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Ecobank 9M 2020 Results: A Tale of One-Offs, Restructuring, and Resilience

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Acquire Honeywell at your own risk, Ecobank warns Flour Mills

By Proshare Research

Proshare Nigeria Limited - Fintech Association of Nigeria


Ecobank Transnational Inc. (ETI) result has been resilient in the face of harsh continental macroeconomic challenges caused by the COVID-19 pandemic. The growth in the banking group’s gross earnings and profit before tax was severely affected by a  couple of one-off charges to its P&L account, especially the one-off goodwill charge off on its Oceanic Bank acquisition in 2011. The group’s cost-to-income ratio declined in Q3 2020 year-on-year (Y-o-Y) while asset quality also crept up a few basis points. However, there are niggling issues about its foreign exchange translation accounting and the proper application of IAS 21.

Key Highlights/Takeaways

  • Gross earnings increased marginally in Naira terms by +0.37% to N613.15bn in 9months 2020
  • Revenue increased by +9.12% year-on-year (Y-on-Y) to N422.61bn in 9months 2019
  • Profit before tax excluding goodwill impairment declined by -13.16% Y-on-Y to N95.08bn
  • Profit before tax for the period declined significantly -68.49% from N109.49bn in 9months 2019 to N34.49bn in 9months 2020.
  • Total assets grew Y-on-Y by +15.38% to N9.43trn in 9months 2020
  • Total deposit grew Y-o-Y by +19.61%
  • Total equity increased Y-o-Y by +7.33% to N708.63bn in 9months 2020
  • ROE excluding goodwill impairment charge was 14.1% while ROE for the period was -3.5%
  • ROA for the period was 0.2%

Holes in the Profit Bag

 

Profitability

Gross earnings of ETI grew marginally by +0.37% to N613.15bn from N610.87bn in 9months 2019, despite the tough macroeconomic challenges caused by the COVID-19 pandemic. Growth in gross earnings was majorly driven by a +55.0% increase in trading income on securities, -19.60% decline in interest expense, and +6.68% growth in interest income.

Translating to USD, gross earnings declined by -19.14% from $1.99bn in 9months 2019 to $1.61bn in 9months 2020 (using the official CBN’s closing exchange rate during the different periods). The group lost $388.43m as foreign currency translation cost majorly due to the devaluation of the domestic currency (see chart 1 below).

Chart 1: ETI’s Gross Earnings 2016 – 2020 (N’bn)

Ecobank

Profit before tax (PBT) declined as a result of goodwill impairment as the banking group took a hit to its P&L as a result of charge offs for the amortization of goodwill on its books after the acquisition of Oceanic bank in 2011. The group’s PBT for Q3 2020 declined by -68.49% Year-on-Year (Y-o-Y) because of one-off charges for restructuring costs and goodwill write-downs. Profit before tax and goodwill impairment declined by -13.16%, the continental banking franchise decided to write off the bank’s goodwill which was related to the acquisition of Oceanic Bank, as a result, it recorded a non-cash, non-recurring impairment charge of $159m. This one-time write-off affected the banking group’s liquidity and regulatory capital ratios (see chart 2 below).

In USD terms, PBT for 9months 2020 declined by -74.62% Y-o-Y, from $356.72m in 9months 2019 to $90.55m in 9montsh 2020, using the official CBN closing rate during the different periods, foreign currency translation cost was $21.85m as a result of the devaluation of the group’s functional trading currency in Nigeria, the naira.

Chart 2: ETI’s Profit Before Tax 2016 – 2020 (N’bn)

Ecobank

The group’s impairment losses on financial assets for the period rose by +88.90% from N32.55bn in 9months 2019 to N61.49bn in 9 months 2020, this was driven majorly by a strategic reserve build up due to COVID-19 as stated in the financials (see chart 3 below).

Chart 3: ETI’s Impairment Losses on Financial Assets 2016 – 2020 (N’bn)

Ecobank


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