Friday, April 28, 2017/6:27 PM/Cordros Capital
Access Bank Plc (ACCESS) yesterday surprised the market with another good start to the year in its Q1-2017 results, wherein gross earnings (44.45% y/y and +8.60% q/q) came in strong, 12.28% above our estimates. This follows higher-than-expected growth across key line items; interest income (+43.10% y/y and 20.06% q/q) and non-interest income (+47.48% y/y and -20.06% q/q). Accordingly, PBT (+38.19% y/y and 70.21% q/q) and PAT (+33.98% y/y and 81.41% q/q) moved in the same direction, ahead of our estimates of 25.35% y/y and 29.90% y/y respectively.
The growth in interest income, broadly in line with our expectation (with variance of 2.51%), was driven by improved yields on earning assets (+110 bps to 12.50%), loans and advances to customers (+29.80% y/y), and investment securities – available for sale (+51.02% y/y), held for trading (+340.51% y/y), and held for maturity (+42.79% y/y), given ACCESS' large portfolio of fixed income securities, in line with other banks' results released so far.
Despite the growth in interest income, net interest margin contracted 40 bps y/y to 6.70%, pressured by a higher increase in interest expense (75.82% y/y and 9.89% q/q), 19.35% above our estimate. Interest expense rose on more expensive deposit mix (term deposits: +108bps y/y to 45.41%), elevated inter-bank borrowings, and importantly, a surge in debt securities finance (which rose 158.75% y/y). As a result, cost of fund tracked higher by 140 bps to 5.10%.
On asset quality, ACCESS booked a 66.76% q/q decline in impairment provisioning (8.72% below our estimate), albeit still up 33.32% y/y, following 50 bps y/y expansion in NPL, which drove marginal uptick in cost of risk (+10 bps y/y) to 0.70%. Note that coverage ratio showed signs of deterioration at 164.3% in Q1-2017, from 169% in Q4-2016, and 215% in Q1-2016.
While we saw a slight q/q moderation, opex rose 30.35% y/y (10.30% above our estimate), stemming from higher personnel costs (+21.89% y/y and -16.85% q/q) and other opex (+35.28% y/y and +8.17% q/q). Despite the cost pressure, cost to income ratio contracted 532 bps q/q and 135bps y/y to 56.57%, albeit above our estimate of 56.05%, as operating income grew faster (33.45% y/y and 8.01% q/q).
ACCESS' management had guided to an optimistic 2017F ROE of 20.0% (vs. 17.4% in 2016FY) and net interest margin of 7.0% (vs. 6.2% in 2016FY). The Q1-2017 earnings growth suggests management is on course to deliver on the ROE guidance, hence we expect a likely revision to consensus. The result is also consistent with our expectation that ACCESS is poised to outperform in 2017F, supported by its sizeable fixed income portfolio, cost containment, and contraction in loan loss provisions. Based on our last TP of N8.81, we have a BUY recommendation on the stock.