Ecobank Transnational: Credit losses still hurting profit

Ecobank Transnational closed last year’s operations with the largest revenue volume among listed companies in Nigeria, towering well over half a trillion naira. It however converted about the least proportion of it into profit compared with the banks here. Its profit margin fell from 13.4% in 2014 to less than 4% in 2015, as key expense lines, particularly loan loss charges swelled and consumed expanded shares of the bank’s gross income.

The bank has been experiencing a rise and fall pattern in profit over the past three years and the current year looks like one of an upturn, subject however to unexpected developments in the second half. The overall earnings picture was downcast at half year but profit was already above the full year figure for 2015.

The depreciation of the naira gives a benign face to otherwise cloudy prospects for the bank’s operating performance in the current year. Key operating figures are significantly down in dollar terms but the drop in the value of the naira has clouded this weakness.

A major challenge for the bank this year is that both revenue and earning assets are down in dollar terms. Gross earnings declined by 4% year-on-year at the end of June and transaction-based incomes are leading the revenue drop. In naira terms, gross income was flat at N273.45 billion during the period.

Revenue weakness came largely from non-interest income, which dropped by 12% to N88.38 billion at the end of June. Fees and commissions – the bank’s second largest income line dropped by 16% to counter an increase of 6% in interest income. Credit quality weakness and rising impairment charges aren’t permitting a reasonable growth in interest income.

Based on the second quarter growth rate, gross income is projected at N548.4 billion for ETI at the end of 2016. That would be a flat growth on the N542.71 billion gross earnings the bank posted at the end of 2015. Revenue had grown by 11% in 2015 to register the largest earning figure among the companies listed on the Nigerian Stock Exchange.

Of the over N542 billion gross income the bank generated in 2015, only N21.25 billion or 3.9% reached the bottom line. Operating expenses consumed one-half of the revenue, interest expenses claimed 22% of it and impairment charges took 19.4%. The only shift so far this year in the cost structure came from impairment charges, which declined to 12% of gross earnings at half year. This permitted an improvement in net profit margin to 11.4% at the end of June. On year-on-year comparison however, profit margin is down from 17.6% last year.

After tax profit amounted to N31.08 billion for ETI at half year, which is a drop of 35% year-on-year. The huge drop in profit last year happened in the second half with the full year profit figure amounting to only 44% of the profit the bank showed at the end of the second quarter.

If the growth rate at half year is maintained to full year, ETI is expected to close the 2016 fiscal year with a net profit of N62.8 billion. This means profit could come close to tripling this year provided the drop in the second half witnessed last year does not repeat itself this year. Profit had fallen by almost 68% last year from the bank’s peak profit figure of N65.68 billion in 2014.

ETI’s profit records have shown wide swings of rise and fall over the past three years in reflection of the uneven markets across which it operates. Its Nigerian operation contributed 45% of gross earnings and more than one-half of profit the group reported in 2015.

Rising credit losses remain a problem for the bank despite the moderation of impairment charges relative to revenue at half year. At the end of June, loan loss charges rose by 85% to N32.91 billion year-on-year – the only outstanding cost increase during the period. The bank’s management said progress was being made in the bank’s initiatives to improve credit quality though the operating environment remains challenging.

Rising credit losses appear to warrant the cut down on credit volume so far in the current year. At half year, net loans and advances were down 14% in dollar terms but the naira translation shows a growth of 23% to N2.86 trillion. Beyond the need for caution, challenges on the liabilities side of the balance sheet are forcing cut downs also on the asset side.

Customer deposits dropped 12% in dollar value at half year and equity base was also down by 19% – from the closing figures in 2015. The size of the balance sheet measured in dollars went down as well by 10% over the first half of the year.

ETI earned N1.08 per share at the end of June, a drop from N1.90 per share at the same period in 2015. It earned 56 kobo at the end of 2015 and is expected to raise earnings per share to over N2.0 at the end of 2016. It offered 0.2 cents in cash dividend for its 2015 trading.