A Second Look At Ecobank FYE 2018: Takeaways From The Most Recent Conference Call


Saturday, April 13, 2019   / 11.07AM / By The Analyst / Proshare Research /Header Image Credit: Eye Care & ETI



Key Highlights

  • The Banks dollar revenue dipped -0.3%
  • Profit before tax rose +51% on defined IFRS9 day one provision adjustments
  • Day one provisioning came to $299m
  • Non-interest income rose to 49% of total income in 2018  from 47% in 2017
  • Consolidated comprehensive income of ETI fell from $368.92m in 2017 to a loss of $43.24m in 2018 mainly as a result of foreign exchange translation issues arising from the application of the NAFEX exchange rate of N364/$ in 2018 as against N306/$ in 2017
  • NAFEX rate was only applied to the month of December 2018 while the CBN official rate was applied over the previous 11 months which in some estimates still creates a possibility of an overstatement of balance sheet size in dollars. The bank, nevertheless, insists that, the balance sheet was translated at a closing rate using NAFEX, hence the balance sheet has taken the full impact of the currency depreciation
  • Ecobank Nigeria’s operations represent only between 23% and 25% of the total continental business of ETI, extenuating the impact of the deteriorating performance of the Nigerian operations on the Group
  • Full application of IAS21-compliant NAFEX foreign exchange translation may weaken ETI’s 2019 financial performance but this is expected to be limited to mainly its Nigerian operations
  • The absence of day one IFRS9 provisioning in 2019 may also weigh down bottom line earnings of Ecobank Nigeria by FYE 



Table 1: Ecobank’s Income Statement Highlights FY 2018

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Table 2: Ecobank’s Financial Position Statement Highlights FY 2018

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Introduction-Tackling The Tough Issue of IAS21


ETI (“Ecobank”) had a better than expected result in FY 2018, putting a bullish twist to an industry undergoing a bearish gross earnings outlook; the deposit money bank’s gross earnings dipped -0.3% from $2.49bn in FY2017 to $2.48bn in FY 2018, however, profit before tax bounced nicely, growing by +51.2% from $288.3m in FY 2017 to $435.9m in FY 2018, a sign that major loan restructuring and a cut back in operating expense seems to be working.


In November 09, 2018, Proshare in a piece titled - Is ETI The Only Bank Using CBN Rates To Convert Its USD Results Into NGN and Vice Versa?, raised concerns over the bank’s persistent use of the official Central Bank of Nigeria (CBN) exchange rate of between N305/$ and N306/$ as a conversion rate for the dollar translation of its financials as against the more recently acceptable accounting practice as advised by IAS21 of using the Nigeria Interbank Offer Rate (NIFEX) or the Nigerian Autonomous Market rate (NAFEX). The guidelines suggest that where more than one currency exists the rate at which dividends can be remitted must be used. The appropriate exchange rate is NAFEX. IAS 21 states that average exchange rates are inappropriate when exchange rates fluctuate as is the case with the CFA, CEDI and NAIRA. Despite this Ecobank appears to have continued to use average exchange rates (see our post on this matter: Compliance with IFRS9 and IAS21 – ETI and The Effects of Changes in Foreign Exchange Rates). But in addition to this a few other accounting touch points persist.


Accounting Issues


In the 2017 audited annual accounts Ecobank’s Managing Director/CEO, Mr. Ade Ayeyemi, noted that, “We are mindful that our adoption of the new accounting standard for financial instruments, International Financial Reporting Standard (IFRS) 9, effective from January 2018, will require earlier recognition of expected credit impairments. We expect this to reduce Ecobank’s earnings in the near-term as it will lead to additional credit loss provisioning.” This is explained by the cost-of-risk of ETI which is still at elevated levels of 2.4% in 2018, which is higher than that of the average ratio of 0.5% for Nigeria’s top Tier 1 banking peers.


So, what really is happening in the bank’s financial office? Well, what appears to be going on is a couple of tidier book keeping arrangements; $811m in new provisions for loan impairments on Loans and Advances to customers in 2018 as against $442m in 2017 was consistent with IFRS9 requirements. But an additional $279m (a specific amount of $33m and a collective amount of $246m) in day one provisions was piled onto the books bringing the total day one provisioning for FY 2018 to $299m.


Furthermore, $570m in provisioning (including the $279m day one provision) was reversed (no longer required) during 2018 as against $115m in 2017, allowing the bank to post a tidy growth in profit in 2018 of +51.2% despite a -0.3% decline in revenue (to understand the provisioning calisthenics, see Table 1 below).  In the last five years the bank’s gross earnings (in dollar terms) has dropped by 20%. However, the bank notes that much of this development was reflective of the fact that the bank chose to report the accounts in dollars rather than in local naira.


