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Stock & Analyst Updates | |
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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-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
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
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
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
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
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
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
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.
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