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.
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.
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.