Ecobank shows the way forward for banks

Amid the troubles currently afflicting Ghana’s banking industry, Ecobank – Ghana’s biggest bank – provides invaluable lessons on prudent financial management for its counterparts. TOMA IMIRHE examines how the bank’s financial performance for 2017 shows how banks in Ghana can maintain financial solidity, improve customer value proposition and keep making competitive returns to shareholders at the same time, even within the turbulence the industry is now encountering.

Over the past one year – since the financial media in Ghana and subsequently the banking public became aware that several banks in the country were no longer safe-havens for depositors – confidence in the industry has taken a downturn. Over the past seven months or so, two erstwhile banks have had their licences revoked; and more recently, the biggest indigenously-owned private bank in Ghana was turned over to an administrator in an effort to rescue it from its financial difficulties.

While no customer has lost any deposits – the Bank of Ghana has opted to protect depositors at all costs to prop-up dwindling confidence in the sector – the banking public, for the first time, is seeing a need to look closely at the finances of various banks so as to ensure their deposits are safe from possible troubles.

Unfortunately, however, the increased attention on identifying and avoiding potentially troubled banks is taking away from the fact that, at the other end of the spectrum, Ghana still boasts some of the most robust and prudently-managed financial intermediaries in Africa. Indeed, the way they are run and the resultant financial performances present a model for the rest of the industry that, if followed, would make all the present difficulties go away.

Perhaps the best model in this regard is Ghana’s biggest bank – Ecobank Ghana, whose financials for 2017 vividly show how to manage a bank in Ghana prudently to the benefit of all stakeholders.

The most important single financial indicator in Ghana’s banking industry currently is the Capital Adequacy Ratio (CAR), which measures how much share capital a bank has as a buffer against financial shocks – particularly from risk assets such as loans outstanding, some of which may not be repaid. Ecobank has unfailingly maintained a CAR of well above the regulatory minimum of 10%; and, indeed, by the end of 2017 its ratio was 13.76% – meaning that the bank is more than adequately capitalised.

Instructively, the bank’s shareholders’ funds eligible for counting as core capital was GH¢434.854million by the end of last year – thus exceeding the new regulatory minimum of GH¢400million a full year ahead of the deadline for banks to meet that new minimum. The Bank’s total shareholders’ funds amounted to GH¢1.03billion as at end of December 2017.

This capital, by the end of 2017, supported total assets of GH¢9,098.14million – thus maintaining its position as Ghana’s biggest bank.

Importantly, Ecobank not only has the largest asset base in Ghana – it has one of the best quality asset bases as well.  Using the International Financial Reporting Standards, now being introduced globally to improve the quality of financial reporting by banks, Ecobank’s Non-Performing Loans [NPLs] ratio was 15.29%; well below the industry average of 21%. Just as importantly, the bank has one of the highest liquidity ratios in the industry at 36.9%, thus assuring that it is perfectly positioned to meet withdrawal demands by depositors at any given time.

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The bank’s financial solidity, which means it is a perfectly safe haven for depositors, has not been lost on Ghana’s banking public. In 2017, the bank’s deposits from customers grew by 21% to reach GH¢6,541.648million by end of the year, up from GH¢5,416.916million a year earlier.  Instructively, this was a higher deposits growth rate than the industry average of 18.2% for the 12-month period up to October 2017.

While the confidence retained by the banking public in Ecobank as a safe-haven for deposits, at a time of widespread uncertainty about many of its competitors, has been a major factor in the bank attracting new deposits faster than the industry as a whole, an even bigger factor behind this feat has been the sheer quality of its customer service. Simply put, customers who have had the opportunity to directly compare the quality of service it offers with that of other banks have tended to consolidate their accounts with Ecobank.

Indeed, the impact of this factor is illustrated by the fact that while during 2017 the bank’s deposits grew substantially in volume, the interest it paid on those deposits declined by 14% from GH¢186.199million in 2016, to GH¢160.308million last year. This shows that Ecobank’s competitiveness with regard to deposits derives from service quality and public confidence rather than pricing. It is instructive that the growth in deposits was spread across all types of deposits – current accounts, savings accounts and fixed deposits.

