Country, EUROMONEY, Interview, Nigeria - Tue December 10, 2013

Ecobank faces moments of truth

A long, debilitating battle over the position of its chairman has led to much soul-searching and investigation at Ecobank, one of Africa’s leading banks. But the direction of the business is the most pressing issue for its bullish chief executive, Thierry Tanoh.

October 29 was no ordinary day for Ecobank Transnational, the pan-African lender that serves many of the world’s most underachieving and underbanked markets.

Months of bickering between board members divided over the future of the bank’s embattled chairman, Kolapo Lawson, and vexed by a near-constant stream of controversies, from chief executive Thierry Tanoh’s bonus to leaked claims of high-level mismanagement, finally came to a head.

This was the fifth such get-together in just three months – this time in Accra, Ghana. Each meeting proved more hostile than the last, pitting factions either supportive or critical of Lawson – and thus the bank’s tone, shape, direction and strategy – against one another.

Yet even the die-hard supporters of a man who had been with the company for much of his working life, joining Ecobank in 1989 and ascending to the chairmanship 20 years later, were wavering. So much so that the bank’s octogenarian co-founder, Gervais Koffi Djondo, had called for the ousting of Lawson.

In the eyes of many, the firm’s good name had been stained – although not yet irretrievably – by the constant flow of conjecture and allegation. Shareholders, politicians and regulators spanning sub-Saharan Africa, along with a smattering of interested global institutions, were demanding to be served the chairman’s head on a plate.

They got it. Even as board members trailed away to phones and restaurants to gossip, Ecobank put out the word: after four years at the helm, Lawson was gone, his exit seen as essential in restoring confidence among investors and depositors alike.

Although it is a rather sad denouement for a man who served a single bank for nearly a quarter of a century, Lawson’s departure allows some spring cleaning by Tanoh, group CEO since the start of 2013, and André Siaka, a vice-chairman of Ecobank who replaced Lawson and will remain interim chairman for at least six months until a full-time replacement is appointed.

The bank needs it. Togo-headquartered Ecobank Transnational (ETI) was cobbled together in 1985 by private investors sprawled across 14 mainly French-speaking west African states. It grew, seemingly randomly and disjointedly, expanding into English-speaking markets such as Nigeria and Ghana, then into such disparate markets as Niger, Chad, Tanzania and Zimbabwe. Other lenders attempted to replicate ETI’s pan-African model as the continent’s fortunes waxed and waned; all failed. Little wonder ETI has long been seen, in its own way, as something of a ‘special one’.

In many quarters, it still is. It rarely delivers an annual or quarterly loss, even in the bleak times – and the sub-Saharan Africa region has had plenty of those. In its latest financials, through the first nine months of 2013, ETI posted net income of $217 million, up 74% year on year, on revenues of nearly $1.5 billion, up 24% on an annualized basis. Much of that outperformance was delivered by central African states, including Cameroon and Congo, which delivered a 30% year-on-year rise in pre-tax profits during the first nine months.

Over the years, the lender has also assembled an internal image of itself as a facilitator of regional change, as well as a social and technological trailblazer. It has expanded into countries that many other lenders, even now, won’t touch. Where it goes, it seeks to deliver, where possible, banking services via the internet and cellphones, to raise the quality of overall service, and to extend opening hours on evenings and weekends.

In September, it joined forces with Nairobi-based African Guarantee Fund to launch a $50 million project to support smaller and mid-sized companies from Benin to Kenya. Nor is it shy about expanding its African footprint inorganically. The bank has been willing in recent years to acquire judiciously in specific markets in search of growth, buying Ghana’s Trust Bank for $135 million in December 2011, a few months after acquiring Abuja-based Oceanic Bank, one of nine lenders bailed out by Nigeria’s central bank in 2009.

This sense that Ecobank Transnational sees itself operating at a higher state of consciousness to its peers shines through at every level. Talking with Euromoney in November, Tanoh is effusive about the bank’s future, despite the turmoil and tumult of the past few months.

“I have no doubt at all that Ecobank will become and will remain the best and largest pan-African bank,” he says. “This is Africa’s bank. This is Africa’s future. When you look at our role in this region, you can see how uniquely we are positioned to be the number-one bank in sub-Saharan Africa. That is our destiny.”

