December 2, 2020/Proshare
by FBNQuest Research
Material increase to price target due to risk-free rate reduction
Access Bank’s Q3 ’20 PBT beat our forecast soundly due to positive surprises on both revenue lines. Funding income benefitted from lower funding costs, driven by a sharp reduction in interest on customer deposits following the CBN’s reduction of the benchmark rate for interest on deposits – to 10% of MPR (1.15%) from 30% of MPR (3.75%). Non-interest income also grew healthily and beat our forecast by 52%.
The drivers were a 277% y/y increase in net fx gains and a strong performance (+85% y/y) from income on digital channels. Following the positive earnings surprise, we have increased our ’20-21E EPS forecasts by c.11% on average. However, our new price target of N16.8 is c.52% higher because we have cut the risk-free rate driving our DDM valuation by 650bps to 6% in order to reflect the decline in government bond yields. The upgrades to our earnings forecasts are underpinned by average increases of 26% to our 20-21E non-interest income forecasts. On the back of these upward revisions, we now expect Access to deliver PBT growth of 38% y/y in 2020, the fastest by any bank under over coverage, thanks to scale and synergies being extracted from its merger with Diamond.
Similar to rival GT Bank, Access is in the process of restructuring into a HoldCo structure with a view to enhancing revenue diversification and firming up returns. Though achieved through a combination of write-offs of c.N24bn (N70bn 9M ’20) and restructurings, we are encouraged to see that the NPL ratio improved 20bps q/q to 4.2%. Access shares are trading on a 2020f P/B multiple of 0.4x for 12% ROAE in 2021f or a 33% discount to the 0.7x average multiple (for 15% ROAE) that our universe of bank stocks is trading on. Our new price target of NGN16.8 implies a potential upside of 93% from current levels. As such, we retain our Outperform rating on the shares.
Q3 ’20 PBT up 52% y/y driven by solid revenue growth
Access Bank’s Q3 PBT grew 52% y/y on the back of solid pre-provision profit growth of 26% y/y. Both revenue lines grew strongly – funding income by 27% and non-interest income by 24%. The stellar growth on both revenue lines completely offset a 210% y/y spike in impairments for credit losses.
In contrast to the stellar PBT growth, PAT declined 39% y/y due to a negative result of -NGN23.5bn in other comprehensive income (OCI) vs NGN871m in Q3 2019.
Sequentially, the trends mirrored those on a y/y basis. PBT advanced by 51% q/q driven by solid funding income growth. However, PAT fell by 69% q/q because of the negative result in OCI.