Takeaways from ETI's Investors Conference Call; Reimaging The Past


Monday, March 30, 2020/    10:00AM / By Teslim Shitta-Bey, Managing Editor/  Image Header Credit: Ecographics


Continental banking conglomerate, ETI, has had mixed results in its operating performance over the last half decade. The three past years in particular have been especially stressful as the group saw its Nigerian operations stumble while its francophone markets have had to take up the slack.  The bank's recent investors call pointed to a number of contemporary developments including the following:



  • Net Interest Income dipped by -19%, sliding from US$930in FYE 2018 (restated figures) to US$750m in FYE 2019s. The fall in net interest income suggests difficulties in sustaining lending spreads. The group's core lending business activities appear to be under pressure from rising cost of funds (C-o-F) and lower nominal lending rates.

  • The groups results were restated for 2018 to reflect a reversal of interest income of US$79.5m. The bank explained that this reversal was mandated by the central bank in Nigeria and reflected legitimate loans to petroleum products marketers. According to the banking group's executives, the reversal was, "related to legitimate loans granted to some petroleum marketing companies for the supply of petroleum products based on government-related fuel-subsidy. The reversal was mandated by the CBN". The adjustments to interest income and hence Ecobank Nigeria and ETI'S bottom line in 2018 raise issues of past trading activities on the bank'Ss stocks in 2018. Was the group's traded equity on the Nigerian Stock Exchange (NSE) based on exaggerated earnings perception and projections? The group's stock market value has dropped -65.9% year-on-year (Y-o-Y) as at March 2020.

  • In line with appropriate IFRS/IAS exchange rate translation governance standards as advocated by Proshare since 2018, the group in compliance with IAS29 in dealing with countries with high inflation rates, took a  US$9m net monetary loss while also taking a further US8m haircut on the basis of monetary translation loss based on end-of-period exchange valuation rather than average value of the exchange rate. Both events caused a decline in the potential bottom line earnings of the group in FY 2019.

  • The bank suffered a US$10m loss in income as a result of a foreign currency translation adjustment for leaving the Angolan market. The loss occurred on the repatriation of residual capital from the Southern African country.

  • The group's cost-to-income ratio (CIR) at 66.2% was moving in the right direction or inching closer to a preferable 50% number but the Nigerian ratio at 94.9% suggests that the Nigerian bank requires a trimming of operational expenses. The CIR was lowest amongst other anglophone West African countries with an average CIR of 46.9%.

  • The banking group posted a strong profit before tax growth of 39% on year-on-year (Y-o-Y), profit before tax rose from US$357m in FY 2018 to US$405m in FY 2019. Most of the increase was pulled from business growth in anglophone West Africa (AWA, excluding Nigeria), francophone West Africa (UEMOA) and Central and East Africa (CESA). The different parts of Africa were responsible for about a third of profit with Nigeria making up the last 1%. Profits before tax attributable to ETI shareholders increased from US$182m in FY 2018 to US$194m in FY 2019.


A Look At the Profit Numbers

ETI's FY 2019 profit numbers showed an improvement over the FY 2018 numbers but the fact that the FY2018 figures were restated makes direct comparison difficult. The group's profit attributable to shareholders fell steadily between Q4 2018 and Q4 2019. ETI's shareholder profits dipped from US$64m in Q4 2018 to US$62m in Q1 2019, by Q2 2019 the profit number had dipped to US$58m before sliding to US$34m in Q3 2019 only to pull up by 14.71% to US$39m in Q4 2019 (see chart 1 below).


Chart 1 Profit Attributable to ETI Shareholders Q4 2018-Q4 2019($'m)

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Source: ETI Conference Call Presentation March 27, 2020


The financial group has equally had challenges improving the margins in its core business of lending as net interest margin has fell from 5.3%in Q4 2018 to 4.6% in Q1 2019 and 4.9% in Q2 2019. By Q3 2019 the margin had slipped to 4.8% and dropped another 100 basis points to 4.7% in Q4 2019 (see chart 2 below). 


Chart 2 ETI: A Case of Shrinking Margins

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The average tier-1 Nigerian bank would want to push for a net interest margin of 7% to allow room for absorption of shocks to earnings and costs. The group's challenge appears to be its inability to attract sufficient low-cost deposits across markets and protecting interest incomes in declining economies. The situation may become worse in 2020 as African economies relying on commodity exports begin to shrink as gross domestic product (GDP) growth rates shift downwards. Nigeria ended 2019 with a GDP growth of 2.27% (2.55% in Q4 2019) but is likely to see a Q1 2020 GDP growth of less than 2% and a Q2 2020 GDP growth that will turn negative if the ongoing Coronavirus (COVID-19) continues to escalate. As at 1.30 pm March 3o, 2020, the Nigerian Centre for Disease Control (CDC) announced 111 confirmed cases of the virus with three recoveries and one known death.  


Averaging Up With RoE

ETI posted an impressive return on equity (RoE) figure of 13% in FY 2019. From a continental perspective it was a respectable return on shareholder's funds but the average return on the continental operations of ETI masked the extreme variability in equity returns across the banking groups respective continental markets. The Nigerian market, for example, gave a shareholder's return of 0.4% (one of the worst in the industry for FY 2019), while the UEMOA region returned 22.8% to shareholders, AWA returned 30.1% and CESA impressed with a return of 23.6% (see chart 3 below).

Chart 3 ETI's RoE and It's Different Shades

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Source: ETI Conference Call Presentation March 27, 2020 


Again, the banking group's Nigerian operations shows operating weaknesses that need to be addressed urgently as the Nigerian business still represents at least a fifth of the group's continental business.

