Ecobank Transnational Inc

11 March 2011 Ecobank Transnational Inc Email: research@securitiesafrica.com Tel: +27 11 895 0380 Sector/Country: Commercial Banking / Nigeria Stock Rating: Overweight Equity Market Cap : USD 1,452m Current Share Price : NGN 15.70 12 Mth Target Price : NGN 20.00 12 Mth Trading Range : NGN 13.81 20.99 Daily Avg: USD 27.5k Free Float: 29.0% Overview Ecobank Transnational Inc (ETI) is a leading independent regional financial institution which was incorporated in Lome, Togo in 1985 as a public limited liability company and a bank holding company. Its establishment was initiated under a private sector initiative spearheaded by the Federation of West African Chambers of Commerce and Industry with the support of ECOWAS. Ecobank currently operates in 30 African countries, which include: Benin, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Congo Brazzaville, Côte d Ivoire, Democratic Republic of Congo, Gabon, Gambia, Ghana, Guinea, GuineaBissau, Kenya, Liberia, Malawi, Mali, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, South Africa, Tanzania, Togo, Uganda and Zambia. The group also operates a representative office in France through its affiliate EBI S.A. in Paris and has a presence in Dubai, UAE. ETI is currently listed on the stock exchanges in Lagos, Accra and the West African Economic and Monetary Union (UEMOA) the BRVM. During 9, the Ecobank Group managed to increase its total branch network to 746 with total assets rising to over USD 9 bn. Its employees now number more than 11,000 in the 30 different countries. Ecobank s current product mix includes wholesale, retail, investment and transaction banking services and products which it sells to corporates, individuals and government institutions. In October 8, Ecobank formed an alliance with Nedbank Limited, through which the two financial institutions now control the largest banking network in Africa, with more than 1000 branches in 33 countries. Investment Case Diversified earnings base ETI has a well diversified earnings base with 40% of its earnings coming from Nigeria, Ghana, Dubai and the UK. Cross selling and intra regional trade ETI is in a solid position to benefit from trade across the ECOWAS, UEMOA, East African Community and Southern African regions. ETI is able to take advantage of retail and corporate opportunities across the African continent assisted by its unique intra regional ICT platform that enables it to process transactions between customers in different countries on the same ICT platform. ETI s partnership with Nedbank provides ETI with additional reach in the southern Africa, for example, ETI Regional Card holders are now able to access their cash at Nedbank 1,860 ATM s in Southern Africa. In addition to this, Ecobank cross sells insurance products from Old Mutual across its platform in West, East and Southern Africa, providing it with an additional source of revenue. Consolidation ETI management is currently looking at consolidating its market position across African countries after a period of rapid expansion. This will lead to an increase in its operational efficiencies resulting in higher profitability. The banking group is however, also looking at growth from non funded revenue streams such as trade finance (oil transportation) and the expansion of commission based business such as intraafrica money transfers and payments. Growth Year to date net revenue for the 9M10 increased +1% to USD619m, largely due to the strong growth in the underlying businesses offset with revenue declines in Nigeria. Cost base ETI currently is currently operating at a cost to income ratio of 71% (FY09: 69%). The group needs to aggressively focus on bad debts and internal costs in order to reduce this ratio. Balance sheet ETI has a strong balance sheet with a tier 1 capital ratio of 21.2% (USD$1.3bn). The current loan to deposit ratio is 71%, which highlights ETI s focus on conservative lending and quality loan generation. Recommendation ETI has historically exhibited high revenue growth with total earnings growing at a CAGR of 33% for the past several years. ETI is trading on an implied December 2010 PER of 8.1x, with the forward multiples being even more attractive. The bank is currently trading at a discount to its book value, at a P/BV of 0.77x making it more attractive than its peer group. We derive a target price of NGN 20.00, using a combination of a dividend discount model and Gordon growth model. We retain our Overweight recommendation on the counter. Key Company Data EPS (USD) 0.58 1.30 1.92 2.25 EPS Growth 45.8% 122.3% 47.6% 17.4% P/E 17.9x 8.1x 5.5x 4.6x P/BV 0.82x 0.77x 0.71x 0.64x P/ABV 0.82x 0.77x 0.71x 0.64x Dividend Yield 1.4% 1.9% 2.9% 3.3% ROE 4.8% 9.9% 13.5% 14.5% Share Price Performance 140 130 120 110 100 90 Jan10 Apr10 Jul10 Oct10 Jan11 Source: Stock exchange data Ecobank Transnational Inc Revenue breakdown (3Q10) East Africa 6% Rest of WA 21% Revenues by region S. Africa 2% Nigeria 26% Other 1% Central Africa 11% Francophone 33% Corp. Banking 30% Source: Company reports, Securities Africa Research Nigerian Stock Exchange Revenues by Business Segment Dom. Banking 55% ETI Capital 15%

