• Saturday, June 15, 2024
businessday logo

BusinessDay

Five major challenges awaiting Ecobank’s new CEO

Five major challenges awaiting Ecobank’s new CEO

 

Half year performance metrics

Ecobank Transnational Incorporated, the parent company of the Ecobank Group recently appointed Jeremy Awori as the new chief executive, replacing Ade Ayeyemi who is set to retire after attaining the age of 60 in accordance with the bank’s policy.

According to a statement from Ecobank’s chair Alain Nkontchou, Awori beat his peers by his experience, delivering an above-average return on equity and reduction of cost-to-income ratios at Absa Kenya.

“The Kenyan banker emerged the best fit for Ecobank as the lender consolidates its position on the continent through bringing costs down to 50 percent of income, managing structural currency losses, driving digital transformation, and increasing profitability through diversified growth,” Nkontchou noted.

BusinessDay highlights five major challenges awaiting Awori who is expected to resume as Group CEO and director of Ecobank Transnational, effective 1 November 2022.

Non-Performing Loan Ratio (remains above the 5.0% threshold)

Analysis of the bank’s results for the half year (H1) ended June 30, 2022, showed that while they reported a significant decline in non-performing loan ratio (NPL), their NPL remains above the CBN threshold of 5 percent.

The group reported an NPL ratio of 6.2 percent in the first half of 2022, down 120 bps from the 7.4 percent reported in the first half of 2021.

Its NPL coverage ratio improved to 113.5 percent in the first half of 2022 from 86.7 percent in the first half of 2021.

A breakdown showed that Ecobank Nigeria reported a 15.50 percent in NPL ratio in H1 2022 from 17.0 percent reported in H1 2021.

Cost-to-income-ratio-of-nigerian-banks

Heightened FX Risk

A report by Global agency, Fitch Ratings showed Ecobank is exposed to the depreciation of Sub-Saharan Africa currencies through its equity investments in subsidiaries, given that its reporting currency is US dollars.

The depreciation of certain SSA currencies led to significant foreign currency (FC) translation losses through other comprehensive income (OCI) that exceeded net income in 1Q22,” Fitch noted.

Read also: Okomu, Ecobank, other stocks drive market’s N140bn gain as week opens

Fitch noted that the impact of FC translation losses on capitalisation is mitigated by risk-weighted assets (RWAs) deflating in US dollar terms as SSA currencies depreciate.

Cost-to-income ratio (relatively high at 58.7%)

ECO Bank’s cost-to-income ratio increased by 270 bps points to 58.7 percent in the first half of 2022 from 56 percent reported in the first half of 2021.

Compared to other geographical regions, ECO Bank Nigeria reported the highest cost-to-income ratio of 81.1 percent among peers.

Fitch Ratings said in a report released in June “rising global risks will weaken domestic operating conditions. Inflation (17.7 percent in May 2022) is expected to remain stubbornly high, posing downside risks to our real GDP growth forecasts of 3.1 percent and 3.3 percent in 2022 and 2023, respectively. However, downside risks are somewhat mitigated by strong oil prices, which should also underpin growth in non-oil sectors and banks’ asset quality.”

High Double Leverage

According to Fitch, ETI’s viability rating is one notch below the ‘group viability rating’, “reflecting higher failure risk at the bank holding company (BHC) of Ecobank Group due to high common equity double leverage and the majority of the group’s operations being outside the BHC’s jurisdiction of domicile”.

“These considerations are balanced against prudent BHC liquidity management,” Fitch added.

Growing fintech threat

In Nigeria’s banking sector, investors are taking positions or stakes in the country’s growing tech ecosystem fueled by attractive fundamentals like the country’s youthful and tech-savvy population, increasing smartphones and internet penetration, large unbanked population, among other factors.

While many CEOs appear to understand their competitive positions today, most of them are worried that new entrants, including established international technology organisations and fintechs could decide to use their sophisticated customer insights to disrupt the customer relationship models.

“Consequently, banks must offer an experience that is more customer-oriented and digital. Beyond adopting innovative technologies, retail banks need to ensure full integration with back-office systems, functions, and processes,” a new report by KPMG, a professional services firm said, adding that the current digital era offers enormous opportunities for innovation.

Accordingly, retail banks must choose to comply – develop in-house processes and standards to a level that is compliant with jurisdictional needs and industry trends.

They must also compete – invest in strategic enablers both in-house and externally including internal data usage, and they must innovate – build strategic partnerships including with non-financial service-related parties.

They need to focus on an onboarding model that prioritises customer centricity, data insights, and agility while maintaining security and transparency.