Are Ecobank Shares a Bargain?

Shares of Pan-African lender, Ecobank Transnational (ETI), have surged 7.1% in the month of September, blowing away the Nigerian Stock Exchange’s All Share Index.

Qatar National Bank’s purchase of a 23.5% stake in the firm triggered the big price move.

Now the stock trades at its highest point in over four years. Is there still value left on the table? Or would investors be better off looking elsewhere? Let’s take a closer look to find out.

Are Ecobank shares a bargain?

Shares of Pan-African lender, Ecobank Transnational (ETI), have surged 7.1% in the month of September, blowing away the Nigerian Stock Exchange’s All Share Index.

Qatar National Bank’s purchase of a 23.5% stake in the firm triggered the big price move.

Now the stock trades at its highest point in over four years. Is there still value left on the table? Or would investors be better off looking elsewhere? Let’s take a closer look to find out.

A Very Big Footprint … and Growing

Ecobank boasts an unmatched pan-African presence. It operates in 36 countries across the continent and is expanding rapidly. Recent expansion activity includes a launch of operations in Mozambique and the procurement of a banking license in  Angola.

Note that the Togo-based bank’s operations are spread pretty thin outside West Africa, and Nigeria in particular. Of Ecobank’s 1253 branches, 1022 are in West Africa and nearly half are in Nigeria. Operations outside of West Africa account for less than 17% of group revenue.

But the mere fact that Ecobank has established a toehold in so many African economies, puts it well ahead of much larger competitors with pan-African aspirations.

Emerging From a Leadership Crisis

It wasn’t long ago that investors were clambering over each other to exit this stock. An executive director of the bank accused the former CEO, Thierry Tanoh, of pressuring her to mis-state the bank’s 2012 earnings and was subsequently fired. This led to a leadership struggle that lasted many months until the board finally voted to remove Tanoh in March of this year. He was replaced by deputy CEO, Albert Essien, a Ghanaian with nearly 25 years of employment at Ecobank.

The allegations of poor governance shown a global spotlight on how the bank does business. While this was a deeply disturbing development for shareholders, I take the view that the bank has emerged a stronger institution as a result of the turmoil and increased scrutiny.

Are Ecobank shares a bargain?
Photo by Gabriel Millaire
Powerful Partnerships

Now, with the entry of Qatar National Bank (QNB), Ecobank benefits from three important alliances.

QNB could prove to be a conduit to loan deals originating from the Middle East. And some analysts suspect that it will eventually make a bid to acquire the bank in its entirety.

Johannesburg-based Nedbank (NED) is looking to build its sub-Saharan footprint to keep up with its South African peers. Toward that end, it loaned Ecobank $235 million in 2011 which the bank can opt to convert into a 20% equity stake up until November 25. If it should do so, the partnership would likely accelerate Ecobank’s expansion in Southern Africa.

Finally, South Africa’s Public Investment Corporation, the government workers’ pension fund, controls an 18% stake in the bank. They’ve proved to be very involved in governance issues, calling for Tanoh’s ouster. I see them as an important watchdog of minority shareholders’ interests.

Improving Efficiency

It’s not cheap to launch banking operations in 36 countries in less than 30 years. And Ecobank’s shareholders have felt the pinch of expansion costs. The bank’s return on equity over the past 12 months is a measly 5.3% and the board opted not to pay out a dividend last year.

As the bank has scales up, however, expansion costs will like begin to take a smaller bite out of earnings. The cost to income ratio improved from 78.7% in the first half of 2013 to 76.2% in the most recent six months. Management hopes that its increased promotion of online and mobile banking platforms will drive further efficiency improvements in coming years.

Valuing Ecobank Shares

Ecobank has grown its net asset value at a 16.5% pace over the past five years, and its shares currently sport a price/book ratio of 1.2. If management is able to grow the bank’s net asset value at a rate of 15% over the next five years, long-term shareholders would realize an 11% annualized local currency return even if the price/book multiple drops to 1.0 and the board decides not to reinstate the dividend.

Given its roster of powerful shareholders and the groundwork it has laid — securing banking licenses across the continent — I think the above assumptions are on the conservative side. Are there bigger bargains out there? Yes. But I believe patient investors at today’s price of NGN18.10 will be well-rewarded over the next five years – assuming a larger bank doesn’t gobble it up before then.

