Despite the tough operating environment and regulatory headwinds holding banks growth in Africa largest economy, Access Bank Nigeria plc have outperformed most of Tier 1 peers by recording an impressive earnings growth
Thanks to the banks focus strategy and its ability to penetrate the market through innovative products across a wide spectrum.
Double digit growth in gross earnings
Gross earnings increased by 43 percent to N168.34 billion in June 2015 from N117.91 billion as at June 2014. The growth was largely driven by a sizeable increase in trading income due to an improved securities and derivatives trading portfolio.
Also the top line got a tremendous boost from a 102 percent year on year y/y growth in non-interest income to ₦69.5 billion in H1’15 (H1’14: ₦34.6billion)
The bank’s interest income increased by 18 percent to N98.86 billion in June 2015 as against N83.57 billion as at June 2014.
Despite ballooning gross earnings, interest expense jumped by 46 percent to N50.70 billion in the period under review as against 34.83 billion the same period of the corresponding year (HI 2014).
The consistently high interest rate environment throughout the period such as the 13 percent interest rate and the harmonization of the CRR on private and public sector funds to 31 percent resulted in increased competition for deposit among banks and hence increase in interest expense.
Further, the banks interest expense have been spiking on the back of Central Bank’s deposits rules which mandates all lenders to put with it 31 percent of their deposits.
Analysts say the rules are hitting banks and discouraging investors from investing in the country’s equity markets. Also the foreign exchange restriction by the regulator is hurting lender’s profit in Africa largest economy. The policy is causing liquidity squeeze.
The Abuja bank excluded 41 import items from access to the FX market so as to encourage local production and reduce pressure on the exchange rate. It also Implemented Treasury Single Account (TSA) across Federal Ministries, Departments and Agencies (MDAs).
The naira has been receiving one or two punch due to a 50 percent fall in the price of oil.Foreign reserves are under pressure as government’s fiscal position has weakened. Allocations to states have also dipped on the back of dwindling oil revenue. Consequently, some are unable to pay salaries, a situation has dampened consumer spending. Nigeria relies on oil for 2/3 of revenue and 90 percent of foreign exchange.
The Central Bank’s action has contributed to the currency stabilizing at an average of 198.93 against the dollar since March. Forward prices suggest it will fall 11 percent to 223 in six months and 21 percent to 252 in a year.
Commendable improvement in profitability coming off strong contributions from non interest income
Operating profit increased by 42 percent to N117.64 billion in June 2015 as against N83.08 billion in June 2014, supported by a 25 percent year on year y/y increase in interest income from loans and advances to ₦76.3 billion (H1’14: ₦61.0billion); and 102 percent y/y increase in non-interest income owing largely to strong gains from derivatives and trading activities with various counterparties
Operating expenses were up by 33 percent to N69.6 billion in June 2015 compared with N52.50 billion last year; drive by 28 percent rise in personnel expenses to N19.70 billion in the period under review as against N15.4 billion last year. The bank boosted its staff strength in order to increase its retail market penetration.
Profit after tax grew by 39 percent to N31. 28 billion in the period under review to compared with 22.58 billion the previous year.
The 39 percent growth in net income one of the highest among its one peer rivals.
Pretax profit increased by 44 percent to N39.11 billion in June 2015 as against N27.18 billion as at June 2014.
Enhanced cost efficiency help spike margins.
The bank’s upgrade of IT solutions to improve mobility, efficiency and collaboration within the workplace has paid off as cost to income ratio reduced to 59.20 percent in H1 2015 as against 63.10 percent as at June 2014.
The improved cost margins has positively impacted on the returns to shareholders as
Return on Equity (ROE) increased to 21.60 percent in June 2015 as against 18.30 percent last year.Return on Assets (ROA) moved to 3.50 percent in June 2015 as compared with 2.80 percent last year.
Cost of risk declined by 10bps ytd to 1.1 percent in H1’15 (FY’14: 1.2%) and remained flat at 1.0 percent in the first two quarters of the year
Yield on Assets (YOA) increased by 20bps q/q from 11.7 percent in Mar’15 to 11.9 percent in Jun’15 largely resulting from the re-pricing of the Bank’s risk assets.
Cost of Funds (CoF) increased by 70bps from 4.6 percent in Dec’14 to 5.3 percent in Jun’15. Relatively high cost of funds recorded in the period was largely due to the additional $400 million Eurobond and a tighter regulatory environment on account of higher interest rates on deposits and harmonization of the CRR to 31 percent.
