ETI PLC: Increased intermediation translates to extra-ordinary growth in top-line and bottom-line earnings

IN LINE WITH ITS ONGOING TARGET TO TRANSLATE FOREIGN EXCHANGE DIFFERENTIALS TO BEAR POSITIVELY ON THE BANK’S BUSINESS, MAINTAINING ITS CURRENT LEVEL OF NII AND NIR DESPITE A CHALLENGING MACRO-ECONOMIC ENVIRONMENT THAT IS EASING UP AS WELL AS A GOOD RECORD

ETI, a public limited liability company, was established as a bank holding company in 1985 under a private sector initiative spearheaded by the Federation of West African Chambers of Commerce and Industry with the support of ECOWAS. In October 1985, ETI was incorporated with an authorised capital of US$100 million. The initial paid up capital of US$32 million was raised from over 1,500 individuals and institutions from West African countries. ETI recently released its financial result for the period June 2015; the Banks financial results indicates impressive double-digit growth in its top-line and bottom-line earnings despite a challenging macroeconomic business environment.

LOANS AND ADVANCES BOOST INTEREST INCOME

The Bank records a remarkable growth of 21.63% in gross earnings to N273.99 billion in the half year ended, June 2015 from N225.26 billion in the half year of 2014. This resulted from a significant growth in interest income which rose by 25.31% over the same period. The growth in Interest income was spurred by a substantial growth in loans and advances which rose to N2.67 trillion in the half year of 2015 from N2.25 trillion in the half year of 2014 due to the growth in net interest income as a result of lower fee and commission income and client driven foreign exchange income. On the flip side, interest expense grew by a notable 24.82% to N59.33 billion from N47.53 billion over the same period. Net interest income also rose by 25.58% due to the substantial interest income base despite a faster growth rate in interest expenses. The significant growth in interest expense was driven by a continued high interest rate environment due to the contractionary monetary policy in operation at the period.

SIGNIFICANT RISE IN NET INCOME

Operating Income rose to N100.98 billion from N87.19 billion indicating a growth of 15.82% in the period under review while Operating expenses rose to N132.11 billion in June 2015 from N119.21 billion in June 2014; reflecting a growth of 10.83% which led to an improvement in cost-income ratio to 62.5% from 68.1% in the prior period. Pre-tax profit for the period showed a growth of 47.40% to N61.41 billion from N41.66 billion over the same period due to additional income from associates. Net income also followed suit with an extraordinary growth of 52.13% to N48.12 billion in June 2015 from N31.63 billion in June 2014. The significant growth in net income translated to a remarkable 39.23% increase in earnings per share (EPS) to N1.81 kobo in June 2015 from N1.30kobo in June of 2014.

BANKS PERFORMANCE REFLECTS OUTSTANDING EFFICIENCY RATIOS

The Bank’s total assets grew by a substantial 20.72% to N4.61 trillion in June2015 from N3.82 trillion in June of 2014. The increase was largely due massive growth in bank’s loans and advances which grew by 52.96% to N352.58 billion from N230.50 billion. This was further supported by cash balances with CBN which grew by 21.36% to N605.66 billion from N499.05 billion and loans &advances to customers which rose by 15.02% to N2.32 trillion in June 2015 from N2.02 trillion in June 2014 which was furthered strengthened by enormous growth in derivative financial instruments over the same period. The Bank was able to grow its customer’s deposits by 12.98% to N3.19 trillion as at June 2015 from N2.82 trillion recorded in June 2014 resulting in a slight increase in loan to deposit ratio to 78.86% from 75.33% over the period. The growth in total customers deposit is expected to grow further in coming quarters as the Bank’s current strategy partly targets the opportunities of the vast unbanked populace in Nigeria. Shareholders’ equity also rose by a momentous 39.05% to N517.11 billion as at June 2015 from N371.89 billion as at June 2014. Total liabilities increase due to a notable 24.05% and 12.98% growth in deposits from banks and customers respectively to N203.25 billion and N3.19 trillion from N163.85 billion and N2.82 trillion. Expectedly, in line with the substantial growth in net income and equity, return on equity (ROE) rose notably to 9.31% in the period under review from 8.50% while return on asset (ROA) rose to 1.04% in the period under review from 0.83% in the corresponding period of June 2014. An improvement in the quality of the Bank’s assets was also recorded as Non-performing loans (NPLs) relatively stable at 4.5% as it has done in past quarters showing effective overall repayment of loans and advances.

WE UPGRADE OUR RECOMMENDATION TO A BUY

Despite the macro-economic headwind in most African countries and Nigeria CBN’s monetary tightening policies which constrained most banks income generation and result in high cost of funds within the financial system, the Bank was able outperform general expectation. Based upon the Bank’s flexibility to the current regulatory policies and the macroeconomic headwind which has lost its momentum and the Banks efficient strategy towards liquidity and income generating capacity, we believe the Bank will enhance its profitability. In line with its ongoing target to translate foreign exchange differentials to bear positively on the Bank’s business, maintaining its current level of NII and NIR despite a challenging macro-economic environment that is easing up as well as a good record of expenses management. Considering the forgoing, we revise our projected gross Earning figure of N547.98 billion but leave our earlier net income projection of N85.69 billion at the end of the current financial year, December 2015. Therefore, using Price to Earnings (PE) multiple Valuation and Net Assets Valuation (NAV) methods, we arrive at an average target price of N25.70. This represents an upside potential on the current stock of the bank. We therefore recommend a BUY on the shares of ETI Plc.