Ecobank Ghana’s Q2 19 profit after tax rose 28% yoy to GHS115mn, driven by increases in net interest and fee income and a 2ppt yoy decline in cost/income to 47%. These more than offset lower trading income and an increase in net impairment charge. Net loans were up 2% qoq and deposits were up 10% qoq.
Reiterate Buy with an unchanged target price of GHS10.3 and an ETR of 31%. Our positive view is supported by sustained improvements in EGH’s operating performance, as cost/income moderated and pre-provision profit rose 32% yoy. The key downside risk to our rating is EGH’s low CAR of 13.2%, which is only slightly above the 13.0% regulatory benchmark, although we are encouraged by its strong earnings generation capacity (ROEs of 30.6% versus 19.8% for peers) and the sustained moderation in its NPL ratio. We expect weak dividend payments due to EGH’s weak CAR, but see limited risk of an equity dilution, going by management’s guidance. EGH trades at 1.9x 2019f PB, a 27% premium to its Ghana peers.
Higher net interest margin and loan volumes boosted operating income. There was also an increase in fees and commissions, which offset lower trading income, and contributed to the 28% yoy growth in operating income. The trend in trading income, which fell 12% yoy, was surprising, as it bucked the trend for other Ghana banks under our coverage which largely benefited from the GHS weakness in H1 19.
Improved cost/income ratio despite higher operating expense. Ecobank recorded a 23% increase in operating expense due to higher general and admin costs (up 48% yoy). Like other Ghana banks under our coverage, the strong revenue growth outweighed cost pressures and drove a decline in cost/income.
Loan growth was slow during the quarter, as seen across our coverage. EGH’s qoq net loan growth was in the 1-2% range of our coverage, but is likely to be more constrained than peers in the short term due to its low CAR, which leaves little room for expansion. We expect a focus on investment securities while the bank tries to strengthen the capital base. That said, there was a decline in the NPL ratio during the quarter, also in line with the trend for most banks.