Many of his peers agree. Mike Brown, CEO of Johannesburg-based Nedbank, which has operated a client-sharing service with ETI since 2008, providing corporate and private customers access to virtually every sub-Saharan African market, describes Ecobank as a “remarkable African success story. To build out across nearly 35 countries, and to be in the top-three banks in 15 of those markets, to be a systemically important bank in Nigeria, the largest bank in Ghana and a top 10 bank in Africa in terms of total capital levels – that’s a tremendous achievement.”

This makes the regular roll call of negative news plaguing the lender in recent months all the more befuddling. The first signs of trouble began in April, when the Central Bank of Nigeria wrote to ETI to remind it of “huge outstanding non-performing facilities”: unpaid debts owed by ETI’s chairman stretching back to a banking crash in 2009. Lawson responded by partly paying off both those debts, as well separate obligations of $1.6 billion owed to Ecobank by a family-run company he also chairs.

But rather than dissipating, the cloud of controversy surrounding Lawson intensified. The day after convening an emergency board meeting on August 5 to discuss Lawson’s future, Ecobank was hit by a far larger scandal. Laurence do Rego, a former head of risk and finance turned whistle-blower, had written to the Nigerian capital markets regulator, the Securities and Exchange Commission, accusing the bank’s board of failing to operate “in the best interests of shareholders”.

The letter, leaked to the media, contained a series of damaging allegations, each more unsettling than the last for the managers and owners of a bank that had long prided itself as an oasis of calm in an often unsettled region.

Do Rego alleged that both Lawson and Tanoh had attempted to sell off non-core assets at “well below market value”, and claimed she was ordered to massage the bank’s full-year 2012 financials to make them appear healthier.

ETI formally rebutted the latter accusation, noting that its consolidated financials had been approved by PricewaterhouseCoopers. Do Rego also questioned whether proper procedures were followed when handing Tanoh a bonus of $1.14 million when, as CEO-in-waiting in 2012, his contract only guaranteed him a one-off payment of $200,000. Tanoh subsequently opted to forgo the entire bonus.

With Lawson gone, attention now turns to a brace of investigations that could define ETI for years to come, leaving the bank either diminished or stronger and better than before. The first, led by Nigeria’s financial regulator, is out of Ecobank’s hands. The SEC is set to rule, probably in early 2014, on a simple matter: whether ETI indeed manipulated its financials to boost investor perception of its underlying performance. Ecobank posted record full-year pre-tax earnings of $348 million in 2012, up a quarter on the previous year.

But the more potent investigation has been launched by Africa’s universal lender itself. Following Lawson’s departure, Ecobank announced it had hired the International Institute for Management Development (IMD) to conduct a nuts-and-bolts probe of internal corporate governance. The Lausanne, Switzerland-based business school’s investigation will focus on a few key areas of concern, notably how the chairman is chosen, how board members are chosen, and how the board itself is structured.

Ecobank executives expect the corporate governance report to be completed by January 2014, although key shareholders in the lender have scotched that idea. (“I wouldn’t be surprised to see the report extend longer into next year, perhaps into the second quarter,” said one individual close to the lender who adds: “We want to see the independent review completed thoroughly and quickly. It isn’t healthy to linger.”) Only after the IMD’s report is published can ETI move forward with replacing interim chair Siaka with a permanent successor.

Ecobank officials rebut any suggestion that the bank’s hand was forced over the IMD probe – although one leading investor tells Euromoney that shareholders “have been telling [ETI] for months that recent events need to be investigated independently. Some serious allegations have been made, and we need serious answers.”

For his part, Tanoh’s attitude toward the IMD report seems to vacillate between slightly weary resignation and a determination to ensure that an opportunity to emerge stronger than before isn’t missed. “I would have preferred not to go through [the review process],” he admits.

But he also hopes that the probe “will strengthen our governance position. It wasn’t a weak governance structure [before] but given how fast we have been growing in recent years, a review was appropriate. I expect us to get better at this. We will emerge stronger, and our long-term aim remains to be Africa’s number-one bank, able to compete shoulder to shoulder with any competitor, whether national, regional or global.”

