ETI FY2020 Results: Profit Slump in The Face of Repositioning

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Tuesday, February 02, 2021, / 02:00 PM / by Adaeze Nwachukwu, Proshare Research / Header Image Credit: ETI


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Coming off the back of a one-off charge against its profit and loss (P&L) account in 2020, Ecobank Transnational Incorporated (ETI), saw its profit take a tumble with its P&L punctured by legacy assets which the bank fully netted off by way of a hefty goodwill charge which came from its acquisition of the former Oceanic Bank Plc in 2011. The queer 'asset' of goodwill for a bank considered to have been 'bad' was bumped off its books leaving it with a tidier bookkeeping outcome. The recent financial result of the African continental banking giant for 2020 saw critical stakeholders eyeballing the following key takeaways:

 

Key Highlights/Takeaways

  • Gross earnings declined Year-on-Year (Y-o-Y) by -1.61% from N842.49bn in 2019 to N828.96bn in 2020 (fell by -6.83% in USD terms to US$2.17bn in 2020).
  • Revenue increased by +7.41% Y-o-Y from N586.88bn in 2019 to N630.35bn in 2020 ( grew by +1.70% in USD terms to $1.65bn in 2020).
  • Profit before tax and goodwill impairment declined Y-o-Y by -13.77% from N146.54bn in 2019 to N126.37bn in 2020 (declined by -18.35% in USD to $330.76m in 2020).
  • Profit before tax declined Y-o-Y by -55.33% from N146.54bn in 2019 to N65.46bn in 2020 (in USD it fell by -57.70% to $171.34m in 2020).
  • Earnings per share (eps) from continuing operations dropped Y-o-Y by -95.59% from 281.57kobo in 2019 to 12.423kobo in 2020 (a slide by -95.76% in USD terms to 0.033cents in 2020)
  • Total assets increased Y-o-Y by +19.12% from N8.62trn in 2019 to N10.27trn in 2020 (or in dollar terms increased by +8.51% to $25.65bn in 2020)
  • Total equity grew Y-o-Y by +17.07% from N687.74bn in 2019 to N805.11bn in 2020 (up by +6.65% in US dollar terms to $2.01bn in 2020) 

 

 

Table 1: ETI FY2020: A Bank in Numbers

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Market: All in A Day's Job, Messing Around with Price and Volume

The share price of ETI is yet to be restored to pre-COVID-19 levels, between January and December 2020 prices declined by -12.75%. Prices were lowest in March 2020 which was the peak of the pandemic while January 2020 the group's highest share price. However, share price movement year-to-date (YTD), has improved marginally in February 2021, with the group's share price rising by +0.78%.

 

The volume of shares traded drew a different pattern,  between January and December 2020, the volume of shares traded grew by +51.85%. October 2020 saw the highest traded volume of 36,016,323 while March 2020 saw a snapshot of the lowest traded volume of 380,672. Year-to-date, the traded volume of shares of ETI saw an uptick of +132.32% as of 1 February 2021 (see chart 1 below).

 

Chart 1: ETI's Share Price and Volume of Shares Traded Jan 2020 - 1 Feb

                2021

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*share price and volume of shares traded as of 1 Feb 2021

Source: NSE, Proshare Research

 

Profitability- A Slide, A Slump, and A Potential Reversal

The group's gross earnings have been rising steadily over the last five years The highest percentage growth was recorded in 2016 with a growth of +22.53% while 2020 recorded the highest growth decline of -1.61%.

 

The group's latest unaudited result for 2020 saw the gross earnings of the group slump marginally by -1.61%  Y-o-Y from N842.49bn in 2019 to N828.96bn in 2020. This was driven by a -9.69% Y-o-Y fall in non-interest income. Major Drivers of the decline in non-interest income were a drop in fees and commissions and a tumble in net trading income, both declined Y-o-Y by -3.48% and -11.79% respectively (see chart 2 below).

 

Translating to USD terms, gross earnings declined Y-o-Y by -6.83% from $2.33bn in 2019 to $2.17bn in 2020 (as stated in the financials). 

 

 

Chart 2: ETI's Gross Earnings 2015 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research

 

Profit before tax (PBT) dipped heavily for the year 2020, this was majorly caused by the year's goodwill impairment charge. The group wrote off the bank's goodwill impairment which was related to the acquisition of Oceanic bank, the goodwill impairment was triggered by the deteriorating economic conditions. 2018 recorded the highest percentage PBT growth of +53.48% while 2017 saw the highest percentage PBT decline of -361.99%.


The Profit Bungee

The Nigerian operation of the group had the highest percentage change in PBT with over +500% growth in PBT Y-o-Y. While in Francophone West Africa (UEMOA) PBT declined marginally by -2.93% Y-o-Y, Anglophone West Africa (AWA) recorded a +19.43% Y-o-Y growth in PBT, and Central, Eastern, and Southern Africa (CESA) had a significant decline of -27.30% Y-o-Y decline in PBT for the period (see table 2 below). 


Table 2: PBT According Regions

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PBT declined by -55.33% from N146.54bn in 2019 to N65.46bn in 2020 (see chart 2 below).

 

PBT in US dollar declined by  -57.70% from $405.08m in 2019 to $171.34m in 2020.

