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How is eTranzact faring one year after its 2018 fraud scandal? 

Many Nigerians were shocked by the news that the CBN had ordered the immediate removal of some key directors of eTranzact International.

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How is eTranzact faring one year after its 2018 fraud scandal? 

Sometime in May 2018, many Nigerians were shocked by the news that the Central Bank of Nigeria (CBN) had ordered the immediate removal of some key directors of eTranzact International Plc, alongside the company’s then Chief Executive Officer, Valentine Obi. This was due to an alleged N11 billion fraud which occurred on one of the company’s platforms and involved three other principal players namely: Smartmicro Systems Limited, Delta State Government, and First Bank of Nigeria Limited.

As you can expect, a scandal of this magnitude had serious negative impact on the ICT Company’s public image, which invariably affected its business operations and financials. It has been over a year since the alleged fraud and the consequent investigations, board reshuffling, and damage control measures. So, on this week’s Nairametrics company profile, we examine how the company is faring now. And as is our tradition, we shall also be examining the company’s business model, its target market, ownership structure, competitors, and most especially, its overall financial performance.

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How is eTranzact faring one year after its 2018 fraud scandal? 

[READ MORE: Scandal: Another blow on Nissan as CEO steps aside]

Corporate information about eTranzact International Plc

Initially incorporated as a Limited Liability Company in 2003, eTranzact International Plc is a Nigerian tech firm which provides payment solutions. It became a public company in 2019, the same year it was listed on the Nigerian Stock Exchange (NSE), specifically on August 7th eTranzact International Plc is one of Nigeria’s six listed ICT firms. With its market capitalisation of N9.9 billion, it is also the most capitalised.

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The company’s business model and target audience

eTranzact International Plc is a dominant player in the Nigerian electronic payment ecosystem. Some of its services include payment processing, Point of Sale (POS), and training services. The company has tech solutions for players in various sectors of the economy including banking, education, the financial market, travel and transportation, telecommunications, and public administrations. Some of the company’s most notable products include:

  • BankIT
  • CorporatePay
  • ATM Cardlex Cash
  • eTranzact Strong Authentication
  • Pocketmoni
  • MobileTopUp
  • Payoutlet, etc

The company does not operate in Nigeria alone, it also has operations in Ghana, Kenya, Zimbabwe, Cote d’Ivoire, and even UK. Information available on its website says that it is, “currently expanding operations to more and more countries in the world.”

The company’s ownership structure

According to information contained in eTranzact International Plc’s full-year 2018 financial result, the company is majorly owned by eTranzact Global, with 50.33% shareholdings. The rest of the shareholdings are, “held by a diverse group of shareholders, including institutional investors.”

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A look at the competition

As earlier mentioned, there are six other IT companies that are listed on the Nigerian Stock Exchange, asides eTranzact International Plc. These companies are Courteville Business Solutions Plc, CHAMS Plc, CWG Plc, NCR Nigeria Plc, OMATEK Ventures Plc, and Tripple Gee and Company Plc. While each of these companies renders unique services they, their interests often conflict in terms of market audience. This creates competition.

Besides the listed companies, there are a number of other emerging payment solutions companies that also pose competitive challenge to eTranzact International Plc. Two good examples of such companies readily come to mind: Paystack and Flutterwave.

While competition understandably remains a major challenge facing the company, it is not the only problem it has faced recently. For instance, the aforementioned 2018 fraud scandal combined with other factors led the company to record a loss after tax of N3.1 billion in full-year 2018. To understand how this happened, let us go back to the story for a moment.

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[READ ALSO: Konga’s Sim Shagaya reignites e-commerce war as he reacts to Jumia’s scandal]

More on the 2018 fraud scandal

The whole scandal began on March 8th 2018 when First Bank of Nigeria Limited reported an N11.49 million fraud to the Central Bank of Nigeria. This fraud allegedly occurred on eTranzact’s Fundgate platform and involved Smart Micro Systems Limited, a merchant onboard the platform.

How is eTranzact faring one year after its 2018 fraud scandal? 