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The Two Sides of Asset Quality

Asset quality has been another major threat the group has had to handle. The quality of loans in the Nigerian market have been particularly troublesome with 54% of the group's non-performing loan assets (NPLs) coming from the country. The next highest region with NPLs was group's francophone market (UEMOA) accounting for 17% of the group's NPLs. Anglophone West Africa (AWA) without Nigerian constituted 11% of ETI's NPLs for 2019 (see chart 4 below).

Chart 4 ETI and It's NPLs -The Regional Break down FY 2019

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Source: ETI Conference Call Presentation March 27, 2020

The poor loan recovery situation in Nigeria may get worse for two reasons, first the loan to deposit ratio (LDR) in Nigeria has been raised to 65% by the CBN, this means that the Nigerian bank would normally either increase its lending or reduces its deposits both  of which outcomes could hurt the bank at a time the Nigerian economy is heading towards a recession. With its FY 2019 LDR at 67.4%, the bank does not, however, need to increase lending which helps contain additional impairment provisions, but its NPL at 23.9% in FY 2019 (up from 13.7% in FY 2018) is way ahead of the CBN's statutory guidance of 5% and much higher than the median NPLs of other tier-1 competitors in the local market.


The second reason why the loan recovery numbers of the bank may slide further is that the reduction in international oil prices and the downward revision of the Nigerian fiscal budget for 2020 will hurt domestic demand, supply and savings. Thecombination of these factors would reduce the banks gross earnings and trim its operating income and bottom line going forward.


The fall in turnover and the likely rise in domestic supply chain costs (as the Naira adjusts to smaller dollar inflows from the oil sector) could create an environment where borrowers find repayment difficult and request for extension of loan moratoriums or interest waivers. Both cash flow adjustments would create challenges for the banks earning calculationsin 2020.


Curing Operating Cost Headaches

Apart from loan asset quality ETI's Nigerian bank equally has major problems with operating expenses. The bank's cost-to-income ratio (CIR) is easily one of the highest in the Nigerian money market with CIR rising from 66.8% in FY 2018 to 94.9% in FY 2019. The high Nigerian cost of operations means that as recession sets in the bank may have to start relieving some of its workers of their jobs or reviewing their pay downwards, the bank's evidently high cost of operations is unsustainable within the new "Coronanomics" of strategic business sustainability.


After Nigeria the next highest cost-to-income ratio centre on the continent was UEMOA at 59.4%, CESA at 58.3% and AWA at 46.9%. The AWA numbers are impressive and show that anglophone West Africa is a major boon to the banks operations with a very competitive cost structure (see chart 5 below).

Chart 5 ETI's Regional CIR Numbers-The Nigerian Blacksheep

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Source: ETI Conference Call Presentation March 27, 2020


Liquidity ...liquidity But None To Spare

ETI as a group had minimal liquidity worries but the Nigerian bank fared far less better. The group targeted a growth in deposits of between 8% and 10% but was able to achieve a lower figure of 5% (12% in constant currency terms). Across the group the banks LDR ratio of 60.5% was strong (although lower than the 65% CBN expectation in Nigeria), the Nigerian ratio of 67% showed strength that was a departure from other operating numbers for FY 2019 (admittedly the PBT growth figure of 39% was equally impressive). The group may, however, need to review its CIR downwards towards 55% to make it regionally competitive (this essentially means brining down its Nigerian costs) and think about improving equity returns on its Nigerian operations, this would require improving liquidity by faster growth in both deposit mobilization as well as loan assets of superior quality. Achieving this in a recessaionary environment will be no mean feat but it is this shot at improvement in its Nigerian operations that will re-esatblish its continental strength and business credibility (see mixed indicators in chart 6 below). 


Chart 6 ETI's Tale of Mixed Indicators

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With Nigeria, and other parts of Africa heading into a Coronavirus and oil price war-induced global recesssion, the numbers in chart 6 above will appear flattering at the end of 2020, unless the group's board can configure operating scenarios that allow the bank put greater pressure on cost containment while also strengthening digital operational platforms to reduce CIR while improving customers service delivery exeperience (UX/UI). Hanging on to old fruits could create an operational bellyache. ETI from a review of its FY 2019 books is due for a makeover, especially in Nigeria.


Leveraging The Continental Balance Sheet

The statement of financial position (or balance sheet) of ETI in 2020 may require a few skips, steps and jumps for the group to weather the emerging perfect storm coming to continental markets.

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Almost a third of the bank's assets were in investible treasury securities in 2019, the gambit may fail in 2020 as yields flatten and inflation eats up nominal market returns. Customers loans was roughly 39% in FY 2019 which means that the bank was cautious in customer lending with just under two-fifths of the bank assets represented as loans to customers. In 2020, it will be a difficult call to lend as supply chain disruptions as a result of COVID-19 will worsen NPLs and the capacity of banks to advanced further credit. The group's NPL ratio of 9.7% in FY 2019 will rise to between 10.2% and 10.5% in 2020, based on in-house modelling projections. Whether this scenario pans out will depend heavily on how long the Coronavirus disease takes in being contained continentally and whether Saudi Arabia and Russia can reach a rapprochement on oil supply cuts in global markets in either Q2 or Q3 2020.


Customer deposits make up 69% of the group's balance sheet; normally, this is a good number but if continued economic pressure lead depositors to take a flight to cash, the bank could find itself in turbulent financial waters. Nevertheless, so far continental diversification has helped the bank maintain a group-wide stability that may not have been attainable if it had not spread itself across different African markets. But how well the continental leverage holds up against the Coronavirus headwinds is yet to be seen.  

Editor's Note

A more detailed analysis of ETI's 2019 Financial Results and 2020 outlook will be contained in Proshare's H2 2019 Banking Sector Review to be released in April 2020. 

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