ACCESS BANK PLC : Post-merger heavyweight   

24 April 2019 : Profitability – driven by FI loans and trading income 

In FY’18, ACCESS posted impressive numbers across-board, notwithstanding a minor contraction in Net interest margin (5.3% as of FY’18 vs 5.8% for FY’17). The bank recorded a 15% rise in Gross Earnings to N528.7 billion, majorly driven by the 19% y/y growth in interest income (accounting for 72% of gross earnings). The rise in Interest income was primarily due to the bank’s activity at the interbank window as loans to financial institutions surged by 109% y/y with a 25% y/y growth in income from investment securities. Meanwhile, Non-interest income declined by 4.3% y/y due to FX related losses, while Other operating income increased 64% y/y to N13.2 billion. 

Operating expenses for FY’18 declined by 2% y/y, a welcome development given that the line item grew by 38% y/y in the previous financial year. This was driven by a 4% y/y decline in Operating costs which offset the 4% rise in Personnel cost. Contrastingly, cost-to-income ratio inched up by 30bps y/y due to flattish movement in Operating income (-0.1%), while operating profits grew by 2.9% y/y in 2018. Overall, PBT and PAT grew 28.9% and 53.2% y/y respectively to N103.2 billion and N95.0 billion, with the latter buoyed by a lower tax rate of 14.4% (FY’17: 15.1%). 

Asset quality – best in class NPL ratio 

Non-Performing Loans (NPL) as a percentage of gross loans fell from 4.8% in FY’17 to 2.5% in FY’18, supported by the impact of IFRS 9 implementation as well as significant recoveries in the year – most notably a N26 billion repayment from EMTS (The telecoms exposure). Loans and advances in FY’18 were flat y/y, while advances to financial institutions doubled y/y; combined, they accounted for 43.1% of total assets while core liquid assets and long-term investments accounted for 15.0% apiece, by analyst's estimates. Analysts expect that ACCESS will remain cautious in growing loan book given the plausible degradation in asset quality in FY’19 from the Diamond Bank merger. As such, analysts have modeled a net expansion of 22.6% in loan book due to the business combination (vs a 50.2% considering Diamond Bank’s 9M’18 numbers) and an NPL ratio of 12% vs management guidance of 10%. 

Outlook and valuation 

According to management, ACCESS is poised to benefit from cost and other synergies worth N150 billion over the next 3 years with a balance sheet that places them on top of the banking sector by sheer scale. Notwithstanding, the bank will need to focus on improving efficiencies across board with emphasis on cost-income-ratio, cost of funds and cost of risk. On a combined basis, the bank is on course to outperform FY’18. ACCESS shares have lost 16.1% ytd versus the NSE ASI (5.7%) and NSE banking index (4.9%), analyst's 12-month price target is N12.75 representing a 85.8% upside to current price of N6.85. 

Reporting for EasyKobo on Wednesday , 24 April 2019 in Lagos, Nigeria

Source: Usoro Essien from Vetiva Capital Management Limited

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