Access Bank: Poised to Outperform in FY-2017, Despite Downward Revision to EPS

August 31, 2017/Cordros Research

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We update our model, following Access Bank Plc’s (ACCESS) impressive H1-17 result. In line with the improved yields on interest earning assets (+280 y/y bps to 13.10% in H1-17), we have raised 2017F assets yield estimate by 125 bps to 12.60%, resulting in interest income growth of 36.71% y/y to N338.06 billion. We believe the high interest rates environment will keep yields on fixed income securities at current levels and drive interest income from repricing of loans to customers over H2-17.

Similarly, we believe the high interest rate environment will impact funding cost (rose 200 bps y/y to 5.6% in H1-17). The surge recorded during in H1 broadly reflected the elevated interest charges on customers deposit, interbank placements, and debt securities issue – from the premium on the USD112 million refinancing of its Eurobond and an additional N59 billion commercial paper issued in H1-17. As a result, we raised our 2017F costs of fund by estimate 120 bps to 5.58%, resulting in 49.19% growth in interest expense to N161.33 billion. However, we believe the strong yields on interest earning assets will offset the expansion in funding cost, thus, we estimate net interest margin to expand marginally by 4 bps y/y to 6.28%.

The surge in NIR over H1-7 was driven by significant gains on foreign exchange trading income from the bank’s derivative instruments (forward contracts, swap contracts, non-deliverable forward contracts). But given the improved intervention by the apex bank which has relatively improved dollar liquidity across the FX windows, we expect derivative gains over H2-17 to taper. We forecast NIR growth of 13.40% y/y to N151.34 billion for 2017F. Accordingly, we have raised our gross earnings growth forecast higher to 28.08% y/y (previously 22.26%) for 2017F to N488.38 billion.

On asset quality, over H1-17, cost of risk contracted by 10 bps y/y to 1.00%, despite NPL expanding by 60 bps to 2.50% and marginal growth in credit loss provisioning (+1.48% y/y) from additional collective impairment charge (+56.10% y/y) recognized during the period. We believe the contraction in cost of risk was flattered by the expansion in net loans and advances (rose 16.52% y/y) during the period. On our cost of risk estimate of 1.28% (+9 bps y/y), we forecast a 13.32% y/y growth in loan loss charges to N24.88billion in FY-17.

While acknowledging the impact of one-off AMCON levy (as against amortization over the full year) on other opex (+65.62% y/y) during the period, the associated administrative, communication, advertising & marketing, and IT & E-business expenses also beat estimates. In the same vein, personnel costs (+25.72%y/y) and depreciation expense (+27.11% y/y, attributed to adjustment in employee compensation) came in far ahead of our estimates. Though we expect some moderation across opex lines over H2-17, overall for 2017F, we forecast 20.05% y/y growth to N192.47 billion, translating to an expansion in operational leverage to 5.4x (compared to 5.3x in FY-16), while cost to income ratio is expected to contract 14 bps y/y to 58.67% (flattered by the growth in operating income).

Overall, the cumulative impact of the elevated funding cost, opex pressure, uptick in costs of risk, and moderate expansion in NIR resulted in a downward revision of our 2017F PAT (+26.44%, previous 39.36% y/y) to N90.33 billion, equating to EPS of N3.05 (previous N3.44) and ROAE of 18.08% (previously 20.01%).

Following the downward adjustment to 2017F EPS, we lowered our target price marginally by 1.09% to N12.06 (previous: N12.19) and rolled forward our valuation to 2018. Our current 12-month TP implies upside potential of 25.47% from current levels; consequently, we recommend a BUY on the stock. ACCESS is currently trading at 2017F P/BVPS of 0.5x (below the peer average of 0.9x and the 5-year average of 0.6x) and 2017 FP/E of 3.2x (below the peer average of 5.5x and the 5-year average of 3.7x).

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