ETI 2017 Results In Light Of Guidance From Fitch And PWC On Exchange Rates Per IFRS


Tuesday, 24 April 2018  09.35AM / By FinRep SA / TheAnalyst 

Ecobank (ETI) reported full year earnings for 2017 in NGN and US Dollars. 

US Dollar reporting is of critical importance as ETI is based in Togo and its major shareholders (
Four foreign shareholders make up 68.9% = Nedbank 21.2%, QNB 20.1%, IFC 14.1% and PIC 13.5%) will translate results from ETI using the US Dollar exchange rate. 

Ecobank’s last credit rating review per its investor portal was done by Fitch on August 10, 2017 and rated as B (stable).

Fitch published on February 15, 2018 a report called
Nigerian Banks Plan Market-Based Reporting of FC Exposure”. 

The report makes it very clear that per IFRS it was expected in “discussions with Banks that we rate….” which includes Ecobank that they recommend the NAFEX rate should be used but at the minimum a switch to NIFEX is required for reporting and complying with IFRS. Please see the extract below.

Our discussions with banks that we rate suggest that most will publish their 2017 financial statements based on the Nigerian Foreign Exchange Fixing (NiFEX) rate (about NGN330/USD) instead of the official exchange rate of NGN305/USD, which they previously used. Some may use a blended rate. The NiFEX rate is the Central Bank of Nigeria's reference rate for spot foreign-exchange transactions, widely used on the interbank market 

In our view, the exchange rate used under the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism is the closest to a true market rate. NAFEX was introduced last year and rates are set by market participants, giving investors and exporters a more transparent way to sell FC. NAFEX attracts greater volumes than other exchange mechanisms. The NAFEX exchange rate is about NGN360/USD 

Switching to NiFEX or a blended rate would give a more meaningful representation of banks' FC positions than using the official rate, in our view. But banks would still be translating FC into naira at a rate significantly below the NAFEX rate. We do not expect banks will go further at this stage as every increase in the exchange rate used could lead to a drop in reported regulatory capital ratios, due to inflation of FC risk-weighted assets, even though the impact would be partially offset by FC translation gains.” 

Fitch also further states:
“We found that that the largest banks - Access, FBN Holdings, Guaranty Trust Bank, United Bank for Africa and Zenith - would be able to withstand this scenario without breaching their minimum CAR requirements.” However, second-tier banks had mixed results. Capitalisation is an important ratings differentiator for Nigerian banks, albeit within a narrow rating range. All the ratings are in the highly speculative 'B' range, constrained in most cases by Nigeria's sovereign rating of 'B+'/Negative and our assessment of the operating environment. 

In January 2018 PWC published a report under their current Financial reporting issues “
Accounting considerations for foreign Currency transactions and balances in Nigeria under IFRSs” 

On page 6 they make it very clear that:
The translation of the financial statements of a foreign operation located in Nigeria should be translated at the NIFEX OR NAFEX rate because these are the two applicable rates at which they can remit proceeds from the investment whether from dividends or sale. 

This also applies to any associate, joint venture or branch investments in a foreign operation that 
Entity A might have within Nigeria.” 

It is very clear from the published results from Ecobank that they used the CBN official rates (306 closing for balance sheet and 306.27 average for income statement) and not the NIFEX (330) not the NAFEX (360) rates as per the guidance given and discussed with them by Fitch and the guidelines published by PWC.

In its own press release dated 21 March 2018 for the 2017 results Ecobank acknowledges the impact of using NAFEX rates on equity on page 4:

Total equity of $2.2 billion was 23% higher than in the previous year, driven by the Group’s return to profitability in 2017. The official rate of NGN306 to the US dollar was used in translating the financial results of Ecobank Nigeria. If the NAFEX exchange rate of NGN360 were used, the impact on total equity would be approximately $0.12 billion or 5.5 

It also further states under Nigeria page 7, the positive impact of NAFEX on non-interest revenue but still chooses without validly stating why they are still using the CBN closing rates:

Non-interest revenue was $225 million, a decrease of 15%, or in constant currency, an increase of 2%, primarily driven by income from fixed income and currency trading due to improved liquidity and volumes in the NAFEX window 

In the 2017 AFS page 24 Ecobank translates the share price at NAFEX rates and they CEO speculates on the reasons for its poor market valuation:

ETI’s share price rallied 45% in US dollar terms over the course of 2017, based on NAFEX exchange rates. I believe that this increase partly reflected the market’s confidence in the measures that management is taking to position the firm for growth, and also the growing investor optimism in Africa’s macroeconomic revival. As at the end of December 2017 our market capitalisation of approximately $1.2 billion (Naira share price was converted to US dollar with NAFEX rate) was below our book value of $2.2 billion, clearly at a price multiple lower than book, and a discount to the average multiple of our similarly sized sector peers on the Nigeria Stock Exchange. 

The apparent under valuation of our stock is as much of a concern for the management team as it is for our shareholders. There are many issues that are causing investor concern, creating legitimate reasons for the undervaluation. These could border around asset quality, risks of a capital raise, ownership structure, corporate governance and transparency, and the quality of the management team. Whatever the concerns may be, we know that the best way to create shareholder value is to build a formidable and healthy company. This is exactly what we set out to build in our ‘Roadmap to leadership’ and digitisation strategy. Rest assured that achieving returns above the cost of equity remains central to our strategy

The question here is if NAFEX is the only way to repatriate earnings / Dividends or buy shares then NAFEX rates must be used for reporting purposes.

In the full 2017 Ecobank AFS on page 162, Ecobank acknowledges that a 10% move in the NGN will have 10% or $48m impact on earnings. Using an estimate of the average exchange rate for 2017 using NAVEX the USD exchange rate would be 334 vs. 306 or roughly 9% less on average but 17.6% less on closing rates (360) .

Proshare Nigeria Pvt. Ltd.
Source: Ecobank Annual Reports

In the full AFS for 2017 page 171 also makes no mention under critical accounting estimates, and judgements in applying accounting policies why they chose to use the CBN closing rate and not NAFEX as this is a critical accounting estimate and or judgement.

The PWC guidance on page 9 makes it very clear under disclosures:

“The rate (or rates) used and the implications should be disclosed clearly. The rate (or rates) used might also be a significant accounting judgment as such the basis for such judgment should be disclosed in the financial statements under the ‘significant accounting estimates and judgements’ note”.

1. A LOOK AT CURRENT FINANCIAL REPORTING ISSUES – PWC Jan 2018: Accounting considerations for foreign Currency transactions and balances in Nigeria under IFRSs.

Ecobank Reports Audited FY2017 Profit Before Tax of $288 million – 21 March 2018

Proshare Nigeria Pvt. Ltd.

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