Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Ecobank Transnational Inc / Equity Bottom-Up

Sometimes in the world of investment, one needs to look through the mists of doubt and uncertainty and think what an opportunity might look like in ten years time.   Investing in ETI NL requires vision and a belief that Africa will move two steps forward, one step backwards. If two-thirds of the 36 countries within ETI's franchise can move in the right direction over the next decade, shares should be way higher. There are some positive signs already.<a href="https://www.smartkarma.com/entities/28060" target="_blank" data-smartkarma-citation="entities:28060:1">Ecobank Transnational Inc (ETI NL)</a> FY18 results show a bank reorganising its Balance Sheet, in turnaround mode, aggressively grappling with painful legacy issues and asset quality and FX risks while at the same time opening up growth opportunity across Africa where ROEs are extremely elevated. (Gabon at 60%, C. Braz at 53%, S.Sudan at 51%, Senegal at 50%, Cameroon at 42%, Zimbabwe at 38%, Sierra Leone at 36%, Guinea at 35%, Ghana at 31%, Mali and Benin at 29% etc). While mindful of inherent and pervasive risk, and some earnings quality issues, we are drawn to the potential and opportunity of ETI at depressed share price levels. (Glass half full, rather than half empty). Fundamental momentum is generally positive, as testified by the very high PH Score, with advances in Profitability, Efficiency, Asset Quality, Provisioning, and Liquidity. Impacted by regulatory change, the Capital position remains tight: for this reason, the bank does not pay a dividend. FX volatility remains challenging to manage, as testified by Comprehensive Income result, though assets and liabilities are balanced mainly between CFA and $ as the bank de-risks exposure from the Naira.Management targets high single-digit Loan and Deposit expansion this year, a ROA of around 1.4%, a slightly better CIR which is trending towards mid 50% in the medium-term, a NPL ratio of 8-10%, NPL coverage of 50-55%, and lower CoR of 2%-2.5%. Targets are prudent, evidence of a long-term sustainable narrative that requires patience.Incorporated in Togo, ETI is a pan-African bank with diverse operational activities across Francophone West Africa (28% of Operating Profit), Anglophone West Africa (21% of Operating Profit), Central, Eastern, and Southern Africa (25% of Operating Profit) as well as Nigeria (24% of Operating Profit). The bank is active in 36 countries.Core supportive shareholders include Nedbank, Qatar National Bank, IFC, and PIC which together own 69% of shares. We note Mirae Asset increasing its position of late as Franklin Resources retreats. Other shareholders include Absa, Parametric, Deutsche, and Robeco.ETI has expanded its digital product offerings with award-winning Ecobank Mobile App, Omni, EcobankPay, Bank Collect, which are improving the customer experience. The online and Mobile-based Africa Rapid Transfer App is facilitating cross-border remittances in and outside Africa.<div class="content-highlight">ETI trades at a P/Book of 0.48x, despite commanding a ROE in excess of COE, a franchise valuation of 5%, and an Earnings Yield of 35%. The combination of a top decile PH Score™, capturing fundamental momentum and extreme undervaluation, a sharply oversold technical signal, and a lowly franchise valuation position ETI in the top decile of opportunity globally.</div>

Sometimes in the world of investment, one needs to look through the mists of doubt and uncertainty and think what an opportunity might look like in ten years time.   Investing in ETI NL requires vision and a belief that Africa will move two steps forward, one step backwards. If two-thirds of the 36 countries within ETI's franchise can move in the right direction over the next decade, shares should be way higher. There are some positive signs already.Ecobank Transnational Inc (ETI NL) FY18 results show a bank reorganising its Balance Sheet, in turnaround mode, aggressively grappling with painful legacy issues and asset quality and FX risks while at the same time opening up growth opportunity across Africa where ROEs are extremely elevated. (Gabon at 60%, C. Braz at 53%, S.Sudan at 51%, Senegal at 50%, Cameroon at 42%, Zimbabwe at 38%, Sierra Leone at 36%, Guinea at 35%, Ghana at 31%, Mali and Benin at 29% etc). While mindful of inherent and pervasive risk, and some earnings quality issues, we are drawn to the potential and opportunity of ETI at depressed share price levels. (Glass half full, rather than half empty). Fundamental momentum is generally positive, as testified by the very high PH Score, with advances in Profitability, Efficiency, Asset Quality, Provisioning, and Liquidity. Impacted by regulatory change, the Capital position remains tight: for this reason, the bank does not pay a dividend. FX volatility remains challenging to manage, as testified by Comprehensive Income result, though assets and liabilities are balanced mainly between CFA and $ as the bank de-risks exposure from the Naira.Management targets high single-digit Loan and Deposit expansion this year, a ROA of around 1.4%, a slightly better CIR which is trending towards mid 50% in the medium-term, a NPL ratio of 8-10%, NPL coverage of 50-55%, and lower CoR of 2%-2.5%. Targets are prudent, evidence of a long-term sustainable narrative that requires patience.Incorporated in Togo, ETI is a pan-African bank with diverse operational activities across Francophone West Africa (28% of Operating Profit), Anglophone West Africa (21% of Operating Profit), Central, Eastern, and Southern Africa (25% of Operating Profit) as well as Nigeria (24% of Operating Profit). The bank is active in 36 countries.Core supportive shareholders include Nedbank, Qatar National Bank, IFC, and PIC which together own 69% of shares. We note Mirae Asset increasing its position of late as Franklin Resources retreats. Other shareholders include Absa, Parametric, Deutsche, and Robeco.ETI has expanded its digital product offerings with award-winning Ecobank Mobile App, Omni, EcobankPay, Bank Collect, which are improving the customer experience. The online and Mobile-based Africa Rapid Transfer App is facilitating cross-border remittances in and outside Africa.ETI trades at a P/Book of 0.48x, despite commanding a ROE in excess of COE, a franchise valuation of 5%, and an Earnings Yield of 35%. The combination of a top decile PH Score™, capturing fundamental momentum and extreme undervaluation, a sharply oversold technical signal, and a lowly franchise valuation position ETI in the top decile of opportunity globally.

Ecobank Transnational: Echoes of the Future