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2020 / 06:38 AM / by Debtors Africa/ Header Image
Implications for FY 2018 and 2019
IFRS9 took a hand in aiding the
performance of Access Bank in 2018. The bank declared a profit before tax (PBT)
of N103.2bn in the year as against N78.2bn in 2017, a growth of +32%.
The rise in PBT came majorly from an IFRS9 day one provisioning adjustment
which in addition to the bank’s net interest income growth increased from
N163.5bn in FY 2017 to N173.6bn in FY 2018 (+6%).
Another cause for the huge reduction in impairment charges was the repayment
made on EMTS loans with the bank resulting in its declassification. The bank’s
net interest margin, therefore, went up from 4.9% in FY 2017 to 6.2% in FY
2018. Access Bank’s IFRS9-compliant impairment charges subsequently fell by -57% from
N34.5bn in FY 2017 to N14.7bn in FY 2018. This resulted in the bank growing
earnings per share (EPS) by +52% from N2.18 in FY 2017 to N3.31 in FY
2018. In Q1 2019 the bank’s net interest income rose by 27% from N44.7bn in FY
2018 to N56.8bn in FY 2019; showing sustained growth in lending activity net
income. Gross Earnings equally showed strong performance by rising 16% in Q1
2019 from N137.5bn in Q1 2018 to N160.1bn in Q1 2019. Evidently, the old
Diamond Bank difficulties have not bothered the new Access Bank. More
accurately, however, it seems that the bank’s Q1 2019 quarterly numbers do not
reflect the merged position of the two former legacy institutions. The Q1 2019
results are still essentially those of the non-merged Access Bank entity.
However, that may not be entirely true. It appears that Access Bank merged the
statement of financial position of both entities but adopted the profit and
loss account of its old pre-merged institution for the recent Q1 result. This
explains the sudden rise in the banks NPL ratio from 2.5% in FY 2018 to 10% in
The banks Non-performing Loans (NPLs)
ratio fell from 4.8% in 2017 to 2.5% in 2018. This demonstrated an improvement
in the bank’s loan asset quality during the year as the bank seems to have spit
out its more toxic loan assets and slowed down the pace of growth of its loan
book. Loans and advances grew by a mere +3% between
FY 2017 and FY 2018 from N2.06trn in 2017 to N2.14trn in 2018. The reduced
challenges to the bank’s loan book resulted in a reduction in its Cost of Risk
(“CoR”) which slid from 1.7% in FY 2017 to 0.7% in FY 2018.
In Q1 2019, the bank’s CoR dropped to
0.5%. But what has come as a surprise is the sudden leap in Access Banks Q1
2019 NPL ratio which stood at 10% (up from 2.5% in FY 2018). The clear
explanation for this is that the bank has since Q1 2019, consolidated the books
of its merger partner, Diamond Bank, and the recent rise in the new Access
Bank’s NPL ratio reflects the poor quality of Diamond Bank’s previous loan book
which took a medium-sized hammer to the larger Access Banks once enviable lower
NPL statistic. Analysts expect that it will take another two years for Access
Bank’s NPL ratio to return to below 5%, even though the bank itself in its
recent April 2019 stakeholders conference call indicated that NPLs in FY 2019
will be less than 10%.
IFRS9 adjustments resulted in the bank’s
capital adequacy ratio dipping slightly from 20.1% in FY 2017 to 19.9% in FY
2018. This was brought about by a fall in shareholder’s equity that was as a
result of a mild charge-off of IFRS9 adjustments to the bank’s statement of
financial position; Access Bank’s shareholder funds dropped by -4% from
N511.2bn in FY 2017 to N490.5bn in FY 2018.
Analysts note that Access Bank’s falling
cost-to-income ratio (CIR) is in line with the bank’s expectations for Q1 2019,
as lower cost of funds and gains from rescaling operations begin to kick in.
The bank had anticipated that by the end of Q1 and the beginning of Q2 2019
some of the gains of the Access Bank/ Diamond Bank merger would begin to take
The banks liquidity ratio rose mildly
from 47.2% in FY 2017 to 50.9% in FY 2018. The improvement was on the back of a
slower growth in loan assets and an uptick in customer deposits. Customer
deposits grew by 14% Y-o-Y from N2.24trn in FY 2017 to N2.57trn in FY 2018 with the bank’s larger number of
low cost customers making up to 50% of the bank’s total deposit liabilities.
