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Stock & Analyst Updates | |
1822 VIEWS | |
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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:
Highlights
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)
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
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
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.
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
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
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
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.
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.
Related News - ETI
1.
ETI Declares N99bn PAT in 2019
Audited Results,(SP:N4.90k)
2.
ETI Announces Two New Appointments and Changes
On Its Board
3.
ETI to Hold Board
Meeting on Feb 28 2020 to Approve Its 2019 Audited Financial S...
4.
ETI Enters
Cross-border Remittance Partnership with Alipay
5.
Ecobank
Transnational Incorporated Appoints Deepak Malik As A Director; Monish Dutt
Departs
6.
ETI:
Walking A Tight Rope; Earnings Down As Continental Headwinds Persist
7.
ETI
Declares N78.84bn PAT in Q3'19,(SP:N7.10k)
8.
S
and P Global Ratings Affirmed ETI And Ecobank Nigeria Ltd Ratings; Outlook
Stable
9.
Airtel
Africa Announces Partnership With Ecobank Group
10.
ETI
Works Its Come Back, Gross Earnings Rises 5.36%
11.
10.ETI
Announces The Completion of Disposal of IFC Shareholdings To Arise B.V.
12.
Negative Sentiment
Sustained On ETI As Share Price Hits 52-Week Low of N6.00K
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