Pan African lender, Ecobank Transnational Incorporation, balance sheet cleaning effort has begun to yield positively on the group performance as earnings skyrocket in the first half of the financial year 2022.
However, Nigeria’s market has remained tough as Ecobank Nigeria Limited is still faced with weak capital, a high cost-to-income ratio and legacy bad loan pressures which have continued to drag
As part of an effort to reflate performance across markets, Ecobank Nigeria looks to offload $200 million in bad loans via a vehicle at a time Asset Management of Nigeria (AMCON) is relatively incapacitated – technically.
In its latest equity report, CardinalStone Partners reiterated a buy rating for Ecobank Transnational Incorporation’s plans to sell $200 million in stage three loans as part of efforts to clean up asset quality and restructure the Nigerian balance sheet.
Nigeria’s multi assets investment firm said Ecobank is relatively cheap compared with its history, with a 12-month price target set at N16.21. Ecobank Nigeria’s performance has been softened by high costs to income ratio, legacy bad loan pressures and weak capital position.
Following previous balance sheet cleaning efforts at the group level, the Pan African lender has seen earnings spike across the financial supermarket business segments, detail from its first half result show.
The group told analysts at a conference call that it has obtained regulatory and board approvals for the sale of $200 million worth of stage 3 loans from its Nigerian business to a vehicle it set up in 2017.
Analysts at CardinalStone said in their review that this earmarked sum represents 46.7% of the total non-performing loans in the region and signals a resolve to improve asset quality aggressively.
It stated further that these non-performing loans have been a drag on the Nigerian business, which has consistently reported NPLs in excess of 15.0% in stark contrast with about 3.0% in other regions in the last 5 years.
“In our view, the decision to restructure the Nigerian balance sheet is likely to be a net positive. In particular, the move (if effected) could drive the Nigerian NPL ratio to 8.9%, with the associated coverage ratio likely to improve from 55.1% in H1’22 to 103.4%”.
Click Here To Read: Fitch Reaffirms Ecobank Nigeria’s Stable Outlook
Ecobank guided to a consequent expansion in capital adequacy ratio (CAR) by 300-400 basis points, according to analysts, saying this potential improvement in the capital buffer could enable the bank to create better quality risk assets to boost earnings potential.
Group-wide asset repricing may be on the cards, CardinalStone said in its latest review. Analysts said despite the 1.7% contraction in credit in H1-2022, they believe that higher asset yields could lead to a net positive impact on interest income.
“To this point, management is confident that a substantial part of its loan book can be repriced higher given rising interest rates”.
Specifically, CardinalStone noted that about 50.0% of the group’s stage 1 loans which accounted for 83.0% of total are expected to mature in less than 1 year.
“Given their liquidity profile and duration, we expect these short-tenured loans to be more amenable to upward repricing. This view is in line with our prior prognosis for a 9.2% growth in interest income to $1.6 billion in 2022”, it said.
On a positive note, analysts indicated that the investment case for ETI remains strong, highlighted by prospects for improved interest and non-interest income.
“The former is premised on the expected surge in asset yields, while the latter could reflect ongoing traction in the digital banking segment”, analysts explained.
In addition, they maintained that regulatory ratios are slightly improved, with strategic initiatives in Nigeria likely to birth further improvements on this front.
From a relative valuation standpoint, the bank appears considerably cheap relative to its history, CardinalStone stated. Specifically, Ecobank’s 2022 price-to-book ratio is trading at a 10.3% discount to the historically mean level.
“We have a 12-month target price of N16.21, which implies a projected total return of 71.9% – 63.6% in capital appreciation and 8.2% in dividend yield.
“In recent quarters, ETI has revealed plans to improve the overall performance of its Nigerian business, which has suffered a slump in pretax contribution to the group from 24.9% to 12.0% in the last five years”, the investment firm stated.
According to CardinalStone, weakness in the bank’s pretax contribution was primarily driven by deteriorating legacy loans, especially in the oil and gas segment.