 

Chart 2: ETI's Profit Before Tax 2015 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research


Impairment charges rose noticeably by +83.70% Y-o-Y from N48.32bn in 2019 to N88.76bn in 2020 (see chart 3 below).

 

The group equally recorded a non-cash, non-recurring impairment charge of $159m in 2020 which adversely affected profit.

 

Chart 3: ETI's Impairment Charges on Financial Assets 2015 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research

 

Total Assets: Building the Balance Sheet Slowly

The continental bank's assets have grown steadily. 2016 saw the highest percentage growth in assets of +33.26% while in 2019 the bank's asset growth dipped to a more humble +4.84%. Nevertheless, the financial group's total assets grew Y-o-Y by +19.12% from N8.62trn in 2019 to N10.27trn in 2020. This was majorly driven by a +34.83% Y-o-Y rise in cash and balances with Central Banks and a +23.87% growth in investment securities (see chart 4 below).

 

Translating into US dollar terms, total assets grew Y-o-Y by +8.51% from $23.64bn in 2019 to $25.65bn in 2020. 

 

 

Chart 4: ETI's Total Assets 2015 - 2020 (N'trn)

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Source: ETI Financial Statement, Proshare Research

 

Loan-to-Deposit Ratio- Growing Loans but Growing Deposits Faster

The loan-to-Deposit ratio declined to 53.43% in 2020 from 60.52% in 2019, which is the lowest the group has recorded in the last five years. This is primarily caused by a marked growth in total deposits which outstripped the growth in the group's total loans and advances.

 

Total deposits grew by +22.51% Y-o-Y, this was driven up by +23.23% growth in deposits from customers while deposits from banks grew Y-o-Y by +17.24%.

 

Total loans and advances for the period grew by +8.16% Y-o-Y which was driven by +9.35% growth in loans and advances to customers while loans and advances to banks grew by +2.34% Y-o-Y (see chart 5 below).

 

Chart 5: ETI's loan-to-deposit Ratio 2015 - 2020 (%)

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Source: ETI Financial Statement, Proshare Research

 

Total Equity: When Shareholders Matter More

The total equity of the group has grown exponentially in the last five years, in 2020 total equity grew Y-o-Y by +17.07% from N687.74bn in 2019 to N805.11bn. The growth in equity reflected a rise in the size of its non-controlling equity interest by  +39.60% and a +31.5% growth in retained earnings, as well as a +10.82% Y-o-Y growth in equity attributable to owners of the parent institution.

 

2017 saw the highest percentage growth in total equity of +23.53% while 2018 recorded the largest decline in equity growth -0.69%, the drop reflected the adoption of international financial reporting standard (IFRS) 9 which required a forward-facing provision for doubtful loans, the provision meant a subsequent decline in the growth of the group's equity even as analysts still question its compliance with international accounting standard (IAS) 21 rules concerning foreign exchange translation for that year  (see chart 6 below).

 

Translating to US dollars, the total equity of ETI grew Y-o-Y by +6.65% from $1.89bn in 2019 to $2.01bn in 2020.

 

Chart 6: ETI's Total Equity 2015 - 2020 (N'bn)

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Source: ETI Financial Statement, Proshare Research

 

Cost: The Little Big Matter of Cutting Costs

ETI's cost-to-income ratio (CIR) fell to 63.26% in 2020 from 66.17% in 2019. This was as a result of a +7.41% increase in operating income at a time operating expenses grew marginally by +2.69% (see chart 7 below).

 

The Nigerian operations of the continental banking franchise had the highest cost-to-income ratio with a CIR of 80.58% suggesting that in 2021 the group would need to reel in its Nigerian costs and cap recurrent and capital spending in a time of a global health pandemic (COVID-19). The group's Francophone West Africa (UEMOA) businesses posted a CIR of 59.57% or 21.01% the Nigerian operations, while Anglophone West Africa (AWA) operations recorded a 48.89% CIR representing the lowest cost to income ratio of the group, the Central, Eastern, and Southern Africa (CESA) businesses posted a CIR of 57.02%.

 

Chart 7: ETI's Cost-to-Income Ratio (CIR) 2015 - 2020 (%)

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Source: ETI Financial Statement, Proshare Research

 

Despite macro-economic challenges caused by the COVID-19 pandemic, the group's performance for 2020 was modestly strong after adjusting for the Oceanic Bank legacy issue of goodwill impairment that was written -off and the write-down of other restructuring costs. The group's asset quality improved as its shareholders' fund also witnessed growth. Earnings per share (eps), however, decline noticeably Y-o-Y and return on equity (RoE) for the period skimmed lower than 1% at 0.64% (PBT at N65.46bn), a far distance from its 1.7%  posted in 2019 which was equally affected by the Oceanic Bank goodwill impairment.

 

Illustration 1: ETI FY2020 Unaudited Result

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With COVID-19 still a threat to business normalization across the African continent, ETI may have to accept a chilly period of lower-than-desired earnings and higher-than -expected costs, at least in its Nigeria operations. The group may, however, witness operational improvements across continental markets between Q2 qnd Q4 2021 if governments are not forced to resume 2020 lockdowns.

 

Tough times are definitely in the works for ETI, just like several other banks, but what may be the clincher on corporate performance in 2021 is how the bank contains operating costs and leverages its continental presence by squeezing value from economies of scale and scope across markets.



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