Reviews & Outlooks | |
Reviews & Outlooks | |
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Thursday, June 27, 2019 /09:30AM / By S&P Global Ratings / Header Image Credit: 1st News
S&P Global Ratings affirmed its 'B/B' issuer credit ratings on
Nigeria-based Access Bank PLC. The outlook remains stable. We also affirmed our
'ngA/ngA-1' Nigeria national scale ratings on the bank.
The affirmation balances the benefits of the Diamond acquisition for
Access' franchise and prospective cost of funding with the bank's diluted asset
quality indicators and integration risks.
We believe the Diamond acquisition will cement Access' leading franchise
in the competitive Nigerian banking sector. The combined entity has total
assets of about Nigerian Naira (NGN) 6.4 trillion (approximately USD17
billion), representing nearly one-quarter of the system's total assets. We
believe Access' expanded customer and loans base will underpin stronger revenue
generation and stability going forward.
At the same time, we see slight pressure on the consolidated bank's
asset quality indicators, because the bulk of Diamond's nonperforming loans
(NPLs) were transferred to Access when the merger became effective on March 19,
2019. We expect that cost of risk will increase to 1.4%-1.5% in 2019, since
Access will have to take additional provisions. We also expect the bank to
write off about NGN120 billion in 2019 and around 0.5%-1.0% of average customer
loans between 2020 and 2021. However, we anticipate that Access' cost of risk
will remain below the sector average, based on our estimate of the sector's credit
losses of 2.8% in 2019 and 2.5% in 2020.
We project Access' risk-adjusted capital (RAC) ratio will hover around
3%-4% through 2021. Although we consider this RAC level to be weak, we expect
the Diamond deal to strengthen Access' earnings capacity, with core earnings
climbing to about 2.5% of managed assets through 2021. We forecast the net
interest margin will increase toward 7% throughout the 2019-2021, while fees
and commissions will rise by NGN30 billion. Diamond's retail focus enables the
bank to build a low-cost and stable retail deposit base (2.7% in 2017 versus
4.7% on average for peers). In addition, Access plans to close about 80
branches, thereby reducing its operating cost base. Still, we forecast the
bank's cost-to-income ratio to increase to about 60%-63%, reflecting the
integration of Diamond, and this compares unfavorably to the best performing
banks in the Nigerian banking sector.
Post-merger execution risks are generally pervasive for a transactions
of this nature, particularly due to the banking environment within which Access
operates and the elevated NPL levels. However, we believe that Access's
integration of Intercontinental Bank in 2011 was successful, and that it boasts
a strong management team.
We expect that Access--similar to its rated peers in Nigeria--will
continue to see funding that is largely contractually short term. This is
manageable, in our opinion, given that the bank's stable funding ratio remains
well in excess of 100% while its broad liquid assets to short-term wholesale
funding ratio amounted to 2.77x in first-quarter 2019. Net broad liquid assets
covered 47% of short-term deposits at the same date. The bank holds a long
position in U.S. dollars, stemming from domiciliary accounts and funding raised
in dollars in the past four years.
The stable outlook indicates our expectation that the integration of
Diamond will likely translate into higher earnings capacity over the next 12
months with manageable operational and integration risks.
We would lower the ratings, in the next 12 months, if Access fails to
successfully integrate Diamond, or if its asset quality deteriorates beyond our
expectations. We could also lower the ratings if we see a marked deterioration
in the bank's capitalization, with RAC ratio weakening below 3% for longer than
expected. We could also lower the ratings if we were to take a negative rating
action on Nigeria (B/Stable/B).
A positive rating action appears remote in the next 12 months, because
it would hinge on an upgrade of Nigeria.
Related News
1.
Access-Diamond
Deal Boosts Large Banks' Dominance in Nigeria - Fitch
2. Access Bank Q1
2019 Results Review: Still Sizable Upside Potential Post Q1 Results
3. ACCESS Declares
N41.15bn PAT in Q1 2019 Results,(SP:N6.05k)
4. ACCESS Declares
N41.15bn PAT in Q1 2019 Results,(SP:N6.05k)
5. Diamond Bank
Shareholders: How To Process N1 Cash Payment Arising From Scheme of Merger
6. NSE Lists
Additional Shares Arising from the Scheme of Merger between ACCESS and DIAMONDBNK
7.
Access Bank
Ratings Affirmed; Outlook Stable; Diamond Bank Ratings Discontinued On
Effective Merger
8. ACCESS Updates
on Scheme Consideration of Cash and Shares for Shareholders of DIAMONDBNK
9. Full Suspension
of Trading In Shares Of Diamond Bank Plc - NSE
10. Access Bank Plc
Holds Signing Ceremony for N15 Billion Green Bond Issuance
11. Access Bank Plc
Obtains Court Sanction Of The Merger With Diamond Bank