•For Q1 ended 31st March, 2012, Access Bank Plc reported a ~143% YoY rise in revenue to N62.6 billion; underpinned by a 170% and 63% rise in interest and non-interest income to N52.1 billion and N10.5 billion respectively.
•What appears to be a strong performance in revenue was actually due to low base in Q1 2011 which also excludes contributions from Intercontinental Bank which was consolidated in Q4 2011. Also, interest accruals from its discounted AMCON bond holdings, in addition to interest income from its trading assets – which rose by five folds from December 2011 – accounted for the 10ppts increase in contribution of interest income to revenue of 86% in Q1 2012 from Q1 2011.
A changing funding base
•The 40bps decline in WACF to 3.4% in Q1 2012 from Q1 2011 reflects a deliberate strategy by the bank to shed high cost deposits resulting in a 7% YTD dip in total deposits to N1.03 trillion. However, as the bank resorted to other sources of funding–interbank takings and other borrowings rose 80% and 15%, respectively–interest expense rose 134% to N14.9 billion.
•On the asset side, the 8% and 7% YTD decline loans and deposits put the bank’s loan-to-deposit ratio at 52%; a 70bps decline from December 2011 as the bank appears to adopt a conservative stance in line with guidance management had given about its intention to focus on extracting cost synergies from the merger as well as loan recovery to drive profitability for FY 2012 whilst reining in risk asset growth.
•Consequently, liquidity ratio and CAR at 70% and 22% in Q1 2012 are well ahead of the 30% and 10% regulatory minimum. The large AMCON bond acquisition from the books of Intercontinental Bank was the primary driver of the increase in Access Bank’s liquidity ratio.
Consolidation still continues to weigh on efficiency
•Cost-to-Income Ratio (CIR) rose 10ppts to 67% in Q1 2012 from Q1 2011 amid a moderation in operating margin associated with the cost burden of the consolidation with Intercontinental Bank. However, Q1 2012 CIR was an improvement on the 94% in Q4 2011 mainly on the back of further staff rationalization which saw the workforce cut to sub 4000 from 5,978 in Q4—and the bank incur N3.4 billion in severance payments.
•An impairment charge of N405 million in Q1 2012 was 67% lower than Q1 2011. Non-performing loan also declined by N9 billion QoQ to N50 billion on the back of loan declassifications and recoveries, as coverage ratio improved to 106% from 89%.
Profits more than double but margins deteriorate
•PBT and PAT both rose by 119% YoY to N15.5 billion and N12.1 billion respectively despite a 300bps deterioration in net margins to 19% between these periods. The result puts annualized ROE at 23% for FY 2012.
•Despite this robust performance, the strong competition for retail deposits could see Access Bank’s dependence on interbank borrowing increase further in a rising interest rate environment. As such, we could see recent the 100bps improvement in NIM to 11.7% Q1 2012 from Q1 2011 reverse
•The bank has large exposure to AMCON bonds; and though this has been supportive of interest income growth, it exposes the bank to uncertain refinancing outcomes for these bonds.
We expect margins to improve for FY 2012
•We forecast a 75% YoY rise in revenue to N 243 billion for FY 2012; supported by interest accruals from the bank’s large AMCON bond holdings and exposure to trading securities whilst we maintain a conservative loan growth assumption of 5% to N606 billion. Our 4% deposit growth forecast toN1.2 trillion puts our target loan-to-deposit at 52% for FY 2012.
•Adjusting Q1 2012 operating expense for N3.2 billion severance stance, we expect CIR to decline to 60% for FY 2012. However, we maintain net impairment charges at 1.1% subject to the extent of recoveries the bank can achieve in the course of the financial year.
•Overall, we forecast PBT and PAT to rise 212% and 184% to N63.4 billion and N47.5 billion for FY 2012; translating to a pre-tax margin and net margin of 26% and 20%, respectively.
We maintain our BUY rating on the stock
•We derive a target price of N10.07 for the bank which is a 55% discount from today’s close. On a relative valuation basis, Access Bank’s current PE and P/Bv at 7x and 0.6x compares favourably with peer average of 13.6x and 1.24x, respectively. We maintain our BUY rating on the stock.
ARM ratings and recommendations ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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