This is correct, but the point also remains that, since the bank has only a ‘quarter’ of its operations in Nigeria; applying the naira to the total group results may not have been a fair reflection of the underlying state of its continental operations. We get this.



Table 3: Ecobank’s Provisioning for FY 2017 and FY 2018 Audited Accounts

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During a conference enquiry by Proshare, the bank represented as follows:

  • We have faced sluggish growth in some of our key markets and this coupled with falling interest rates has made growing revenue a challenge not just for us but for the wider industry.
  • Aside from the impact on revenue growth from exogenous factors, internally we took a strategic decision to largely hold off on credit origination, especially during the ‘securing the foundation’ phase of our strategy. Given that our net interest income was largely driven by credit, curbing loan growth had an adverse impact on NII growth. And as we classified more loans in addressing the credit quality challenges, our non-accrual loans increased. Consequently, the declining loan balances meant lower credit related fees, which made a big chunk of our non-funded income. All of these combined to impact revenues heavily.
  • But now that we have entered the ‘execution phase’ of our strategy, we are beginning to grow loans, albeit cautiously. You will notice that we grew loans in FY2018 on an underlying basis, especially in the 4Q and are guiding to an 8-10% loan growth in 2019.
  • We are also delighted that our revenue mix continues to be strong as we continue to drive value in the non-interest revenue lines including the digital banking products. Non-interest income now represents 49% (compared to 47% in prior year) of total income mainly driven by income from Cash Management. The strong growth in our deposit base has also enabled the Group to record continued growth in revenue despite the falling interest rates in most of our markets.



Chart 1: Ecobank’s Gross Earnings 2014-2018

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Source: Ecobank Audited Annual Accounts 2014-2018


Table 4: Ecobank’s 5-year Revenue and Profit Numbers (2014-2018)

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The bank’s reaction to its gross earnings decline throws up further lines of enquiry about another oddity in its books; it’s shrinking shareholder funds.


The bank proudly announced in the FY 2018 Results that it had achieved a healthy 17.5% return on equity (ROE) in the course of the year, but that statement tactfully ignored to mention the fact that shareholder funds had equally been pummeled by about a fifth or 23%, falling from $927m in 2017 to $716m in 2018.


To make up for its foreign exchange adjustments to meet IAS21 requirements and to restore its capital adequacy ratio (CAR), the bank had to raise a further $64m in capital. The use of the NAFEX rate rather than the CBN official rate for foreign exchange translation has obviously led to a major decline in Ecobank’s equity between 2017 and 2018.


The bank in responding to the issues raised, noted that:

“Our accounting policy for our investment in subsidiaries, translating and consolidating these has not changed from prior year. What we changed was the rate used in the translation of the results of our subsidiaries in Nigeria. This was the result of the consistent divergence of the CBN rate and industry best practice by banking participants in the Nigerian market. In 2018, we adopted the NAFEX rate of 364 naira to one US dollar and moved away from the CBN official rate of 306 naira to the US dollar. This had an adverse impact on Ecobank Nigeria’s equity. In December a capital injection of $64 million was made into Nigeria


While the improved ROE for the group is partly on the back of a smaller equity it should also be noted that this follows through on a much-improved profit performance compared to the prior year. A performance, which saw a $148m or 51% growth in PBT and a 47% growth in profits attributable to shareholders to $262m.” 


While this would reflect a fair explanation, it invariably opens up another line of enquiry, a matter for clearing up on the bank’s FY 2018 accounts i.e. the growth of its off-balance sheet contingent assets.


The banks off-balance sheet transactions grew considerably in the course of the year between FYE 2017 and FYE 2018. Contingent off balance sheet items rose from $3.9bn in 2017 to $5.5bn in 2018, a rise of +41%. The bank explained this away by stating that the rise was attributable to:

“An increase in loan commitments, bonds and guarantees especially in our trade finance business. This is in line with our strategy of boosting growth in products that are not capital intensive.”


This would indeed be a smart business move if the quality of the contingent assets were such that facility crystallization remains remote and inherent risks in the off-balance sheet portfolios are properly priced-in. We will see.



Other Matters Arising


Against the backdrop of Ecobank’s performance for FY 2018, a few other matters have nudged analysts at the firm to take a deep dive into the numbers released. A recurring theme and sour point for shareholders in 2018 was that the bank has failed to declare a dividend in the last three years. Indeed the last time a dividend was declared by Ecobank was in 2015.