The new and larger Access Bank may begin to see strains on its liquidity in Q2
2019 as tries to resolve legacy challenges from the poor loan book of the
former Diamond Bank. Some observers have said that the situation may require
the fresh injection of capital as its Q1 2019 result show that its liquidity
ratio dropped to the 2017 value of slightly over 47% (actual Q1 2019 liquidity
ratio for Access Bank was 47.8%). Analysts are still figuring out why despite
Diamond Banks well-known poor-quality loan book, Access Bank’s Q1 2019
financials do not fully reflect this reality.
From analyst’s perspective, Access Bank’s
CAR for Q1 2019 was expected to fall below 19% especially since it saw a
reduction in shareholder funds in FY 2018 which would have led to a dampening
of CAR at the consolidation of the books of both the old Access and Diamond
banks (the official minimum CAR threshold is 15% for banks with international
licenses and 10% for banks with national licenses). IFRS9 adjustments on the
consolidated books should have provided massive day one reductions in
impairments but they would also have led to large charge offs against the
shareholder equity of the new bank leading to a sizable fall in shareholder
funds and a reduction in CAR. To explain the low impairment charges and the
modest reduction in shareholder equity in Q1 2019, a number of outcomes seem
plausible; either the new bank did not make full impairment provisions for
Diamond Bank’s legacy loans or the legacy loans were not fully consolidated
into the new Access Bank’s Q1 2019 results.
Access Bank has, over the years, been
dynamic in managing its statement of financial position by optimizing assets
and liabilities to gain best operating leverage. The banks total asset to total
liabilities ratio of 1.11 is modest for a financial institution but it is not
certain whether this ratio takes into account the equity diminution expected
from the impairment adjustments required for the poor performing loans on the
former Diamond Bank books. Access Bank’s IFRS9 adjustment for FY 2018 was
roughly 9% of the total N881bn adjustment for the 12 banks under review (total
industry adjustment was in the region of N1trn).
12: Leverage Ratio of Access Bank for FY 2018
Access Bank has
transitional IFRS issues and perhaps IAS21 issues also, given its foreign
operations and foreign currency (FCY) translation considerations for its
African subsidiaries. But since the bank has from the beginning of last year,
2018 adopted the NAFEX rate as its rate of currency conversion this may not be
too important a challenge for now.
The more pressing
problem seems to be the full consolidation of the accounts and the adoption of
the right impairment costs to the merged profit and loss account and the
required charges to the shareholder funds. As things stand, the bank does not
appear to have fully adjusted the merged entities accounts for proper IFRS9
accounting rules application.
Implications for FY 2018 and 2019
ETI’s profit before tax (PBT) grew 53% from
$288.3bn in FY 2017 to $435.9bn in FY 2018. The climb did not reflect the slow
growth in Gross Earnings which skipped forward by 1% from $2.49bn in FY 2017 to
$2.48bn in FY 2018. The slowdown in Earnings was a reflection of the global
fall in trade and GDP growth rates as an increasingly bad-tempered trade
relationship between America and China stalled global expansion. Net interest
income (a measure of the underlying profitability of the bank’s core business)
fell by -3%, sliding from $977.3m in FY 2017 to
$929.8m in FY 2018. However, fees and
commissions (none interest income) grew by +10%.
The rise in fees and commission was similar to that of other local banks as
deposit money institutions shy away from straight lending to either contingent
(or off balance sheet) obligations to trade-related activities such as standby
letters of credit (SLCs), advance payment guarantees (APGs) and bank guarantees
(BGs). On the shoulders of larger non-lending transactions ETI’s fee income
last year rose from $469.5m in FY 2017 to $507m in FY 2018, a growth of 8%.
IFRS9 adjustments for impairment losses on
financial assets pulled down the bank’s impairment charges by -36% from $411.05m in FY 2017 to $263.92m in FY 2018.
