Nedbank’s 2018 Results Preview Ecobank Expectations; Cue Waiting Game

Tuesday, March 12, 2019    02.47PM / By Proshare Content / TheAnalyst


Nedbank Group, a South Africa-based financial consortium posted a stronger year end result in 2018 than it did in 2017 courtesy of its Ecobank Trans International (ETI) affiliate. The NED Group’s headline earnings rose 14.5% from R11.787bn in 2017 to R13.495bn in 2018.


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But as cheerful as this result appears, a number of questions still need to be answered. Are the banks associate investments adding as much value as they seem/appear? 


Much of the growth in Nedbank’s earnings in 2018 was the result of a favourable outlook from its ETI investment. Nedbank, excluding ETI, delivered only 2.8% in headline earnings growth.


The improvement in ETI results were basically related to a one-off International Financial Reporting Standard rule 9 (IFRS9) day one adjustment that allowed ETI recast a $299m impairment loss through its balance sheet in its new 2018 accounts (IFRS 9 allows this to not restate 2017).


This brought about a reduced impairment provisions in 2018 and improved ETI’s year-end bottom line announcement; hence rubbing-off nicely on Nedbank, that was in search of a good year after its bundling-off of Old Mutual. ETI made up 78% or R1.35bn of R1.708bn of Nedbank’s 2018 headline earnings growth. 

Table 1: Nedbank’s Key Performance Indicators 2018

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Source: Nedbank Group Limited, 2018 Annual Report 

Chart 1: Nedbank’s Headline Earnings 2018

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Source: Nedbank Group Limited, 2018 Annual Report 


ETI - Much Ado About a Turnaround 

The pleasant discussions at Nedbank about a turnaround in ETI encourages curiosity further to the observations noted.


ETI’s resurgence has depended more on accounting niceties than on underlying operating performance(s). Most of the upward drift in ETI’s earnings for 2018 came from a one-off adjustment for IFRS9 day one provision in its 2018 accounts. The loss of R744m in 2017 morphed into a profit of R608m in 2018 translating to a R1.352bn profit recovery. Nevertheless, the headline earning’s including funding costs of R233m, is only R375m.


Chart 2: Nedbank’s Associate Income 2018

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Source: Nedbank Group Limited, 2018 Annual Report


A  day one IFRS9 adjustment of $299m in 2018 (Nedbanks share is R780m) through the balance sheet allowed ETI to report reduced impairment losses and improved profits in 2018. The R780m is more than the total R608m associate income reported for ETI in 2018 (after funding costs the associate income is only R375m). ETI reported PBT of $288m in 2017; the day one adjustment is to restate the impairments of 2017 meaning that the full profit for 2017 was wiped out by an additional impairment provision of $299m.


The reported impairments for 2017 was $411m, including the $299m restatement for 2017 total impairments was $710m and PBT for 2017 was an actual loss of $11m.  In other words, making for the appropriate adjustments, there has been no turnaround at ETI; just clever accounting.


But on the good side, ETI finally decided to comply with IAS 21 best accounting practices by using the NAFEX rate to convert its Nigeria results in Q3 2018 (after critical reporting last year by Proshare which insisted that ETI’s use of the official N/$ rate of N305/$ for converting its Nigerian performance in dollars, overstated its performance) resulting in another R361m balance sheet reduction in Nedbank’s books. The real result of ETI reflects a reduction in carrying value from 2017, while Nedbank has made spirited effort at convincing investors that ETI has turned a corner on its rocky road to recovery.


Chart 3: Nedbank’s Carrying value 2018

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Source: Nedbank Group Limited, 2018 Annual Report


In the detailed notes to its accounts, Nedbank explains that it has associate income of R608m minus funding costs of R233m, indicating/meaning that headline earnings from Ecobank is only R375m. 


However, the unanswered question from Nedbank is: “what is its total loss from ETI including the funding costs for the ETI acquisition at the time of the investment?”


Beyond the funding costs, the carrying value of ETI fell from R6.3bn to R3.2bn and the market value came to only R2.9bn. The transaction appears to have destroyed R3bn in value, excluding funding costs, with no reprieve in the horizon.


Chart 4: Nedbank’s Quarters of Profitability 2017- 2018

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Source: Nedbank Group Limited, 2018 Annual Report 


Table 2: Nedbank: Africa Financial Highlights 2018

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Source: Nedbank Group Limited, 2018 Annual Report 


ETI - Looking Back With Confidence? 

Last year, ETI was reported to the Nigerian Financial Reporting Council (FRC) for not following IFRS (and specifically IAS21) as it relates to exchange rates. The complaint / allegations dealt with the following issues:

  • ETI changed its results in June 2016 by only amending the average exchange rate calculation for Nigeria out of 20 currencies – the only way this would have been allowed is if actual exchange rates was used, as averages are not allowed when exchange rates fluctuate. The reporting was not consistent per the accounting framework for previous periods nor was the methodology used consistently applied to all 20 currencies as required by the IFRS;
  • ETI was the only bank in Nigeria (as at reporting date) using the CBN official rate despite a Fitch report and PwC publishing guidelines that NAFEX / NIFEX was the most appropriate rate to use.  ETI implemented NAFEX in November 2018. Cross jurisdictional entities like MTN and Stanbic (Standardbank)  had earlier reported its results using NAFEX;
  • Possible artificial inflation of US Dollar revenues by booking transaction revenue using the NAFEX rate on the date of the transaction to its functional currency but then converting at the CBN rate at month-end its reporting currency per its stated accounting policy;
  • The IAS 21 says that actual exchange rates must be used to translate results and an average exchange rate is allowed under certain circumstances. ETI uses average exchange rates to translate its results although IAS21 says it is inappropriate when exchange rates fluctuate. The Ghanaian Cedi, West African Franc and Nigerian Naira all fluctuate against the US Dollar;
  • ETI received an accounting opinion from Deloittes which stated the conditions which needed to be met in respect of IAS 21 for average exchange rates to be used and this appeared to have been ignored;
  • A letter / court case involving  a past chairman accusing management of Fraud and the subsequent settlement by ETI out of court lends credence to a governance culture that needs to be ascertained as no longer existing; and
  • The possible overstatement of IFRS9 day one provision that allowed ETI to report record profits for 2018 due to lower impairment losses (see  Impairment - Practice Guidance )


