Nigeria is Ecobank’s biggest market and also its Achilles heel – a drain on capital that is severely hindering its business elsewhere. The bank’s issues in Nigeria are threefold: its local subsidiary is blighted by low profitability, which is in turn exacerbated by both a cost burden and a stock of impaired loans that dwarfs those of its market peers.
Given that Nigeria is Ecobank’s largest single market and accounts for 24% of the group’s balance sheet, the weak growth and volatile asset quality it reports are critical to the group’s overall performance.
“Nigeria is by far our most challenging place,” Alain Nkontchou, who was named chairman of Ecobank in July, tells Euromoney. “We believe that the way to recovery is there, and as far as I am concerned it is very high on our agenda to solve the Nigerian problem once and for all.”
Elsewhere, Ecobank is in a great place. At a group level, many of its big bets on technology are paying off. In 2019, it added 4 million retail customers, and brought a small army of previously unbanked sole traders and small businesses into the formal economy.
Its investment in digital is also helping to address some of Africa’s biggest challenges.
Rapidtransfer, Ecobank’s mobile-based cross-border money transfer app, lets thousands of Africans send money home for a fraction of the usual fee: the average cost of sending $200 to sub-Saharan Africa is among the highest in the world, at around 9%. Rapidtransfer does it at 3%. That’s of invaluable help to countries highly dependent on inward remittances.
Delivering digital
For group CEO Ade Ayeyemi, this is about lifting people out of poverty – but it also means creating wealth, cutting the cost of transactions and bringing financial services to the dislocated and unbanked.
Ecobank’s goal is to deliver digital banking services to 100 million Africans.
If it is to achieve its ambitions, however – and shake off the memory of a seven-year-old governance scandal – it must resolve the legacy issues at its Nigerian subsidiary that hold back growth at the group level.
Nkontchou says the bank has a strategy in place and that, subject to challenging market conditions, he would like to see material improvements in “no more than a year”. When pressed on this, Nkontchou says he’d prefer to be “judged in due course”.
Analysts say that the bank is still paying for years of over-exposure to the oil and gas sector and poor underwriting standards
Analysts say that the bank is still paying for years of over-exposure to the oil and gas sector and poor underwriting standards – which saw huge bets placed on single-credit risks, without the cushion of syndication or a strong balance sheet.
Inevitably, when many of these loans went bad after oil prices fell in the mid-2010s, Ecobank was hit hard – and without the capital needed to support its continued lending, the overall group made a loss after tax of $205 million in 2016.
It did act, moving $780 million worth of impaired loans to a separate resolution vehicle the same year – but non-performing loans still account for 22.7% of its local loan book, while more than half of the group’s stage two loans are restructured oil and gas exposures in Nigeria.
“Ecobank Nigeria has higher stage three loans ratio than domestic peers,” says Ramy Habibi Alaoui, senior analyst, banks EMEA at Fitch Ratings. “[This] can be explained, in our view, due to more aggressive growth in the oil and gas sector as well as weaker underwriting standards.”
Generating income
Management is now focused on cleaning up the balance sheet while pushing its digital capabilities to generate income via trade finance, cash management and deposit gathering.
“We have set up a resolution vehicle (in 2016) and the expansion of the loan book has been very measured,” says Nkontchou.
But details on the strategy remain sparse.
The Nigerian subsidiary returned to a profit of $24 million in the first half of 2020, against $6 million for the whole of last year. This was, however, the result of significantly lower interest expenses, and also lower impairment charges, rather than improved profitability: Ecobank took a $52 million one-off hit when Nigeria’s central bank told commercial lenders to repay the interest on a selection of government-related energy sector loans.
Last year, the bank made a pre-tax profit of $174 million in francophone West Africa.
Costs are a huge issue. While Guaranty Trust Bank posted a cost-to-income ratio of 40.6% in the first quarter of 2020, Ecobank Nigeria’s comparative figure was 81.9%.
Ecobank has some hefty and committed backers. South Africa’s Nedbank and Qatar National Bank are long-term strategic investors in ETI, its holding company. And in June 2019, the IFC sold its 14.1% stake in Ecobank to the Rabobank-backed investment company Arise.
But there’s little incentive for them to inject more capital into Nigeria while it offers a return on equity of just 3.2%.
“You are in this cycle where the bank needs more capital and needs to address its cost base, but there is no one shareholder who is prepared to put their hands up and say up, ‘I’ll put the money in’,” claims a senior banker in Nigeria.
“You can’t have a return on equity in the low single digits, and if you are not growing in the mid-teens you are actually growing backwards, you are eroding your franchise,” the senior banker says. “You need to grow faster than inflation otherwise you are going backwards.”