This helped buoy profitability as distributable earnings rose by +44% from $227.6m in FY 2017 to $327.8m in FY
Comprehensive Income (OCI)
A quiet part of ETI’s improved statement of
financial position that has caught analyst’s attention is the bank’s Other
Comprehensive Income (OCI) which saw the bank harbour a loss of 371.9m net of
tax (see page 174 of the Group’s
Audited Account FY 2018). This line item reflects the adverse impact of IAS21
foreign exchange translation costs on the bank’s books. In other words, it
reflects the effect of provisions of IAS21 on the procedure for converting
foreign exchange from the currency of domestic transactions to the currency of
financial reporting. In the case of ETI this involves consideration of a
bouquet of 21 currencies across the continent. Francophone West African
operations (UEMOA countries) are a little less complicated as the CFA Franc is
linked to the French Franc and therefore had some underlying stability in
relation to an international reserve currency. The same cannot be said of the
naira to dollar exchange rate.
When considering the naira to dollar exchange rate
a number of issues are pertinent here. In an earlier report last year, 2019, Proshare Nigeria had insisted that ETI
was adopting the wrong foreign exchange translation rate of N306/$ as against
the autonomous market rate, NAFEX, rate of N364/$ in compliance with IAS21 rules (A-Second-Look-At-Ecobank-FYE-2018–Takeaways-From-The-Most-Recent-Conference-Call). This had the following
impact on the bank’s Q1, Q2, Q3, and Q4 results in 2018:
- It exaggerated the bank’s
profit in dollar terms
- It exaggerated the size of
the bank’s shareholder funds
- It boosted its total
assets (this grew by a foreign-exchange translation induced excess of $1bn in
Q3 2018) and,
- It boosted ROE (from 7.8%
in FY 2017 to 11% in FY 2018) and,
- It reduced Cost-of- Risk
(CoR) from 3.3% in FY 2017 to 2.4% in FY 2018
In 2019 analysts believed that the bank would not
be able to take advantage of day-one adjustments as the adjustment has been
fully made in FY 2018 under the permissible IFRS accounting rules. This will
- Profit before tax may
decline as huge write offs and reversal of impairment provisions would be
difficult to justify, especially for the Nigerian subsidiary where the Central
Bank (CBN) still perceives that there is a certain level of inadequate
provision for NPLs on the bank’s books.
- The bank would have to
calculate the full year on the basis of a NAFEX rate for FY 2019 in Nigeria
rather than the FY 2018 calculations that involved the application of official
rate for the first eleven months and the application of NAFEX in the last month
of the year December 2018.
- Unlikely growth in loans
and advances in 2019 would suggest that profit in the year would be muted
except the bank is able to make up for lower interest income by bolstering
non-interest income from trade and off -balance sheet earnings by way of
charges on contingent liabilities such as bank guarantees.
ETI’s assets have
deteriorated, especially in Nigeria, as a result of the slow growth of the
broad economy which grew by 1.93% in Q4 2018. The various domestic and
international headwinds were fairly well mirrored in the banks very modest 1%
growth in dollar gross earnings in FY 2018 (ETI group has had difficulty
growing gross earnings since 2014) and the reduction in loans and advances in
the Nigerian market (loans fell -15% from $2.7bn
in FY 2017 to $2.3bn in FY 2018). This was when loans to UEMOA countries rose +3% from $3.8bn in FY 2017 to $3.9bn in FY 2018.
16: ETI Abridged statement of financial position 2014-2018 ($’000)
However, IFRS day one
provisions in FY 2018 allowed the bank post a stronger-than-would-be-expected
profit before tax in FY 2018. Impairment provisions fell from $411m in FY 2017
to $263.9m in FY 2018, representing a Y-o-Y fall of -36%.
The Impairment decline raised a few IFRS9 issues.
The bank had a direct
IFRS9 adjustment of $279.2m in FY 2018 but provision for impairment were up
$810.6m soon to witness a large charge reversal of $570.6m described in its
report as provisions no longer required. Supporting this was a massive loan
write of $830.6m. The combination of these fiscal actions supported the bank’s
earnings leap in FY 2018.
Total equity as at 31
December 2018 was US$1.8 billion, down US$360 million compared to as at 31 December
2017. The decrease was primarily as a
result of the adverse impact from other comprehensive income (OCI) items and
the full impact of the implementation of IFRS 9. The primary OCI drivers were
the foreign currency translation reserves, which moved by US$295 million, and
negatively impacted equity. Factors responsible for the adverse movement
include the Group’s decision to adopt the NAFEX rate in December 2018,
resulting in a US$158 million impact.
