Access Bank Plc - Management to Continue Exploiting Opportunities in FX Derivatives


Wednesday, March 22, 2017 11:30 AM / CardinalStone Research

Access Bank of Nigeria Plc held its earnings conference call to explain its FY'16 results. We retain our target price (TP) to N8.32 and maintain our BUY rating on the counter.  

Kindly see below the key points from the conference call 

Management explains exposure to $1.2 billion Etisalat loan Syndication 
During Access Bank's conference call, management gave insights on its exposure to the $1.2 billion Etisalat loan syndication which according to media reports had become delinquent. The bank's exposure within the syndication is N40 billion. Management further disclosed that it is exposed to MTN and Airtel to the tune of N20 billion and N8 billion respectively. According to management, the Etisalat loan is up to date in terms of interest and principal payment, and hence, remain performing.

The deterioration in the obligors' fundamentals and a request to temporarily stay repayments triggered the ongoing loan restructuring and renegotiation of terms. Currently, the Central Bank of Nigeria (CBN) and Nigerian Communications Commission (NCC) are moderating the ongoing negotiations between the syndicate banks and the obligor.  

Income from derivative asset to continue 
Derivative income accounted for an average of 38.7% and 14.3% of non-interest income and gross earnings respectively over the past 2 years. Management disclosed that they intend to take advantage of the opportunities in the derivative market to drive non-interest income. Prior to June 2016, the FX derivative market only offered Swaps and Forwards as hedging instruments. 

Following the devaluation, the CBN introduced Futures and Non-deliverable forwards (NDF) which according to management has increased opportunities to further support its income from derivatives going forward. The bank recently swapped US$50 million and US$100 million with JP Morgan and South Africa's ABSA at N400 and N329 respectively. 

Recent events in the currency market have exposed a need for foreign and local investors to hedge their FX exposures and as such we believe this income stream is set to stay. Given that the market remains in its nascent stages in comparison to advanced economies, certain inefficiencies may exist that will present lucrative income opportunities for traders.   

Short term business outlook - H1'17 
We expect income from derivatives transaction to continue to support gross revenue in H1'17. However, we expect the growth rate to slowdown as the bank has closed out most of its US$2 billion swap transactions and the new deal with JP Morgan and ABSA only accounts for US$150 million. 

We expect e-banking income contribution to non-interest income to improve as the bank's retail channel migration strategy continues to yield result in H1'17. With the bank's balance sheet fully squared, a further devaluation of the naira will not have a significant impact on profitability for the period.   

Overall, we expect the currently attractive yields in the fixed income space to continue to stifle real loan growth. Hence, barring any significant devaluation in the currency, we expect marginal growth of 7% in credit asset in H1'17.  

We have retained our target price of N8.32 on Access bank; this represents 34.2% upside to current price of N6.20. Access bank currently trades at P/B of 0.4x which is at a discount to peer average of 0.7x.

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