Ecobank H1 2015 earnings: Looking inward,outward and on the books for profit generation

Dear Africa Interested Individuals:

                                                         Ecobank (also known as ETI) has released its H1 2015 earnings to the public.  Find below my summarized findings of the bank's performance.  I will start with the "bigger picture" and then take a look at the clusters.  

Ecobank has over the first six months of 2015 been making internal sacrifices (management calls them efficiency gains) for a better tomorrow.  Management has also worked hard to take minimal hits and resiliently move forward while going through the "hail storm" of the current business operating environment that pervades the African continent.  Over the review period, Ecobank as a group faced declining client activity, adverse foreign-exchange rates, declining asset quality and lower loan balances.  These headwinds were curtailed by sacrifices made through a reduction in headcount, lower judgment calls on credit impairment losses, reduction in property and equipment deemed surplus (aided lower depreciation expense) and a reduction in net loans, led to pre-tax income rising 22% despite net revenue remaining flat year-on-year.  Management ensured that operating expenses did not rise in any cluster that could not have a more significant rise in net revenue.  I deem this good financial discipline and an inward approach to profit generation.  Let us take a look at each cluster and my observations.

Francophone West Africa (FWA):  Operating expenses were lower by 15% year-on-year and a 25% reduction in the judgment call made on credit impairment losses led to a growth in pre-tax income of 9%.  I deem the $15.6m impairment loss on the income statement for H1 2015 to be kind or in simple terms the income statement provision was stingy.  Management attributed the lower impairment loss figure to "lower loan balances."  This is not a given.  A reduction in net loans does not automatically imply lower credit impairment on the income statement.  Meanwhile, non-performing loans (NPLs) ratio actually increased from 4.7% to 5.6%.  In addition, the average credit impairment relative to performing loans declined by 10 basis points.  The profit for FWA does not pass my stress test and I deem the profit as stated to have been contrived courtesy of the less than realistic impairment losses on the income statement.  This cluster is the 3rd largest contributor to group pre-tax profit.      

Nigeria:  Nigeria contributed more than half of the group's net income for H1 2015 with its figure of $124.5m.  The major contributor to the Nigerian cluster's 51% growth in pre-tax income is the reduction in operating expenses of $48.2m (15%) and a minor (in comparison) boost from lower credit impairment losses on the income statement from a loan portfolio of deteriorating asset quality.  NPLs ratio increased from 2.2% - 3.1%.  As was the case with FWA, credit impairment judgment relative to performing loans also decreased by approximately 10 basis points even though asset quality worsened.   Nigeria is the largest contributor to group pre-tax profit.       

Rest of West Africa:  The approach of this cluster to loan quality assessment and credit impairment differed from the Nigeria cluster.  This is also the cluster where the current CEO hails from.  Net impairment losses were largely unchanged year-on-year despite a decrease in NPLs.  NPL ratio actually improved (decreased) from 6.2% to 3.3% driven by write-offs according to management.  (I hope these write-offs were already fully (100%) provisioned for prior to write-off.)  Literature so far released made no comment about this.  This cluster had the 2nd largest contribution to group pre-tax profit. The figures here check out and get a PASS mark.  

Central Africa:  This cluster is struggling but due to lower economic activity, CFA franc depreciation and rapidly declining asset quality which led to a $7m credit impairment loss provision on the income statement.  This figure is almost half of eventual net income to help you put things into perspective.  The figures here check out and get a PASS mark.  

East Africa:  This cluster is on a lending spree in a region with plenty of promise and burgeoning economic activity.  The bank did well in my opinion to loosen its shackles here in its quest to generate profit from an area that reflects promise and is dealing with headwinds as strong as Nigeria, Central Africa or Rest of West Africa.  Net loans rose 24% ($118m) and net revenue by $10m year-on-year.  Client activity was also up and this led to a 32% ($5.6m) rise in non-interest revenue driven by higher fee and commission income and client-driven foreign exchange income.  NPL ratio deteriorated to 8.6% from 8.4% and this led to a net impairment loss of $2.9m on the income statement.  The figures here check out and get a PASS mark. This region had the smallest contribution to profit among all the Africa clusters. 

 Southern Africa: This cluster had a 23% ($11m) rise in net revenue and a 36% ($2.6m) rise in net income driven by loan volume growth and efficiency gains according to management.  Non-interest revenue contributed 20% ($1m) more than interest revenue to net revenue for this cluster.  Net loans increased in tandem with deposits at $75m.  Net impairment losses for loans on the income statement were $3.8m ($100,000 more than the same period in 2014) despite non-performing loans ratio worsening from 5.6% to 7.3%.  Do not forget that net loans increased 23% which will boost the denominator of this ratio.  Nonetheless we got the above.  

Ecobank Development Corporation (EDC)  This is the investment banking, asset management and securities arm of the group.  The big news here is that assets under management (AUM) increased by $104m, salaries increased and certain high profile hires came on board.  Due to the increased operating expenses largely driven by personnel costs, the $1.7m increase in revenue could only generate a $100,000 increase in pre-tax income.  Hopefully, EDC can put to good use its $104m increase in AUM.  I will be on the lookout.  The figures here check out and get a PASS mark.  

I need to close this out.  Will skip International after saying this:  Net loans decreased by 31% ($111m).  Management said net interest income was up $2.7m or 135% driven by an increase in average loan balances and higher yields.  I will leave it at that.

Nigeria was the worst hit when it came to cost-cutting measures ( I guess the biggest guy always getting the biggest beat-down.)  The least hit was EDC.  

I like the inward and outward look to profit generation; I do not like the "on the books" look.  The inward and "on the books" look trickled down to the bottom-line leading to a rise in pre-tax income by 22%.  Cost-cutting can only go so far without disrupting outward look to profit generation.  This is already reflected in the flat growth in net revenue.  

Africa's largest bank by reach has a lot of leg room left to stretch out and take the continent by storm.  I do worry about three different bank employees (Neddbank, ETI & QNB) sitting on one bank's board.  Will they all be in agreement on the way forward?  Will short-term gain be taken over short-term pain to please these significant shareholders when applicable?  There is still a dilution effect from Qatar National Bank's preference shares not yet exercised.  I just hope the bank has not mortgaged itself when the going was rough to remain afloat.  There are interesting times ahead, I will be watching.  I hope my summarized version was not too long?           

                 Tell others to tell others about this Africa Research Blog; a new dawn is here.