Revenue / Revenue Growth 1,600 1,400 1, 1,000 800 600 400 Gross Earnings Revenues / EBITDA / EBITDA Margin 1,600 1,400 1, 1,000 800 600 400 Gross Earnings Growth (RHS) 70% 60% 50% 40% 30% 20% 10% 0% 10% 7.0% 6.5% 6.0% 5.5% 5.0% Gross Earnings Net Interest Income Net Interest Margin (RHS) Net Income / EPS 250 150 100 50 Net Income (LHS) EPS (RHS) 2.5 2.0 1.5 1.0 0.5 0.0 Key Value Drivers A wide coverage distribution platform ETI has a large distribution platform across SubSaharan Africa providing it with a head start in front of other banks in terms of intra regional corporate and consumer banking. It s integrated ICT platform is a key driver of its business, allowing card holding customers to move between countries in West and Eastern Africa and have unrestricted access to their cash. A strong balance sheet growing at a CAGR of over 30% for the past seven years has increased shareholder equity by a CAGR of over 40% over the same period of time. Interest earning assets have risen by a compound average growth rate of >35% to drive ETI s gross earnings to above USD 1.0bn. ETI s balance sheet provides it with strong leverage for it to generate corporate and multinational business. Strategic partnerships ETI has strategic partnerships in place with companies such as Western Union, Accion, Amadeus and Nedbank of South Africa. These strategic partnerships provide ETI with technical expertise to bridge skills gaps in the banking sector. ETI also benefits from cross selling products with its partners, for example its partnership with Nedbank enables it to sell banc assurance products from Nedbank and Old Mutual across its banking platform. The Nedbank partnership also provides ETI s customers with access to Nedbank s ATM and banking platform in Southern Africa providing additional cross selling opportunities for the group s various divisions such as investment and corporate banking divisions. Catalysts Economic Growth in Sub Saharan Africa Ecobank has operations in some of the fastest growing African countries such as Uganda, Ghana and Nigeria. Its position and as a top tier banking group in these countries will provide it with opportunities to increase both interest and non interest income (eg. from fees, commissions and foreign currency trading). Consolidation of ETI s network and operations will enable the company to reduce its operational costs. This will be critical in countries such as Nigeria where inflationary pressures can undermine the profitability of the group, thus consolidation of the group will make ETI more competitive. Potential Risks Inflationary pressures in Nigeria ETI s largest market Nigeria is increasing its money supply in a low interest rate environment. If this environment is not managed well, coupled with reforms in the petroleum sector this could result in the escalation of operating costs and lead to lower profit margins. Regulatory changes Changes in the regulatory environments of its major markets can affect the profitability of the group as seen from the banking sector crisis in Nigeria. Competitive pressures Competitive pressures in ETI s main markets have increased with foreign banking group looking to enter markets such as Nigeria whilst mergers and acquisitions plus regional strategies for banking groups such as UBA will lead to increased competition for ETI. Bull / Base / Bear Case Scenario Analysis Bull case Price Target NGN 23.00 Assumptions: single digit loan growth during FY10, followed by double digit loan growth over the next two years. Net interest margin improves to over 7% from 5.7% currently. Cost to income ratio improve to 60% from over 88% (9). Group experiences element of debtor recoveries. Base case Price Target NGN 21.00 Assumptions: single digit loan growth during FY10, with loan growth expected to accelerate to 8% over the next two years. Net interest margin improves to over 6.5% from 5.7% currently. Cost to income ratio improve to 64% from over 88% (9). Assumes ETI improves its earnings by consolidating its position in key African markets and exploiting cross selling opportunities whilst managing costs. Bear Case Price Target NGN 17.00 Assumptions: single digit loan growth during FY10, with benign loan growth expected over the next two years. Net interest margin improves to over 6.0% from 5.7% currently. Cost to income ratio improve to 70% from over 88% (9).

