Ecobank is undervalued, but its Nigerian business is also underperforming

Pan-African lender, Ecobank Transnational Incorporated, on December 1, 2022, released its third quarter 2022 results; reporting a 2.37% year-over-year increase in pre-tax earnings in the third quarter of 2022 thanks to growth across all its revenue lines. It posted the highest quarterly interest income of N168.619 billion than in the first and second quarters. And on top of that, pre-tax profit rose 29% yoy to Naira 52,071,000 million, while net income rose 10% to Naira 180,540 million.

Although profit after tax from continuing operations declined 4.34% to N40,192,000,000 due to higher tax expenses from other geographic reporting segments, it still affirms the bank’s consistent earnings over the years.

For example, the bank’s third-quarter earnings history for the last 5 years has a growth rate of 14.65%, while the annual earnings history for the last 5 years has a compound annual growth rate (CAGR) of 15.97%.

Additionally, the third quarter 2022 results affirm the bank’s strong revenue diversification supported by a broad geographic footprint across four reporting regions and notable non-interest income of 45.46% of operating income in 9M 22.

Pan-African lender with subsidiaries spanning 33 Sub-Saharan African (SSA) countries saw its assets increase by $25.6 billion or N11.207 trillion as of September 30, 2022, making it one of the largest banking groups from the continent outside of South Africa.

  • In a statement, the CEO of the Ecobank Group, Ade Ayeyemi, explained the reasons behind the results.. These results reflect the resilience, brand strength and diversification of our pan-African franchise. We saw decent activity from clients in the wholesale and consumer payments, trade finance and foreign exchange markets. In addition, despite inflationary pressures, we maintained a strict cap on costs, thereby improving our cost-to-income ratio to 56.3% from 58.3% in the prior year.

However, it is important to note that EcoBank Nigeria contributed only 13.59% ($184 million) to the group’s net income; the smallest among the four main regions.

Following the release of the third quarter results on December 1, 2022, the share price appreciated by 11.44%, closing at N11.20 on December 9, 2022 with a year-to-date gain of +28, 74%, outpacing the industry of NG Banks and NGXASI.

In retrospect: In 2022, the bank started the year cautiously following the IMF’s plan to lower the global growth forecast due to the high inflation and high interest rate environment.

  • But after the successful implementation of his ‘Execution momentum strategy‘ and supported by rising interest rates, the bank posted a strong earnings performance in the first half of 2022.
  • The group’s pre-tax profit was 108,956 million naira, an increase of 28% from 85,324 million naira a year earlier.
  • In a quarterly analysis, Q1 2022, revenue missed analyst estimates by 4.7%, while earnings per share (EPS) beat analyst estimates by 61%. In the second quarter EPS rose 50% to US$0.003O.
  • Overall, despite the decline in earnings after tax from continuing operations in the third quarter, earnings after tax from continuing operations in the 9 months of 2022 came in at N117,405, representing an increase of 13.07% compared to 9 months of 2021.

cost perspective: Overall, we expect the Bank to continue to improve its revenue momentum and cost containment to further reduce its cost-to-income ratio.

  • Although its ‘One Bank’ ‘Make Centrally, Distribute Locally’ cost reduction plan strategy seems to be paying off considering the downward trend of its cost-to-income ratio, it is still high at 56.3%.

Attention should also be focused on the Nigerian region: According to Fitch Ratings in June 2022, Ecobank Nigeria has the weakest profitability of all Nigerian commercial banks based on the narrow net interest spread and loan impairment charges.

  • The region contributed the least to group net income, with the region partly affected by the low growth rate of non-interest income. Ecobank Nigeria increased its non-interest income by just 4%, even supported by a one-time gain of $21.5 million from the sale of the former Ecobank Nigeria head office building and other ancillary properties.
  • Its profit of $23.9 million in the first 9 months of the year compares with total assets of $6.2 billion or 0.5% annualized. For context, Zenith did 2.7% last year.
  • The cost-to-income ratio, while improving slightly to 77.9% from 79.6% a year earlier, is still higher than the group’s cost-to-income ratio and is a drag on group earnings.
  • Net impairment charges on the region’s loans at $13 million compared to $8 million a year earlier are high.

Valuation: Over the last 5 years, the bank has steadily increased its profits amassing $1.198 billion in profit. Since ETI is profitable, we use its price-earnings ratio for relative valuation analysis.

  • Based on its price-earnings ratio (2.2x) compared to its peer average (3.8x), African banking industry average P/E of 5.5x and NG Market (6.9x) , indicates that at the current price, the stock is cheaper relative to its earnings potential, its peers, and the market.
  • Invariably, the P/E ratio indicates that Ecobank’s share price is undervalued.

… Ecobank is undervalued, but its business in Nigeria is also underperforming Read more in … Naijaonpoint.

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