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Thursday, October 25, 2018 14:25PM / By The Analyst
ETI
released its Q3, 2018 results yesterday and declared $314 million (PBT) or
N75.72bn (PAT). The share price at the close of business yesterday was N16.00k
(dropping from the start of day figure of N16.85k (YTD – 5.88%); up 48% year-on-year on
constant currency basis per their official press release.
Interestingly,
there has been a muted reaction to the figures from the market. This is perhaps
a given, the market does not like the results on the back of realities which
would indicate that the only reason for a good result is the application of
IFRS 9 day one adjustment.
Source: Proshare Markets / The Analyst
Ecobank
is struggling to grow revenues, just up by 1.1% year-on-year. In its
annual reports (see page 16), Ecobank recognizes the impact of using the NAFEX
rate (360 NGN to USD) to convert its reporting numbers from
Nigeria vs the CBN rate (306 NGN to USD). It would appear
that the bank is still not using NAFEX in computing its results.
Source: Ecobank
Find out more information, Click here to access Ecobank’s
IR Portal in Proshare Markets
It
is not too difficult to notice the 37% decrease in operating profits before
impairments and taxes.
The
real results/impact is explained by the bank below:
Source: Ecobank
Find out more information, Click here to access Ecobank’s
IR Portal in Proshare Markets
Applying NAFEX, Different Outcomes
If
the revenues from Nigeria is recalculated using the NAFEX rate, revenues are
down 3% overall.
Nigeria
is struggling at this time, with revenues down 18% and operating expenses
growing 3%; resulting in pre-impairment income down 37% for Nigeria.
Adjusting
for NAFEX, revenues are down 31% and pre-impairment income down 47% for
Nigeria.
It
must be noted that the impact of foreign exchange currency losses on equity
using the NAFEX rate is not disclosed by Ecobank.
The
results are further impacted by an IFRS9 day one adjustment for 2018 of $299m
which allowed Ecobank to impair its financial assets through the balance sheet
without impacting on the reported profits for 2018.
This
allowed Ecobank to report that its ‘impairments’ recognized through the income
statement for 2018 has reduced from $292m in 2017 to $217m in 2018 (or 25.68%
drop).
By
including the $299m impairment in the 2018 balance sheet Ecobank has shown a
small profit of $15m as total impairments for 2018 would be $299m (balance
sheet) plus $217m income statement for total impairments of $516m.
The
recalculated results for Ecobank should look more like $531m pre-impairment
income minus $516 total impairments, giving us a PBT of $15m.
Including
the NAFEX adjustment impact of $12.8m the recalculated results for Ecobank is
only $2.2m PBT.
It would appear
that there are clever and creative ways to deploy IFRS in order to improve
income statement results by front loading provisions in the balance sheet and
then releasing it through the year to allow for improved profits while the
revenue growth remains static or perhaps negative (and in this case - 1.1% or
negative using the NAFEX exchange rate to calculate the results for Nigeria).
The
market reaction says a lot, and experience would indicate that knowledgeable
and discerning investors around the issue of NAFEX and reporting understand
what is going on; and are selling off Ecobank shares (ETI @N16 yesterday
and today after trading as high as 22.15 in August 2018) as the
underlying business performance is not sustainable. Using IFRS to increase
revenues will work for 2018, but what is the plan for 2019?
For
further information, perspective and additional insight for our team, kindly
e-mail us vide analyst@proshareng.com
Find out more information, Click here to access Ecobank’s
IR Portal in Proshare Markets
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