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ETI H1 2020 Results: COVID-19 Takes a Mild Toll

Stock & Analyst Updates	2273 VIEWS
Stock & Analyst Updates
2273 VIEWS

Tuesday, August 04, 2020, / 07:05 PM / By ThAnalyst / Header Image Credit: @GroupEcobank

ETI elbowed into 2020 with major expectations for lending and deposits. The Group beat analyst's forecast of a slowing of loan asset growth and deposit liabilities, as the COVID-19 pandemic disrupted revenue streams and supply chain networks of the deposit money banking Group's (DMBG's) corporate customers in H1 2020. Nevertheless, the virus hurt the Group's profits, as it posted a fall in pretax earnings from N73.43bn in Q2 2019 to N64.13bn in Q2 2020.

Key Highlights

Gross Earnings declined by -3.3% to N392bn from N405bn in the previous quarter. The fall in gross earnings was caused by a general slow down in economic activities as full lockdowns in major commercial and industrial parts of the African sub-region from March 2020 caused a fall in the Group's revenues.
Profit before tax (PBT) declined by -12.7% to N64bn. PBT tumbled as revenues caved and costs fell slower than revenue lines. The banking industry in 2020 has been under severe pressure as customers find themselves in deep cash flow waters as operating cash flows shrink with declining capital expenditure (CAPEX). Although banks have seen cost-to-income ratios (CIR) fall marginally as a result of a slide in operating expenses (OPEX); the fall in OPEX has been slower than revenue declines between Q1 and Q2 2020 and between H1 2019 and H1 2020.
Profit after tax (PAT) declined by -18.4% to N48.5bn. The decline in PAT mirrored the dip in PBT.
Net Assets grew by +8% from N688bn to N743bn. Faster lending despite the coronavirus pandemic has pushed net assets up but this could have important implications for non-performing Loans (NPLs) as new loans could face restrictive earnings opportunities for corporates in 2020.

Gross Earnings-Tanking on A Virus Crush

ETI's gross earnings were mildly affected by the COVID-19 pandemic, as its gross earnings declined by -3.3%. Its gross earnings declined from N405.2bn in Q2 2019 to N392.01bn in Q2 2020 (see Chart 1).

Chart 1: ETI Gross Earnings Q2 2016- Q2 2020

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Source: ETI Financial Results, Proshare Research

PBT Drop- Bad Loans But Worse Headaches

ETI's PBT was not spared from the adverse effect of the coronavirus. Its PBT declined by -13%. PBT dropped from N73.43bn in Q2 2019 to N64.13bn in Q2 2020. A major drag on PBT was an increase in net impairment loss on loans and advances which grew by +151.52% rising from US$33m in H1 2019 to US$83m in H1 2020(see Chart 2). The Group's cost of risk (CoR) rose from 0.9% in H1 2019 to 1.9% in H1 2020 suggesting increased corporate vulnerability to poor quality loans and advances (the Group's non-performing loans (NPLs) ratio was 9.8% in H1 2020 as against 9.7% in H1 2019).

It must be noted that the Group's gross impairment losses on loans declined from US$137m in H1 2019 to US$132m in H1 2020 representing a decline of -4% or when taken into naira terms impairment losses saw a rise of +40% between Q2 2019 and Q2 2020. The Group's impairment losses on total financial assets between Q2 2019 and Q2 2020 rose by +104%.

Chart 2: ETI PBT Q2 2016-Q2 2020

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Source: ETI Financial Results, Proshare Research

ETI's Total Assets-Stepwise growth Vs Side Glances

ETI posted an increase in total assets despite the coronavirus. Its total assets grew by +16.5% between December 2019 and June 2020. Assets floated from N8.06trn in FYE 2019 to N9.39trn in H1 2020 (see Chart 3).