Income Statement USD in million, except per share data Gross Earnings 1,178 1,073 1,212 1,355 % yoy growth 2.8% 8.9% 12.9% 11.8% Net interest Inc ome 459 473 530 623 NIM margin 5.9% 5.7% 5.9% 6.5% Other income 414 385 412 441 Operating income 873 858 942 1,064 margin 74.1% 79.9% 77.8% 78.5% Operating expenses (excl. D&A) 571 515 553 602 Depreciation and Amortisation 61 69 73 79 Profit before tax 101 189 298 351 Extraordinary gain / (loss) 0 0 0 0 Taxation 36 47 84 98 effective tax rate 36.1% 25.0% 28.0% 28.0% Profit after tax 65 142 215 252 Minority Interest 14 28 47 56 Net Income/(Loss) 51 114 168 197 Weighted avg. no. of shares (mn) 8,734 8,734 8,734 8,734 No. of shares outstanding (mn) 8,734 8,734 8,734 8,734 Adjusted EPS (USD) 0.58 1.30 1.92 2.25 Dividend per share (USD) 0.00 0.00 0.01 0.01 Cash Flow Statement Cash generated from operations 37 2 479 518 Finance income 757 1,073 1,212 1,355 Finance cost 322 215 269 291 Tax paid 51 48 56 87 Net cash from operating activities 346 807 406 459 Purchase of PP&E 135 123 139 156 Purchase of intangible assets 3 3 3 3 Purchase of investments 2,499 118 32 33 Others 2,548 27 25 27 Net cash used in investing activities 89 218 199 218 Dividend paid to shareholders 30 40 59 69 Others 136 0 0 0 Net cash used in financing activities 165 40 59 69 Net increase in cash & cash equivalents 92 550 149 172 Opening cash and cash equivalents 810 902 1,452 1,601 Closing cash & cash equivalents 902 1,452 1,601 1,773 Balance Sheet In USD millions Cash and short term funds 902 1,452 1,601 1,773 Due from other banks 1,380 1,394 1,464 1,537 Treasury bills and government bonds 532 505 530 557 Investments in subsidiaries & associate 0 0 0 0 Investments 514 632 664 697 Loans and advances 4,766 4,614 4,997 5,397 Other assets 383 376 424 474 Property and equipment 487 542 608 685 Goodwill 14 14 14 14 Other Intangible Assets 18 20 23 25 Total Assets 8,997 9,549 10,325 11,159 Deposit and current accounts 6,952 7,404 7,996 8,635 Managed funds 0 0 0 0 Other liabilities 486 486 486 486 Taxation 37 35 63 74 Deferred tax 33 33 33 33 Dividend payable 0 0 0 0 Term loan 0 0 0 0 Borrowings 254 254 254 254 Shareholders' fund 1,112 1,186 1,295 1,423 Minority Interest 123 152 199 255 Total Liabilities and Equity 7,761 8,212 8,831 9,482 Income Statement Ratios Gross earnings growth 2.8% 8.9% 12.9% 11.8% Net Interest margin growth 17.6% 3.0% 12.1% 17.6% Net Interest Margin 5.9% 5.7% 5.9% 6.5% Operating Income Margin 74.1% 79.9% 77.8% 78.5% Profit Before Tax margin 8.6% 17.6% 24.6% 25.9% Net profit margin 4.3% 10.6% 13.8% 14.5% Tax rate 36.1% 25.0% 28.0% 28.0% Cost to Income ratio 72.4% 68.0% 66.5% 64.0% Balance Sheet Ratios Loans and advances growth 27.0% 5.0% 8.0% 8.0% Deposits growth 11.6% 6.5% 8.0% 8.0% Return on average Assets 0.7% 1.5% 2.2% 2.3% Return on average Equity 4.8% 9.9% 13.5% 14.5% Leverage (Assets/Equity) 8.1x 8.1x 8.0x 7.8x Loans/Assets 53.0% 48.3% 48.4% 48.4% Loans/Deposits 68.6% 62.3% 62.5% 62.5% NPL/Gross Loans 16.0% 15.0% 14.5% 14.5% Securities Africa Quattro is our proprietary data package which enables clients to unlock value through fundamental research of historical financial data. Access limited to subscribers only.

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