Ecobank still contends with weaker SSA economic outlook and capital raising challenges

Proshare

Thursday, April 23, 2015 3:29 PM / ARM Research

Ecobank Transnational Incorporated Plc (ETI) released FY 2014 audited results wherein gross earnings rose 19% YoY to N483 billion while PBT and PAT both increased by more than one-half to N87.2 billion and N66.9 billion respectively.

ETI did not declare a dividend as in 2013, however ETI announced a 1 for 15 scrip issue.

Dual revenues streams combine to drive top-line growth
Q4 14 gross earnings expanded 13% QoQ to N138.3 billion reflecting strong increases across both revenue streams: NIR (+17% QoQ to N57.9 billion) and interest income (+11% QoQ to N80.4 billion). In contrast to management guidance about subdued risk asset creation at Q3 14 earnings call, interest on earning assets expanded at its quickest pace (+18.4% QoQ) driven by strong growth across all segments: Loans (+16% QoQ), Bank placements (+33% QoQ), Bills (+47% QoQ) and Cash (+33% QoQ).

The quicker rise in naira values for the four items relative to more muted growth on dollar basis (see Figure 1) suggests currency weakness (CFA Franc, Nigerian naira Ghanaian cedi, etc) played a sizable role in interest income expansion. Thus, whilst interest income rose 11% QoQ, annualized asset yields contracted 100bps QoQ to 7.1%. Similarly, the currency volatility helped drive higher FX trading income which underpinned the strong growth in NIR.
Figure 1: QoQ growth across interest earning assets

Softening cost control and higher provisions offset benign funding costs
Despite 13% QoQ expansion in funding base (N3 trillion) interest expense contracted 1% QoQ to N27.9 billion. ETI notes changing deposit mix with lower exposure to more expensive Nigerian deposits offset by higher francophone West African dollar deposits.  WACF declined 30bps QoQ to 2.8%.

Operating expenses bucked the single digit trend growth over 9M 2014 (+8% YoY) by rising 15% QoQ (+19% YoY) to N69.1 billion.  ETI links the uptick to increases in ICT costs, professional fees and higher AMCON charges in Nigeria. Nonetheless, reflecting the momentum in top-line, CIR declined 120bps QoQ to 62.6%.

Provisions expanded for the second consecutive quarter, rising more than double from Q3 14 to N21billion which ETI links to legacy exposures. Relative to 2013, Q4 14 provisions are 50% lower reflecting base effects after ETI took a $163million provision taken on a single asset in Q4 13.

Largely reflecting the higher impairment charges, PBT and PAT declined 17% and 33% QoQ to N20.7 billion and N14 billion respectively.  Correspondingly, PBT and PAT margins are 500bps and 700bps lower QoQ at 15% and 10% respectively.  

Weaker SSA economic outlook and capital raising weigh on near term picture
Going into 2015, we see the challenged macro space across Sub-Saharan Africa which has seen the IMF lower regional GDP growth by 40bps to 4.5% in April (on the heels of the January 2015 cut 90bps to 4.9%) and broadly weaker currencies as driving muted risk asset growth for ETI.

Nonetheless, we think ETI’s geographical platform positions the bank to experience NIR expansion on FX volatility across its various African subsidiaries (ex. Nigeria where volatility in FX markets shrank post-implementation of order based 2WQ).

Given aggressive loan book expansion in Nigeria, the pressured economic environment speaks to some deterioration in asset quality over 2015. Furthermore, whilst group CAR rose 410bps YoY to 20.4% following the Ned bank and IFC equity dilutive capital injections, ETI’s Nigerian subsidiary still requires Tier I capital to meet CBN minimum regulatory threshold of 16% for SIFI.

Overall, we see scope for moderation to our last published FVE (N24). ETI trades at a current P/E of 6.77x and P/B of 0.95x which are both at discount to peer averages with last trading price at 16% discount to our FVE implying an overweight recommendation.


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