September 11, 2020/United Capital Report
Consolidating gains from derivative assets
Access Bank Plc (“ACCESS” or “The Bank”) released its H1-2020 results earlier, showing a 22.3%y/y growth in Gross Earnings (GE) to N396.8bn. However, PBT and PAT growth were muted, +1.8% and -1.4% to N74.3bn and N61.0bn, respectively. Loans and Deposits expanded by over 10.0% to N3.4tn and N4.7tn, respectively. We update our estimates and we review our expectations below.
N103.3bn gain on derivative instrument alone! : ACCESS reported a 22.3% y/y increase in Gross Earnings (GE) despite a 9.6%y/y decline in Interest Income to N246.7bn amid pressure on asset yields and rising uncertainties in the macroeconomic environment. Specifically, the increase in GE was driven by Non-Interest Income (NII), especially via N103.3bn gain on derivatives instruments. Notes to the account indicated that this relates to gains on currency forwards, swaps and future contracts entered into by the Banks. This resulted into a 191.4% surge in NII, though moderately supported by a significant upsurge in E-banking charges.
Net Interest Margin (NIM) declined 280bps to 4.9% as funding cost remained relatively high despite industry wide reduction in interest expenses. Expectedly, impairment charges jumped by more than 2 folds to N16.4bn due to COVID-19 worries. Contrary to expectation, OPEX further increased by 40.0% to N174.3bn. As such, Cost to Income Ratio ticked northwards to 65.8% (vs. 61.5% in H1-19). An inspection of the OPEX component indicated that a N5.0bn increase in salaries (despite salary reviews in Q2-2020) as well as a jump in AMCON levy (N12.8bn), accounted for the pressure on OPEX. Against this backdrop, PBT and PAT growth were muted settling at N74.3bn and N61.0bn respectively, with annualized ROE and net margin slowing to 15.4% and 15.4% respective.
Improved NPL despite rising credit quality worries: ACCESS’s total assets stood at N7.8tn as of H1-2020, up 8.7% from N7.1tn in Dec-2019. Worthy of note, effective CRR stands at 30% according to management, which is well below peers. Loans and advances represent N3.4tn, up 10.6%, while Investment Assets was N1.2tn (+11.6%). Cash balances however fell 8.2% to N663.9bn, in contrast to tier-1 peers and decent deposits growth. Also worthy of note, derivative assets expanded 80.9% to N259.6bn, buttressing the jump in non-interest income. Surprisingly, ACCESS’ NPL ratio improved to 4.4% (previously 5.8%), despite rising asset quality concerns across the sector, though loan to funding ratio came in at 59.1%. Overall, Capital Adequacy Ratio (CAR) was flattish at 20% while liquidity ratio settled at 44.7% for the period.
Earnings profile suggests a stable outlook: According to management, ACCESS’ multi-country expansion strategy remains intact despite COVID-19, hence, we imagine that increased focus on acquisition across the continent will continue. On synergy, we understand that over 60% of the diamond merger synergy target has been achieved. So, the 2021 target for complete synergy is well underway.
Overall, we expect ACCESS to sustain a broadly stable performance for the rest of the year with non-interest income, particularly gains on derivative assets, estimated to offset short falls in interest income. Again, recent review of savings rate by the CBN should buoy funding cost which seemed relatively high. While OPEX is expected to remain pressured, we imagine that H2-2020E will see slower growth in wage bill given that the cost saving from recent salary review is over weighted towards H2-2020 compared to H1-2020.
Thus, we expect PBT and PAT to remain broadly stable in FY-2020, though we worry about the adequacy of impairment taken so far. However, management linked improved NPLs ratio to write offs, loan repayment and robust risk management approach. But we expect full year NPL ratio to increase above 5%. By valuation, P/B and P/E ratio came in at 0.3x and 2.4x, well below peer averages at 0.5x and 2.9x . However, with increased uncertainties in the horizon, triggered by COVID-19 and the market risk-off sentiment, we have increased our country risk premium for the bank while adjusting our other assumptions in line with recent policy changes. As such, we revise our TP for ACCESS from prior N12.2/share to N8.7/share. However, this translates to a 29.0% upside compared to market price of N6.75. Thus, we maintain a BUY rating on ACCESS.