Net Interest Margin (NIM) declined to 5.6% in Jun’15, reflecting the negative impact of increasing funding costs
Aggressive foray into risk assets creation boost asset quality
The bank’s balance sheet reflects steady progress in the bank’s performance over the period. Total assets grew by 14 percent to N2.39 trillion in June 2015 as against N2.10 trillion last year; driven by increased investments in high-yield government securities.
Gross loans and advances increased by N1.28 trillion in June 2015 compared with N1.12 trillion last year.
Customer deposits increased by 13 percent to ₦1.64 trillion in Jun’15 from ₦1.45 trillion in Dec’14, reflecting continued implementation of the Bank’s customer engagement strategy.
Access UK recorded a 600bps ytd improvement in its contribution to the Group’s deposit base, accounting for 8% of total deposits in Jun’15 (Dec’14: 2 percent).
Trading and pledged assets grew by 123 percent ytd to ₦314 billion in Jun’15 as against N140 billion as at Dec’14. The growth is on the back of sizeable growth in investments in high-yielding government bonds and treasury bills
The Bank sustained risk-conscious loan growth of 14 percent ytd (Jun’15: ₦1.3 trillion) despite macro instability, regulatory headwinds and political uncertainty witnessed during the first half of the year. (6 percent of loan growth in the period was attributable to corporate and retail customers)
Gross NPLs reduced by 7 percent ytd to ₦23.7 billion in Jun’15 (Dec’14: ₦25.3 billion) largely owing to the continued execution of the Bank’s remediation strategy NPL ratio improved to 1.8 percent in Jun’15 (Dec’14: 2.2 percent) as a result of direct close monitoring of the loan book and increase in the loan portfolio, with emphasis on quality obligors
These improvements underscore the impact of the Bank’s continued and effective implementation of its risk management policies in a bid to achieve an optimal loan portfolio
Total impairment charges stood at ₦8.9 billion in H1’15 (H1’14: ₦3.5 billion) Rise in credit impairment charges was largely due to the adoption of a stricter methodology in charging collective allowances
Capital and liquidity still above regulatory requirements
Access Bank’s capital adequacy ratio was 19 percent as at the end of June 2015, which is significantly higher than the regulatory requirement of 15 percent. Liquidity ratio grew to 37 percent in Jun’15 (Dec’14: 36 percent ) and increased by 200bps q/q (Mar’15: 35 percent)
Group successfully raised ₦41.8bn through its recently concluded Rights Issue.
This translate to 7.62 billion ordinary shares of N0.50 each at N6.90 per share on the basis of 1 (one) new ordinary share for every 3 (three) ordinary shares held as at 23 October, 2014.
Gaining market share on reactivation strategy.
The gains of account reactivation strategy are becoming obvious. This developments have made Chapel Hill Denham, a research and investment firm to raise their FY-15E customer deposits growth forecast for Access Bank to 12.1 percent yoy from 11.7 percent yoy previously on the expectation that Nigeria lender will consolidate the gains seen so far in its account reactivation strategy across its business segments.
“Furthermore, we see the strategy playing a supportive role in the growth of non-interest income in the coming quarters as more retail customers are migrated to the bank’s e-channels,” said Analysts at Chapel Hill Denham.
“We, however, raise our FY-15E cost of funds (CoF) forecast to 5.1% from 4.6% previously as we see a sustained upward pressure on interest rates. This, combined with our expectation of lower yield on assets, implies a revised net interest margin (NIM) of 5.4% in FY-15E vs. 6.2% previously, said the analysts
“The success rate of Access rights issue reduces expected dilutive impact on EPS. Access raised N41.7bn in rights issue in March 2015, c.20% lower than the initially planned N52.6bn. This partly explains the 11.1% upward review of our FY-15E EPS to N1.81,” said Tajudeen Ibrahim, analysts at Chapel Denham Hill.
“We maintain our BUY rating on Access, but raise our 12-month TP to N8.70 from N8.00. We now forecast average ROAE between FY-15E and FY-17E at 16.6% vs. 15.2% previously. Access is trading on FY-16E P/B of 0.3x and ROAE of 17.0% vs. our sector coverage average FY-16E P/B of 0.6x and ROAE of 15.8%, Ibrahim summed.
BALA AUGIE
