As Ecobank Group continues to navigate the complexities of the African banking landscape, its Nigerian operations are increasingly becoming a point of concern, consistently lagging behind the Group’s other regions in terms of performance.
Over the past five years (2019-2023), Ecobank Nigeria has contributed an average of 7.5% per year to the Group’s profit before tax, with the highest pre-tax profit contribution of 20.18% recorded in 2020.
In 2023, the region contributed only 4.65% to the Group’s pre-tax profit of $581 million, down from 5.74% recorded in 2022.
This downward trend has persisted into 2024. The Group’s Q2 2024 results reveal that Nigeria contributed only $6 million in profit before tax, a mere 2% of the Group’s total $324 million profit before tax in the first half of 2024.
Despite the underperformance of the Nigerian operations, Ecobank Group delivered a strong performance in the first half of 2024.
The Group’s profit before tax increased by 5%, or 23% when adjusted for foreign currency translation effects, to $324 million.
This growth was driven by strong net interest income and well-managed credit costs, which were partially offset by higher inflationary-driven expenses and a proactive increase in central impairments reserve overlays.
The Group’s net revenues (net interest income plus non-interest revenue) reached $994 million, marking a 2% increase, or a 21% increase in constant currency terms, from the prior year.
The positive revenue growth was primarily due to higher interest rates, loan repricing in several markets, and increased trade loans and trade services fees.
Commenting on the results, Jeremy Awori, CEO of Ecobank Group, highlighted the strength of the Group’s diversified business model. “Our half-year results demonstrate the strength of our diversified business model.
Despite facing macroeconomic challenges in some of our operating markets, the company increased its net revenues to $994 million and its profit before tax by 5% to $324 million.” said Awori.
Nigeria Performance
While the Group has managed to deliver solid results despite Nigeria’s underperformance, the continued decline in Nigeria’s contribution raises questions about the sustainability of this growth, particularly in a market as significant as Nigeria.
Nigeria’s underperformance may challenge the Group’s growth ambitions. While the Group’s return on tangible equity (ROTE) improved to 34.7% in the first half of 2024; up from 27% in the previous year, Nigeria posted a return on equity of just 3.80%, the lowest among the regions, representing a decline of about 60% year-on-year.
This sharp decline can be attributed to reduced profits driven by falling net revenues and rising operating expenses.
Nigeria’s contribution to the Group’s pre-tax profit dropped significantly to just 1.85% ($6 million) of the Group’s $324 million pre-tax profit in the first half of 2024, compared to a 9.24% contribution in the same period of 2023.
Over the past five years, Nigeria’s contribution to the Group’s net revenue has declined by an average of 7.9% per year, with the lowest contribution recorded in 2023.
In the first half of 2024, this contribution declined further by 53%, representing just 7% ($68 million) of the Group’s $994 million net revenues.
Although Nigeria’s total expenses as a proportion of the Group’s total expenses have continued to decline; falling to 16% in 2023 from 22% in 2019, and further to 9.8% in the first half of 2024 compared to 18% the previous year, the cost-to-income ratio has continued to rise.
The cost-to-income ratio increased by 500 basis points, climbing to 78% from 73% in the first half of 2023, marking the highest ratio among the regions.
This trend highlights the ongoing challenges in managing costs relative to income generation in the Nigerian market, which could pose significant risks to the Group’s overall profitability if not addressed.
Implications for the Group
Strategic Vulnerability: Nigeria is one of Africa’s largest economies, and its underperformance in Ecobank’s portfolio signals a potential weakness.
If the Group is unable to capitalize on the opportunities in such a significant market, it may hinder its overall growth potential. The continued lag in Nigeria’s contributions could dampen the Group’s ambitions to be a leading pan-African bank.
Cost Management Concerns: The significant rise in Nigeria’s cost-to-income ratio to 78% may indicate inefficiencies in managing expenses relative to income.
While this increase could also be attributed to policy shifts or other external factors, it remains a concerning trend that could negatively impact the Group’s profitability if not addressed promptly.
Investor Confidence: Nigeria’s declining return on equity and minimal profit contributions are concerning, particularly given the region’s strategic importance within Ecobank Group.
If this trend of underperformance continues, it could undermine investor confidence and prompt a reassessment of the Group’s overall growth prospects by investors and analysts.
The bearish turn in Ecobank shares after Q1 2024, where the stock gained 17% YtD, reflects growing concerns. Despite a strong 97.17% YtD gain in 2023, the stock has declined by 1.97% YtD as of August 16, 2024.
Although there is a general bearish trend in the banking sector, Ecobank’s decline might be more specific. The low beta of 0.317 suggests that, even with sector-wide pressures, company-specific issues, such as Nigeria’s performance challenges and the volatility in dividend payment, are likely having a noticeable impact on the stock’s value.
At its current price, the stock appears undervalued with an earnings multiple of 1.15x, lower than the banking sector’s average ratio of 2.2x.
However, this apparent undervaluation might be tempered by ongoing challenges in Nigeria, leading analysts like Meristem and Afrinvest to place a ‘Hold’ rating on the stock, as reflected in the NGX compendium of Broker’s stock recommendations for August 12–16, 2024.
Ecobank’s recent performance highlights both its strengths and the challenges it faces, particularly within its Nigerian operations. However, Ecobank Nigeria’s continued underperformance could significantly impact the Group’s long-term prospects, particularly in terms of profitability, strategic positioning, and growth potential.
If the challenges in Nigeria are not addressed, they could undermine the Group’s overall success, making it crucial for Ecobank to either find ways to improve its performance in Nigeria or to strategically reposition its operations to mitigate these risks. This can lead to a stronger market position, higher stock value, and better returns for shareholders.
