Downgrading to Hold from Buy following good performance: We are downgrading our recommendation on the Ecobank Transnational Incorporated (ETINL) 9.5% 2024 bond to Hold from Buy. Spreads have tightened significantly since the bond was issued and now look closer to fair. Having said that, we acknowledge that indicative prices are now off the highs. As-reported results for Q3 left much to be desired – net income fell qoq, and performance in the Nigeria business remained weak relative to other geographical divisions. However, on a constant currency basis, Q3 PBT rose yoy. The Group disclosed end-June capital ratios, which were lower than at end-18, but stressed that these ratios remain higher than the regulator requires.
Net income down yoy: Q3 net income (after minorities) of US$34mn was 45% lower than in the previous quarter. The annualised ROE was 11.8% on our calculations, down from almost 19% a year ago. Lower core revenues and a relatively high tax charge both contributed to the weaker bottom line. Foreign currency translation effects also played a part in this – in NGN, Q3 PBT of just over NGN36bn was 15% higher yoy, reflecting higher non-interest income and lower provisions. Regarding the tax charge, ETI noted that profitability in countries with higher tax charges increased relative to that in lower tax countries, leading to the higher effective tax rate at group level.
Nigeria business remains the laggard: Performance in the Nigeria business was less strong than elsewhere, once again. However, while operating profit fell qoq, the net result was better than in Q2 (breakeven versus US$2mn loss). In Francophone West Africa (UEMOA), Anglophone West Africa (AWA) and in Central, Eastern and Southern Africa (CESA), profitability metrics generally remained solid, though we note that net income was lower than in the previous quarter in both UEMOA and CESA.
Disappointing yoy decline in revenues: ETI disclosed operating revenue of US$393mn for Q3. This was up slightly qoq, but significantly lower than a year ago. The suspension of interest on subsidy-related oil and gas loans in Nigeria contributed to the yoy decline in net interest income, as did slow growth and tighter spreads. Net fee and commission income and ‘other’ operating income also declined yoy. The Group disclosed that the Central Bank in the Francophone region mandated lenders to repatriate exporters’ foreign exchange proceeds, which impacted non-interest revenues.
Yoy decline in costs wasn’t enough to offset weaker revenues: Operating expenses totalled US$261mn in Q3, higher than in Q2, but down 4% yoy. Despite this, the cost/income ratio rose to 66.4% from 59.6% a year ago, driven by weaker revenues.
Decline in gross loans contributed to higher NPL ratio: ETI disclosed net loan loss provisions of US$33mn, down from US$45mn in the previous quarter and US$82mn a year ago. The non-performing loans ratio was 9.9%, up from 9.6% at the end of last year. The total volume of non-performing loans has actually declined since the end of last year. However, gross loans fell almost 5% in the first nine months of the year, leading to the higher NPL ratio.
Drop in deposits lead to LDR rise: The loan book was almost flat qoq, while customer deposits fell 4%. This meant that the LDR increased to almost 56% from 54% at the end of June. We note that this ratio is for the whole group, rather than the Nigeria business, where the LDR was 67.3%, up versus end-June, and higher than the Central Bank of Nigeria-mandated minimum of 65%, which will be applicable from the end of this year. ETI reported cash and equivalents of just over US$2.7bn, down slightly on the end-18 level, but still accounting for about 12% of total assets. ETI still only has one senior eurobond outstanding, and previous comments from management suggest a return to the eurobond market isn’t imminent.
Capital ratios down since end-18: ETI disclosed end-June 2019 Tier 1 and total capital ratios of 8.8% and 12.3%, respectively. These ratios were down from 9.6% and 12.8% at end-18, due to foreign currency translation effects and IFRS 9 implementation. However, the Group flags that capital ratios remain higher than the regulatory minimums of 7.25% (Tier 1) and 9.5% (CAR). At the end of September, the equity/assets ratio was flat versus the end-June level, at 8.1%.