· Ecobank Transnational Incorporated (ETI) reported results for the 3 months to March 2012 which showed 58% YoY growth in turnover to ~N71.2bn. However, PBT and PAT came in at ~N7.9bn and N5.6bn, indicating YoY declines of 10% each way.
Volumes and pricing jointly drive revenue growth
· Higher interest rates relative to Q1 2011 as well as the significant balance sheet expansion from the Oceanic acquisition combined to drive the strong revenue growth. Interest income rose 93% YoY to N52.2 billion largely driven by a 48% growth in loan book as well as increased holdings of government securities.
·Non-interest income also rose 37% to N24.6 billion, supported by a 46% rise in fee & commission income. However, trading income was a drag on non-interest growth, rising a moderate 8% to N6.5 billion.
Funding costs rise
· Higher rates also impacted on interest expense which doubled to N19.6 billion. Higher volumes also played a role as deposits rose 50% to N2.1 trillion. Average funding costs rose to 3.4% by our estimates, a 120bps deterioration from 2.2% as at December 2011.
· Nevertheless, ETI continues to reduce its interbank takings, cutting back by a further 43% QoQ to N85 billion, after a 50% shrinkage post-acquisition.
Opex and provisioning jump
· ETI reported opex of N46.2 billion, 4% ahead of our estimates on an annualized basis. This represents an 84% jump which management has linked to Oceanic bank acquisition costs. Consequently, cost-to-income ratio worsened, rising 11ppt QoQ to 81%. Furthermore, provisions jumped 74% ~N3.2 billion and we believe this relates to loan losses.
·The adverse movement in operating costs and impairment charges were primarily responsible for the weak bottom line performance. According to management, in spite of significant revenue growth, profitability was “negatively impacted by Oceanic Bank restructuring costs and adverse currency effects.”
Outlook remains bright
·We expect revenue growth to remain strong as ETI’s ability to tap into growth opportunities has been enhanced by recent capital injection. Furthermore, we expect the increasing contributions from the Oceanic acquisition to help sustain Q1 growth rates going forward.
·Although funding costs worsened moderately from FY 2011, we think this largely reflects a reversal of the disproportionate consolidation impact on balance sheet relative to income statement in 2011 results. More importantly, in light of sustained efforts to reduce the erstwhile Oceanic’s dependence on the interbank market, we are optimistic that expected funding synergies will materialize on the back of improved operational integration as well as enhanced ability to gather low cost deposits as confidence rebuilds in its Nigerian operations.
·Similarly, we are not unduly concerned by the jump in opex having noted in our FY note that Q1 2012 results could be adversely impacted by restructuring charges during the period. However, this should moderate going forward, and supported by efficiency initiatives, we expect CIR to improve over the course of the year to 75%, which nonetheless remains high relative to Tier 1 peers.
·Overall, we believe our expectations for improved profitability in 2012 are on track for realisation. Although interest and non-interest income currently track 3% and 6% below our estimates, we expect increasing contribution from Oceanic to help ETI meet our FY revenue target even as operating costs are streamlined.
Valuation appears attractive
· ETI trades at current PE of 4.4x and P/Bv of 0.6x compared to industry averages of 11x and 1x, respectively. ETI also traded at 5 x forward 2012 PE and we find these valuation metrics attractive.
At current price of N11.2, ETI retains significant 52% upside potential relative to our fair value estimate of N17.03. Consequently, we retain a BUY rating on the stock.
ARM ratings and recommendations ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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