Ecobank Ghana and Standard Chartered Bank Ghana H1 2015: Large is in and old is out or maybe not?

Dear Africa Interested Individuals:

                                                        Let us take a look at how the largest bank (Ecobank) and the oldest bank in Ghana (SCB) are doing as at June 30th, 2015 in a concise fashion.  

Ecobank Ghana is going all out to increase its earnings and make a profit.  The bank has pitched its tent with lending given the high lending rate environment in Ghana and reduced its exposure to non-lending business areas.  Interest income weighting relative to gross earnings is at 71% which is interestingly enough, less than that of SCB Ghana at 78%.  SCB increased its exposure to investment securities to offset its high NPL ratio negative impact on the income statement while Ecobank reduced its exposure to investment securities to increase its profit where it believes it has a comparative advantage and good lending opportunities despite the tough business climate in Ghana.  

Ecobank Ghana has given out 92% of its deposits as net loans; this is also equivalent to 71% of its assets.  The bank has pitched its tent with lending as the mainstay of the business and is reaping the fruits of it.  RoE is already at 26% as at the half-year mark.  This is double SCB Ghana's RoE and almost double Nigeria's GT Bank with a best Nigeria RoE of 14% as at the half-year mark.  

Borrowings increased by $39.4m over the first six months of 2015 and debt to capital is still at 29%; this is commendable and below my safety threshold of 30%.  Ecobank has over extended itself as it pursued its aggressive lending and needs tier one capital urgently.     

SCB Ghana's total branch network generated top-line earnings on average, 4X more than the total branch network of Ecobank Ghana.  When it comes to the bottom-line (the line that really matters,) Ecobank Ghana achieved a pre-tax income margin of 49.9% versus 37.3% for SCB Ghana as at H1 2015.   

The NPL ratio of SCB Ghana is 17% while that of Ecobank Ghana is approximately 2%.  Despite the wide disparity in asset quality, the credit impairment on the income statement for Ecobank Ghana is 42% of SCB Ghana's figure.  The loan book of Ecobank Ghana is about 2.5X larger than that of SCB Ghana.  Only 39% of SCB Ghana's assets are loans while it is 71% for Ecobank Ghana.  Ecobank Ghana provisioned on the income statement a bit better than SCB Ghana on average. 

Ecobank Ghana is 84% larger than SCB Ghana as at June 30th, 2015.  Despite this, Ecobank's operational efficiency was just 100 basis points higher at 36.1% versus 35.1% for SCB Ghana.  Ecobank Ghana has extracted pre-tax income from its asset base 110 basis points more than SCB Ghana at the half-year mark.  

Ecobank Ghana's customer loan book is 150% more than that of SCB Ghana while the interest income (from all sources) for Ecobank Ghana is only 72% higher than that of SCB Ghana.  Each bank is clearly focusing on the business area it is getting the most success presently from which is smart and has helped SCB Ghana;s EPS to decline by 34% instead of a lot more given its abysmal asset quality.

Ecobank Nigeria is the flagship in size of the ETI group while Ecobank Ghana is the brightest light.

As at December 31st, 2014, SCB Ghana was actually a better bank than Ecobank Ghana.  SCB Ghana was 12th in my African Banks' Human Capital ranking while Ecobank Ghana was 15th.  SCB Ghana had a much much better RoE and a better RoA than Ecobank Ghana.  The tables have significantly turned in six months.  The largest bank has found a way to outwit the oldest bank by being aggressive to an extreme level in expanding its loan book and it is paying off so far.  Ecobank Ghana may have maxed out and needs to consolidate on its gains ahead of seeking out more ground in the second half of 2015.  It has little wiggle room left to maneuver and needs to loosen things up a bit if the 2015 financial year is to end the year singing the same tune it did at the half-way mark.  So what do the markets think?

As at August 25th, 2015, the annualized 2015 price-to-earnings ratio for SCB Ghana is 14X while that of Ecobank Ghana is 6X.  The multinational premium which is prevalent across some African stock markets may be in play here.  Despite the 34% decline in net income by SCB Ghana and the 27% rise  in net income by Ecobank Ghana year-on-year, their H1 EPS is just 0.04 Cedis apart with Ecobank Ghana having the edge.  The market in Ghana is not yet seeing the current turn of events as something here to stay.  The oldest bank is still getting significant leeway which keeps its price per share 110% higher than that of Ecobank Ghana as at August 25th, 2015.  I guess old habits die hard and Ghana is not to be left out.        

These results are impressive for a country that has its inflation rate hovering at 17% and its MPR at 22%.  The figures for both banks are better than every Nigerian bank bar GT Bank for a few ratios in the case of SCB Ghana.  Succeeding in more difficult operating environments always gets a plus one in my book.

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