Table 5: Ecobank’s Dividend History (2005-2018)

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This indicates that shareholder return(s) have largely been dependent on share price increases. Given that between August 2018 and April 2019, the bank’s share price has tanked from N22 to N11.35, a nine (9) month capital loss of -93.9% occurred. The bank responsed to this observation thus:


First, this was a very difficult decision to take, as no board is happy to even cut the dividend, let alone pass a dividend payment.


In 2016 when we embarked on our ‘roadmap to leadership’ strategy, we articulated that the first 2 years of the 5-year strategy will be used to ‘secure the foundations’ of the firm to position it to deliver longer-term value. We then embarked on a transformational journey that included refreshing executive management team, substantially overhauling our risk management, address legacy challenged assets (where in Nigeria we had to set up the resolution vehicle), improving cost efficiency across the Group etc. This culminated in the firm posting a loss in 2016. As a result of all of these actions, returning capital to shareholders was not feasible during that period.


We understand that with the strong profit generated in 2018, the expectation of shareholders could be for the resumption of dividend payments. However, following rigorous deliberations on the differing needs facing our company in the ‘Execution’ phase of our ‘Roadmap to Leadership’ strategy, a decision was taken to continue to strengthen the Group.


This decision was predicated on strong economic reasoning based on the long-term prospects of the company. Factors considered included the need for capital to drive growth and improve performance in key affiliates, potential regulatory capital demands and the liquidity buffers required to sustain Ecobank as a safe and sound financial institution.


The Board and the executive management team are confident that, with our actions and strategy, the company is well positioned for sustainable growth with return on equity above the cost of equity and ultimately return of capital to shareholders.. We are confident that as we drive the growth strategy, shareholders will not only be rewarded with cash dividends in the near-term, but also with the performance in the company’s share price.


In explaining the issues bank officials noted equally noted that:

If by foreign exchange this refers to exchange on translation of foreign operations, this was primarily a result of Group’s decision to adopt the NAFEX rate and the weakening of the XOF/XAF as well as the Ghanaian cedi against the US dollar in the current year. Having a balance sheet presented in US dollars means foreign exchange translation fluctuations depending on the relative strength of local currencies as compared to the US dollar (or the Euro, in the case of the CFA franc) will have an impact on this line.


Our credit quality remained broadly stable across the franchise, with isolated episodic challenges in some countries. Encouragingly, we are gradually seeing the benefits of the substantial investment we made in people, processes and systems in risk management in the last few years. Impairment losses on loans and advances continued to benefit from an effective NPL strategy, stringent credit underwriting standards, enhanced portfolio monitoring, and an improving risk culture across the businesses.


For 2018, impairment losses on loans and advances were $240 million, compared with $326 million for 2017. The decrease was primarily driven by lower impairments within Commercial Bank and Corporate and Investment Bank, mostly from Nigeria. Also, impairment losses were no longer required or provision releases as it is may also be referred to, particularly in overdraft loans and credit cards, came in substantially higher, partially offsetting increases in gross impairments.


The bank points out that most of its contemporary challenges relate principally to its Nigerian subsidiary which constitutes about a quarter of the group’s total business and revenue as a proportion of the group’s total activities and rounds off at about 25%. Besides over the last three years the Nigerian operation as a proportion of the group’s business has slowly melted down from 30% in 2016 to about 25% in 2018. ETI remains the foremost bank in Ghana and arguably the leading bank in Sub-Saharan Africa according to management.


Illustration 1: Ecobank’s Nigeria’s Market Transition (2016-2019)

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The bank’s management equally took time to point out that, compared to other banks in Nigeria; its IFRS 9 Day 1 provision was not the highest in the industry when properly contextualized - as a ratio of the loan book.


A comparative review of the banks impairment charges as a proportion of its loan book to customers shows that its cost of risk was highest at 2.4% against 0.70% for Access Bank, 0.30% for GT Bank, 0.3% for UBA and -0.70% for StanbicIBTC. This, according to the bank, shows that the management has adequately provided for loan losses and is not likely to be subject to large future provisioning. StanbicIBTC, in turn, notes that its negative cost of risk for the FY 2018 was because of offsetting, “provisions for impaired loan by write-backs which resulted from recoveries made on previously written off loans and reversals on some nonperforming loans”.