Chart 3: ETI Total Assets Q2 2016-Q2 2020

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Source: ETI Financial Results, Proshare Research

The rise in assets on lower PBT means that the Group has become trapped at smaller returns on assets (ROA), this was 1.1% in H1 2020; an outcome investors may look at with a cautious side glance as they review the bankers return on equity (ROE) with equal foreboding (although at 15.2% in H1 2020 this measure of profitability was impressive). The Group's numbers, however, hide the poor performance of the Group's Nigerian operations with a return on asset of 1.0% in H1 2020 and a return on equity of 4.0% over the same period.

ETI's CIR-Slaying The Cost Monster, Slowly

ETI's cost-to-income ratio declined slightly from 66.4% in H1 2019 to 64.08% in H1 2020. The decline in cost-to-income (CIR) as a result of the rise in its operating income by +4% in H1 2020 and a negligible rise in operating expenses. The rise in operating income could be attributed to the growth in the Group's net interest income by +23% (see Chart 4).

ETI's Nigerian operations recorded the highest CIR in H1 2020 with a CIR of 80.5% compared to the average CIR of other anglophone West African economies (AWA) of 46%.

Chart 4: ETI Cost-to-income ratio

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Source: ETI Financial Results, Proshare Research

ETI's Impairment Losses-Fixing The Loan Book

ETI recorded a significant rise in its impairment losses as a result of business disruptions and revenue losses that came about as a result of the coronavirus pandemic in Q1 and Q2 of 2020. The Group's impairment loss rose by +76.4%. ETI's impairment loss skipped from N20.68bn in H1 2019 to N36.48bn in H1 2020. A plausible reason for the rise in impairment costs could be the increase in provisions by the bank to mitigate future losses that may arise as a result of an inability to recover some loans due to business disruptions caused by the coronavirus (in compliance with IFRS9 rules)(see Chart 5).

Chart 5: ETI Impairment Losses

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Source: ETI Financial Results, Proshare Research

Deposit from Customers- The Stroll To Safety

During a crisis, the volume of bank transactions and activities often dip. Bank customers tend to hold cash and spend more on purchasing essential items rather than saving. The behavioral actions of economic agents represent what has been called a "flight to safety".

Analysts may find it difficult to evaluate the components of ETI's deposits, the increment in its deposits in H1 2020 bucked broad expectations. The financial intermediary reported a one-tenth increase in deposits from customers despite the challenges posed by the coronavirus pandemic on domestic businesses continent-wide. Deposits from customers climbed by +10.81% in H1 2020 over H1 2019. Deposits rose from N5.83trn in H1 2019 to N6.46trn in H1 2020 (see Chart 6).

Chart 6: ETI Deposit from Customers

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Source: ETI Financial Results, Proshare Research

Loans and Advances -Keeping Customers Satisfied

Given several virus-related business challenges particularly, production, distribution and supply chain disruptions, it was expected that banks would become hawkishly conservative with their loan books and clawback lending, but ETI thought differently, as its loans to customers for H1 2020, rose by +5.71%.

Its loans and advances to customers rose by +5.71% in Q2 2020. It rose from N3.15trn in Q2 2019 to N3.33trn in Q2 2020 (see Chart 7).

Chart 7: ETI Loans and Advances to Customers

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Source: ETI Financial Results, Proshare Research

ETI: The Need For A Strategy Rejig

As H1 2020 results of ETI partly reflect the corporate business pains in the year, analysts believe that Q3 2020 may put additional pressure on banks' profit and loss accounts and statements of financial positions but if the virus-related lockdowns are eased within the quarter, Q4 2020 may see a slow but persistent expansion of businesses and bank revenues and profits. The strategy for banks like ETI going forward would be cost containment, differentiation and niche dominance. If ETI achieves this in 2020 it would represent a great feat of corporate reset, so far the forlorn position of the Group's Nigerian operations gives analysts a few sleepless nights (see illustration 1 below).

Illustration 1 Ecobank Nigeria's Three (3) Generic Strategies

As oil price continues to pick up, economic and transaction activities scale back to the pre-COVID levels, analysts believe that the worst-case scenario might be implausible. Even if the good times are not here, disaster is certainly not looming.