Earnings Report /

Ecobank Ghana: Strong Q2 21 earnings on impressive non-interest income and lower cost of risk

  • Non-interest income growth outweighed the decline in net interest margin

  • On efficiency, good cost discipline and higher revenue lowered the cost/income ratio

  • EGH holds 32% of the industry’s total assets, maintain Buy

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
15 September 2021
Published byTellimer Research

Ecobank Ghana (EGH) reported Q2 21 EPS of GHS0.50, a 24% yoy increase. This was on the back of lower impairment charges (-25% yoy) and an 80% yoy increase in non-interest income arising from strong growth in trading and fee income revenues (+97% yoy and +73% yoy respectively).

ROE dropped from 24.6% in Q2 20 to 23.8% in Q2 21, loans declined 2% yoy due to the bank’s lack of appetite for loans, while deposits grew 13% yoy.

We maintain our Buy recommendation on EGH, with an unchanged target price of GHS9.1 on account of:

  1. Lower cost of risk (1.4%) which is slightly below the industry average of 1.5%, as well as the improvement in NPL ratio from 15.4% in Q2 20 to 13.9% in Q2 21, compared to the high industry average NPL ratio of 17.9%.

  2. Its position as the second-largest bank in Ghana by total assets after GCB at GHS16bn, with an increase in ROA from 3.5% in Q2 20 to 3.8% in Q2 21.

  3. Operating efficiency remains strong as the bank continues to manage costs, recording a best-in-class cost/income ratio of 38.4%, well below the peer average of 44.2%, supported by its digital strength and improved payment solutions.

The bank currently trades at 0.8x FY21f PB and 4.2x FY21f PE, against an average for our Ghana banks coverage of 0.8x and 2.8x respectively.

Key positives

  1. Cost to income ratio declined from 40.7% in Q2 20 to 38.6% in Q2 21, on the back of higher income due to strong non-interest revenue. On cost, we expect EGH to gain more efficiency benefits as a result of its digital strategy, particularly as it moves from depending largely on its branch network to more mobile and digital banking.

  2. Asset quality improved on a yoy basis as the NPL ratio declined from 15.4% in Q2 20 to 13.9% in Q2 21, translating to a 12% yoy decline in NPLs due to loan write-offs. Loan impairment charge dropped (-25% yoy). On a qoq basis however, the loan impairment charge increased 40% qoq, with the NPL ratio rising from 12.0% in Q1 21 to 13.9% in Q2 21. This was driven by repayment challenges faced by clients in the quarter. 

  3. Non-interest income grew 80% yoy on the back of the 73% yoy and 97% yoy growth in fee income and trading income respectively. Fee income and trading income together account for 96% of the bank’s non-interest income. In turn, non-interest income constitutes 44% of total income. This impressive performance was driven by higher trading volumes and fees generated from digital services. We expect non-interest income to stay elevated as the bank trades more fixed income volumes and expands its digital platforms to compensate for declining interest income.

Key negatives

  1. Net interest margin fell from 15.8% in Q2 20 to 10.8% in Q2 21 on the back of a decline in yields on loans and investment securities from 17.9% in Q2 20 to 12.6% in Q2 21, which outweighed the 100bps decline in cost of funds. This was due to the 2% yoy decline in loans and the fall in interest rate on short-dated securities.