ETI 9M 2020 Results: A Tale of One-Offs, Restructuring, and Resilience

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Monday, December 07, 2020, / 04:00 PM / by Adaeze Nwachukwu, Proshare Research / Header Image Credit: techeconomy.ng


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Ecobank Transnational Inc. (ETI) result has been resilient in the face of harsh continental macroeconomic challenges caused by the COVID-19 pandemic. The growth in the banking group's gross earnings and profit before tax was severely affected by a  couple of one-off charges to its P&L account, especially the one-off goodwill charge off on its Oceanic Bank acquisition in 2011. The group's cost-to-income ratio declined in Q3 2020 year-on-year (Y-o-Y) while asset quality also crept up a few basis points. However, there are niggling issues about its foreign exchange translation accounting and the proper application of IAS 21.


 

Key Highlights/Takeaways

  • Gross earnings increased marginally in Naira terms by +0.37% to N613.15bn in 9months 2020
  • Revenue increased by +9.12% year-on-year (Y-on-Y) to N422.61bn in 9months 2019
  • Profit before tax excluding goodwill impairment declined by -13.16% Y-on-Y to N95.08bn
  • Profit before tax for the period declined significantly -68.49% from N109.49bn in 9months 2019 to N34.49bn in 9months 2020.
  • Total assets grew Y-on-Y by +15.38% to N9.43trn in 9months 2020
  • Total deposit grew Y-o-Y by +19.61%
  • Total equity increased Y-o-Y by +7.33% to N708.63bn in 9months 2020
  • ROE excluding goodwill impairment charge was 14.1% while ROE for the period was -3.5%
  • ROA for the period was 0.2%

 

Holes in the Profit Bag

 

Profitability

Gross earnings of ETI grew marginally by +0.37% to N613.15bn from N610.87bn in 9months 2019, despite the tough macroeconomic challenges caused by the COVID-19 pandemic. Growth in gross earnings was majorly driven by a +55.0% increase in trading income on securities, -19.60% decline in interest expense, and +6.68% growth in interest income.


Translating to USD, gross earnings declined by -19.14% from $1.99bn in 9months 2019 to $1.61bn in 9months 2020 (using the official CBN's closing exchange rate during the different periods). The group lost $388.43m as foreign currency translation cost majorly due to the devaluation of the domestic currency (see chart 1 below).

 

 

Chart 1: ETI's Gross Earnings 2016 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research

 

Profit before tax (PBT) declined as a result of goodwill impairment as the banking group took a hit to its P&L as a result of charge offs for the amortization of goodwill on its books after the acquisition of Oceanic bank in 2011. The group's PBT for Q3 2020 declined by -68.49% Year-on-Year (Y-o-Y) because of one-off charges for restructuring costs and goodwill write-downs. Profit before tax and goodwill impairment declined by -13.16%, the continental banking franchise decided to write off the bank's goodwill which was related to the acquisition of Oceanic Bank, as a result, it recorded a non-cash, non-recurring impairment charge of $159m. This one-time write-off affected the banking group's liquidity and regulatory capital ratios (see chart 2 below).

 

In USD terms, PBT for 9months 2020 declined by -74.62% Y-o-Y, from $356.72m in 9months 2019 to $90.55m in 9montsh 2020, using the official CBN closing rate during the different periods, foreign currency translation cost was $21.85m as a result of the devaluation of the group's functional trading currency in Nigeria, the naira.

 

Chart 2: ETI's Profit Before Tax 2016 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research

 

The group's impairment losses on financial assets for the period rose by +88.90% from N32.55bn in 9months 2019 to N61.49bn in 9 months 2020, this was driven majorly by a strategic reserve build up due to COVID-19 as stated in the financials (see chart 3 below).