Operating income using NAFEX exchange rate for Nigeria (N360/$ (NIFEX) vs N306 /$ (CBN)) fell by $54.6 to $1.312m a 3% reduction on 2017. Expenses using NAFEX dropped 3.7%.  The only positive is that impairment losses reduced due to Day One IFRS9 provision of $299m resulting in increased profits (see


It is noteworthy that ETI issued a public statement denying these allegations on December 19, 2018 (see Ecobank Responds to Wrongful Allegations ) wherein it stated that: 

“IFRS 9 2014 does not require restatement of comparative period financial statements except in limited circumstances related to hedge accounting (not applicable to Ecobank Group) or when an entity chooses to restate (the Group has not, nor have most of its peers). The standard requires that where comparative periods are not restated, the difference between the previous carrying amounts and the new carrying amounts be recorded in opening retained earnings or other components of equity, as appropriate.


This is the approach that has been followed by the Group and as a result the transition impact of $299m has been recognised in equity.

 In conclusion, we can confirm to all stakeholders that there were no misstatements in our financial statements as alleged in our financial statement for the year ended 31 December 2017 nor in our three quarterly reports released during the 2018 year. We also note that this unfounded allegation was made by a former employee of the Group who is currently in court claiming payment of 13 years’ salary for an alleged unlawful termination of his employment contract.” 


Chart 6: ETI Gross Earnings 2014-2018

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Source: ETI Annual Accounts and Q3 Results 


Table 3: ETI P&L 2017-2018 Q3

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Source: ETI 9 Months Accounts 2017 and 2018


ETI has not been able to grow revenues in dollars since 2014.  Deposits have fallen from $17.4bn in 2014 to $15.5bn in 2018 (-10.9%). Loans and advances have equally stumbled from $12.3bn in 2014 to $8.6bn in 2018 Q3 (-30.1%). 


The use of the correct NAFEX exchange rate may likely have a negative impact on final year-end 2018 numbers.  ETI’s asset and liability growth has been negative over the past five (5) years (see table below) suggesting a roll back in operating activities and a thinning down of profits. 


Table 4: ETI Abridged Balance Sheet 2014-2018 (Q3)


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Source: ETI Audited annual accounts and 9 months 2018 


ETI - Talking About Loans 

ETI’s non-performing loan (NPL) portfolio still remained troubled in 2018. The bank’s nine (9) month numbers show that its NPL rose from $910m in H1 2018 to $985m in 9-months 2018 numbers.


In Q1 2018 NPL was $965m. The NPL ratio equally rose to 10.4% in 9-months 2018 from 9.6% in H1 2018 and 10% in Q1 2018 (about twice the Central Bank of Nigeria prescribed rate of 5%).


The bank’s cost-of-risk slowly glided up from 2.51% in Q1 2018 to 2.56% in H1 2018 and then 2.79% in the 9-months 2018 returns. This showed that the bank’s loans were becoming costlier despite the fall in loan assets Year-on-Year (see chart below).


Chart 7: ETI Asset Quality Q1 2017-9 month 2018

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Source: ETI Quarterly accounts 2017-2018 


When FX Rates Matter 

FX rates have important effects on the quality of results produced by ETI the chart below shows just how significant FX translation rates can be on the banks books.


Chart 8: Impacts of FX Rates on ETI PBT and Equity

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Source: ETI Quarterly accounts 2017-2018


Looking at Q3 2018 profit before tax (PBT), if the official exchange rate is applied; the figure settles at $86.6m.


Applying the NIFEX rate of N330/$ to same, the PBT drops to $80.5m and if the NAFEX rate is applied at N360/$; the Group’s PBT falls even further to $73.8m. The difference between using the official exchange rate and the NAFEX rate shows up as an exchange rate-induced profit difference of +17.3%.


The assumptions guiding the observations made above may benefit from a clarification from the entity. 


Cue the Waiting Game 

Analysts patiently wait to see what the impact of FX adjustments will have on ETI’s results for Y/E 2018. Compliance with IAS 21 rules are expected to depress earnings and show the bank as less profitable than it was under the old foreign exchange conversion practice.


Based on September 2018 results analysis, Total Assets appear overstated by $858m or NGN 308bn ; Deposits from customers appear overstated by $549m or NGN 197bn and loans and advances appear overstated by $374m or NGN 134bn; while Total equity would be deemed exaggerated by about $118m or NGN 42bn.


Table 5: Nine (9) month 2018 Loans, Assets, Deposits and Equity conversion Overstatements


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Source: Company Financials


Until year end 2018 results are eventually released by ETI, all that stakeholders can do in the interim is to watch, wait and worry. 


Visit Ecobank Transnational Incorporated Plc IR Page in Proshare MARKETS


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ETI Plc -One Year Share Price Movement in Graph

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ETI Plc – Q3 2018 Results

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