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.
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:
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?
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