Nigeria | Ecobank Transnational Incorporated FY:2015 & Q1:2016 Earnings Update

LAGOS, Nigeria, Capital Markets in Africa — Ecobank Transnational Incorporated (“ETI” or “the Bank” or “the Group”) published its FY: 2015 and Q1:2016 numbers recently after issuing an initial profit warning. The FY: 2015 result reflected the Bank’s recent operational challenges as it booked a monumental impairment charge in loans and   advances which surged to N105.2bn (136.9% higher than N44.4bn in FY: 2014). This pattern was also witnessed in the Bank’s Q1:2016 result; thus significantly altering the earnings capacity of the Group. 

Disappointing Performance amidst Challenging Operating Environment
ETI’s FY: 2015 performance was quite disappointing though largely not   unexpected given the earlier profit warning issued by the Group few weeks before the result was released. Whilst the Bank sustained gross earnings growth, up 10.9% Y-o-Y to N542.7bn (vs. N489.3bn) but down 8.0% in US Dollar terms, the burden of higher impairment charges and sustained   pressure on operating expenses  weighed down profitability. The FY: 2015 gross earnings was driven majorly by interest income which grew 20.0% to N345.8bn, despite 1.9% reduction in total loans and advances. Interest   expense grew slower by 15.1% to boost the net interest income by 22.7% Y-o-Y to N226.6bn in FY: 2015 from N184.6bn in FY: 2014. Non-interest income, however, declined by 2.1% from N201.1bn to N197.0bn.

A significant surge in credit impairment charges to N105.2bn in FY: 2015 from N44.4bn in FY: 2014 was recorded on the back of elevated risk in the operating environment following a comprehensive review of the Bank’s loan book and processes in Q4:2015. The high impairment was also precipitated by the operational challenges in most of the 36 African     countries and beyond with Non-Performing Loans (NPL) ratio jumping markedly from 4.4% in FY: 2014 to 8.2% in FY: 2015 and further rising to 9.0% in Q1:2016. Operating expenses also increased significantly by 9.0% to N270.4bn impeding PBT growth by 53.0% to N40.6bn from N86.4bn in FY: 2014. Similarly, a higher annual effective tax rate of 45.6% in FY: 2015 from 23.5% in FY: 2014 further dragged PAT by 66.6% to N22.1bn from N66.1bn in the previous year.

The weakening performance continued in Q1:2016 as the gross earnings declined by 3.6% to N131.4bn from N136.2bn in Q1:2015 dragged by 2.2% (up to N85.9bn from N84.1bn) temperate growth in interest income despite 2.0% moderation in interest expense which supported a 4.5% (up to N56.7bn from N54.2bn) increase in Net-interest income. Credit impairment pressures remain noticeable in Q1:2016 result as it surged 54.6% (N13.3bn vs. N8.6bn in Q1:2015) while OPEX increased marginally by 0.6%. PBT, in turn, declined 32.4% to settle at N20.6bn from N30.5bn while the higher tax rate of 20.7% relative to 18.9% in Q1:2015 pressured PAT by 33.9% from N24.7bn to N16.4bn. 

Constrained Risk Assets and Deposits Pressure Income Lines
Against the backdrop of the high-risk environment affecting the banking industry, ETI restrained from aggressive risk asset creation as the total loans and advances declined 1.9% from N2.64tn in FY:2014 to N2.59tn in FY:2015 and further declined to N2.51tn in Q1:2016. Deposits growth, on the other hand, was also moderated as the Bank was only able to grow deposits by 1.3% from N3.5tn in FY:2014 to N3.6tn in FY:2015 with a decline of 3.7% recorded between FY:2015 and Q1:2016 (N3.4tn). Loans to Deposits ratio eased to 72.6% in FY:2015 from 75.0% in FY:2014 and also increased to 73.1% in Q1:2016 though largely within the regulatory threshold of 80.0% for Nigerian banks. In our view, the recent risk assets assessment profile of the Bank which led to huge provisioning on most of its loans and advances threatens to impede the Group’s interest income and ultimately its profitability in 2016 financial year. The Bank targets a flat loan growth for FY:2016 while the bank deposits    market remains challenged as most banks struggle for customers in a generally tough operating environment. 

Full-Year Dividend of N0.40; Dividend Yield at 2.9%
The Board of Directors of ETI proposed a final dividend per share of US 0.2 cents or 40 kobo, implying a dividend yield of 2.9% as at market price of N14.00 (18/04/2016). At this yield, the Bank currently ranks as one of the banks with the lowest dividend yields, attributable to both low dividend payout (33.2%) and the sharp decline in share price of ETI in the last one year due to generally weak market sentiments. The closure date for the dividend payment has been fixed for 19th July 2016 while payment date is scheduled for 2nd August 2016. 

We Revise Our Target Price on ETI and Review Our Rating to Accumulate
ETI remains conservative currently in its loan growth drive as witnessed in FY: 2015 and Q1:2016 results. The Bank’s deposits growth is worrisome given the trend that was witnessed in the last two results released. We are of the view that given the high NPL Ratio (8.2%) which is projected by the Bank to be as high as 7.5% for FY:2016, the Bank may still experience some constraints in its operational performance. We have reviewed our loan growth forecast from 5.0% to 1.0% for FY:2016 as we believe the Bank will focus more on strengthening its risk management framework to recover some of the NPLs than creating additional risk assets. From a blend of our valuation methodologies of Neat Asset Valuation, Dividend Discount Model and Residual Income Model, we arrived at a target price of N16.81 against our previous price of N21.54. With our 2016 target price, ETI portends a 20.1% upside potential and as such we revised our investment recommendation to “ACCUMULATE” from “BUY”.

Source: Afrinvest (West Africa) Limited Research Team