How it all began

Smart Micro Systems Limited approached eTranzact to help deploy a bulk purchase solution which would facilitate payments to Delta State employees. Additionally, the company allegedly configured an additional outbound fund transfer solution which required Smart Micro to maintain a pre-funded settlement account with a first-generation bank for settlement.

In March 2018, First Bank of Nigeria Limited informed eTranzact that the settlement account was in debit to the tune of N11.49 billion. That same March, the Managing Director of Smart Micro Systems Limited, Michael Obasuyi, wrote a petition to the Economic and Financial Crimes Commission (EFCC) against eTranzact. In a twist of events, eTranzact also wrote a counter-petition against Smartmicro Systems Limited. All these led to an investigation by the EFCC, which implicated Michael Obasuyi. He was then arrested for alleged cybercrime and money laundering.

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Nigeria’s apex bank also ordered the removal of the company’s CEO, two directors and others. This, the company later explained in its financial report, was not because these individuals were a party to the alleged crimes. Instead, they had to go because the alleged crime happened under their watch.

How the scandal affected the company’s financials

eTranzact International Plc recorded a loss after tax of N3.1 billion for the 2018 financial year, as against N208 million profit after tax made in 2017. This was largely due to a spike in operating and administrative expenses. For instance, administrative cost for the period stood at N2.3 billion, as against N1.6 billion in 2017.

The company also had to make provision for the N11.49 billion fraud case it found itself immersed in. Below is how the company summarised how much it expended in this regard, according to information it provided on page 20 of its 2018 financial results.

“…This relates to provision for Fraud Assets in relation to a portion of the N11.49 billion fraud reported by First Bank of Nigeria Limited (FBN) on March 8th, 2018, involving Smart Micro Systems Limited (SM), a merchant on-board to the eTranzact Fungate platform as an aggregator for Micro Finance Banks. As directed by the Central Bank of Nigeria (CBN) in a letter issued on Match 13 2019 the net liability was shared equally between eTranzact International Plc and First Bank of Nigeria Ltd at N5.75 billion each. Also, the sum of N5.95 billion recovered from Smart Micro System Limited was shared equally and used to reduce the impact of the liability.”

[READ FURTHER: FAAN in recruitment scandal as politicians hijack process]

How has the company performed so far in 2019?

For its H1 2019 financial results, eTranzact International Plc reported a profit after tax of N96 million, against a loss after tax of N231.8 million during the comparable period in 2018. Revenue also jumped to N6.4 billion in H1 2019, compared to N4.2 billion in H1 2018. Administrative expenses reduced to N470.9 million, compared to N600.3 million in H1 2018. All these are indicative of the possibility that the company may record positive performance at the end of full-year 2019, compared to 2018.

However, eTranzact International Plc needs to do more to clean up its image, especially as it pertains to corporate governance lapses on its part. Its shares are currently below listing standard (BLS) with just 10.06% free float. Note that the Nigerian Stock Exchange requires companies on its main board to have a free float of 20%, while those on ASEM are required to have a 15% free float.

 

Patricia
1 Comment

1 Comment

  1. Jagaban

    November 2, 2019 at 1:12 pm

    So you mean the Central Bank of Nigeria, Delta State, First Bank, eTranzact, Smart Micro Systems Limited, Pricewaterhouse Coopers, Ernest and Young, and the EFCC cannot categorically explain/unravel the fraud after an entire year? How and who stole what and when??

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Why Insurance firms are selling off their PFAs

It has not been uncommon over the years to have insurance companies with pension subsidiaries.

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Why Insurance firms are selling off their PFAs

The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.

A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.

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 So why are they selling them off? 

Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.

The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.

READ MORE: AIICO seeks NSE’s approval for conducting Rights Issue

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Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”

What the future holds

With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.

 

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Patricia
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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian banking system has been through two major asset quality crisis.

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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursedRising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN. 

Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022the highest of all the previous NPL crisis faced by financial institutions within the nation.  

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Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.  

READ MORE: What banks might do to avoid getting crushed by Oil & Gas Loans

Background  

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Over the past twelve years, the Nigerian banking system has been through two major asset quality crisisThe first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis 

The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.  

Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.  

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 READ MORE: Ratings firm explains why bank non-performing loans could be worse than expected

The current situation 

Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability.  These cases are the base case, lower case, and upper case. 

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Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.  

Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrencethe company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.   

Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quicklythe optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024. 

With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.   

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Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency

Neimeth has been one of the better performers in the stock market in the last one year. 

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Even with a 939% jump in H1 profit, Neimeth still needs to build consistency 

Neimeth’s profit after tax for H1 2020 might have jumped by 939% from H1 2019, but there’s still so much the company needs to do to remain in the game. 

For the first time in years, Pharmaceutical companies across the globe are in the spotlight for a good reason.  As the COVID-19 pandemic rages on, the world waits patiently for this industry to produce a vaccine that can once again lead us back to the lives we all missed. Nigeria is also not an exception, it seems. One of Nigeria’s oldest pharmaceutical companies, Neimeth, has been one of the better performers in the stock market in the last one year. However, there is still so much the company needs to do to earn profits consistently. 

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READ MORE: Covid-19: List of pharmaceutical firms that will receive grants from the CBN

Neimeth’s recently released H1 2020 results show a jump of 19.4% in revenue from 976 million earned in H1 2019 to 1.165 billion in H1 2020. While this is impressive, its comparative Q2 results (Jan-March ‘ 20) show a drop in revenue of 25.4% from 748.8 million earned in Q2 2019, to the 568.7 million revenue in Q2 2020. In similar vein, while its profit-after-tax soared by 939% from 5.447 million in H1 2019 to 56.596 million in H1 2020, its quarter-by-quarter results show a drop of 118%. While there is a truth that some months are better performers than others, Neimeth’s extreme profit jump in the half-year results juxtaposed with the more-than-100% drop in the first quarter of this year, reveal wide-gap volatility in its earning potential. Its revenue breakdown attributes the quarter-by-quarter drop in revenue to a comparative drop in its ‘Animal Health’ product line by a whopping 897.42%. The ‘Pharmaceuticals’ line also only experienced a marginal jump of 2.57%. 

Full report here. 

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READ MORE: Nigeria records debt service to revenue ratio of 99% in first quarter of 2020.

Current & Post-Covid-19 Opportunities  

A 2017 PWC report had revealed that by 2020 the pharmaceutical market is expected to “more than double to $1.3 trillion. Mckinsey had also predicted that come 2026, Nigeria’s pharma market could reach $4 billion. The positive outlook of the industry is even more so, following the disclosure by the CBN to support critical sectors of the economy with 1.1 trillion intervention fund.  

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The CBN governor, Godwin Emefiele, had stated that about 1trillion of the fund would be used to support the local manufacturing sector while also boosting import substitution while the balance of 100 billion would be used to support the health authorities towards ensuring that laboratories, researchers and innovators are provided with the resources required to patent and produce vaccines and test kits in Nigeria. 

READ MORE: Airtel to acquire additional spectrum for $70 million 

While manufacturing a vaccine for the Covid-19 pandemic might be nothing short of wishful, the pandemic presents a global challenge that businesses in the healthcare industry could leverage. Through strategic R&D, it could uncover a range of solutions, particularly those that involve the infusion of locally-sourced raw materials.  

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In order for the company to attain sustainable growth, it needs to come up with structures and systems that are dependable, while also tightening loose ends. One of such loose ends is its exposure to credit risk. It’s Q2 2020 reports reveal value for lost trade receivables of N693.6 million carried forward from 2019. To this end, it notes that while its operations expose it to a number of financial risks, it has put in place a risk management programme to protect the company against the potential adverse effects of these financial risks. 

At the company’s last annual general meeting (AGM), the managing director, Matthew Azoji, had also spoken on the company’s efforts to gain a larger market share through its initiation of bold and gradual expansion strategies.  

The total revenue growth and profitability of the half-year period undoubtedly signals a potential in the company. However, we might have to wait for the company’s strategies to crystalize and attain a level of consistency for an extended period before reassessing the long-term lucrativeness of its stock or otherwise. That said, it certainly should be on your watchlist.  

Patricia
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