Liquidity ratio for ETI
dipped a bit in 2018; most of the decline was as a result of a modest leap of +0.4% in Group’s total assets from $22.4m in FY
2017 to $22.5m in FY 2018 and an equally mild rise in deposit liabilities of +0.5% from $15.3bn in FY 2017 to $15.7bn in FY
2018. The bank’s capital adequacy ratio tumbled from 28.8% in FY 2017 to a much
more sober 13.6% (or lower than the CBN’s minimum statutory threshold of 15%)
in FY 2018.
ETI’s leverage ratio
more or less sat somewhere in the middle of other domestic Nigerian banks which
ranged from a high of 1.21 (GT Bank) to a low of 0.49 (Unity Bank). With the
recent $450m, 9.75% Eurobond Issue in 2019 ETI’s leverage ratio may worsen. A
lot will depend on the extent to which the new bond Issue retires old debts
that have fallen due and how the bank uses the remainder of the Bond amount to
drive growth in interest earning assets in the course of the year, 2019. ETI’s leverage ratio was 1.09 in FY 2018.
(Ecobank’s) foreign exchange translation accounting still appeared to have
exaggerated its performance in 2018. In addition, the IFRS9 day one
provisioning seemed to have enabled the bank strengthen its profit & loss
account. The day one adjustment impact on P&L and shareholder funds was
definitely not unique to ETI. All local deposit money banks to varying degrees
took advantage of the IFRS9 day one adjustments to paint a prettier picture of
their books. But ETI seems to be
singular in its use of IAS21 in a way that allowed it to pick and choose when
to apply the NAFEX rate of exchange and when to apply the official rate (see www.proshareng.com/news/Stock
A few things are clear about the bank’s FY 2019
- No day one IFRS9 adjustments would reoccur
in FY 2019
- IAS21 rules concerning the use of NAFEX
rates for conversion between the currency of transaction (naira) and the
currency of presentation (dollar) will apply from January to December 2019,
unlike in 2018 when it was applied only to the last month of the year, December
- Shareholder funds are not likely to shrink
to increase the bank’s return on equity (ROE) for the local Nigerian subsidiary
as there will be no day one IFRS9 adjustments to be charged against shareholder
funds by FYE December 31, 2019.
loan growth may improve in 2019 as the bank’s management in a conference call
communication with Proshare
assured that guidance growth for loans in 2019 will be in the neighbourhood of
- Q1 2019 results of ETI showed that the bank
would likely grow gross earnings by more than +1%, although
it would still be below +6% for FY 2019.
keep CAR above the CBN regulatory requirement of 15%, the bank would need to
raise further equity; the recent $450m Eurobond Issue stretches out the banks
debt profile over an additional five year horizon but ETI’s Nigerian subsidiary
will need equity to strengthen its books and prepare it for the steady growth
in the lenders loan portfolio
challenge in 2019 would be to increase gross earnings and operating profit on
the back of growth in the bank’s loan book. It would be recalled that the
bank’s gross earnings had actually declined over the past five (5), therefore,
increasing revenue growth was a strategic imperative for the bank, and would
make or mar its 2019 business outlook.
Implications for FY 2018 and 2019
Zenith Bank’s profit before tax rose from N199.3bn
in FY 2017 to N231.7bn in FY 2018, representing a rise of +16%. Most of the growth came from day one IFRS9
adjustment gains as gross earnings tumbled -15.4% from
N745.2bn in FY 2017 to N630.3bn in FY 2018.
Net interest income rose +14.6% from
N257.9bn in FY 2017 to N295.6bn in FY 2018, but the real boon to Zenith’s
profit and loss account in FY 2018 was the -81.3%
fall in IFRS9 day one adjusted impairments from N98.2bn in FY 2017 to N18.4bn
in FY 2018.
However, the banks improved earnings is no thanks
to worsening loan quality as the bank’s non-performing loan portfolio rose from
4.7% in FY 2017 to 4.9% in FY 2018; this was about 2 basis point lower than the
statutory 5% upper bar but it indicated that a few of the banks loans were becoming
increasingly toxic. This could harm FY 2019 profit figures without the comfort
of a day one IFRS9 accounting safety net.
