TheCable

Ecobank Transnational Inc (ETI) is not able to grow earnings in dollar terms so far this year and revenue and profit declined at the end of the third quarter. Local currency gains in revenue aren’t reflecting in dollars when translated at the lower exchange parity.

The bank has achieved strong earnings growth in the functional currencies but this is hidden by the currency translation effect. With operational and impairment losses being encountered however, Ade Ayeyemi (pictured), the bank’s chief executive officer, expects to close the year with a lower profit than expected.

In naira terms, the bank achieved one of the strongest profit advances in the banking sector in 2014 and another strong growth in profit can be expected from the bank in 2015. Last year’s growth of 178.7% in net profit was partly a recovery from a profit drop of 44.7% in 2013. This year, both revenue and profit are expected to be up on the high growth attained in the preceding year. Growing revenue and improving profit margin have brightened profit prospects further in the current year.

ETI is leading the group of listed banks on revenue volume this year as it did in 2014. In terms of profit numbers however, it steps back on account of comparatively lower profit margin. The bank improved gross earnings by 18.1% year-on-year to N411.83 billion at the end of the third quarter. Revenue growth was led by interest income, which grew by 24% while a 10% improvement in other operating income moderated the growth rate. In dollar terms, other operating income dropped by 9% and led to a 3% decline in gross earnings.

Based on the revenue growth rate in the third quarter, ETI may gross over N550 billion at full year. That will be an increase of 12.4% over the gross income of N489.25 billion it reported at the end of 2014.

After tax profit grew at a lower pace of 15.1% than revenue in the third quarter but the full year outlook indicates a much stronger growth prospects for the bank. At N60.42 billion, after tax profit amounted to 92% of the preceding year’s full year figure at the end of the third quarter. The full year prospects indicate that profit may grow by close to a quarter on the 2014 closing figure to about N82 billion. The bank had closed last years’ operations with a net profit of N65.68 billion, which was a leap by 179% from a 45% drop in 2013.

While profit margin is down on year-on-year basis, it is improved from 13.4% at the end of last year to 14.7% in the third quarter. The bank has taken steps to improve controls and systems and implemented internal and external reviews that have resulted in improved ability of the bank to convert revenue into profit.

A major favourable cost behaviour that permitted the profit growth attained came from operating cost. It grew by 13% year-on-year compared to the 18% improvement in gross income. That reduced operating cost margin from 51.3% in the same period last year to 49.2% at the end of the third quarter.

Interest expenses showed a moderated growth at a year-on-year increase of 21% in the third quarter against an increase of 24% in interest income. That permitted a comfortable growth of 25% in net interest income during the period. However with the slacken performance of non-interest income, interest expenses claimed an increased proportion of gross earnings during the review period.

The biggest adverse movement on the income statement of the bank during the review period is in respect of impairment losses on risk assets, which grew by 48% year-on-year to N34.67 billion. It accounted largely for the loss of profit margin at the end of the third quarter and the inability of the bank to match profit growth with revenue.

Whether the impairment losses would rise further in the final quarter is a critical factor to watch on ETI at full year. Last year, an impairment charge of N23.41 billion at the end of the third quarter suddenly swelled to N44.42 billion at full year. Should that pattern repeat itself this year, the profit expectation for the bank at full year will not be realised.

The bank earned N2.19 per share at the end of the third quarter, down from N2.38 in the same period last year. The growth in profit did not lead to an increase in earnings per share due to additional shares issued and loan to equity conversions exercised during the review period. Earnings per share is projected at N2.97 for the bank at the end of 2015. The bank earned N3.05 per share at the end of 2014 and issued a bonus of 1 for 15 to shareholders.