The success of Ecobank’s focus on superior customer service also reflects in the growth of its net fees and commissions income in 2017 – which grew by 26% to GH¢198.755million, up from GH¢157.222million in the previous year. This was two and a half times the industry average growth of 10.5% and reflects the sheer growth in the volume and value of financial transactions consummated by the bank on behalf of its customers.

In an era when financial intermediation is proving precarious, as illustrated by the record-high industry average NPL ratio, non-funded income through fees and commissions is a crucial source of revenues and profits; and here Ecobank is showing the industry just how to do it, by giving customers superior service in executing financial transactions for them.

Even as the bank strives to increase its non-funded income, it has also taken steps to improve its asset quality through a more cautious approach to credit risk-taking. However, the figures in the bank’s 2017 accounts do not quite tell the real story. While Ecobank’s loan book size contracted sharply in 2017 from GH¢3,480.544million to GH¢2,685.468million, and its investment in securities portfolio grew strongly from GH¢641.010million to GH¢2,518.542million, this was not entirely the result of a retreat from risk-laden lending to risk-free government debt securities as the figures would seem to suggest.

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Rather, it was largely the result of restructuring the bank’s balance sheet brought about by the conversion of energy sector ‘legacy’ debts into medium-term bonds issued by the special purpose ESLA vehicle. About one-fifth of Ecobank’s outstanding loan book was reclassified as investments in debt securities following the ESLA bond issuance, and this largely accounts for the fall in loan book size and the increase in investment portfolio size.

Actually, this also accounts largely for the rise in the bank’s NPL ratio as shown by its 2017 financials. Since the energy sector debts held in Ecobank’s loan book were classified as performing [as they were being serviced from the Energy Sector Levies Account as at 2016], the conversion of this debt into investment securities [the ESLA bonds] in 2017 resulted in a large part of the bank’s erstwhile performing loans being taken out of the loan book. Thus, in proportionate terms, the non-performing loans in the resultant much smaller loan book accounted for a much larger proportion of the loan book as a whole – and thus a higher NPL ratio, even though the value of NPLs had not risen in absolute terms.

Most importantly, though, Ecobank’s strong growth and improved financial solidity through the restructuring of its loan book was achieved without impairing its profitability: a fact recognised by equity investors who subsequently rewarded it with a 54% increase in its share price in the space of just the first two months of 2018, which has made Ecobank Ghana one of the best performing equities in Africa as a whole so far this year.

While pre-tax profits fell by 22.5% last year to GH¢358.383million, down from GH¢462.676million in 2O16, this was only because there was a one-off contribution of GH¢177.854million to the previous year’s profits from an oil-related transaction. Pre-tax profits for 2017 were actually 15.9% (GH¢73.561million) higher than the previous year’s, without taking that one-off contribution into account.

 Indeed, Ecobank’s return on average equity for 2017 was 25.35%, a return on investment that very few financial portfolio instruments – whether debt or equity – could match.

Expect the bank’s profitability to get even better in the coming years. In 2017, total operational cost increased by a minimal 3% – which compares rather favourably with the industry cost growth of 18% as at September 2017. From this year, the bank’s transformation into a digital bank will begin reaping phenomenal rewards with regard to lower operating costs; the bank is currently focused on deepening customer transactions and interactions via digital channels, as opposed to the much more expensive brick and mortar channels with attendant employee costs.

While the bank’s shareholders stand to benefit immensely from the resultant higher profitability, customers are already reaping rewards from the bank’s status as a completely safe haven for their deposits, a committed and financially powerful supporter of their household and business financial needs, and a most capable vehicle through which to consummate their financial transactions.

And for Ecobank’s competitors, it offers an operating model for successfully navigating through the treacherous terrain in which Ghana’s banking industry now finds itself.

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