Ecobank Share to See 21% Upside, Gets Buy Rating

Ecobank Share to See 21% Upside, Gets Buy Rating

In the financial markets, a 21% gain is a tall order but equity analysts are asking treasures hunters to take a position on the expectation of strong capital appreciation in Ecobank Transnational Incorporation (Ticker: ETI).

Now, after efforts to reposition the Pan-African financial service supermarket, the group balance sheet has been relatively clean: low toxic assets helped earnings boost.

Also, its capital position has improved greatly, lifting the Pan African bank lending appetite across its key markets with improved income from interest-yielding assets book. Analysts are also keying into the improved fundamentals and expect the group to sustain its growth trajectory. Projections for the current year have been positive after the earnings beat.

Earnings per share for the year is expected to print at N6.60, according to Meristem Securities projections and a target price of N14.56 has been set for the year. Give or take, equity analysts are seeing more than 21% upside in ETI, at a current price of N12 and a December target price of N14.56. It simply means, investing N12 in the bank’s share and get N14.56 – all things being equity.

What if analysts miss? What if ETI closed the year higher than projected? After its financial year 2021 earnings beat, the Nigerian Bourse rerates the Pan-African lender’s share price, rising more than 40%, according to MarketForces Africa Research analysts.

Believing that the share price re-rating opportunities are still available, equity analysts are now seeing beyond the current market price. To them, the share price will surge further to about N15 in December.

What if you buy now?

According to Meristem Securities note, equity analysts indicated an intention to bet large on ETI with double-digit upside opportunity to be pocketed. Ecobank group had initiated moves to rebalance its market position and products/service portfolios were recently improved upon – the group actually put efforts into driving momentum by deploying robust financial technologies.

With a sturdy capital position that followed the removal of its legacy non-performing loans, Ecobank raised its appetite for lending last year, and boost its earnings position with increased income from non-interest related business space. In its equity report, Meristem Securities believes that the group would sustain its recent momentum, noting that both interest and non-interest income spurred topline growth in 2021.

Ecobank Transnational Incorporation recorded all-time high gross earnings of USD2.34 billion which translates to 5.74% year on year growth in 2021, analysts said in its latest report on the ticker. Francophone region contributed 31.82% to the group topline, while Ecobank Nigeria’s contribution was 12.69%.

The performance of the group’s interest income, rising by 13.58% year on year to N603.37 billion was hinged on growth in interest on customer loans and investment securities during the period.

The equity report noted that Ecobank group’s interest on treasury instruments was the only underperformer, recording a 4.12% year on year decline, although its overall impact was insignificant.

Meristem said expansion in fees-based revenue, surged 26.25% year on year, resulting from a significant increase in transaction volumes across digital channels was the major catalyst for the improvement in non-interest income. The group trading income however reduced by 8.50%, but also with an overall negligible impact, according to Meristem Securities Limited’s equity report.

“We expect a higher interest income in 2022 based on two factors: an increase in benchmark rates across the group’s operating regions which could lead to higher lending rates; and expected loan book expansion.

“Also, we note the group’s aggressive drive towards digital banking which is expected to support fees-based income in 2022”. Considering its improved fundamentals, Meristem Securities analysts projected gross earnings for the financial year 2022 to print at N1.013 trillion.

Analysts said although interest income increased, a 14.82% expansion in the funded-asset base to N10,484.75 billion pressured asset yield downwards by 19 basis points to 6.23%. The group’s interest expense increased by 17.36% to N216.67 billion as total interest-bearing liabilities expanded by 13.85% to N10,304.06 billion pushing the cost of funds up by 40 basis points to 2.27%, according to Meristem analysts’ review.

Consequently, the net interest margin dropped by 20 basis points to 5.10%. Analysts said a 5.21% increase in operating expenses was more than offset by the 12.09% year on year surge in operating income. Overall, Ecobank group recorded 385 basis points decline in cost to income ratio (CIR) to 58.90%, signifying the ability of the Pan-African lender to efficiently manage its cost profile in the year.

With respect to its prior acquisition, the group recorded a one-off goodwill impairment of N62.49 billion in 2020, a move to clean up its balance sheet position. It happened that Ecobank’s profit after tax (PAT) soared by 333.67% to N146.67 billion a year after the audacious move.

“Our view is that deliberate cost containment measures by the group would lead to better operational efficiency and improve PAT to our projection of N162.25 billion in 2022”, Meristem analysts said in the equity report.

The group’s gross loans increased by 10.59% in 2021, driven primarily by an expansion in Stage 1 loans by 15.96%. Meristem analysts said in the note that reclassifications and write-offs underpinned the 9.60% decline in Stage 3 loans which caused the non-performing loan, NPL, ratio to slow to its six-year low of 6.25% in 2021.

Furthermore, the group reported a better capital adequacy ratio of 14.80% supported by a series of capital raising exercises during the year. The improved asset quality, as well as capital adequacy positions, propped the group’s decision to pay out dividends of 0.16 cents per share.

“Considering the outlook for the group’s profitability and general stability in the economic environment where the group operates, we expect a further improvement in the overall group’s asset quality”, Meristem stated in the note.  #Ecobank Share to See 21% Upside, Gets Buy Rating