• Ecobank Transnational Incorporated (ETI) reported 91% YoY growth in gross earnings to N148 bn for the 6 months to June 2012. However, PBT and PAT contracted 2% and 4% YoY to N20.1 and N13.9bnrespectively, as acquisition costs weighed.
• Relative to our estimates, annualized revenue was 7% below (narrower than the 11% shortfall in Q1) while PBT and PAT are tracking 12% and 19% behind respectively.
Acquisitions still driving revenue growth
• ETI’s significantly expanded balance sheet from the acquisitions completed in Q4 2011 remains the primary driver of revenue growth through increased earning assets (+59% YoY). According to ETI, revenues in Q2 2012 “received a healthy boost from the inclusion of Oceanic Bank and TTB.”
• On a QoQ basis, both net income and non-interest income rose 5% and 21%, respectively, indicating stronger contribution from the acquired entities. ETI attributed higher net interest income to “volume growth and a better portfolio mix of earning assets” while the growth in non-interest income “…was driven by cash management fees, fees and commissions on loans, and investment banking related activities”. Fee and commission income grew 24% QoQ (+49%YoY) while net trading income rose 40% QoQ (+21% YoY).
Synergies show early signs in moderation of funding costs
• The growth appetite that drove a 3% balance sheet expansion was funded by increment in deposits and supported by interbank takings. Coming off a sharp contraction in Q1 as ETI weaned Oceanic of expensive interbank takings, we view the growth in funding base as evidence of its improved competitive position in the domestic market. More so, as interest expense rose a marginal 2% QoQ in spite of the expanded deposits and interbank takings. The dynamic resulted in a mild 10bps QoQ dip in average funding costs to 3.3%, the only decline in the industry among banks that have reported thus far.
Though acquisition costs still elevated, margins improve
• Opex increased a modest 5% QoQ to N48.5 billion but, on an annualized basis, was 7% ahead of our estimates which had factored in immediate moderation post Q1 restructuring charges. However, restructuring charges appear to have extended into Q2 2012. Staff costs grew 68% and ETI attributed the 71% YoY jump in opex to acquisition costs. According to management operating expenses would have grown 15% otherwise. Additionally, non-staff costs increased 75%, reflecting investments in technology and fixed assets. Nevertheless, as a result of stronger revenues, , cost-to-income ratio moderated 300bps to 78%.
• Similarly, provisions rose 14% QoQ to N3.7bn, 9% ahead of our estimates on annualizing current results after tacking same in Q1 2011. This appears to vindicate our conservatism regarding provisions, which was informed by general caution on industry charges. The increase in provisions reflected higher provisions in Nigeria and on TTB’s SME loan portfolio, according to ETI.
• In spite of the higher opex and provisioning, the impact of topline growth and flat funding costs filtered through to bottom-line as PBT and PAT rose 57% and 54% QoQ, respectively; the corresponding margins expanded by 300bps and 200bps to 14% and 10% respectively.
Better positioned to capture synergies
• ETI appears to be progressively making better use of its expanded balance sheet with recent growth in interest income largely driven by higher loan volumes given that asset yields dipped 60bps QoQ—which suggests that expansion was largely in the more competitive corporate segment. Nonetheless, based on fresh capital injection in Q1 and relatively moderate impact of Q2 loan growth on loan-toasset ratios (+1ppt), we see room for additional risk asset creation to drive sustained revenue growth for ETI in the near term, in spite of overall revenue growth concerns we have for the broader industry in view of recent 400bps hike in CRR. ETI’s significantly larger multinational base should also be favourable inthis regard, providing alternative growth outlets to domestic constraints. However, with current run rate tracking lower than our estimates, we expect the additional growth in risk assets to help meet our FY target of N320 bn which is thus unchanged.
• We believe moderation in funding costs so far in Q2 2012 reflects its vastly improved ability to mobilise cheaper deposits negotiate funding terms . In our view, the difference in ETI’s performance relative to smaller banks which also consummated acquisitions is the sheer size of the combined footprint. The ~370 branches from Oceanic alone dwarfs the post-acquisition networks of the likes ofFCMB (~330) and Sterling (<200). We have revised our interest expense estimates 5% lower to N79 bn based on the assumption that current growth rates in interest expense will persist.
• A decline in CIR to 78% in spite of rising opex reflects the stronger revenue growth we had anticipated in making our FY estimate of 75%. However, to account for the faster run-rate in opex driven by staff and infrastructure development costs, we have revised our CIR estimate 150bps. We have alsoraised provisioning estimates to capture the moderately faster run rates implied in Q2 2012 results.
We maintain BUY rating
• The downward revision we made to interest expense has been offset by higher operating costs and revisions driving our profit estimates moderately lower in the current year (PBT: -9% to N42.3 bn). Notwithstanding, dueto an improvement in funding costs in Q2 2012 that is unique in the industry, our net interest margin estimates is slightly more bullish leading to moderately higher profit margin expectations over our forecast horizon. This culminates in a moderate upward revision to our fair value estimate from N17.03 to N17.4.
• ETI trades at 0.5xB/v and 4x PE, compared to 1x and 9x for the industry, and 71% discount to our fair value as at today’s close. We therefore maintain our BUY rating on the stock.
ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for thestock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE marketcapitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point ratingsystem for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in bothcategories, the basis for ratings subject to target price deviation is outlined below:
DISCLAIMER/ADVICE TO READERS:While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the authors best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This article is published with the consent of the author(s) for circulation to the online investment community in accordance with the terms of usage. Further enquiries should be directed to the author whose e-mail is ARM Research [email@example.com]