Investors can purchase Ecobank shares on three different African exchanges, namely the Nigerian Stock Exchange, the BRVM, and the Ghana Stock Exchange.

What Do You Think?

Do Ecobank shares look like a good long-term buy? Let’s hear your thoughts in the comments!

Disclosure: Ryan holds a beneficial interest in shares of Nedbank through his work with Africa Capital Group.

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20 thoughts on “Are Ecobank Shares a Bargain?”

  1. I have them in the fund i manage and ETI shares help me outperform others peers African funds, on YTD performance.
    Everything is in your email and with a Price to book a the current level i think it’s stay a very good long term opportunity.
    Now in the short term, we will wait the Nedabnk’s decision but in any case nothing can replace brand and footprint.
    Regards
    MK

  2. The numbers say one thing – that there is value – but qualitatively I am more cautious than optimistic. Specifically, who is running the show? The Nigerian influence (where their largest single asset is), the Francophone West African contingent (where the bank was born and where its most profitable franchise reside), the South African representation through PIC, the largest single shareholder. At least that was before the Qataris. I haven’t even mentioned Nedbank of South Africa. So I think they will struggle to come up with a clear unified vision which could lead to mismanagement and politicking.

    I am not even sure if I totally agree on the quantitative thesis as you argue it Ryan. sure NAV has compounded 13% if you take the two end points at 2013 and 2008. but in 2012 they raised money so that compounding is not from profitability. average ROE in the period is 9.9%. ETI has $23bn worth of assets and nets $330m (1H14 x 2). Zenith Bank is one eighth the size and nets 79% more bottom line. Sure at 1.5x book its a premium versus ETi but it should be based on lower risk and higher returns. in fact, it should trade at a much higher premium in my view versus ETI.

    I have always thought the strongest case for ETI was sum of parts. ETI has a lower market cap ($2.03bn) than its listed associate in Ghana ($2.08bn). I think eti owns 88% of Eco Ghana so if the market price is correct in Ghana then ETI’s share is worth $1.8bn. So you are getting the remaining assets: Nigeria, Francophone West Africa etc, for around $200m. Despite my reservations about the politics, $200m is too low. Therein lies the value. But overall, in my opinion, I think my political concerns will overshadow the ‘hidden asset’ value in the stock.

    Best,
    GPM

    1. Correction on the last point. Ecobank Ghana does not have a $2bn market cap. it is in fact $638m (I mistakenly looked at ETI listing in Ghana I think). So even that argument falls away. leaving no valuation basis to be long ETI in my view.

    2. I enjoyed this enlightening contribution but I am somewhat confused by the claim that Zenith Bank is one eighth of the size of Ecobank’s $23b. Zenith Bank total assets are at least $18b. So, it’s a bit difficult to understand how that amounts to one eighth of $23b. Thanks

    3. Great stuff, GPM. Many thanks for your feedback!

      I see your point about the lack of a unified vision at the top. Certainly a risk there. In the main, though, I see the competing ownership interests as a positive for shareholders. If they end up finding a way to collaborate and meld their strengths, then ETI becomes an even bigger force in African banking. If, on the other hand, they end up wrestling with each other for the steering wheel, the conflict will drive the share price higher as each party tries to increase their stake.

      You’re absolutely right in your criticism of the valuation model that I used. That was my mistake. ETI raised capital via a rights offer and my calculation of equity growth should have taken that into account.

      In my view, ETI’s real value stems from the fact that it has secured licenses in so many countries. This is a costly endeavor and has weighed on its bottom line. Now that most of the groundwork has been laid, however, profitability should improve. Plus, as the QNB move demonstrates, it has set itself up as an attractive takeover target for larger banks.

  3. Dear GPM,
    First I think you should also correct the assets size of Zenith Bank vs ETI.
    Secondly you have to bear in mind that the market’s price represents the value under certains circumstances. Then question, are the political, management issue already priced in??
    Thirdly we are bargaining for the future, not the past and the present.
    Having said that I can understand your position.
    Regards
    MK

    1. Dear MK
      Fair enough MK. And you’re quite right. I meant to say Zenith Assets at $19.6bn is roughly an eighth smaller (13% to be exact) than ETI based on FY13 numbers.
      Best,
      GPM

  4. Ryan,
    Very interesting article as always. I also liked the opinions from GMS and MK; both have valid arguments.

    In my opinion, ETI is not a bargain, or at least it is not if you are looking to realize superior returns within next 5 to 7 years. I have two main reasons:

