Pan African financial powerhouse, Ecobank Transnational Incorporation’s (ETI) first half of the year 2019 is a mixed bag, and perhaps the confusing exchange rate regime in the country is the major culprit.

On the one hand, the bank recorded an up-tick performance in Naira terms with profit surging by 5% on the back of 11% increase in its gross earnings. However, in terms of dollar performance, the same result shows that all the line items in the financial statement nose-dived year-on-year, thus keeping the users of its financial statement at the mercy of their interpretation

Meanwhile, the management expects to grow profit before tax by 8% maximum and remains focused on improving assets quality. Non-performing loans (NPL) ratio target for 2019 is pegged between 8% and 10%, which is somewhat double of 5% industry’s benchmark.

The Group has the lowest cost of funds in the banking sector. At the end of the first half, its cost of funds was at 2.9%. This feat was achieved on the back of high customer deposit as a proportion of financing mix. But the size and geographical dispersion douse all the related advantages given the weight of its cost to income ratio on overall performance.

In 2019, Ecobank expects its operating income to remain flat as the Group seeks to achieve moderation in cost to income ratio with 62% as target. But at the end of the first half of the year, cost to income ratio settled at 66.4%. This underperformed by analysts estimateso, and even the Group’s guideline for the year now seems like a tall order.

Furthermore, due to its structure, ETI prepares its financial statement in USD as well as in Naira, and there appears to be an imbalance in translation between the local currency and in dollar terms. While Ecobank financial statement in Naira showed an uptick trend, its dollar translation portrayed that the Pan-African brand’s performance plunged in the first half of 2019.

ETI moved away from using the CBN Official Rate of N306 and instead adopted the Nigerian Foreign Exchange Autonomous Rate Fixing (NAFEX) at N364 for translating its financial statement. This means that the Group’s financial statements would be volatile as adjustments at NAFEX would result to either gain or loss in financial statement translation.

“We have a situation where a listed company chose higher FX rate to translate financial statement. Obviously, there seems to be no rule against that but it is tantamount to overstating the statement of financial position should NAFEX rate, which is expected to be more volatile compared with CBN rate, changes,” said a financial analyst.

The impact of the choice on the statement of the financial statement is material, such that it could be largely a tool for hiding the fair value of the bank’s financial position. By simulation, if ETI adopts the CBN rate, then its balance sheet size would shrink by about 19% -which is the difference between official rate and NAFEX.”

In the first half of 2019, ETI’s financial statement shows that gross earnings closed at N405.201 billion as against N384.588 billion in the comparable period in 2018. The trend shows a 5% rise between the periods but if one has to look at it in dollar term, the Pan-Africa financial service operators’ gross income slipped by 11%.

Operating profit before impairment losses slide 11%, from N106.187 billion in the first half of 2018 to N94.11 billion in 2019. Again, in dollar terms, operating profit went down by 25% between the periods. Overall, ETI recorded profit before tax of N73.433 billion in the first half of 2019. This represents 13% uptick from N65.099 billion recorded in 2018.

The narrative around the performance where the two different currencies used to prepare the financial statement cast doubts on the true state of its financial performance.

Meanwhile, total assets of the Group went down both ways, irrespective of choice made between naira and dollar.

In the period, ETI total assets pitched at N8.086 trillion as against N8.223 trillion at the beginning of the year. In dollar value, total assets went down marginally, from $22.582 billion to $22.435 billion.

Customer deposits increased marginally. In the first half, deposits closed the period at N5.832 trillion as against N5.803 trillion at the beginning of the period.

ETI’s total loans and advances to customers went down 6% from N3.339 trillion at the beginning of the year to N3.15 trillion at the end of the first half in 2019.

Shareholders’ fund slightly went down from N660.073 billion to N651.316 billion at the end of the period.
The struggle against rising cost
Historical trend has shown that banks often resort to downsizing whenever the numbers fail to add up.

Ecobank Nigerian recently laid-off 1,500 staff and thereby reducing its payroll value. The Group’s operating expenses had ballooned in recent times, and elevated personnel cost has been one of the key drivers. Unfortunately, fat cats were least affected in the mini-restructuring, while contracts staffers were primary target.

It has been alleged that vested interest in the bank pulled plug on the battalion of contracts staffers to pave way for certain interests connected to the Managing Director to take over outsourcing contracts.

For reckoning, the past few years have been so challenging for ETI, Pan-African bank’s holding company with presence in about 36 African countries. Analysts are of the view that Ecobank brand scorecard was hard hit due to lack of transparency in its reporting of the asset quality, poor credit origination and monitoring.

In the past few years, ETI was exposed to poor corporate governance, succession planning and myriad of corporate contradictions that complicated its governance stance as found in the internal management of the Group with total assets that closed financial year 2018 at N8.223 trillion or $22.582 billion.
Cost to income ratio settled at 61.5% in 2018 as against 61.8% in 2017. Though, it declined but slow down when compared with the size of the Group’s 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 makes the profit conversion, which is the amount of the earnings that the Group was able to convert to profit or free cash flow, low.

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 reflect the group’s stable funding and liquidity profile, expansive geographic and business diversification, 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 reflect ETI’s deposit-based funding structure, noted that customer deposits accounted for 71% of total assets as of June 2018, and with limited reliance on riskier short-term market funding.

ETI’s deposits have historically been stable, while the bank also has access to longer-duration market funding, which helps support its liquidity management and better match the duration of its assets and liabilities.

At the end of end of financial year 2018, deposits from customers increased by $733 million, or 5%, to $15.936 billion. This, excluding the impact of FX translation, deposits increased by $2 billion.

The increase was driven by Corporate and Investment Bank and Commercial Bank, where deposits growth was driven by strong customer engagements especially through digital products and channel offerings.

Earnings trend

In 2018, the group recorded a significant improvement in its earnings generating capacity, supported by the new management team’s focus strategy and reorganisation initiatives that have led to cost cutting and lower provisioning requirements.

Ayeyemi 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.

This occurred as a result of massive investment at the digital front, as ETI is 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 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 account 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 the group, quality of reporting has significantly improved as well.

We note that the significant improvements 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 US 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.
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 total assets expanded 19.81% from N6.864 trillion in 2017 to N8.223 trillion at the end of financial year 2018. The group total liabilities which 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 the group 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 cost 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.

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.