September 15, 2020
By FBNQuest Research
9% increase to our price target post rollover to 2021E
Access Bank (Access) management reaffirmed its 2020E ROE guidance of 20-25%. Although its H1 2019 PAT – including other comprehensive income (OCI) – of N80.3bn implies an annualised ROAE of 25.4%, we believe that the 2020E guidance may be optimistic. The bank’s Q2 PBT was flat y/y despite stellar growth in non-interest income – mainly driven by derivatives. – which surprised positively relative to our forecast. Consequently, we have raised our 2020-21E non-interest income forecasts by c.40% on average.
The upgrades to our non-interest income forecasts are offset by average reductions of c.14% to our funding income forecasts which we have made to reflect the subdued interest rate environment and a 200bp reduction in the NIM guidance to 6.0%. Despite these revisions, our 2020E EPS forecast is c. 39% higher because of the OCI gains. However, our 2021E EPS forecast is c.9% lower. Nonetheless, our new price target of N11.0 is 9% higher because we have rolled over our valuation to 2021E.
In contrast to most banks, Access Bank’s NPL ratio improved to 4.4% from 5.5% in Q1 due to a combination of write-offs totaling N46bn, and loan growth of c.3% q/q. The bank also restructured c.17% of its loan book. Access is trading on a P/B multiple of 0.35x for 11.9% ROAE in 2021E, or at a 33% discount to the 0.5x multiple for 15.5% ROAE that the sector is trading on. Having sold-off by -32.5% ytd vs.-4.7% ASI, our new price target implies a potential upside of 63% from current levels. We reiterate our Outperform rating on the shares.
Q2 PBT flat y/y due to spike in loan loss provisions
Access Bank’s Q2 PBT was flat y/y at N28.0bn. Although pre-provision profits advanced by 22% y/y, growth on this line was more than offset by a 424% y/y spike in loan loss provisions. The growth in pre-provision profit was driven by a 180x y/y expansion in non-interest income due to positive base effects in the comparable quarter of 2019 (N65.9bn Q2 2020 vs N364m Q2 2019). This strong performance was mainly underpinned by a N103bn gain on derivatives in H1 (vs. -N1.8bn H1 2019). In contrast to the stellar performance of non-interest income, funding income fell by -45% y/y.
Further down the P&L, PAT grew by 204% y/y, thanks to a positive result of N33.7bn in OCI (vs. N3.4bn Q2 2019). Sequentially, PBT fell by 40% q/q due to y/y reductions on both revenue lines. However, PAT advanced by 111% because of the strong result in OCI.