ETI: Walking A Tight Rope; Earnings Down As Continental Headwinds Persist


Sunday, November 03, 2019 /07:50AM / Teslim Shitta-Bey, Managing Editor/ Header Image Credit: Proshare


Ecobank Transnational Incorporated (ETI) has had a mixed season in 2019, an apparent fallout from operational challenges endured in 2018.  The bank has sorted out the problems associated with its interpretation of the International Financial Reporting Standard (IFRS) rule 9 concerning the treatment of its impaired loans and it has, fortunately, adopted the use of the IEFX rate of N360/$ rather than the official rate of N307/$, for the translation of its financial performance. However, in the currency of report (US dollar) the banks gross earnings dipped by 10% and its 9 months after tax profit fell by 12% in September 2019.


Income Statement

  • Gross earnings fell -10%, indicating a marginal reduction in continent-wide income especially a fall in business activities in its local Nigerian subsidiary
  • Profit after tax (PAT) slumped -12%, as net interest income dropped by -23% (even though staff costs fell by -5%) and other operating expenses equally fell by -12%       
  • Impairment losses declined as loan asset quality improved between 2018 and 2019; impairment provisions fell from N275.12bn in September 2018 to N185.04bn in September 2019, representing a fall of -32.74%
  • Interest Income slumped -5% from $364.20bn in September 2018 to $347.57bn in September 2019
  • Interest expense climbed +20% from $140.69bn in September 2018 to $169.34bn in September 2019, the sharp rise in Interest expense relative to the decline in Interest income squeezed profits in the groups underlying operations
  • Net Interest Income dipped -20% as Interest income fell and Interest expenses went up, the consequence was felt in the banking group's bottom line as profit after tax (PAT) fell by -33% from $78.54bn in September 2018 to $52.76bn in September 2019


Statement of Financial Position

  • Loans and advances to customers fell from $9.17bn in the 9 months to September 2018 to $8.69bn in 9 months to September 2019 or by -5.23%.  The fall came at a time the Central Bank of Nigeria (CBN) issued a policy circular that stated that deposit money banks in Nigeria maintain a loan to deposit ratio (LDR) of 60% (which has now been raised to 65% by December 2019). On the bright side ETI's continental diversity has tempered the impact of the new CBN LDR rule on the group's statement of financial position, but on a darker Ecobank Nigeria side, the new CBN Rule may adversely affect the local bank's cash reserve ratio (CRR) and bottom line.
  • The group held a high position in fixed income assets such as treasuries between 2018 and 2019, but with T-bills falling from $1.83bn in 9 months 2018 to $1.446bn in 9 months 2019, representing a fall of -20.77%. Apparently, the group decided to reshuffle its assets portfolio to enhance income, albeit at higher group portfolio risk.
  • Deposits from customers over the period September 2018 to September 2019 remained flat. Deposits fell from $15.95bn in September 2018 to $15.56bn in September 2019, representing a slump of -2.45%. For group operations this may not have adverse consequences, especially for its Nigerian operations as a decline in deposit at a time of reduced lending would temper the decline in the LDR.  
  • Year-on-Year (Y-o-Y) the groups retirement benefit obligations have spiraled by rising from $3.89m in September 2018 to $37.65m in September 2019, reflecting a rise of +867.87%. The rise in obligations may suggest a policy of early retirement (in Nigeria) or a gradual reduction in the size of senior staff also in Nigeria which has for some years been struggling with operating costs.


Struggling With The Profit Engine

ETI's profit engine is purring, but on a low key. Profit before tax declined by -4% on a reported annual basis (although it climbed +49% in terms of constant currency). The fall in pre-tax profit indicates that in the currency of reporting (US dollars) the banking Group is finding it difficult to push up interest income as a proportion of gross earnings, hence lowering its bottom line. The low relative interest income could equally reflect the minimalist growth in loans and advances across its subsidiaries as loans to customers by September 2019 was $8.7bn or up +1% from the contemporary period of 2018 (in constant currency terms loans and advances over the period rose by +14%).

The Holdco's Operating profit before impairment losses & taxation was $138m or what amounted to a fall of -26% from the previous year. Improved impairments of $90m and a $54m increase in recoveries of previously written-off loans improved impairments by $144m. Nevertheless, this was not enough to allow for a needed growth in profit, PBT still fell by $11m.

