Ecobank Stays Balance Ahead of Eurobond Payment
Pan African lender, Ecobank Transnational Incorporation (ETI) boosted its earnings performance in the financial year 2022 with few but important downside risks.
However, the group’s exposure to foreign currencies had a run on its results. Both Ghana cedis and Nigerian naira rates were depressed as the group was unfavourably positioned in the FX markets.
The group still come out strong albeit but overall pressure following a decline in capital position would mean so much to regulator and of course shareholders.
In 2023, there is a general or expectation by consensus that Ecobank Nigeria Limited’s contribution will improve following continual efforts to bring back its lost allure.
The group earnings continue to pop following its balance sheet cleaning efforts amidst uncertainties in its Africa markets.
In its recent release, Fitch Ratings affirmed Ecobank Transnational Incorporated’s (ETI) Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook.
The Pan African lender’s viability rating (VR) was kept at ‘b-‘, saying ETI’s Long-Term IDR is driven by its standalone creditworthiness. As a non-operating bank holding company (BHC), ETI’s viability rating is notched down once from the ‘b’ group VR due to high common equity double leverage.
Sufficiently high, data show that Ecobank’s common equity leverage printed at 167% in 2022. On the upside, Ecobank enjoys a strong pan-African franchise, strong revenue and geographical diversification.
The group recorded improved asset quality, healthy operating profitability and a strong funding and liquidity profile in 2022. In the rating note, Fitch said these considerations are balanced against the group’s heightened exposure to foreign exchange (FX) risk and moderate capitalisation in the context of its risk profile.
Ecobank faces higher failure risk due to high common equity double leverage, according to Fitch. This triggered its decision to knock down the group viability rating to b-.
According to Fitch, ETI’s operating conditions are being negatively influenced by rising sovereign debt sustainability risks across Sub-Saharan Africa (SSA).
Nigeria and Ghana, which are two of the group’s largest markets, suffered downgrades in the past year, with the latter defaulting on local- and foreign-currency debt in Q1-2023.
The group had banking subsidiaries spanning 33 SSA countries and assets of USD29 billion in 2022, making it one of the largest banking groups on the continent outside of South Africa.
The financial services group’s strong revenue diversification is supported by a broad geographical footprint and high non-interest income.
Its financials show that in 2022, non-interest revenue accounted for 45% of operating income. Though, the group is facing pressures from heightened foreign exchange risk.
Ecobank group remains exposed to the depreciation of SSA currencies through its equity investments in subsidiaries given that its reporting currency is the US dollar.
Fitch said the depreciation of SSA currencies, in particular the CFA franc, the Nigerian naira and the Ghanaian cedi, led to large foreign currency translation losses through other comprehensive income (OCI) that exceeded net income in 2022.
“The impact of foreign currency translation losses on capitalisation is mitigated by risk-weighted assets (RWAs) reducing in dollar terms as SSA currencies depreciate”.
In 2022, Ecobank numbers showed that impaired loan ratio declined to 5.2% from 6.4% in the comparable year, primarily due to write-offs and robust loan growth.
Specific loan loss allowance coverage of impaired loans also declined to 53% due to the release of provisions on a heavily-collateralised upstream oil and gas loan.
It asset quality has been weakened by rising sovereign risks due to large holdings of sovereign fixed income securities – especially, loan restructuring in Ghana.
The group’s operating profit to risk-weighted assets improved significantly to 3.8% in 2022 from 3.2% due to a wider net interest margin and greater cost efficiency.
Fitch said it expects foreign currency translation losses through OCI to decline in 2023, reflecting a broadly stable CFA franc, an appreciating cedi and the naira depreciating only modestly against the US dollar.
The group’s common equity Tier 1 ratio declined to 9.6% from 10.0% due to large FX losses, leaving only a moderate buffer over its current minimum regulatory requirement of 8.5%, according to the rating note.
The ratio remains low compared with SSA peers and is considered moderate in the context of the group’s risk profile, Fitch Rating stated, while keeping an eye on its strong funding profile.
It is noted that Ecobank group’s funding profile benefits from a high percentage of current and savings accounts and low depositor concentration.
Fitch considers ETI will be able to utilise group liquidity and leverage its strong relationships with development finance institutions in refinancing the large amount ($675 million, including a $500 million Eurobond in April 2024) of holding company debt maturing in 2024.