 

Chart 3: ETI's Impairment Losses on Financial Assets 2016 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research


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Bearing the Pains of a Downturn

 

Asset Quality

ETI's non-performing loans (NPL) ratio for the period 9months 2020 remained unchanged from the figure posted in 9months 2019, the NPL ratio stayed at 9.9%. The Nigerian operations of the group recorded the highest NPL ratio compared to other regions. Nigeria's NPL ratio for the period was 21.6%, while Francophone West Africa (UEMOA) was 4.7%, Anglophone West Africa (AWA) 6.8%, and Central, Eastern, and Southern Africa (CESA) 9.7% (see chart 4 below).

 

Chart 4: ETI's NPL Ratio 2016 - 2020 (%)

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Source: ETI Financial Statement, Proshare Research

 

The group recorded steady growth in total assets in the first 9 months of 2020. The continental lender's total assets grew by +15.38% from N8.17trn in 9months 2019 to N9.43trn. Growth in total assets was driven majorly on the back of cash and balances with Central Banks which grew by  +37.06% Y-o-Y, investment securities, treasury bills, and other eligible bills, and deferred income and tax assets all grew Y-o-Y by +26.57%, +20.45%, and +27.64% respectively (see chart 5 below).

 

Chart 5: ETI's Total Assets 2016 - 2020 (N'trn)

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Source: ETI Financial Statement, Proshare Research


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Cost

The cost-to-income ratio (CIR)  for 9months 2020 declined to 63.4% against 66.4% in 9months 2019, this was majorly due to a +9.12% Y-o-Y increase in operating income while operating expenses rose by +4.23% as a result of restructuring costs which saw a strategic realignment of staff with corporate requirements.

 

The group's Nigerian operation recorded the highest CIR of 79.0% compared to UEMOA's 59.5%, AWA's 47.1%, and CESA's 58.2% (see chart 6 below).

 

Chart 6: ETI's cost-to-income Ratio 2016 - 2020 (%)

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Source: ETI Financial Statement, Proshare Research


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Loan-to-Deposit Ratio (LDR)

In a time of a pandemic, customers were expected to hold cash for essential purchases, however, the converse seemed to have been the case as ETI's deposit grew by +19.61% Y-o-Y, which pushed down its loan-to-deposit ratio (LDR) for 9month 2020 compared to the contemporary period of 2019. LDR declined to 54.89% in 9months 2020 as against 61.27% in 9months 2019, total loans increased Y-on-Y by +7.16% (see chart 7 below).

 

Chart 7: ETI's loan-to-deposit Ratio 2016 - 2020 (%)

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Source: ETI Financial Statement, Proshare Research


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A Not So Good Look at Goodwill


Total Equity

Shareholders fund has been on a steady path of growth over the last few years, for the period shareholders fund grew by +7.33% Y-o-Y, from N660.22bn in 9months 2019 to N708.62bn in 9months 2020. this was driven by a +5.08% Y-on-Y increase in retained earnings and a +29.14% increase in non-controlling interest of the group (see chart 8 below).

 

 Return on equity (ROE) for 9months 2020 excluding the goodwill impairment charge was 14.1%, however, including the goodwill impairment charge, ROE for the period was -3.5%.

 

The Nigerian Operations of the group recorded a higher ROE of 5.9% as against 0.4% for 9months 2019, although comparing the Nigerian operations with other regions it recorded the lowest ROE in 9months 2020 across continental markets. For UEMOA the return on shareholders equity was 19.1%, AWA 28.8%, and CESA 16.5%.

 

Chart 8: ETI's Total Equity 2016 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research


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A Never Ending Restructuring

ETI 9months 2020 results showed strategic decisions were made to position the transnational bank for a recovery in 2021. Nevertheless, investors have still expressed concern over what appears to be a never ending restructuring cycle, especially for its Nigerian operations that has remained the sick baby of the group for the past four years.

 

Another problem investors seem to face with the continental banking giant is its unclear compliance with IAS 21 accounting regulations over the translation of its results from its functional currency (the naira in the case of Nigeria) to its presentation currency (US dollars). Analysts feel that the group applies an average conversion rate, but in countries with volatile exchange rates the IAS21 rules require the bank to use actual rates. ETI appears to use closing rates in volatile foreign exchange markets in East Africa, but average rates in Nigeria. While average rates may be acceptable for the statement of financial position in Nigeria. The same would not apply to Ecobank Nigeria's P&L account. On discussing the matter with bank executives, Proshare was assured that the Nigerian bank complies with the provisions of IAS 21.

