2023 9M: Ecobank sets to surpass year 2022 performance, while Nigeria business continues to trail

Ecobank Transnational Incorporated has recorded a commendable 9-month performance and is likely to beat its 2022 5-year record performance.

In addition to its commendable overall performance, the bank’s share price presents a compelling investment opportunity. It is attractively priced, boasting a lower price-to-earnings ratio compared to sector.

Despite these positive indicators, its Nigeria business is still trailing behind other geographic regions in performance, although the 9M 2023 results indicate it will likely outperform its 2022 results.

Ecobank Transnational Incorporated (ETI) has disclosed a significant 55% year-on-year increase in profit before tax, amounting to N262.171 billion, as indicated in the audited financial statements seen by Nairametrics.

This figure not only reflects a remarkable increase but is also noteworthy as it stands 14% higher than the full-year figure of N230.55 billion recorded in 2022, which itself represented a 5-year high.

The banking group ascribed this growth to a combination of increased revenue and enhanced cost efficiency. CEO Jeremy Awori provided insights into the results, stating,

• “Ecobank generated profit before tax of $450m for the nine months to September, an increase of 55% in constant currency from the prior year. Moreover, we delivered profits attributable to ETI shareholders of $224m, which translated to a return on tangible shareholders’ equity of 25.6% on the back of a strong revenue growth of 34% in constant currency and an improved cost-to-income ratio of 53.7%.”

A cursory review of the financial statements shows that in the first nine months of 2023, operating income surged by 12% or 55% in constant currency to $1.518 billion or N884.618 billion.

This figure not only signifies a noteworthy year-on-year growth but also surpassed the full-year 5-year record of N794.860 billion set in 2022.

On the other hand, while the improved cost-to-income ratio of 53.7% is said to have played a significant role in bolstering the impressive bottom, a comparative analysis with other banks such as UBA, FBNH, Stanbic IBTC, Zenith, etc., reveals that it is relatively high.

Despite the fact that revenue grew faster than operating expenses, the notable increase in the latter might have played a role in the bank’s relatively high cost-to-income ratio.

The bank’s operating expenses, driven by the growth in staff expenses and other operating costs, surged by 48% year-on-year to N475.353 billion. This figure exceeded even the 2022 full-year N448.441 billion.

We expect the bank to continue enhancing its cost-containment strategies to further reduce its cost-to-income ratio

In addition to the significant rise in net revenue and enhanced cost efficiency contributing to the impressive bottom line, another critical success factor noted is the group’s widespread geographic diversification in alleviating challenges specific to regions.

This advantage has proven instrumental in mitigating challenges unique to specific regions, as highlighted in the banking group’s 9-month result statement:

• “Group profit before tax increased by 12% or 55% at constant currency to $450 million, driven by positive operating leverage (revenue growth higher than expense growth) and despite the exposure to Government of Ghana (GoG) Eurobonds substantially increasing impairment charges on other financial assets and continued hyperinflation in Zimbabwe and South Sudan creating net monetary losses.

The geographical diversification advantage is evident in Nigeria as its business in the country lags behind the financial performance of the banking group’s other geographic regions.

In the 2022 FY, the Nigeria business accounted for only 12.85% ($239 million) of the group’s net revenue. This trend continued in the 9M period of 2023, with the Nigeria business contributing 12.52% ($190 million) to the group’s net revenue.

Also, a breakdown of the PBT shows that Nigeria’s business contributed only 5.56% ($25 million) which is 80.18% of its 2022 full-year contribution, while Francophone West Africa (UEMOA), Anglophone West Africa (AWA), and Central Eastern and Southern Africa (CESA) contributed 52%, 36% and 49% respectively.

Total assets and stock performance

Despite the fluctuating performance in certain regions, the Pan African lender remains a formidable presence as one of the largest banking groups on the continent, outside South Africa, with total assets up $26.644 billion or N20.697 trillion as of September 30, 2023, and subsidiaries spanning 33 Sub-Saharan Africa (SSA).

Following its impressive performance in 2022, Ecobank paid a final dividend of $0.11 cents per share, representing a 5.6% payout.

Over the last five years, the bank has distributed dividends in two of those years. Given the bank’s potential to exceed its 2022 profit after tax, it is expected that the banking group should increase its dividend per share in contrast to 2022.

This potential increase in dividends would contribute to enhancing the current dividend yield, which stands at 3.29% and helps strengthen investor confidence.

Last year, the stock rallied to 21.84% YtD gain, outperforming the NG Banks industry and NGXASI. This year, the Year-to-Date gain has surged to an impressive 61.32% as of the close of trading on Monday, December 4, 2023. This substantial gain underscores the positive investor sentiment and market confidence in Ecobank’s ongoing financial success and growth prospects.

Focus on the Nigeria region: The Nigerian market is the largest in Sub-Saharan Africa and should hold the future potential for the Group. o, the need to focus on growing revenue, cost efficiency and digital payment systems should be highly prioritized.

• The region’s comparatively poor performance is, in part, influenced by several factors, including low net revenue, elevated expenses, and an increase in net impairment charges on loans.
• Net revenues increased 3% or 37% in constant currency to $190 million, benefiting primarily from the net impact of higher market rates and loan growth.
• The persistent rise in the overall prices of goods and services contributed to a 28% increase in operating expenses, reaching N134.376 billion, marking the highest among the regions. This had an impact on the cost-to-income ratio. Although there was a slight improvement, reducing from 77.9% in the prior year to 73.6%, it remains higher than the group’s cost-to-income ratio, and a drag on the group’s earnings.
• The region’s Net impairment charges on loans have continued to grow from $17 million compared to $11 million in 2021 to $25 million in 9M 2023 compared with $13 million in 9M 2023, reflecting additional impairment charges.

Ecobank Valuation: Over the past 5 years, the bank has consistently grown its earnings accumulating $1.336 billion or N513.548 billion in profits with a compound annual growth of 8.03% or 15.11% in constant currency.

• However, in 2022, the growth in earnings, measured in constant currency, fell below the 5-year compounded annual growth rate, but there has been a significant rebound with a 55% increase in the first 9 months of 2023.
• This has driven the trialling 12-month EPS to N10.17 and consequently a trailing price-to-earnings ratio (1.68x). When compared to the banking sector average ratio of 4x, it indicates that at the current price, the stock is cheaper relative to its earnings potential and the sector.
• In essence, the P/E ratio is signalling that Ecobank’s share is undervalued

In summary, the bank outperformed its key 2022 guidance ratios and has exceeded its 2022 earnings during the first 9 months of 2023.

As we anticipate the release of its Q4 2023 results, a pivotal consideration is whether the bank will fall short of or exceed its projected guidance.