Questions remain. Why did it take so long for the pride of African banking to act? After all, scandals by their very nature stymie any organization’s ability to function cohesively: attention is sidetracked, human resources are diverted, and board meetings are spent discussing firefighting efforts rather than long-term strategy. “How did we get here?” asks one heavyweight Ecobank shareholder. “Why did we allow things to go this far?”

They’re both good and pertinent questions. Internally, ETI admits it dropped the ball over its outgoing chairman, failing to deal in a timely fashion with both the mess and the message. “Our mistake with Kolapo [Lawson] was failing to ask him to step aside before,” notes a senior Ecobank official. “If we had acted earlier, all of this would have blown over by now.”

Maybe. But the accusations extended by do Rego have also cut deep. Ecobank, as one would expect, has sought to marginalize or undermine not the allegations, but the risk and finance chief’s influence and intentions. While the media has portrayed her as a whistle-blower and, by inference, a figure of respect, others have questioned the accuracy of this depiction.

“Laurence levelled these allegations at us [in the leaked letter to the Nigerian SEC] the day after she was asked to resign,” notes the senior ETI official, who believes she is “less a whistle-blower than a disgruntled ex-employee”. A bank spokesman, Jeremy Reynolds, has stated that Ecobank initially suspended do Rego in early August after discovering that she lacked a specific professional qualification she previously claimed to have. An accountant from Benin who won a prestigious business award in 2010, she in turn denies those allegations.

The question now becomes: what next? For sure, Ecobank is suffering, as the heavyweight shareholder notes, from both a “shareholder-confidence issue as well as a public-confidence issue”. But these are solvable problems being dealt with through internal and external investigations. Thierry Tanoh, chief executive of Ecobank Thierry Tanoh, chief executive of Ecobank

Perhaps the greater challenge now is deciding what the bank wants to become. The lender has in recent years, as its CEO admits, grown substantially, perhaps beyond the comprehension and control of its founders and senior managers. A linguistic split down the centre of the bank has at times threatened to become a chasm, pitting English-speaking markets (Nigeria, Ghana) against French-speaking west African states. “There has always been a tension between minority [francophone] and majority [anglophone] shareholders,” says an individual close to the bank. “The francophone guys always demand greater weight and say in decision-making, while the anglophone guys in Nigeria say: ‘We’re the biggest block of shareholders in Ecobank, so what we say, goes’.”

Tanoh bridles at suggestions of internal linguistic dissonance. “Honestly, I have not seen evidence of such friction. I don’t believe that’s a fair statement. We are from different backgrounds and we may speak different languages internally, but that is what makes us different and special. Our diversity makes us the best institution through which to really understand the complexity and potential and diversity of Africa’s markets. Our diversity is a blessing not a curse.”

There is truth and delusion here in equal measure. Ecobank’s rich heritage and diversity does indeed help it operate far and wide. No other lender has successfully and for so long balanced the competing cultural demands of operating across a multiplicity of markets where the mother tongue switches so quickly, from English to French, and from Spanish to Portuguese.

Yet the language issue, which is more a cipher for broader problems related to money and power, clearly remains. Ecobank’s historical links in francophone west Africa remain strong, notably in countries such as Togo, where it is a revered institution. But the bank’s commercial heart belongs increasingly in Nigeria, home to many of its largest and most influential institutional and individual shareholders. Africa’s most populous nation generated 41% of the total revenues posted by ETI through the first nine months of 2013, and accounted for 43% of both assets and deposits, according to bank data. Net interest income generated in Nigeria jumped by 15% year on year over the period, to $349 million.

And this outsized dependence on anglophone markets is only likely to grow following the acquisitions of Trust Bank and Oceanic Bank. This might be good for ETI’s shareholders, but it will do little to assuage fears within its francophone wing that the lender’s inevitable long-term identity is as a Nigerian lender with a pan-African presence. “These tensions have prevented Ecobank from growing faster, and often from having a coherent strategy,” says a Nigeria-based analyst who declined to be named. “It has the best pan-African footprint of any bank, but these frictions have hindered its ability to leverage that advantage, either in corporate or retail banking.”

