Significant growth in earning assets drives revenue: Ecobank reported 18.6%y/y recovery in revenue (versus a decline of 8.3% in FY2017) to GHS1.52bn in FY2018 on the back of significant increase in earning assets, which helped to cushion the adverse impact of low interest rates on revenue.
The bank's earning assets were driven by 54.5%y/y expansion in the loan book to GHS4.15bn in FY2018. The huge growth in the loan book was driven by the fact that investment securities, which are mainly government securities, have become unattractive on the back significant drop in treasury yields in the last year. The growth in earning assets was mainly funded by 16.3%y/y rise in customer deposits to GHS7.61bn in FY2018. The loan-to-deposit ratio of 54.5% gives the bank an opportunity to further expand the loan book in 2019.
Digital migration boosts operating efficiency: The move towards digital banking and other cost control measures helped to limit the growth of operating expenses (+15.1%y/y), which pushed the cost-to-income down by 90bps to 51.5% in FY2018 from 52.4% in FY2017. Ecobank's migration to digital banking could support further improvement in operating efficiency in the future, but in the next five years we shall find out how far technology can drive cost savings in the bank. We think that the digital banking drive could allow Ecobank to reduce its cost-to-income to close to 40% in the next 5 years.
Improvement in asset quality saves margins: There was significant improvement in Ecobank's asset quality as the NPL ratio dropped to 11.5% in FY2018 from 20.0% in FY2017. In addition, the bank's cost of risk dropped to 3.5% in FY2018 from 6.5% in FY2017 on the back of 25.6%y/y decline in impairment charges to GHS129.36mn.
Earnings recover: The bank's profit before tax grew by 41.3%y/y (versus decline of 22.5%y/y in FY2017) to GHS506.25mn in FY2018, buoyed by the recovery in revenue emanating from strong loan growth, better operating efficiency, and improvement in asset quality. PAT also grew by 32.8%y/y to GHS339.97mn in FY2018.