The bank’s books also received a nudge from its
other comprehensive income (OCI) which rose from N2.7bn in FY 2017 to N6.3bn in
FY 2018, a growth of +133%. The large part
of this growth was as a result of adjustments for fair market valuation of
profit on tradable equity instruments on the bank’s balance sheet which
reversed from a negative value of N5.2bn in FY 2017 to a positive value of
N4.8bn in FY 2018.
Zenith’s rising NPL was an early warning signal
concerning the reduction in the quality of its loans and advances; admittedly
the size as at FY 2018 was not a problem as it was conveniently tucked slightly
under the 5% statutory ceiling, but its rising orientation would need to be
addressed against apprehensions about the falling quality of risk assets. The
N108.2bn IFRS9 adjustment in FY 2018 would have had an impact on the banks
shareholders fund resulting in an increase of bank capital by 0.4% (in sharp
contrast to the decline in capital of its competitors in FY 2018, for example
Union Bank’s capital shrunk by as much as -34.3% in
171: Impairments of Selected Nigerian Banks FY 2018
Source: Audited Annual Accounts of Selected Nigerian
Banks FY 2018
Between 2017 and 2018 the banks liquidity ratio
rose by 2.3% from 69.7% in FY 2017 to 72% in FY 2018. Zenith is easily one of
the sector’s most liquid banking institutions, which can, perhaps, be
understood from the perspective of its long institutional retail banking
memory. This explains why Zenith Bank is more liquid than most of its fellow
tier1 counterparts such as GT Bank and Access Bank that come from a more
preeminent corporate banking background.
This explains why Zenith Bank also has one of the
lowest cost-to-income ratios (CIR) in the sector. Zenith Bank’s CIR fell from
52.8% in FY 2018 to 49.3% in FY 2018. The banks large low-cost retail
liabilities were a major factor in keeping finance costs down.
The banks cost-of-risk equally fell between FY
2017 and FY 2018, from 4.3% in 2017 to 0.9% in 2018, a difference of 3.4%.
Going into the year, 2019, the deposit battle will be a straight fight between
the new and larger Access Bank and the sturdy Zenith Bank, with both banks
trying to retain a permanent grip on lower cost liabilities to improve net
172: Deposits of Selected Nigerian Banks 2018
Source: Audited Annual Financial Statements of Selected
The bank had a total asset- to- liabilities ratio
of 1.16 in FY2018, this indicated a modest but tolerable asset coverage ratio;
one of the highest for a Nigerian DMB in FY 2018.
The bank grew its total assets from N5.96bn in FY
2017 to N5.60bn in FY 2018, a growth of +6.4%.
The bank’s Q1 2018 total assets rose from N5.68trn in 2018 to N5.88trn in Q1
2019, a rise of N220bn. Zenith’s total liabilities in turn rose from N4.78bn in
FY 2017 to N5.14bn in FY 2018, a forward skip of +7.5%. Total liabilities took off slightly from
N4.94trn in Q1 2018 to N5.1trn in Q1 2019, a modest rise of +4%.
Zenith Bank, so far, has been a smooth-running
retail banking franchise. However, two primary issues that the bank would have
had to tackle in 2019 are growing its loan portfolio without compromising its
cost of risk (CoR) and growing its low-cost liability base. With the banking
sector showing signs of consolidation as reflected in the recent Access
Bank-Diamond Bank merger, the competitive imperative for acquiring a larger
number of savings and current account customers has become pressing.
IFRS9 provisions have helped to clean up Zenith
Bank’s books without destroying shareholder funds (unlike fellow tier 1
counterparts). The bank’s shareholder funds rose from N812.12bn in FY 2017 to
N815.75bn in FY 2018, a growth of +0.4%.
Zenith’s forward FY 2019 performance would rely on
sustaining lower cost-to-income ratios and larger fee-based
revenues. The fact that a new managing director, Ebenezer
Onyeagwu (who took over from Peter Amangbo in April 2019), had been ushered in meant
that the bank would stay focused on strategic intent for five years which is
the normal duration of a first tenor for the MD of the Bank.
Related Reports (PDF)
1. Download the Full PDF Report – Debtors Africa, May 13, 2020
2. Executive Summary PDF – Proshare, May 14, 2020
AMCON and Financial Services Debt Burden in Nigeria – Aug 17, 2018