Ecobank Earnings for 2021 to Hit 7-Year High, Says CardinalStone
Ecobank Transnational Incorporation (ETI) financial year 2021 earnings likely to reach 7-year high, says CardinalStone Partners in a recent report on the Pan-African lender after impressive earnings for the first half.
Equity investment analysts’ team led by Phillip Anegbe and Jerry Nnebue made the projection following the recent earnings release and subsequent conference call of the Pan-African lender, ETI.
“In our view, the financial year 2021 earnings is likely to reach a 7-year high of $292 million compares with $85 million in 2020, driven by higher pre-provision operating income and lower net impairments”.
CardinalStone noted that ETI’s pre-provision operating income has been mostly subdued over the past few years, dragged by weaker non-interest income and net interest revenue that record an average annual growth rate of 7.5% and 5.6% respectively.
However, analysts said a more significant operating expenses moderation is likely to offset pass-through from lower non-interest income and net interest revenue and sustain pre-provision operation income improvement in the financial year 2021.
Specifically, it was noted that the potential impact of lower staff-related costs driven by layoffs could cascade to a 2.4% contraction in operating expense in the current year.
“All in, we project return on equity and return on return on tangible equity at 18.2% and 16.1%, respectively”, analysts added.
In valuation, CardinalStone analysts leave the 12-month target price unchanged at N6.28, translating to 18.5% upside at a reference price of N5.30. Analysts added the target price reflects an exit price to book ratio of 0.22x on 18.2% return on equity projection, compared to a forward price to book of 0.18x.
Meanwhile, CardinalStone analysts recognised that the management has a low appetite for aggressive lending, noting that over the last five years, ETI’s gross loans have declined by 3.7% on the average per annual in the last five years.
“We had hoped that the improvement in economies in the financial year 2021 would reignite an appetite for lending, with a modest 0.5% loan growth projection. However, we note that gross loans are down 3.5% year-to-date, which, according to management, reflects the fragile state of most economies in which ETI operates”, analysts explained.
“In our view, it is unlikely that risk asset creation will rebound quickly enough in the second half of 2021 to catch up with the initial forecast, despite management’s 0-2% loan growth guidance amidst efforts aimed at improving lending support for MSMEs”.
Consequently, CardinalStone now forecasts a 1.5% decline in loans for the financial year 2021, saying that over the midterm, however, management is optimistic that it can grow its loan book to above $10 billion -last achieved in 2015.
This is expected to happen with a particular focus on the Central, Eastern and Southern Africa (CESA) and the Francophone West Africa (UEMOA) regions.
Meanwhile, analysts expressed the view that payment will be a key contributor to future earnings growth, saying ETI has continued to build momentum in its digital business, and this could be a pivotal earnings support in the future.
ETI’s payments initiative cuts across disbursements, merchant solutions, biller solutions, card solutions and alternative channels and is also supported by strategic partnerships with Airtel Africa, MTN, Alipay and Palm Pay.
According to CardinalStone, these initiatives drove the bank’s payments to revenue ratio to 11% in the first half from 9% in 2020, and the expansion of the bank’s agency banking solution suggest that opportunities still abound in the space. Thus far, disbursements account for over 50% of the lender’s payments revenues, with card solutions contributing a further 32%.
However, analysts recognised that Nigerian weakness persists, and a reversal may not be imminent, noting that the segment appears to be partly challenged by sizable non-earning assets.
The region accounts for over 75% of the Group’s cash reserve ratio (CRR). In the first half of 2021, analysts said the region held over 22% of the group’s assets but contributed 3.5% to revenues.
More disturbing, despite accounting for around 27% of Group loans – the second largest in the Group in the first half of 2021 – Nigeria contributed the lowest net interest income (9% of total).
“Its contribution to operating income has also plummeted from 38% in 2016 to 15% in the first half of 2021. However, management is optimistic that the Nigerian business may soon turn a corner, partly supported by a $300 million Eurobond issuance in February 2021”.
CardinalStone said although the segment accounts for 62.0% of Group NPLs, management notes that over 65.0% of the Nigerian non-performing loans (NPL) is lumped in three names.
A resolution of one could lead to a 340 basis points drop in the NPL ratio (Nigeria’s NPL ratio is 17.5%), analysts noted.
Nevertheless, given that the timeline for the expected resolution of nonperforming assets remains blurry, CardinalStone analysts said they maintain a cautious outlook for the segment adding that regional diversification remains the key strength of the Pan-African lender.
Notwithstanding the weakness in the Nigerian business, ETI consistently grew earnings; between 2016 to 2019, with a one-off goodwill impairment charge and COVID-induced weakness dragging 2020 numbers lower.
Analysts said although higher loan recoveries played a role in the consistent earnings growth over the years, stronger operating performances across the other regions had a noticeable impact.
For instance, CardinalStone said while the Nigerian return on equity remained subdued at 2.5% in the first half of 2021, the return on equity for the Central, Eastern and South Africa (CESA) region jumped to 19.5% in from 2.5% in 2016.
“In addition, the return on equity of both the Anglophone West Africa AWA and économique et Monétaire Ouest Africaine (UEMOA) regions have continued to hover around their historical mean, with management guiding to the continued pursuit of asset creation opportunities in these regions”.
However, analysts noted that the hyperinflationary environment in Zimbabwe and South Sudan portends downside risk to overall earnings.
For context, between 2019 and the first half of 2021, the net monetary losses arising from hyperinflationary environments amounted to $93 million.
In valuing the banking group, analysts at CardinalStone leave the target price at N6.28, representing a 18.5% upside from the reference price of N5.30 with a buy rating.
“A downside to our expectation is the lack of dividend payments, likely due to management’s focus on ensuring strong capital buffers.
“We also note the FX risk, given ETI’s wide array of currency exposure across the different regions, the likelihood of higher net monetary losses from hyperinflationary environments, and the likelihood of higher net impairment charges on slower than expected recoveries, CardinalStone noted.
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Ecobank Earnings for 2021 to Hit 7-Year High, Says CardinalStone