Chart 2: Cost of Risk for Selected Nigerian Banks 2018

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Source: Audited Annual Accounts of Nigerian Banks FY 2018 



The Bank, The Strategy and The Outlook


The bank in 2019 will face a speedily consolidating ecosystem with market share becoming a critical factor. The bank is already three years into a five year strategic plan embarked upon in 2016. The current phase is called, “execution”.  From a recent Conference Call meeting with senior executives of the bank this is likely to involve:

  • A reduction in Cost to Income ratios
  • A strategic expansion of the digital banking platform across multi-channels
  • Leveraging its continental spread to reduce funding costs and provide regional banking convenience for customers


Deep Dive

A dive into the banks comparative ratios attempts a bit of explanation around its strategies, which are essentially generic.


Cash Interest Coverage

This ratio is a measure of liquidity and shows how easily the bank provides cash to cover interest obligations. For FY 2018, ETI had cash to interest coverage of 2.4. This was adequate, but fell short comparative to other banks such as Stanbic IBTC, 4.07; GT Bank, 4.40; Access Bank, 4.76, and UBA, 6.61.


Chart 3: Cash Interest Coverage Ratio of Selected Nigerian Banks FY 2018

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Source: Audited Annual Accounts of Nigerian Banks FY 2018 


Capital Expenditure Ratio

ETI’s capital expenditure for FY 2018 was somewhere in the middle of the park, with its expenditure ratio at 0.30 which was higher than GT Bank at 0.13 and UBA at 0.18 but lower than Access Bank at 0.34 and StanbicIBTC at 1.05.



Chart 4: Capital Expenditure Ratio of Selected Nigerian Banks FY 2018

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Source: Audited Annual Accounts of Nigerian Banks FY 2018 


Quality of Earnings Ratio

ETI has the highest quality of earnings ratio in FY 2018 in the reviewed bank class as its operating income as a proportion of its net operating cash flow is the highest of the banks analysed.


Chart 5: Quality of Earnings Ratio of Selected Nigerian Banks FY 2018

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Source: Audited Annual Accounts of Nigerian Banks FY 2018 


Non-Interest Income to Operating Income

ETI’s effort at increasing non-interest income to smoothen out variability in operating earnings seems to be panning out as the bank was able in FY 2018 to push non-interest income as a proportion of operating income to almost 50%. This was mirrored in the rise of its off balance sheet assets. Relative to other banks Ecobank was slightly behind StanbicIBTC but well ahead of Access Bank, 43%; GT Bank, 37%; UBA, 33%.


Chart 6: Non-Interest Incomes/Operating Income of Selected Nigerian Banks FY 2018

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Source: Audited Annual Accounts of Nigerian Banks FY 2018 



The Strategy

Going forward into 2019, the bank clearly intends to stall growth in lending and increase non-interest income, while equally pursuing a cost-to-income reduction plan. The bank’s CIR is currently at 62%, making it one of the highest in the sector. Discussion with the bank’s management indicates that plans are afoot to bring this down. The cost cutting will be complemented by an increased shift towards trade finance and fee-based incomes to reduce the impact of volatility of interest-based activities on the bank’s financial position, hence de-risking the bank’s income statement. Ecobank Nigeria may need to raise further capital in 2019 or use its retained earnings to fatten the size of equity. This may result in a fall in ROE to between 15 and 16% for FYE 2019.


Chart 7: Selected Bank’s Cost to Income Ratio 2018

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Source: Audited Annual Accounts of Nigerian Banks FY 2018 


Illustration 2: Ecobank’s Three Generic Strategies 2019

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ETI has done a good job trying to pull up operating performance under the circumstance and readily acknowledges that there is much work ahead; which appears will be much more challenging than that of the previous year.


Bearing the full weight of IAS21 NAFEX adjustments in 2019 and having to cope with the absence of IFRS9 one day provisioning treatment will put a lot of pressure on the bank’s books.


Ayeyemi’s optimism is commendable and he comes good with the cache of proven performance and commitment to executing strategies for sustainable performance. He will need all the luck he can get along the way.


Proshare Markets has advanced work on its exclusive Proshare Confidential report on the bank where it would look at fundamental, technical and strategic issues related to the bank’s African operations and its overall fiscal balance and prospects.

Do feel free to share your opinions/observations and feedback with us vide content@proshareng.com and/or research@proshareng.com


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Visit ETI Plc IR Page in Proshare MARKETS


Ecobank One Year Share Price Movement

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Table – 2018FY Audited Results

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Click Image to view full results


For further details and contributions on the subject, kindly contact Proshare management via coo@proshareng.com



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