Ecobank Transnational Incorporated

ECOBANK TRANSNATIONAL INCORPORATED

Ticker:                            ETINature of Business:    BankingLocation :                              Nigeria
Recent Price:           NGN5.20    52-Week High/Low: NGN7.30/3.90Estimated Fair Value:      NGN10.30-NGN13.70
Expected Return:      58%Consider Buy:                   Below NGN12.00Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
Truly a pan-African bank, Ecobank Transnational Incorporated (ETI) takes pride in the provision of banking services in 35 African countries. Besides, it has international offices in Beijing, Dubai, London and Paris. Headquartered in Lome (Togo), ETI expanded its branch network through the acquisition of Oceanic Bank in Nigeria. ETI  boasts of over 28 million customers and close to 700 branches. The company, which began in 1985, is listed in Cote d’Ivoire, Ghana and Nigeria. The taking-over of Premier Finance Group in Zimbabwe in 2011 paved the way for the commencement of business in that country. And the acquisition of Trust Bank Limited (Ghana) in 2011 bears out the claim that ETI has the largest presence in Middle Africa.

ETI is increasing its footprint in Africa through its agency banking product, Ecobank Xpress Point (EXP). EXP has made it possible for millions of unbanked people in African communities to access banking services. In addition, it is investing in technology in order to take advantage of the digital transformation in Africa. Consequently, it introduced Rapidtransfer, an application that enables customers to send and receive money across Africa. ETI has embarked on cost-cutting measures, such as right-sizing, to improve profitability. Therefore operating expenses have been on the decline in the last five years.

Alain Nkontchou took over the group chairmanship position from Emmanuel Ikazoboh on 30th June 2020; Ade Adeyemi is the group chief executive officer of ETI. Bashir Mamman Ifo retired during the 2020 fiscal year and was replaced by Dr.  Georges Agyekum Nana Donkor. Dr. Donkor is a representative of ECOWAS Bank for Investment & Development (EBID) on the board of the bank.  Ms. Zanele Monnakgotla was named a non-executive director following the resignation of Dr. Daniel Matjila. Prof. Enaze Okonedo and Mr. Herve Assah joined the board as independent non-executive directors.

Investment Thesis
ETI is repositioning itself in order that it can take advantage of the opportunities that abound in the digital economy.  It has closed about 600 branches and reduced its workforce by over 5000. The bank has also spent a significant amount of money on the overhaul of its technology infrastructure. The technology infrastructure upgrade is expected to drive down cost, improve efficiency and boost profit margins of the bank going forward. The partnership with Alipay should have a huge impact on earnings as more and more people are carrying out their transactions on mobile devices and online. Alipay is a mobile and online payment platform owned by Alibaba Group in China.  It processes millions of transactions on a daily basis.

ETI’s financial performance has improved. The quality of its loan portfolio is getting better. The non-performing loan ratio dropped 3.1 percentage points to 7.6% in three years. The bank has reduced the accumulation of toxic debt by carefully growing its loan portfolio. Loans granted to customers average out to 60% of customers’ deposits. Total assets are rising and more deposits are being collected by the bank amid the turbulent economic environment.

ETI has the know-how to provide banking services to multinationals, government agencies and international organisations. Its Corporate and Investment Banking business segment (CIB) caters to this category of customers. An operating income of NGN362.4 billion was made from CIB in the year 2020 compared to NGN294.4 billion in 2019. This was equivalent to 56.5%  of the total operating income of the group in the year under consideration (2019: 50.2%). Besides, this segment has improved the quality of the assets of the bank.

The management is making efforts to grow the other business segments, namely commercial banking and consumer banking; these segments provide banking services to individuals, small and medium enterprises, local non-governmental organisations and so on.  But they have been impacting net assets negatively as they contribute more to the bank’s liabilities than to its assets.

ETI has grown its shareholders’ wealth. It raised $350 million from the issuance of Tier 2 Sustainability Notes in June 2021. The bond proceeds will help to shore up its capital but liquidity pressure could be exerted on the company due to growing indebtedness.

Currently, the stock of the company trades below our fair value estimate. We are of the belief that patient investors stand to benefit from the deliberate actions of the management to improve the bank’s competitive strength.

Valuation
ETI has an Earnings Power Value (EPV) of NGN23.13. A share of ETI is worth between NGN10.30 and NGN13.70 per share. The stock of ETI is expected to generate a 58% return to the investor.

Financial Overview
Gross earnings rose by 3.3%  while Profit After Tax (PAT) lost 21.6% on a 3-Year Compound Annual Growth Rate (CAGR) basis. Net interest income got a 27.8% boost from NGN271.2 billion to NGN346.6 billion. Net interest margin gained 9% to 41.2%; this was due to a 4% rise in interest income and a 23% fall in interest expense. Interests on bills and investment securities were responsible for most of the increment in interest income in 2020. Interest on treasury and other eligible bills rose by 20.1% or NGN14.2 billion year-over-year while interest on investment securities jumped by 13.8% from NGN120.2 billion in 2019 to NGN136.8 billion in 2020. ETI got more deposits in spite of the fragile global economy and competitive constraints. Customers’ deposits appreciated by 23.6% ( 2019:2.1%); gross customers’ loans expanded by 9.4% (2019:0.4%) .

Non-interest income is improving; it gained 3.1% over the past three years. But PAT worsened by 66.1% to NGN33.7 billion; nevertheless, total comprehensive income was up to NGN136.2 billion owing to other comprehensive income of NGN102.5 billion. Return on Equity (RoE), as a result,  picked up and surpassed its average of 12% by 4.8 percentage points. Earnings Per Share (EPS) and Book Value Per Share (BVPS) grew at a compound rate of  20.5% and 6.9% respectively. However, Return on Asset (RoA) remained low.

Borrowed funds rose by 1.7% year-over-year to NGN769.9 billion or 94.8% of shareholders’ fund. It, however, amounted to 7.4% of total assets. The bank produces adequate cash flow from its operations. Free cash flow is also generated for the shareholders in spite of the continuous spending on capital. A total of NGN123.6 billion was spent on both tangible and intangible assets in 2020 (2019:NGN168.1 billion). Spending on assets per share amounted to NGN5.02 while free cash flow per share jumped to NGN38.13.

Business Risk
The slackening of global economic activities and increasing competition have negative effects on revenue. However, we are of the opinion that ETI can consolidate its market position by leveraging its distribution network in Africa. Besides, the growing digital economy is a boon for discerning financial institutions.

Recommendation: Buy

Earnings Chart of Ecobank Transnational Incorporated

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