Following the release of ETI's H1'22 results and subsequent investor call, we reassess the investment case for the bank. The result of our assessment corroborates our view on the strong impact of rising yields on performance and highlights the potential positives of management's renewed efforts to reposition the Nigerian business.


Rewriting the Nigeria story

In recent quarters, ETI has revealed plans to improve the overall performance of its Nigerian business, which has suffered a slump in PBT contribution to the group from 24.9% to 12.0% in the last five years. The weakness in PBT contribution was primarily driven by deteriorating legacy loans, especially in the oil and gas segment. In addition, the elevated cost-to-income ratio has also bedevilled the subsidiary's performance. To engineer a strategic recovery in this business, an experienced Nigerian
CEO, Mobolaji Lawal was appointed effective January 2022 to pilot affairs. A key thrust of the new strategic drive is to address legacy bad loans and
weak capital base issues.


Strategic initiative to improve asset quality in Nigeria

In its recent conference call, ETI revealed that it has obtained regulatory and board approvals for the sale of $200 million worth of stage 3 loans from its Nigerian business to the resolution vehicle entity set up in 2017. This earmarked sum represents 46.7% of the total non-performing loans in the region and signals a resolve to improve asset quality aggressively. These non-performing loans have been a drag on the Nigerian business, which has consistently reported NPLs in excess of 15.0% (vs c.3.0% in other regions) in the last 5 years.

In our view, the decision to restructure the Nigerian balance sheet is likely to be a net positive. In particular, the move (if effected) could drive the Nigerian NPL ratio to 8.9%, with the associated coverage ratio likely to improve from 55.1% in H1'22 to 103.4%. Management also guided to a consequent expansion in CAR by 300-400 bps. This potential improvement in the capital buffer could enable the bank to create better quality risk assets to boost earnings potential.