Time for Access Bank to rein in costs, impairment charges


 Thursday, April 14, 2016 3.01 PM / Cordros Capital

Following updates to our earnings forecast and valuation for
Access Bank Plc (ACCESS), we have revised TP on the Bank’s shares to N7.30 (previouslyN7.98) and maintained a BUY recommendation.

EPS and ROAE are expected to lower to N1.95 and 14.59%, from N2.65 and 20.4%% in 2015FY, respectively. For 2016FY, the three major challenges facing ACCESS include:

(1) restraining costs, after interest expense and operating expenses swelled in 2015FY;

(2) sustaining non-interest income line, as the derivative contracts which spurred growth in previous years are set to mature; and

(3) rising impairment charges from an increase in NP.

Management has guided for a recovery in net interest margin to 7.0%, after it fell by 90 bps y/y to 5.9% in 2015FY. Whilst we share similar optimism -- given the implications the recent monetary policy tightening measures should have on asset yield -- we note ACCESS’ inability to rein in cost of funds in 2015FY wherein it expanded to 5.2% from 4.6% in 2015FY. Overall, we expect net interest income to increase by 12.3% y/y, driven by margin improvements and our loan growth projection of 9.0% (slightly lower management guidance of 10%).

With questions looming on ACCESS’ ability to replicate its strong 2015FY non-interest income growth -- which was achieved through lucrative derivative contracts -- management assuaged those concerns stating that the freed up funds from the expiring transactions may be channeled into other high yielding dollar investments. We are however cautious about management ability to successfully replicate last year’s performance, consequently we expect non-interest come to decline by 21.9% in 2016FY.

We expect an uptick in cost of risk to 1.3% (above management guidance of >1%), from 1.0% in the previous year. Our outlook is based on latent risks in upstream portfolio (particularly from indigenous oil companies) as well as transmission effect of a weakening macros to rising NPLs. Consequently, we expect the ratio of NPLs to climb to 2.5%, from 1.7% in 2015, and impairment charges to increase by 26.0%.

We expect cost to income ratio to weaken slightly to 66%, from 62% in 2015FY (significantly above management guidance of 55%) majorly based on weaker operating income (i.e. decline in non –interest income). Our CIR forecast incorporates a 7% decline in operating expenses given management’s commitment to slash operational costs in 2016FY (after it vaulted up by 39% y/y).

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