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Ecobank’s impairment loss is huge but it could just be accounting
Ecobank’s impairment losses were governed by 3 core elements in Q2 2020.
The most innovative bank in Africa – at least according to Global Finance – Ecobank Transnational Incorporated (ETI), has done its bit to hold its fort on the continent’s financial landscape. From being awarded by Global Finance for its prompt identification of new tools and its many unified integrated apps that cater to its customers across 33 African countries – the largest footprint of any bank operating in West, Central, East, and Southern Africa, to Euromoney’s prize of Africa’s Best Bank for Corporate Responsibility, the year 2020 has had its own streaks for the bank. However, it too has had its fair share of the year’s madness, evident primarily in its Q2 financial statements – the peak period of the COVID-19 pandemic and the lockdown by virtue of it.
Even with many companies across the world grappling to at least make the same level of revenue from previous years, Ecobank’s Net Interest Income recorded an impressive increase of 24% from N68.5 billion in Q2 2019 to N84.8 billion in Q2 2O20. This can be attributed to both an increase in interest income as well as a 21% decrease in interest expense – a combination of strategies that will leave any company well within its books. While its operating lines were relatively impressive, there is only so much the company can control by itself. For Ecobank, the impact of the ailing macroeconomic conditions is a 101% increase in impairment losses on financial assets from N10.3 billion in Q2 2019 to N21 billion in the period under review. But it might not be as bad as it seems.
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Impairment and its impact on the company’s financials
Impairment occurs when the fair value of a company’s financial assets falls below its book value. Before now, companies were only expected to provide for bad debts at least from the point where they become doubtful. However, since the movement from IAS 39 to IFRS 9, companies have been required to book an expected credit loss on all their financial assets.
In order to account for this expected credit loss, there is a range of factors that are considered particularly the company’s Probability of Default (PD) and Loss Given Default (LGD). And as far as the probability of default is concerned, a wide range of relevant forward-looking information (FLI) – that is things that could happen to the company based on its assessment of macroeconomic indicators, are used to form its assumptions. What this means is that if the probability of default in Q1 was high, Q2 naturally had a storm coming with an increased possibility of the bank’s obligors defaulting.
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Ecobank’s impairment losses were governed by 3 core elements in Q2 2020. The first was a 40% increase in impairment charges on loans and advances, then a 4% decrease in impairment charges on other financial assets, and finally, a 21% decrease in recoveries. The company had noted in its books that the period’s net impairment losses were higher compared to the previous year, mainly because recoveries of non-performing loans in the six months to June were lower compared to recoveries in the prior year’s period.
This can be attributed to the stringent financial position of many of the company’s debtors. So even though it had taken the much-needed steps to reduce its non-performing loans, its cost-of-risk for the period was 1.7% compared with 0.7% for the previous year. It also noted the impact of monetary and fiscal policies, in the central banks of countries where ETI operates, all of which have been aimed at mitigating market concerns and providing liquidity to the market.
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In explaining the impairment increase, it revealed that, “the management team has taken appropriate steps to assess the impact on the Group’s financial statement based on the information available as of date.” It, however, noted that it is currently reviewing the key parameters for the impairment model.
“This would be finalized during the second half of 2020. In the meantime, we accounted for an additional collective assessment impairment of $36 million to cope with the expected potential risk of this pandemic in our financial structure and the various current uncertainties in the markets.”
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The resultant effect on its income statement is an 18% decrease in profit for the period from N59.5 billion in Q2 2019 to N48.5 billion in Q2 2020. The company can only hope that the actual impact is far less than predicted.
With significantly increased customer deposits in Q2, boosting its liquidity in the unsettling economic times together with its strengthened operational position, Ecobank is undoubtedly on a good course. While its stock price is still at its 52-week low of N3.90 amongst other unfavorable stock market trends, it is only a matter of time before its operational growth catches up with the stock market and it commences its journey to an upward trend.
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Fidelity Bank Plc must cover the chink in its curtains to keep rising
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years.
The Nigerian banking sector has consistently been one of the most profitable sectors in the Nigeria Stock Exchange market. However, in 2020, Deposit Money Banks (DMBs) have faced a flurry of impediments, which may have affected their solidity.