One final issue remains: Ecobank’s financial future. The bank’s five-year-old client-sharing service with Nedbank is touted by both sides as a resounding success. ETI channels clients seeking exposure to southern African toward Nedbank, which returns the favour by guiding corporates seeking exposure to sub-Saharan African markets in the direction of its partner. Nedbank CEO Brown reckons that “around 60” of the lender’s corporate customers now work on a daily basis, somewhere and somehow, with Ecobank. Both lenders take part in quarterly alliance agreements to discuss sectors, markets, strategies and customers.

Some doubt the effectiveness of this arrangement. In a September 25 research report, Renaissance Capital analyst Adesoji Solanke warned that the two groups, despite a “strong lending pipeline”, still “continue to operate separately”. The raw potential was huge but the practicalities of interlocking the operations of two such disparate African lenders would remain, the analyst added, “a tough ask … so long as Nedbank remains a minority holder in ETI”.

This last point is telling. The next year will be crucial to the future of both lenders. A $285 million loan extended by Nedbank in 2010 to help ETI buy Oceanic Bank came with strings attached. At some point before the end of November 2014, Nedbank has the option to convert that loan, thanks to two subscription agreements – one at a fixed price, the other at a variable price – into 20% of Ecobank’s issued equity, turning it into the largest shareholder.

And Nedbank CEO Brown remains determined to pursue that agenda. He tells Euromoney: “While we haven’t formally decided when the decision will be made, and we still have to go through our internal processes, it is our current intention to exercise our subscription rights to the 20% shareholding.” Some analysts believe Nedbank is ultimately destined to buy a controlling stake in ETI: one path to that end would involve it joining forces with South Africa’s Government Employees Pension Fund, or PIC, which already owns 18.16% of Ecobank.

Together, the two would control just shy of two-fifths of Ecobank, making a majority takeover, with the aid of a few disgruntled shareholders, all the more easy. It’s not, for instance, too hard to imagine the International Finance Corporation, the private-sector arm of the World Bank, which owns just shy of 7% of ETI, from selling some or all of its stake if the Togo lender fails to salve its new-found reputation for poor corporate governance.

For his part, Brown firmly rebuts any suggestion of a raid on Ecobank. “Not a chance,” he says. “This is simply not correct. Our contractual agreement is to buy no more than 20% [of Ecobank], so we can’t buy any more.”

He adds: “Talk of an alliance with PIC, now or in the future is factually incorrect.”

And there are good reasons for this phlegmatic resolve to remain two lenders rather than one. First, Ecobank also has a loose agreement, again connected to the 2010 Oceanic acquisition, allowing it to acquire up to one-fifth of Nedbank. (Brown says: “If Ecobank wants to achieve some level of cross-holding in Nedbank, as per our agreements, we would use our best endeavours to help them achieve this.”)

Second, Ecobank would be a tricky takeover target. It’s almost certainly undervalued – the lack of a strong peer group of substantially sized regional lenders makes a comparison hard, but ETI’s price-to-book ratio is 0.71, while its shares, listed on the Nigerian Stock Exchange and currently trading at around N14 (8.8 US cents) have been range-bound between N10 and N20 for more than four years.

Yet any challenger would have to stump up more than mere money. Ecobank comes with a hidden cost: a presence in nearly three dozen African markets, some vast and increasingly industrialized, others overwhelming poor and rural. There would be linguistic divisions to deal with, and headaches from operating across dozens of markets, each beholden to a different set of regulatory criteria, not to mention the continuing probes by the IMD and Nigeria’s financial regulator. Ecobank chair Lawson is gone, but his legacy is not forgotten.

Even with a middling share price, this is a bank with potential aplenty, sprawled across dozens of rising African states, with an increasingly powerful presence in Ghana, Nigeria, and potentially, via its alliance with Nedbank, South Africa. Ecobank Transnational may face a rocky few months ahead, although the ongoing investigations are unlikely further to puncture its reputation: any additional damage is likely to be superficial.

Ecobank’s chief executive is bullish about the future, as you’d expect him to be, having survived the ousting of a chairman without losing his own head. Tanoh points to three key areas where ETI plans to grow harder and faster. “We will focus on becoming bigger and more efficient in Nigeria,” he says. “Second, we want more growth in eastern and southern Africa, which are becoming increasingly important markets. And finally, we won’t forget our [historical] core market in west Africa. It’s one thing to get to be number one and quite another one to stay there. It’s a dynamic market, and we need to stay alert.”

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