Ecobank Transnational’s first quarter earnings report makes a promising opening for the bank this year. Based on the first quarter performance, a big rise in profit may follow the bank’s profit plunge in 2013 and the strongest profit growth in many years is very likely to be posted in 2014.
The bank saw a profit crash of nearly 50% last year but looks very good to lift net profit by more than one and half times this financial year. First quarter earnings figures are showing new strength in stepping up revenue growth and in rebuilding profit margin – that sank to one of the lowest levels in the banking sector in 2013.
At the end of the first quarter, net profit amounted to about N15 billion, which is an increase of 15.3% over the corresponding profit figure in the preceding year. Based on the first quarter growth rate, the bank is expected to earn after tax profit of N60.8 billion at the end of the current financial year. This will be a growth of 158% over the 2013 net profit figure of N23.57 billion.
The high profit growth anticipated for the bank is largely a recovery from a profit fall of 48.2% in 2013. The bank’s stable earnings growth trend was interrupted last year, as an upsurge in credit losses gulped revenues and set profit tumbling from its 2012 peak of N42.61 billion. Loan loss expenses had advanced by 143.8% to over N60 billion in 2013, claiming a significantly increased share of net revenue of the bank. This accounted exclusively for the profit drop the bank suffered last year.
The adverse impact of loan loss expenses on the bottom line is still continuing even in the current financial year. Loan loss provisions again rose by 76.3% in the first quarter and continues to claim an increasing proportion of the bank’s revenue. The strong recovery and growth in profit anticipated for the current year therefore depends on whether loan loss expenses will rise further or moderate relative to revenue in the course of the year.
The bank is maintaining a continuing growth in gross earnings though it is experiencing a decelerating growth. At N109.84 billion in the first quarter, gross income is up by 17% from the corresponding first quarter figure last year. Based on the current growth rate, full year revenue is projected at N441.3 billion for Ecobank Transnational in 2014.
This will represent an increase of 7.3%, which is a continuing slow down from the outstanding revenue growth of 51.7% in 2012. Gross earnings had risen by about 15% in 2013. Interest income continues to lead revenue growth in the current year and interest expenses continue to moderate to the benefit of profit margin.
With the profit fall in 2013, the bank closed last year with one of the lowest profit margins among listed banks. Net profit margin dropped from 12.7% in 2012 to 5.7% in 2013. Net profit margin has recovered at 13.6% in the first quarter but has failed to improve over the 13.9% recorded in the first quarter of last year.
The high rise in loan loss expenses isn’t the only factor affecting the profit performance of the bank. Operating cost has remained high relative to revenue despite its continuing moderation. Operating expenses grew slightly below gross earnings in 2013 and the moderation is also being maintained in the current financial year.
Despite the moderation, operating cost remains comparatively high at 54.3% of gross earnings at the end of the first quarter. The ratio has hardly changed from the 54.5% recorded at the end of 2013. This is considerably higher than the average banking industry operating cost margin of about 43%.
The bank’s comparatively high operating cost margin is the explanation for its inability to improve profit margin. Effort to raise profit capacity therefore needs to focus on just two expenditure lines – loan loss provisioning and operating expenses. The two expense lines are responsible for the bank’s position of being one of the largest revenue earners in the banking sector and yet one of the lowest performers in terms of profit. Guaranty Trust Bank’s net profit in 2013 is almost four times that of Ecobank Transnational’s while its gross income measures only 59% of that of the West Africa bank.
Ecobank earned 72 kobo per share in the first quarter, increasing from 66 kobo in the corresponding period in the preceding year. Full year earnings per share is projected at N2.46 for Ecobank Transnational in 2014.
