level, the Group was able to reduce operating expenses on the back of reduction in numbers of member of staffs on its payroll in 2018. The analysis shows that operating expenses declined by 1%, to $1.123 billion. Excluding the impact of FX translation, expenses were flat.
Meanwhile, costs associated with systems development and head office investments led to a 2% increase in depreciation and amortisation expense. Other operating expenses decreased by 2%, driven by lower expenses from rent and utilities and insurance.
Overall, the decrease in operating expenses reflected the accrued benefits from the restructuring exercises in the last two years. The cost-to-income ratio, as a result, improved to 61.5% from 61.8% in 2017, despite slower revenue growth.
Meristem Securities Limited noted that the bank’s cash management services across its West African wide coverage remains a key driver of income and the analysts expect this to continue in 2019. The firm also expects to see an increase in interest income owing to the significant loan growth of 30.12% in the fourth quarter of 2018; hence, it projected loan growth of 3.20%.
The Securities firm noted that with regards to interest income, non-interest income and gross earnings, and projected growth of 10.94%, 11.05% and, thus, 10.72% respectively. The results showed that lower asset yield pressures net interest margin, as yield declined from 6.20% to 5.90% in 2018, mainly due to the lower yield on earnings assets across the Nigerian environment and the switch of asset blends towards investment in securities as against loans.
In 2018, operating expenses grew moderately by 0.72%, while impairment charges declined considerably by 34.87%, owing to the impairment write-backs of about 318.75 million. Like its peers in the industry, Ecobank is still bearish on lending. Most big balance banks leveraged on high yield environment to shored up performance in 2018. The Group recorded a decline in loan amount. The numbers showed that net loans and advances to customers berthed at $9.167 billion, which means it receded by 2%.
But, compared with the apex bank benchmark, non-performing loan ratio declined to 9.6% from 10.7% in 2017. This means that about 10% of the Group gross loans is exposed to default.
In presenting its financial statement the Group moved away from using the CBN Official Rate N306 and instead adopted NAFEX rate N364 for translating its financial statement. Analysts said that what this means is that the Group financial statement would be volatile; as adjustment at NAFEX would result to either gain or loss in financial statement translation.
ETI is expecting its operating income to remain flat in 2019 as the Group seeks to achieve moderation in cost to income ratio with 62% as target. The management also expects to grow profit before tax by 8% maximum and remains focus at improving assets quality. Thus, NPL ratio target for 2019 is pegged between 8% and 10%.