Nigeria Banking Sector Coverage - December 2011 'Bad ... - Imara

In its 9M 11 results to September, ETI continued to gain
from margin improvements on interest income, as net
interest income put on 16.16% to USD 399.0m, with NIMs
up 60bp y-o-y but up by 30bp compared to H1 11, to
6.2%. Fee and commission income gained 49.06% to USD
278.9m, and net fee and commission went up by 45.16%
to USD 263.3m, diluted by the 2.74x increase in fee and
commission expense. While lease, dividend and other
operating income were down y-o-y, their drop was more
than compensated for by the 64.79% increase in net
trading income to USD 131.6m. Operating income for the
period was up 29.88% to USD 804.3m.
Operating expenses saw a steep increase of 24.76% to USD
546.2m, with staff costs going up by 22.77% to USD
251.4m and other expenses rising by 31.66% to USD
240.5m. Increased levels of compensation were said to be
the main driver of the staff cost increase, while
expansion and inflation drove other expenses growth.
With revenues growing ahead of expenses growth,
however, the cost to income ratio improved to 67.91%
from 70.70%.
Provision charges registered an increase y-o-y of 26.73%
to USD 80.4m, a function of a growing loan book and
management’s decision to be conservative with
provisioning to boost reserves. All the regional clusters
recorded a decrease in the charge with the exception of
Francophone West Africa, which saw a 116% rise driven by
high increases in Burkina Faso, Togo, Cote d’Ivoire and
Mali. Management points out that the possibility of
significant write backs come the year end exists due to a
large proportion of “discretionary” provisions. PBT
increased by 50.58% to USD 177.7m and attributable
earnings closed the period at USD 106.6m, up 51.86%. EPS
for the period was US 1.08c, up from US 0.71c. The retail
banking arm, or ‘Domestic’ business was the worst
performer, with a PBT contribution of USD 6.4m, while
the Corporate banking business contributed USD 96.3m
and Ecobank Capital contributed USD 72.1m.
The balance sheet was flat quarter on quarter, up just
0.97% to USD 11.9bn. Loans and advances to customers
went up by 4.46% to USD 5.7bn, with holdings of treasury
bills down 17.63% to USD 650.2m and trading assets down
40.83% to USD 9.8m. The NPL ratio improved to 5.7% from
13.6% at 9M 10 and 7.2% at H1 11. This was attributed to
more NPL sales to AMCON, (customer loans in Nigeria
actually down y-o-y), and the aforementioned prudent
approach to lending, as well as write offs.
Customer deposits, like loans and advances, were largely
unchanged q-to-q, shedding 0.94% to USD 8.9bn, with the
focus remaining on growing the low cost current and
savings accounts, which were marginally higher at 77.74%
of deposits compared with 77.0% at half year. The LDR
was 64% compared with 61% at H1 11, while the CAR
ended the period at 19.5%, unchanged from the H1 11
position.
Outlook
Having hitherto been on an aggressive growth drive,
ETI notes that bar another 5-6 countries, its
geographical expansion programme is reaching the tail
end. We expect that as the group moves into a
consolidation phase, it should begin to realise more
benefits from its diversified earnings base, while the
CIR should start to trend downwards. Opportunities
for cross border trade activity should also increase,
especially as the continent is encouraged to push for
more intra-regional trading.
ETI has always targeted being in the top 3 banks in
countries where it is present. While achieving this in
roughly half of its markets, this has not been the case
in the key Nigerian market. Extended talks to merge
with First Bank collapsed, but following the banking
crisis, ETI identified one of the wounded, Oceanic
Bank, for acquisition. ETI on 24 October confirmed its
100% acquisition of Oceanic. This was the first stage
of the transaction, with the second set to be the
merger of Oceanic with Ecobank Nigeria and the third
the provision of additional capital by ETI to bring the
minimum CAR of the new entity to 16%. The total
transaction consideration saw: AMCON invest NGN
290bn in Oceanic to bring its NAV to zero and ETI
paying NGN 55bn to Oceanic shareholders. The NGN
55bn was split 70% into c2.5m ETI ords and 30% as
c1.1m participating cumulative prefs. This will
achieve ETI’s goal of becoming a tier 1 bank in
Nigeria, creating a bank with over 600 branches and
1,450 ATMs. ETI recently announced that strategic
partner Nedbank had provided it with a USD 285m 3yr
convertible facility which Nedbank can choose to
exercise between 24 and 36 months’ time to become
a 20% shareholder in ETI (valuation implications are
obvious). No further details of the facility were
availed, although part of the funds will go towards the
Oceanic acquisition. If the conversion does occur, this
should prove positive for both parties.
Aside from the Nigeria expansion, ETI also hoped to
conclude the acquisition of Trust Bank in Ghana in Q4.
However, it seems some local opposition to the
transaction may delay the conclusion, with the BoG
having set up a panel to look into the concerns.
Valuation and Recommendation
Pre-Oceanic, we value ETI, based on a DCF valuation,
at US 10.8c per share, representing upside of 68.2%
against the US 6.42c it currently trades at on its most
liquid listing in Nigeria. (Upside is 34.46% on the BRVM
and 58.95% on the GSE). A coverage based PBV
average based on the last published post merger proforma
accounts suggests a valuation of US 10.3c per
share. While there do appear to be arbitrage
opportunities across markets, the length of the
process involved in moving shares across registers
largely makes the trade unattractive as prices could
move against one very quickly. BUY.
11