Ecobank Loses Revenue, Profit in Q1
Ecobank Transnational Inc.’s [ETI] experienced operating volatility in the first quarter from a Nine percent growth in gross earnings at the end of last year to a two percent decline in the first quarter of 2020. There is even a wider swing in profit from a 28 percent growth to a 19 percent drop over the same period.
There is a significant loss of strength in how much profit management was able to extract per naira of income in the first quarter. It was as high as over 15 kobo in the first quarter of last year but was down to 10 kobo at the end of March 2020.
One critical operating figure underlies the wide swing in fortunes for the bank – impairment losses on financial assets. The gain in profit margin and the upswing in profit performance last year were exclusively powered by a drop of 55 percent in loan impairment expenses to N48 billion at the end of the year. That meant a cost saving of more than N58 billion for the bank for the year.
There is a sharp U-turn in loan impairment losses this year at a year-on-year growth of 49 percent to over N15 billion at the end of the first quarter. Loan loss expenses claimed an increased share of operating profit at 32 percent in the first quarter compared to 21 percent in the same period in 2019.
The drop in loan impairment expenses last year turned a 9 percent drop in operating profit before the charges into a 35 percent leap in operating profit after the loan loss expenses. The reverse is the case this year with an increase of 3 percent in operating profit before loan impairment expenses turning into a 10 percent drop after the charges.
Rising loan impairment expenses are despite a seal on new lending that left the customer loan portfolio unchanged at roughly N3.4 trillion at the end of the first quarter from the closing mark in 2019. In five years to 2019, ETI has recorded loan impairment expenses in excess of N583 billion. The effect of the huge credit losses on the bottom line has been up and downswings that have continued into the current financial year.
There was equally a downward swing in non-interest income in the first quarter from a revenue growth leading increase of 13 percent in 2019 to a drop of 14 percent to N67 billion in the first quarter. While all the key components of non-interest earnings grew last year, they were all down at the end of the first quarter.
A favourable turn came from interest expenses, which dropped by 12 percent to below N48 billion in the first quarter after rising more than three and half times ahead of interest income at the end of last year. This is against an increase of 7 percent in interest income to over N124 billion in the first quarter. The favorable combination resulted in a 23 percent advance in net interest income to N76.6 billion at the end of March 2020.
The corporation closed the first quarter operations with gross earnings of under N195 billion, which is a 2 percent decline year-on-year. The increase in interest income could not fully counter the drop in non-interest income – which accounted for the drop in gross earnings. Revenue growth has been weak for the bank in recent years and even the growth recorded last year was only possible in naira terms due to exchange rate differential.
The decline in interest expenses afforded the bank a cost-saving of close to N6.5 billion over the review period. The proportion of interest earnings devoted to interest expenses went down from over 46 percent to 38 percent year-on-year. The bank was therefore able to overwrite the 14 percent drop in non-interest income and raise operating income slightly to about N144 billion.
The bank’s management reined in operating expenses in the light of the disappointing revenue performance. Total operating cost only edged up by 2 percent to less than N95 billion at the end of the first quarter. It had grown far more rapidly at 11 percent at the end of last year.
An outstanding drop in net impairment expenses for credit losses last year turned to outstanding growth in the first quarter. That was the singular development for the bank in the first quarter that changed the earnings story. It created a void between an improvement in operating profit and a drop in after-tax profit.
ETI closed the first quarter operations with an after-tax profit of N24.7 billion, which is a drop of 19 percent year-on-year. The bank’s profit records in recent years have followed up and down swings and the current financial year seems set for a downturn.
The bank earned 72 kobo per share in the first quarter, down from 92 kobo per share in the same period in 2019. It closed last year’s operations with earnings per share N2.81 per.
The outlook for the bank this year indicates that rising loan impairment expenses in the face of revenue challenges will shape the earnings story in 2020. Management is expected to keep up with its cost-saving programs but these aren’t likely to be sufficient to defend the bottom line.
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