ETI’s great re­cov­ery boosts par­ent’s purse

Financial Mail - Investors Monthly - - Analysis - Warren Thomp­son

Ned­bank de­liv­ered blis­ter­ing earn­ings and div­i­dend growth at its in­terim stage due to a re­ver­sal of for­tunes at Ecobank Transna­tional In­cor­po­rated (ETI).

The pan-African bank­ing con­glom­er­ate, listed on the Nige­rian Stock Ex­change, is 20% held by Ned­bank. It has pulled it­self out of a steep dive, con­tribut­ing head­line earn­ings of R134m to Ned­bank’s re­sults for the pe­riod. This fol­lows a R1.1bn loss a year ago.

With head­line earn­ings grow­ing at just 2% from Ned­bank’s “man­aged op­er­a­tions” — all the busi­nesses in which Ned­bank owns a con­trol­ling stake — ETI was the pri­mary rea­son the group lifted head­line earn­ings per share for the six months to June by 26% to R13.61. While Ecobank does not yet pay a div­i­dend, Ned­bank’s strong cap­i­tal base and cash gen­er­a­tion meant the group could lift its div­i­dend by 14% to R6.95 per share.

More good news could flow from ETI. The bank­ing group has had six con­sec­u­tive quar­ters of prof­itabil­ity fol­low­ing ex­ec­u­tive changes that have con­trib­uted to a dras­tic im­prove­ment in the qual­ity of its credit book. Its credit im­pair­ment charge de­clined by 35% over the re­port­ing pe­riod.

Due to lags in re­port­ing, in ETI’s most re­cent quar­ter the bank posted prof­its of R162m (Ned­bank’s share) which were not in­cluded in the group’s re­sults at the in­terim stage, but which will be in­cluded in the full-year num­bers.

An­other ben­e­fit that could flow to Ned­bank share­hold­ers from its stake in ETI is the pos­si­ble re­ver­sal of a R1bn im­pair­ment charge the bank raised against its in­vest­ment, fol­low­ing a string of poor quar­terly per­for­mances. The pro­vi­sion

will be re­viewed at year-end and should the en­cour­ag­ing op­er­a­tional per­for­mance con­tinue at ETI, Ned­bank could re­verse a part or all of this pro­vi­sion. A full re­ver­sal could re­sult in an 8% boost to Ned­bank’s full-year head­line earn­ings by our es­ti­mates.

While growth was anaemic at the group’s core “man­aged op­er­a­tions” there were some pos­i­tive devel­op­ments. First, the bank’s net in­ter­est mar­gin (the dif­fer­ence be­tween its cost of bor­row­ing and its cost of lend­ing) in­creased by nine ba­sis points, from 3.58% to 3.67% over the pe­riod.

This con­trib­uted to net in­ter­est in­come ris­ing 3.4% to R14bn. Non­in­ter­est rev­enue, gen­er­ated pri­mar­ily from fees, rose by 4.3% to R12.2bn. With ex­penses con­tained at 2.7% over the pe­riod, head­line earn­ings from the bank’s core op­er­a­tions rose 2%.

Ned­bank CEO Mike Brown at­trib­uted some of the im­pres­sive cost con­trol to the group’s in­vest­ment in tech­nol­ogy, run­ning at about R2bn a year. “We have strate­gi­cally fo­cused our in­vest­ment in tech­nol­ogy and it’s be­com­ing more and more ev­i­dent in our re­sults. We ex­pect the in­vest­ment to con­tinue in­creas­ing rev­enues and ef­fi­cien­cies.”

Ned­bank’s p:e of 9.4 has caught the eye. Pa­trice Ras­sou, head of eq­ui­ties at San­lam In­vest­ment Man­age­ment, says: “Given where our mar­ket is trad­ing, find­ing stocks on a sin­gle digit price:earn­ings mul­ti­ple is very at­trac­tive.”

While Ras­sou be­lieves the bank has a strong cor­po­rate and in­vest­ment bank­ing fran­chise which con­trib­utes about 60% of the group’s prof­its, he be­lieves growth in earn­ings is more likely from the re­tail and busi­ness bank­ing di­vi­sion (40% of prof­its).

“The re­cov­ery can be led by the re­tail busi­ness, which I be­lieve can grow its earn­ings the fastest. It has done well on the cus­tomer ac­qui­si­tion side, but we are strug­gling to see it trans­late into vol­umes and ul­ti­mately prof­its.”

With Old Mu­tual share­hold­ers likely to re­ceive three Ned­bank shares for ev­ery 100 held in the forth­com­ing un­bundling, the re­sults might give pause to con­sider hold­ing on to them.

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