Monday, November 21, 2016 8:25 AM /Vetiva Research
ACCESS organized its first investor conference in Nigeria tagged “Leading through Innovation – A path to competitiveness and sustainability” during which management gave an update on the bank’s medium term strategy and shared its near term targets with analysts and investors. We have penned down our key takeaways from the meeting and discuss our view going forward.
Bold guidance amidst tough operating conditions
No gainsaying, the challenges that have clouded 2016 so far will likely remain the key theme across the banking sector in 2017. The demand/supply imbalance in the crude oil market will continue to put pressure on prices and the resulting impact on the currency of oil dependent emerging market economies would likely remain.
Default across sector might not materially change for the better, credit growth will remain tepid as banks scramble for safe haven assets, and capital buffers will take increasing prominence. Management alluded to the challenging times ahead and highlighted strategies to navigate the headwinds onward.
2017 strategy will be largely focused on (1) Asset Quality Drive (2) FX Liquidity Management (3) Advancement in Digital Banking (4) Enhancement in Balance Sheet Efficiency, and (5) Improvement in Cost Management.
ACCESS remains an asset quality champion with sector leading NPL ratio and Cost of Risk of 2.1% and 0.9% respectively (as at 9M’16). Amidst the rising default and deteriorating asset quality, the bank is focused on maintaining its asset quality leadership with an NPL ratio estimate of 2.5% for FY’17.
Also, in response to the tight FX liquidity environment, we recall that ACCESS raised a $300 million 5-year Eurobond at 10.5% in October in a bid to support its FX liquidity and will continue to enhance its balance sheet even in 2017.
Whilst we have also observed impressive improvement in efficiency over the last few years, we highlight that management intend to continue to drive profitability through cost containment as it estimated a Cost to Income Ratio of 51% for FY’17 vs. 9M’16: 58%.
Ticking the boxes of promises made
Whilst most of ACCESS’ peers have grown organically in the last few decades, ACCESS has leveraged on inorganic means with the acquisition of Intercontinental Bank in 2011 pushing the bank into the tier I space.
Amidst the tough operating environment and fierce competitive market, ACCESS has evolved from being one of the many Nigerian banks (ranked 65th out of 89 banks in 2002) to being a top 3 bank across many performance metrics.
The bank currently prides itself as a Nigerian corporate bank leader and a high performing diversified banking leader and strives to become the world’s most respected African bank in 2018 with best in class technology in Africa, Industrialized global operating model, and expanded footprint in the most attractive African markets.
Whilst the bank’s ambition to be the World’s Most Respected African Bank appears to be a tall order at the moment, ACCESS’ past record is a testament to its ability to deliver on its growth promises.
De-risking key in the near term
From the discussion with management, we gathered that the bank continues to focus on de-risking its portfolio, building a consolidated business, expanding its international network, and driving efficiency through technology innovation in a bid to successfully navigate the tough operating environment.
Asides restructuring existing loans, the bank has been cautious about risk asset creation - maintaining a zero exposure to the troubled Power sector whilst restricting credit to quality names across other sectors.
Given the increasing contribution of the oriental community (Asia) to the development of Nigeria, the bank is driving its oriental segment of the business to meet specific needs of businesses from India, China, South Korea, Hong Kong, Lebanon, and Israel.
Also, ACCESS continues to focus on enhanced technology and innovation to drive efficiency as the bank looks to contain its relatively high operating cost (coming from a high cost base post acquisition of Intercontinental Bank). Despite the persistent economic headwinds, we have seen the bank’s effort yield fruits in recent years, leading to a well-diversified income base, improved efficiency, and better profitability.
Update on SWAP transaction
ACCESS’ income from derivative instrument has been a topical line item around the bank’s earnings in recent years. The income line offsets the impact of currency devaluation on its foreign currency liability and has consistently supported Non-Interest Income.
We recall that in our previous notes, we had mentioned that ACCESS entered into an off balance sheet currency SWAP transaction with the sovereign as the dollar giver. The bank had exchanged a staggered nominal value of $2 billion for an equivalent naira amount in 2014.
From our understanding of the cash flow from the SWAP transaction, we note that whilst ACCESS will receive dollar interest from the sovereign, the bank will also be paying interest on the exchanged naira equivalent based on the rate agreed at initiation.
Given that the bank is long the dollar in this transaction, we expect the bank to continue to benefit from any currency devaluation - offsetting the impact on FCY borrowings.
Furthermore, when we take into consideration that the SWAP agreement was consummated in 2014 when interest rates were relatively lower than current levels, we believe ACCESS is also benefiting from the interest rate differential between the SWAP rate and the current market rates.
From our discussion with management, we understand that the $950 million of the initial $2 billion is outstanding and expect the impact of the income line on earnings to taper gradually as we approach 2018 (the maturity date of the last tranche).
We maintain our BUY rating on ACCESS
Having listened to management discuss its near term plans, we maintain our positive view on ACCESS. However, we discount a few optimistic targets of the bank as it relates to significant moderation in CoF, margin expansion, efficiency improvement, and contained CoR.
That said, we believe the bank is well positioned to successfully navigate the headwinds ahead. We have revised our expectations across a few line items (particularly NPL formation in FY’17 and FY’18) and updated our valuations accordingly.
We maintain our BUY rating on ACCESS at a target price of N9.16 (Previous: N9.45). ACCESS trades at FY’16 P/E and P/BV ratios of 2.2x and 0.4x compared with Tier I bank’s averages of 3.3x and 0.6x respectively.
1. FO, Access Bank and Others Turn to the Bond Market