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Access Bank 9Months 2019 Result; Strong Earnings, But OPEX Rises 47.7%

Stock & Analyst Updates	1955 VIEWS
Stock & Analyst Updates
1955 VIEWS

Wednesday, October 30, 2019 /08.00PM / TheAnalyst/ Header Image Credit: New Mail Nigeria

Access Bank Plc, had a strong 9-month earnings performance by September 2019, however, warm feelings about the bank's profit has been muted by analysts concerns over the +47.70% rise in the bank's other operating expenses. A chunk of the added expense was as a result of the rise in its AMCON surcharges which went from N17.49bn in 9 months 2018 to N22.66bn in 9 months 2019, representing a hit of a further N5bn to the bank's Income Statement for the year 2019.

Highlights

Income Statement

Gross Earnings grew by +37.7% from N365.1bn in 9 months 2018 to 502.8bn in 9 months 2019, the bank achieved the growth despite lower consumer spending and slower economic growth (GDP grew 1.94% in Q2 2019)
Net Interest Income (after impairment charges) went up +74.17% from N114.6bn in 9 months 2018 to N199.6bn in 9 months 2019, suggesting a major improvement in the bank's core lending activities.
Net gains on Investment Securities tumbled -104.39% from N75.1bn in 9 months 2018 to N3.3bn in 9 months 2019, indicating that the bank suffered a major hit in its Corporate Finance business, especially on traded equities.
Net foreign exchange loss reversed from a loss of N29.58bn in 9months 2018 to a profit of N5.15bn in 9 months 2019, a rise of +117.41%.
Other Operating Income flew +184.76% from N11.68bn in 9 months 2018 to N33.26bn
Other Operating Expenses leaped from N81.84bn in 9 months 2018 to N103.1bn in 9 months 2019, representing an upward spring of +25.98%.
Profit Before Tax (PBT) skipped up from N70.27bn in 9 months 2018 to N103.10bn in September 2019, a rise of +46.72%.

Statement of Financial Position (3 months to September 2019)

Loans and advances to customers grew from N1.99bn in December 2018 to N2.77bn in September 2019, a growth of +39.20%, the direction and magnitude of lending follows expectations of the Central Bank of Nigeria's Loan to Deposit Ratio (LDR) requirement of a minimum of 65% by December 2019
Invested Securities climbed from N501.07bn in December 2018 to N760.59bn in September, an upward bounce of +51.79%.
The bank is expanding rapidly in growing fixed property and equipment assets which rose from N103.67bn in December 2018 to N196.41bn in September 2019 or by +89.46%, the implication is that the bank's breakeven operating margin will have to rise a notch.
Deposits from customers grew significantly between December 2018 and September 2019, rising from N 2.56bn in December 2018 to N4.24bn in September 2019 a rise of +65.63%, the fast-paced growth in deposits increases pressure on the bank to further grow its lending in order to meet CBN's minimum LDR requirement of 65% for the year ended December 2019.
Interest bearing borrowings went up sizably by +82.57% from N338.42bn in December 2018 to N617.86bn in September 2019, this signifies a potential squeeze on cost of funds and operating margins.

The Little Big Issue of Profitability

Access Bank has been able to sustain major underlying profitability despite expectations that its merger with erstwhile Diamond bank would take its toll on the bigger entities operating profit as top line earnings swells steadily. Access Banks profit after tax closed the first 9 m0nths of the year 2019 at N94.05bn (+49.21% higher the than its H1 2019 result) reinforcing a trend established in the second quarter of the year which saw the bank post the third largest after-tax profit for deposit money institutions listed on the Nigerian Stock Exchange (NSE) after GT Bank (N99.13bn) and Zenith Bank (N88.88bn) in H1 2019(see chart 1 below).

Chart 1 H1 2019 Profit After Tax of Selected Banks

Proshare Nigeria Pvt. Ltd.

Source: Half Year (H1) 2019 Financial Reports of Selected Banks

With the bank's 9 months 2109 performance analysts are contented with a forward year end (FYE) 2019 profit after tax performance in the region of N135bn. This plays nicely to the strategy of investors who had early on shorted the bank's stock at the commencement of its merger with Diamond Bank. Access Bank's recent result should add a few more basis points to the equity returns of those that bought the stock late in 2018 or early in 2019.

Comparative top line earnings for Access Bank has expectedly been strong post-merger as the bank's H1 2019 result showed a +28% Y-o-Y growth in gross earnings, the fastest for any of the banks listed on the NSE (see Table 1 below).