Country specific challenges also dented the Group's performance, for example, The Public Accountants and Auditors Board (PAAB) on 11 October, 2019 noted that the economy of Zimbabwe was showing characteristics that would require the application of the Financial Reporting in Hyperinflationary Economies Standard (IAS 29). This would have significant impact on the financial results of Ecobank Zimbabwe. The potential impact of IAS 39 on the Group's results as of 30 September 2019, could not be determined accurately, due to the scarcity of reliable locally published official data (the accounting adjustments for IAS provisions will have major adverse consequences for results in Q4 2019)"

A further struggle with ETI's report is that it does not appear to be in strict compliance with Financial Reporting Council (FRC) Rule 8 that states, " shall also disclose, as part of that supplementary information, the exchange rates applied in translating its assets, liabilities, income and expenses for the period". Admittedly, ETI has improved its reporting quality by using the IEFX rate rather than the official rate in Nigeria, but clarity over the translation rates for other African jurisdictions would have proven useful, especially since the Cedi and Francophone CEFA have witnessed decline in value against the United States dollar over the 9 months 2019. ETI managers, however, believe that the Group is in compliance with FRC rule 8, according to a ranking official of the Group, "Yes we are compliant with FRC rule 8 and IAS 21. For ETI holding company, our functional currency is USD. Capital injection is done into affiliates in USD, dividends from affiliates to the holding company is in USD, management fees to Holdco is in USD, Holdco pays dividend to the ETI shareholders in USD, etc. So, our functional currency is appropriate to be in USD"

Part of the translation problem appears to be the fact that ETI operates in more than 36 African countries with 20 functional currencies, suggesting a cornucopia of exchange rates. Nigeria contributed virtually nothing to profitability and so the Naira would be of minimal consideration in the Group's profit calculation for the period (see table 1 below).

 Table 1 ETI: Contribution of Countries to PBT 9 Months

Profit Before Tax

                                                                              US $                                              %

UEMOA (Francophone West Africa)






AWA (Anglophone West Africa)



CESA (Central, East and South Africa)






Ecobank Group



Source: ETI 9 months 2019 Financial Statement

In the notes to the September 2019 financials the Group observes that "... The net pre-tax loss of $130m reported under "ETI & Others" largely comprises of net interest and fee expense of $61m and operating expenses of $34m, both from running the Holdco" It appears that the Holdco structure of the Group runs an expensive operating model that inhibits earnings growth. The Group has found it difficult to grow pre-tax earnings since 2014.

In ETI's June 2019 H1 investor presentation, the following guidance was given in USD terms NOT in constant currency numbers. Only 3 of the targets were met by the Group's operations in September 2019 based on January 2019 assumptions (revisions were made in June 2019).

Clearly Ecobank Nigeria has dragged down the Group's overall performance, but the impact has been moderated by the gradual reduction in the size of the Nigerian operation to the Groups overall continental activities, the Nigeria operations are about a fifth of the Group's total activities in 2019 (See illustration 1 below).


Illustration 1 Ecobank Nigeria Competitive Transition in Group Activity

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Impairments: Understanding the Arithmetic

A tough part of ETI's 9 months ended September 2019 financial statement is manoeuvering through the arithmetic of its loan impairment consideration and non-performing loans (NPLs) (see illustration 2 below).  

Illustration 2 ETI's Loan Impairment Arithmetic 2016-2018

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An area that may need further clarification is that of bad debts and impairments. The NPL ratio for Nigeria deteriorated from 8.8% in 2018 to 14.8% in 2019. The Group experienced a rise in its credit losses from $636m in 2018 to $658m in 2019, or what amounted to an upward drift of +3.46%.

On enquiry to the Group's financial bosses it was noted that, "ETI's performance is in USD, while underlying operating cash flows are in local currencies. Hence, the reported USD results of ETI include the impact of the depreciation of our various local currencies against USD. This is the primary reason why we also show our results in constant currency so that the market can see the underlying performance growth in our business.

For example, in 2019, we have witnessed depreciation in our key currencies (CFA and Ghana Cedi) against USD"

In response to Proshare's request for further clarification on movements in the Group's NPLs, executives explained that, "our NPL ratio went up Q-o-Q to 9.9%. Although, still within our market guidance for 2019, we are not satisfied at this current level. The growth in our NPL ratio is primarily due to our relatively flat gross loan book, hence any loan classification puts pressure on the ratio. We saw some few loans classified to Stage 3 bucket in Nigeria and a few other countries."

The increase in impairments in Q3 is primarily coming from our Francophone West Africa region as we continue to regularly examine our portfolio".


Handling The Asset Business

Generally, slow trade growth across the African continent with the exception of Ghana and Cote D'Ivoire in West Africa and a number of East and Central African economies, have tied a noose around the Group's loans and advances as lending activity slowed down majorly in the first 9 months of 2019 with loans and advances to customers slumping from $9.17bn in September 2018 to $8.69bn in September 2019, representing a -5.23% tumble Y-o-Y. Customer deposits equally fell by -2.38% from $15.94bn in 9 months 2018 to $15.56bn in 9 months 2019. The Group's loans to deposits ratio, LDR, fell from 57.53% in September 2018 to 55.85% in September 2019, the decline has not troubled ETI bosses because less than a quarter of the Group's business (20%) is located in Nigeria where the Central Bank (CBN) has imposed a minimum LDR requirement for banks of 65% by December 2019.   


