A sky high impairment loss dampens Ecobank’s profit

A sky high impairment loss on loans  has dampened the bottom line of Ecobank Transnational Inc., Africa’s most geographically diverse lender after it reported last month that earnings would be lower than expected due to a weak currency and drop in oil price.

Impairment charges or loan loss expenses occurs when it is probable that the Bank will be unable to collect all or some of the amounts due, including both the contractual interest and principal payments under a loan agreement.

For the year ended December 2015, Ecobank’s net income reduced by 73 percent to N21.25 billion from N65.68 billion as at December 2014.Revenues reduced by 10 percent to N416.48 billion in December 2015 as against N379.32 billion as at December 2014. 

The receding profit can be attributed to a 136.92 percent rise in impairment charge on loans and advances and financial assets to N105.16 billion, suffered due to continuous writing off of bad debts as default mount.

Last year, Ecobank published the list of 73 delinquent debtors which owed it a total sum of N5.4 billion. This could result in high Non Performing Non Loans (NPLs) as exposure to oil and gas heightens.

The Pan African bank in a statement posted on the website of the Nigeria Stock Exchange said the macroeconomic headwinds caused by a sharp drop in oil price affected operation across the continents.

“Our 2015 results were disappointing. We did a comprehensive review of our processes and portfolio leading to elevated impairment charges in the fourth quarter”, said Ade Ayeyemi, chief executive director of Ecobank.

“Impairment losses were significantly increased by $265 million to $532 million. This was unacceptable to us, and we have taken drastic steps to address asset quality and strengthen our processes,” said Ayeyemi.

“Our diversified business model is a source of competitive strength and stability. In the last few months, management and I, have worked to revise our strategy and operating model around our customers, our products, and our geographical footprint. We have made some management changes and developed a strategic plan aimed at ensuring we generate sustainable long-term performance.” Ayeyemi added.

Oil’s 70 percent price decline since mid-June 2015 has raised questions about asset quality at Nigerian banks. This is because a slow growing economy has made if practically difficult for customers to honor obligations.

Growth in Nigeria slowed to 2.8 percent last year, the weakest level since 1999 and down from 6.2 percent recorded in 2014. Inflation has arisen to 12.80 percent in March as against 11.40 percent as at February, according to the National Bureau of Statistics (NBS).

The central bank of Africa’s most populous nation has restricted dollar sales to lenders as it seeks to curb inflation and stop the reserve from continuous depletion due to a sharp fall in oil price.

The policy is however causing liquidity squeeze and hurting the profit of banks.

Ecobank is not the only lender hard hit by a rising loan loss expenses. Zenith bank recorded a 200 percent rise in impairment charges, Access (+22.0 percent), Fidelity (+33.85 percent), FCMB (+41.30 percent), GTBank (+74.80 percent), UBA (+58.74 percent), Union Bank (+106 percent) and Sterling Bank (+104 percent), based on data compiled by Markets and Finance.

Analysts say loan loss expenses are critical in assessing financial system stability, as they are a key contributor to fluctuations in banks’ profitability and capital positions. This has a bearing on banks’ supply of credit to the economy.

Further analysis of the financial statement of Ecobank shows net income increased by 20 percent to N345.75 billion in December 2015 from N288.10 billion as at December 2014. However interest expense reduced by 15 percent to N2216.55 billion in December 2015 compared with N184.58 billion as at December 2014. Net interest income was up by 23 percent to N226.55 billion as at December 2014.

The Togolese lender’s loans and advances by were down by 2 percent to N2.23 trillion in December 2015 from N2.28 trillion as at December 2014. Deposits from customers increased by a mere 1 percent to N3.27 trillion in December 2015 as against N3.23 trillion as at December 2014.

Experts say the outlook for Nigeria banks is grim as a possible devaluation of naira and the continued exposure to oil and gas may see earning falter.

“We see a three-fold impact on Nigerian banks from a naira devaluation: 1) capital, 2) FX income and 3) asset quality. On our estimates, GTBank, FCMB and Zenith’s capital adequacy ratios (CARs) are the most sensitive to a weaker naira given they do not have sufficient FX tier 2 capital buffers to shield them from the impact of a devaluation; but FBNH, Skye, Ecobank Nigeria (not covered) and FCMB would probably be quickest to breach minimum CAR requirements and feel the pressure to raise capital. GTBank, Fidelity and Stanbic witnessed the most significant jumps in FX income in 4Q14 and 1Q15 when the naira was devalued and history could repeat itself,”  said Adesoji Solanke, head of research renaissance capital in a recent note to Markets and Finance.

“The asset quality impact is more difficult to estimate, but we expect an increase in cost of risk (CoR) to 2.4% on average in FY16, vs 1.7% in 9M15. The outlook appears grim and management teams allude to this but in our view, the banks are not reflecting this sufficiently in their guidance. Our base case for the sector assumes a margin decline of at least 30 bpts on average, a 70 bpts increase in CoR to 2.4%,a 2 ppts decline in RoE to 10% and 20% devaluation. We however acknowledge investors’ concerns about the performance of the loan book in the event of devaluation and a continued decline in oil prices. We think the prolonged decline in oil prices leaves the sector facing unprecedented risks, including FX scarcity (which no bank or the regulator appear to have factored in as a plausible scenario, said Solanke

Ecobank’s share price closed at N13.87 on the floor of the exchange while market capitalization was N334.26 billion.

BALA AUGIE