With reduced income from fee and commission implemented at the start of the year by the Central Bank of Nigeria, the paucity of foreign currency for international transactions, the resulting economic contraction from dire effects of the coronavirus pandemic, and the consequent operational constraints of keeping employees safe, 2020 is obviously fraught with numerous disorders for banking institutions.
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For most, it hasn’t exactly been a year for growth at all, more like a walk in the woods, where improvements to bottom-line is almost unexpected. This period, many banks seem content with simply surviving and fundamentally matching their previous feats.
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years. The bank generated a 2020 9M PAT of N20.4billion, rising 7.08% from the corresponding figures last year, but drilling solely into its results in Q3’2020 and its exact comparative period in 2019, the bank suffered reduced interest revenue, reduced fees and commission, reduced profit before tax, and reduced after-tax profit.
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Fidelity Bank Plc concluded Q3 with a profit position of N9.1billion, 13.7% decline compared to its position in 2019 y/y. PBT reduced by 12.9% from N10.8billion in 2019 to N9.4billion this year. Gross earning in Q3 was only N49billion as against N57billion in 2019 – plummeting 14%.
The Group Chief Executive Officer of the bank, Mr. Nnamdi Okonkwo, commenting on the result said: “Our 9 months results reflect our resilient business model, particularly in a very challenging operating environment. We worked closely with our customers to gradually recover from the economic impact of the pandemic and the attendant effect of the lockdown. The drop in gross earnings was due to the decline in interest and similar income, caused by lower yields and drop in fee income.”
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True cause of the reduction in earnings
DMBs generate gross earnings under three primary subheads: Interests earned, Fees and commission, and Other operating income. Fidelity Bank Plc generated a combined total of N150.8billion for the period ended September 2020 from these three categories, compared to the N158.5billion in the corresponding period last year.
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Deeper analysis reveals that this rising tier-2 bank has seen more deficit in revenue from fee and commission compared to the other aforementioned gross-earnings’ generating-sources within this period. Interest earned dropped by a difference of N4.3billion, while revenue from fee and commission saw a decline of N4.8billion from N14.5billion in 2019 to N19.3billion YoY.
Fee and commission as a component of gross earnings
Card maintenance fees, account maintenance fees, commission on remittances, collect fees, telex fees, electronic transfer fees, amongst others, represent the plethora of channels that makes up income from fee and commission.
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The real insight this particular component of gross earnings provides is that a spike in revenue generated indicates increasing/increased customer account activity. The more a customer maximizes the usage of an account’s product and facilities, the more the revenue earned from this segment. Thus, earnings from fees and commissions are so overriding due to their apparent controllability.
For example, a bank could make the decision to purely pursue and aggressively drive the usage of its ATM debit card and promptly see the revenue from commission rise. Furthermore, an increased rate of card production and collection necessitates usage and consequently means more money is earned as card maintenance fees.
READ: Unity Bank Plc posts gross earnings of N11.04 billion in Q3 2020
The fact that gross earnings reduced mostly from fees and commissions should be a telling concern for the Management of Fidelity Bank Plc. Post covid-19 would birth the dawn of a new era for business processes. The management must guarantee the usability of its electronic banking channels, promotion of its cards, and with urgency, implement improved service delivery mechanisms to ensure that it is the first port of call to customers for general payments and remittances.
These measures are of grave significance in the bid to bridge its widened fee and commission income gap.
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Other indices
Holistically, in the 9 months ended September, it is worthy of note that the bank made certain advancements. Customer Deposits, Net Loans and Total Assets all grew in double digits. Customer Deposits grew by 22.3% from N1.2billion to N1.5billion, Total Assets also rose by 21% from N2.1billion in 2019 to N2.5billion, and Net Loans rose by 12.9% to N1.3billion from N1.1billion.
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Airtel is paying up its debts
Airtel’s annual report revealed that the company has a repayment of $890 million due in May, as well as, an installment of $505 million due in March 2023.
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Unilever Nigeria Plc: Change in management has had mixed impact
9 months into the change of management, Unilever Nigeria Plc’s performance in Nigeria has been largely underwhelming.
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