Chart 1 Loan-To-Deposit Ratio (LDR) of Selected Nigerian Banks H1 2019

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Source: Selected H1 Financial Statements of Banks in Nigeria

Liquidity Not A Challenge

The continental banking Group remains adequately liquid with a liquid asset to total assets ratio of 68.16% in September 2019 (after deductions for 50% of loans, quasi-fixed and fixed assets for the 9 months) compared to the liquidity ratio of 69.78% in the contemporary period of 2018 (Proshare's calculations are a rough-and-ready indicative ratio which assumes that half of the Group's risk assets are difficult to recover within a period of a year).

The Debt-Equity Balance

ETI has had equity growth concerns as it struggles to increase dollar earnings, a challenge seen in its slow equity growth. Indeed, the Group's capital adequacy ratio has fallen between 2017 and 2018 and is expected to fall moderately further in 2019 on the back of current equity and risk asset positions (see Table 2 and chart 2 below).  Raising fresh equity may be a major strategic imperative going forward, even though this may be at the cost of return on Equity (ROE) in the short term. The Group increased the size of equity of its Nigerian Ecobank subsidiary by $56m in 2018, but the parlous shape of the economy and the need to meet the new CBN LDR requirement may require injection of more equity. The fresh equity option may not be too attractive considering an NPL ratio for 9 months 2019 of 9.9% but the alternative of lower profit numbers is no less undesirable.

Table 2 ETI: Ratio Analysis 2017-2018

Ecobank (ETI)




Cost of Risk



Capital Adequacy Ratio



Liquidity Ratio






NPL Ratio



Chart 2 Debt-Equity Ratio of Selected Banks H1 2019

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Source: Financial Statements of Selected Nigerian Banks H1 2019

Guidance Concerns

The Groups guidance numbers set at the beginning of the year 2019 proved to be optimistic (see illustration 3 below)

Illustration 3 ETI Guidance Performance for Q3 2019

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The Holdco revised the expected performance outcomes by H1 2019 to meet the more valid outlook for respective continental banking subsidiaries given the slower-than- expected growth in global and African economies (Nigeria saw its GDP grow by 1.94% in H1 2019) (see ETI H1 Performance Guidance revision in Illustration 4 below).

Illustration 4 ETI Revised (H1 2019) Guidance Performance for Q3 2019

Proshare Nigeria Pvt. Ltd.

Executives of the bank insist that, "When these KPIs are benchmarked to the Constant Currency numbers, our September 2019 results are broadly within range. Except our cost-to-income ratio (CIR) and RoA which are outside range. We expect these to improve in Q4"

Reworking the Model

Analysts note that with pressure in its Francophone operations generally and with Nigeria proving to be a sick child of the Group, the Holdco may need to revise strategy and begin to sift through details of its scale and operating expenses (OPEX) across markets to achieve optimal operational efficiency.


The Group has proven strong in market presence across the continent, despite slow continental GDP growth. The Holdco has in 9 months 2019 reduced its cost of risk (CoR) placing it in a position to provide credit at competitive rates limiting default risk. Lending has been flat but as long as non-performing loans (NPLs) stay moderate, this is not a bad outcome. 


ETI has major work throughs to embark upon in respect of costs (OPEX) and credit and deposit generation. The underlying challenges with its net interest income in US dollar terms require new thinking. If the group is to grow organically in a sustainable manner both loans and deposits need to rise.


The Holdco's ability to hedge country-specific risk by continental diversification of assets is a major competitive opportunity and the Group needs to see how it can optimize regional borrowing costs by arbitraging across alternative deposit markets. The risk algorithms may be slightly complex but they are not insurmountable. Optimizing lending processes market-by-market would create unusual competitive advantage.


 A slow growing global economy with major tense economic touch points (China-US trade conflict, China Hong-Kong Sovereignty Conflict, Eurozone tension over Brexit and a myriad of other global political and economic flash points) have had the effect of muting bank performances worldwide. Contagion of sluggish growth in Europe, Asia and America on African economies has posed a problem for ETI as both lending and deposit growth rates have been pretty flat in the course of the year. Problems with the weak growth of the Nigerian and Francophone economies have added a further layer of threat to ETI's gross earnings and pre-tax profits for 2019. 


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Both ETI's top and bottom lines were weak in the reporting currency of US dollars in September 2019, but the Group is not taking its modest income statement arms folded. The Group is re-engineering to improve efficiency at lower cost to reduce its cost-to- income ratio (CIR) and retool the workforce for an increasingly digital future. How well the efforts pan out would be a matter for review in Q4 2019.


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9.     ETI Declares N59.49bn PAT in Q2 2019 Results, (SP: N9.00k)

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11.   Ecobank Hosted by London Stock Exchange after Successful $500m Eurobond Issuance

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13.  Ecobank Bags Most Admired Financial Services Brand in Africa

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15.  ETI Issues a 5-Year $50m Senior Unsecured Bond Offering

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17.  ETI Declares N29.66bn PAT in Q1 2019 Results,(SP:N10.45k)

18. ETI Announces Board Changes:Appoints Dr. Aasim Qureshi; Mr. Al Khalifa and Dr. Daniel Matjila Depart

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