Table 1 Gross Earnings Growth Rate of Selected Banks H1 2019

Gross Earnings
Bank	H1'19 (N'm)	H1'18 (N'm)	% Change
Access Bank	324,376	253,024	28.20%
Ecobank (ETI)	405,202	384,588	5.36%
FBNH	294,231	293,336	0.31%
FCMB	89,786	83,925	6.98%
Fidelity Bank	103,655	92,295	12.31%
GTBank	221,870	226,632	-2.10%
Stanbic IBTC	117,374	114,207	2.77%
Sterling Bank	74,499	77,608	-4.01%
UBA	293,690	257,918	13.87%
Union Bank	76,017	83,333	-8.78%
Unity Bank	20,547	17,492	17.47%
Wema Bank	40,835	32,034	27.47%
Zenith Bank	331,586	322,201	2.91%
Source: Financial Statements of Selected Nigerian Banks H1' 2019

Strengthening Statement of Financial Position

The Access Bank-Diamond Bank merger has increased the bank's overall size (fixed and risk assets) and provided it with some flexibility to withstand systemic shocks as a result of greater retail market deposit and penetration. Harmonized digital footprint also has represented a boon for the merger as technology dominance (with a fully functional tech foundry at play) has enabled the bank evolve cutting edge service delivery on a robust digital platform. Glitches still exist with deployment but economies of scale and efficiency can quickly be realized.

The bank's cost of risk (CoR) has gradually declined since FYE 2017 dropping from 1.7% in 2017 to 0.7% in 2018 and 0.5% in Q1 2019 (see Table below). The bank has also gradually been able to reduce its cost to income ratio from 62% in 2018 to 53% in Q1 2019.

Table 2 Access Bank Operating Ratios 2017-Q1 2019

Access Bank
Ratios	2017	2018	Q1 2019
Cost of Risk	1.7%	0.7%	0.5%
Capital Adequacy Ratio	20.1%	19.9%	19.1%
Liquidity Ratio	47.2%	50.9%	47.6%
Cost-to-Income	61.9%	62.2%	53.2%
NPL Ratio	4.8%	2.5%	10.0%

Source: Access Bank 9 months 2019 Financial Statement, NSE

Liquidity Thoughts

The bank's cash to interest coverage ratio (CICR) has stayed flat of the past nine months rising by a blip from 1.66% in December 2018 to 1.67% in September 2019, the higher the cash cover the more liquid the bank, apparently the recent bank merger Access Bank and Diamond Bank has made liquidity slightly inflexible upwards.

Leverage and Its Concerns

Total assets to liabilities of most banks have clustered around similar rates in the last 9 months. The sectors Total liabilities to Total assets ratio (for H1 2019, see Chart 2 below) concentrated around 90% with some banks dropping slightly lower and others tipping slightly higher, the industry outlier in H1 2019, however, was Unity Bank Plc with a ratio of 191%, this was the obvious consequence of a severely weak equity position. Analysts note that the higher the ratio the lower the bank's equity and the higher its leverage. Access Bank's H1 total liability to total assets ratio was 91%, in 9 months 2019 the ratio settled at the same 91% ratio. Typically banks leverage at least seven times their average three-year deposit levels meaning that Access Bank still has headroom to increase its leverage, without hurting its balance sheet stability, if it so desired.

Nevertheless, with total assets increasing by +33.53% and total liabilities growing by +34.30% between December 2018 and September 2019, the bank still remains in a comfortable place.

Chart 2 Total Liabilities to Assets Ratio of Selected Banks H1 2019

Proshare Nigeria Pvt. Ltd.

Source: Financial Statements of Selected Nigerian Banks H1' 2019

Swotting The Numbers

Access Bank, Nigeria's largest bank by total asset, has 9 months 2019 numbers that feed into an interesting Strengths, Weaknesses, Opportunities and Threats (SWOT) framework (see illustration 1 below):

Strength: Strong 9 months 2019 top and bottom line earnings growth

Weakness: Escalating operating expenses. OPEX went up by +25% three months to September 2019 and remains a part of the statement of financial position that the bank needs to watch closely

Opportunities: Foreign expansion of operations reduces country risk exposure to slow economic growth in Nigeria. The bank has applied for approval to acquire majority interest in a Kenyan bank and has received "no objection" approval by the CBN. The next hurdle has been crossed with the Kenyan Competition Commission approving Access Bank's purchase of 93.57% of the equity of Transnational Bank Plc, Kenyaâ€™' 36^th largest bank by assets. Transnational Bank has 28 branches with 97,000 customers. So far, the Kenyan foray looks like a viable proposition if the new management can reverse Transnationalâ€™s weak earnings situation; in the course of the year the bank made a loss of Kshs 98m.

Threats: Intermittent Central Bank (CBN) regulatory circulars continue to disrupt planning and strategy as new circulars constrain operations and set new guideline for lending and use of liquidity. The consequence has been significant for banks in the 9 months of 2019 as several deposit money banks (DMBs) were penalized for not being able to meet the CBN-imposed LDR threshold of 60% (which has since been revised to 65% by December 2019) (see chart 3 below).

Chart 3 CBN Debits to Banks in Default of 60% LDR Requirement Sept. 2019