    First, the Pan African model still needs to be proven. Sub-Saharan Africa is still perceived as high-risk investment destination as whole, and most investors prefer to customize or fine-tune their Africa risk exposure at portfolio level through allocations into country-specific stocks rather than investing in Africa through a pan African holding stock. Although the intra-trade topic- thanks to massive advocacy work from our business leaders Tony Elumelu, Aliko Dangote, Mo Ibrahim and the likes- is gaining attention, poor political governance and diverging agendas from our governments will make it a long rocky way before ETI can harvest the fruits of its strategy. One example… As one executive manager of ETI stated recently in an interview, the company reports to 20+ different regulators across Africa! That too many ! Especially when you know that ETI deals with only one regulator in its most profitable geographical segment which is Francophone West Africa. It is true we are going in the right direction but so far integration has been happening regionally not at a panafrican level. Therefore, stating that ETI will create additional value from synergies derived from its panafrican footprint is quite bold. I don’t see this approach changing unless drastic reforms are engaged by African governments.

    Second, I am not sure best governance practices have come out of the leadership crisis that ends in April 2014. By firing the CEO, the Board – which composition has never really reflected shareholding mix (red flag!) – ousted the one who was supposed to strenghten the group organization to take ETI to the next level and reinstated the former executive managers who had led the group under Ekpe’s leadership in the 00’s. That’s not an improvement.

    I am optimistic though. ETI should be able to return good performances to its investors just by the sole fact that Nigeria, Ivory Coast, Kenya and Ghana will keep up the high economic growth pace.

    Whether ETI will outperform its peers whose strategies are region- or country-focused in a 5-7 years timeframe… I am less confident.

  5. Hi DG,
    very good point.
    But Two things.
    First: footprint and diversification.
    All the businesses (African or even worldwide) are taking this path or are willing to. Not a easy one anyway
    I think governments and the politic framework will adjust and not the inverse. it can take some times but it looks like all the protagonists are watching in the same direction.
    Second: Good governance is the common sense for any regional and sustainable business. It will come sooner or later. For me, it”s nearly “Whether we like or not”. And private sector can turn it quicker than governments. Look at the the future and learn from history: I guess that any management (or board) knows the maxim.
    bootom line: A precious stone needs to be polished. And if you don’t do, someone else will. Whether it’s QNB, Nedbank, etc etc (or another one)..
    Have a nice weekend
    MK

  6. Hi MK,

    I agree with you. For Ecobank, is more a matter of whether core financial data and macroeconomic fundamentals tell the full story…

    Economic integration is the direction all businesses are heading to whether govt officials like it or not. However, if I promise to return $200 to you without telling you when, if you give me $100 today, will you?

    He who is willing to invest needs also to think about a reasonable holding period at the end of which he cashes out to realize his $$$ returns. This is where things get blurry in my opinion when contemplating an investment in Ecobank.

    I say efficient Africa intra-trade and pan African integration is a long way to go. I am in my 30’s but I am not sure one day I will see a nigerian travel to Malawi or Angola without needing an entry visa. I am exaggerating a bit but you get the sense of my thoughts.

    If I had patient capital that I won’t need for the next 15 years, sure I’d invest part of it in Ecobank. But if my strategy requires capital be returned to investors by 2020, ETI is not where I’ll put the money.

    As to good governance, it’s common sense ok, but history showed us that common sense in the corporate world cannot be taken for granted and it doesn’t take much to destroy value (look at African Bank in SA…). In the case of Ecobank, the markers of good governance are yet to be seen and a better strategy would have been to strengthen the foundations of the group before entering East Africa which is more competitive than West Africa in terms of financial services.

    For now, I am not buying ETI above a P/B of 1.

    1. Many thanks for your thoughts, DG. You’ve obviously been following this share closely. Very insightful.

      This has been a fantastic debate. I think the key point of difference boils down to this — Does ETI’s pan-African footprint merit a premium valuation for its shares?

  7. I agree with DG. I think I can get better diversified banking exposure in emerging Africa myself by buying in different markets rather than banking on eti to do that for me. The short history of African markets has shown that you do better with this strategy. I think the same will be true in the next decade. But everything at a price. At below PB 1x, I would consider eti. Not as a core holding though.

    Happy hunting fellas.

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