 

The broad requirements of IAS 21 are summarized below:

 

The Ernst and Young generally accepted accounting principles ("GAAP") Manual for IAS21

 

Summary of IAS 21


Objective of IAS 21

The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. [IAS 21.1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. [IAS 21.2]

 

Key definitions [IAS 21.8]

Functional currency: the currency of the primary economic environment in which the entity operates. (The term 'functional currency' was used in the 2003 revision of IAS 21 in place of 'measurement currency' but with essentially the same meaning.)

 

Presentation currency: the currency in which financial statements are presented.

 

Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

 

Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity.

 

Basic steps for translating foreign currency amounts into the functional currency

 

Steps apply to a stand-alone entity, an entity with foreign operations (such as a parent with foreign subsidiaries), or a foreign operation (such as a foreign subsidiary or branch).

1. the reporting entity determines its functional currency

2. the entity translates all foreign currency items into its functional currency

3. the entity reports the effects of such translation in accordance with paragraphs 20-37 [reporting foreign currency transactions in the functional currency] and 50 [reporting the tax effects of exchange differences].

 

Foreign currency transactions

A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction (use of averages is permitted if they are a reasonable approximation of actual). [IAS 21.21-22]

 

At each subsequent balance sheet date: [IAS 21.23]

foreign currency monetary amounts should be reported using the closing rate non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined

 

Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognised or in previous financial statements are reported in profit or loss in the period, with one exception. [IAS 21.28] The exception is that exchange differences arising on monetary items that form part of the reporting entity's net investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in other comprehensive income; they will be recognised in profit or loss on disposal of the net investment. [IAS 21.32]

 

As regards a monetary item that forms part of an entity's investment in a foreign operation, the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item. [IAS 21.33] Also, the accounting should not depend on which entity within the group conducts a transaction with the foreign operation. [IAS 21.15A] If a gain or loss on a non-monetary item is recognised in other comprehensive income (for example, a property revaluation under IAS 16), any foreign exchange component of that gain or loss is also recognised in other comprehensive income. [IAS 21.30]

 

Translation from the functional currency to the presentation currency

The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy are translated into a different presentation currency using the following procedures: [IAS 21.39]

 

assets and liabilities for each balance sheet presented (including comparatives) are translated at the closing rate at the date of that balance sheet. This would include any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets and liabilities of the foreign operation [IAS 21.47]; income and expenses for each income statement (including comparatives) are translated at exchange rates at the dates of the transactions; and all resulting exchange differences are recognised in other comprehensive income.

 

Special rules apply for translating the results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy into a different presentation currency. [IAS 21.42-43]

 

 

Where the foreign entity reports in the currency of a hyperinflationary economy, the financial statements of the foreign entity should be restated as required by IAS 29 Financial Reporting in Hyperinflationary Economies, before translation into the reporting currency. [IAS 21.36]

 

As oil price continues to pick up, economic 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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Between the Group and Local Operations

Executives of ETI note that the extant IAS21 rules are consistent with its statement of accounts, however, it should be noted that as a group its functional and presentation curreny is the US dollar and so its reporting requirements would differ from its separate zonal continental reporting.

 

This would likely be a subject of a future Proshare Confidential report on the foreign curreny translation challenges of continent-wide businesses in the light of the African Continental Free Trade Agreement Act (AfCFTA). But so far, ETI may have done a decent job of keeping its books clean, but a few issues still appear to require further enquiry.

 

As COVID-19 ravaged African economies in Q2 and Q3 2020, ETI has had to work out plans for derisking its country-based credit exposure and this may have informed the need to build adaptable loan support structures in its continental credit administration process, how well the new thinking works will depend on probables and imponderables, with the results needed to be seen (see illustration 1 below).

 

Illustration 1: ETI, Managing Credit Risk During COVID-19

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