Equity Analysis /

Ecobank Ghana: Q1 19: Reiterate Buy on strong net interest income

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Rahul Shah
    Rohit Kumar
    Tellimer Research
    7 May 2019
    Published by

    EGH reported a 51% yoy jump in PAT to GHS101mn in Q1, beating our forecast by 21%, on the back of higher net interest income. The bank’s PAT was driven by the strong growth in total operating income, which saw support from higher trading income (other Ghana banks like GCB and CAL Bank saw similar support). There was only a slight increase in both loan impairment and operating expense. Unlike the results from GCB and CAL Bank, there was an improvement in EGH’s asset quality, with NPL falling to 11.7% at end-Q1. 

    Reiterate Buy with an unchanged TP of GHS10.30 (ETR of 58%). Our view is supported by: 1) the strong earnings growth from higher net interest margins and loan growth; 2) operational efficiency; and 3) the moderation in NPL ratio. The bank’s stock currently trades at 1.3x PB, versus a five-year historical average of 2.6x.

    Total operating income supported by higher margins and FX volatility. Higher trading income and higher net interest margins drove EGH’s strong operating income performance. The improvement in net interest margin was partly because of the 70bps yoy decline in cost of funds. However, on a qoq basis, net interest margins fell by 260bps on lower asset yields. 

    Steep moderation in cost/income ratio. Unlike the significant increase in opex for GCB and CAL Bank (up by 28% yoy on average), in our view, EGH’s early adoption of technology has been a positive for the bank’s operating efficiency, with opex up just 6% yoy. As a result, EGH’s cost/income ratio fell to 46% at end-Q1 19, below our forecast of 50% for 2019. We highlight that the bank’s improvement in operational efficiency could present an upside risk to our valuation. 

    NPL ratio decline for the second consecutive quarter. Following the gains in EGH’s asset quality, we reiterate our view that the bank’s NPL ratio could fall to 9.6% at end-2019f due to the strengthening of economic activities and loan book growth. The bank’s loan book increased by 9% YTD versus our 21% growth expectation for 2019, while customer deposits are up just 3%. However, EGH’s relatively low CAR (13.4% versus peer average of 18.7% and regulatory threshold of 10%) could be a negative for risk asset growth and dividend payout.