Analysts Downgrade Ecobank to Hold, Bearish On Future Earnings
Ecobank Transnational Incorporated Plc earnings performance failed to excite analysts as lender sets off to a rocky start, as analysts at Meristem Securities Limited stated.
Discussions at the Broadstreet insidiously placed the Pan-African lender as uncompetitive, partly due to weak turnout.
The group’s cash cow – Ecobank Nigeria has been underperforming in recent time, thus putting pressure on results.
Traded at ₦5.10 on Friday on the Nigerian Stock Exchange, ETI market capitalisation closed at ₦93.582 billion on 18,349,551,215 shares outstanding.
Amidst the Bull Run on the local bourse driven by improved market sentiment, ETI’s share price surged from ₦4.90 on first trading day to close the week at ₦5.10.
Though, the trade chart for the week shows that the lender’s stock peaked at ₦6.05 before it stopped going vertical.
In the first quarter of 2020, the review of the lender’s numbers shows that non-interest income drags top line performance.
Analysts at Meristem stated that ETI’s poor performance picked up where it left off in 2019.
The lender reported gross earnings decline of 2.30% to ₦194.86 billion or -3.40% to USD532.53 million in its 2020 first quarter results.
Earnings were dragged by reduced non-interest income of -14.8% from almost all revenue streams.
Management attributes this to lower earnings from client driven FX sales, reduced cash management fees from its Francophone subsidiaries, along with a decrease in asset management and investment banking fees.
Albeit these were partially offset by higher credit related fees and fixed-income securities trading gains.
Meristem stated that the bank fared a bit better on its interest income line, as earnings grew by 6.65% to ₦124.45 billion.
This was driven by income from loans and treasury bills.
“We note that the bank appears to have begun putting the woes from its subsidy related oil and gas loans behind it, as earnings from its Nigerian subsidiary improved significantly during the period”, analysts explained.
This was reflected in growth reported in net interest income which expanded significantly by 108.86%.
Nonetheless, analysts held that with net interest margin well below 2% and return on equity (ROE) at 3.2%, the Nigerian subsidiary is not yet out of the woods.
For the rest of the year, Meristem reiterate that it maintains downbeat outlook for earnings in view of the expected impact of the COVID-19 pandemic on interest earnings and transaction volumes across its operating regions.
However, analysts acknowledged that revaluation gains might provide support to performance.
Then, the firm observed a higher net impairment charges as a downside to the scorecards as it compounds earnings woes.
Meristem explained that the combination of an improved current and savings accounts (CASA) mix to 78.51% as against 78% in 2019 and a 3.74% year to date decline in interest bearing liabilities, pushed interest expense down by 11.94% to ₦47.87 billion.
Thus, lender’s cost of funds fell to 2.60% against 3.20% in Q1 2019, while group wide net interest margin improved to of 5.40%, coming from 4.80% in Q1:2019.
Although the bank recorded lower impairment charges on loans and other financial assets during the period, significantly lower recoveries from delinquent credit facilities (-66.32% year on year) drove the 49.02% spike in net impairment charges.
Analysts took cognizance of the relatively modest growth of +2.03% in operating expenses.
However, its impact on cost efficiency during the period was minimal as Cost-to-Income ratio only improved by 20 basis points to 66.00%.
Consequently, profit after tax (PAT) declined by 18.02% to ₦24.31 billion or -20.17% year on year to USD67.49 billion.
“Our expectations for lower profitability in 2020 remain unchanged, as business risks are tilted further to the downside in the wake of the COVID-19 pandemic”, Meristem stated.
Meanwhile, analysts estimated that ETI’s non-performing loans (NPLs) will remain elevated in the near term.
Analysts expressed that the lender is struggling to address its asset quality concerns as NPL ratio inched higher to 9.90% from 9.70% in 2019.
Legacy asset quality challenges from its Nigerian subsidiary continue to weigh heavily on group performance, Meristem explained.
This has been so as NPL ratio for the subsidiary stands at 23.30% and contributes over 60% to group NPLs.
“We also do not like the subsidiary’s low stage 3 loan coverage ratio of 42.80%.
“This compounded our concerns that its significantly weaker earnings profile will hinder it from making adequate provisions.
“We expect even more pressure on asset quality in financial year 2020 due to the impact of COVID-19 on the business environment”, analysts at Meristem Securities explained.
On the funding side, the bank’s adjusted capital adequacy ratio remained unchanged from 2019 at 11.60%, slightly above the 10% regulatory limit.
However, its Tier 1 Capital ratio of 8.80% highlights a weakness in its core capital given the prevailing concerns.
In its recommendation, analysts at Meristem stated that the bank has begun the year on a tough note.
The investment firm stated that it view on short-term earnings outlook does not support any optimism.
Thus, Meristem Securities Limited estimated earnings per share (EPS) of ₦3.50 for financial year 2020.
Analysts then sets target price to earnings ratio of 1.50x, and December 2020 target price of ₦5.25.
This implies a downside of 6.25%. Hence, analysts at Meristem downgrade stock to HOLD.
Analysts downgrade Ecobank to Hold, bearish on future earnings.
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