Wednesday, March 15, 2017 03.55 PM / ARM Research
Access Bank Plc (Access) released its audited results last week wherein it reported an 8% YoY increment in post-tax profits to
N71 billion. Thus, Access announced a N0.40 final dividend which brings total FY 16 pay-out to N0.65 (+8.3% YoY) and translates to dividend yield of 6%.
That said, the results notably revealed a deceleration in earnings run rate from 9M 16 (+19% YoY) on account of higher taxes, which came in at a multi-year peak of 21%, with FY 16 PBT up 20% YoY. Focusing on the results, in line with the pattern in 2015, Access reported strong non-interest revenues (NIR), helped by a gain from the disposal of its 17% stake in Stanbic IBTC Pensions Limited (SIPML) which offset softer net trading income. For the sake of context, excluding the asset sales, PAT would have been 16% lower YoY.
Over FY 17, management forecasts a 300bps YoY expansion in ROE to 20%, hinged on a more upbeat NIM outlook (+80bs YoY) and though unstated in its guidance, subsisting NIR momentum. However, we think a reduced derivatives position and much tamer NGN depreciation picture relative to 2016 (2017: 23% vs 53% in 2016), which is sync with Access’ position, means FX translation gains are likely to be thinner than over the last two years.
To place things in context, despite the one-off disposal of its stake which helped push FY 16 earnings over the line, ROAE declined 300bps. With no assets to sell and with less fuel from currency depreciation for its derivative tank, at least relative to prior years, we think Access faces an uphill struggle to replicate earnings momentum to boost ROAE. In view of the subdued earnings picture, we lower our rating by one notch from STRONG BUY to OVERWEIGHT with our fair value estimate (FVE) at N7.52 (vs N7.97 previously).
Disposal of Pensions stake offsets sharp drop in FX trading revenues:
As earlier stated, disposal of its stake in SIPML, which was announced in February 2017, was central to 2016 earnings strength, as it helped mask the steep drop in FX trading income (-76% YoY to N8.8 billion). Though derivative gains held steady at N50 billion (-4% YoY), management linked the swing from gains over the last three quarters to a loss of N46 billion in Q4 16 to its decision to call back some of its swap contracts with the CBN. While this is understandable, relative to stable currency performance in the quarter, the volatility in derivative gains seems out of place.
Importantly, management noted that it now has $300 million outstanding down from $900 million as at 9M 16.
Elsewhere, for the second consecutive quarter, fee income ran well below H1 16 quarterly run rate of N17 billion at N9.8 billion in Q4 16 due to lower e-business Income. Access linked the development to softer card revenues as FX market difficulties forced the bank, as with the broader sector, to discontinue usage of naira cards for foreign transactions. That said, the strong H1 16 number helped drive strong fees over FY 16 (+66% YoY to N55 billion). Second order impact of the NIR strength helped flatter cost-to-income ratio (-320bps YoY to 58.8%) as an inflationary environment drove OPEX higher (+10% YoY).
Overall, for the second year running, while NIR turnover provided a pillar of support for earnings, we would like to point out that the underlying trend, with key linkage to FX, does not appear sustainable.
Deterioration in economic landscape catches up with asset quality:
Access reported a 40bps YoY expansion in NPL ratio to 2.14% which drove an upsurge in impairment charges (+54% YoY to N22 billion). The increase in loan loss charge reflected higher specific impairments which the bank links to issues in its O&G Services portfolio, General Commerce and Construction which cumulatively account for 29% of its loan book.
Figure 1: Trend in NPL and coverage ratios
Over, FY 16, though net loans expanded 32% YoY, Access states that organic loan growth was 8% YoY, driven by government on-lending, with translation impact of NGN depreciation accounting for the remainder. That said, impact of the risk asset expansion on capital adequacy ratio (CAR) was muted, as earnings expansion and debt issuance helped boost the metric well clear of regulatory limit of 16%. (2016: 21%).
Lower interest rate environment in H1 16 helped NIMs
In contrast to Zenith, Access reported higher net interest margin (+10bps to 6.4%) largely on account of better funding costs in H1 16. Given its higher share of term funding (42%), Access benefitted from the collapse in interest rates in H1 16, when the CBN’s accommodative monetary policy stance kept rates subdued. Though subsequent monetary tightening drove funding costs higher, which drove the bank to issue N26billion in commercial papers at average rate of 21% in November 2016.
On the interest income side, in spite of higher interest rates on government instruments and upward loan repricing, asset yields closed 2016 lower (-80bps YoY) as impact of currency movement on FCY component of loan book drove wider expansion in interest earning assets.
Figure 2: Trend in NIM, asset yields and WACF
Softer FX translation gains to guide earnings lower:
Going into 2017, Access has switched from a net-short FCY position on its balance sheet (2015-year end: $430million) to a net long FCY position (2016-year end: $301million), by our estimates, which should break the cycle of FX translation losses.
That said, the bank has reduced its outstanding swap position with the CBN to c.$300 million. The reduction in swap positions and a tamer NGN depreciation outlook (+23%), in our views, relative to 20161 implies a softer support from this line item for earnings in 2017.
On fee incomes, though increased CBN interventions in the FX market should boost dollar liquidity, we note that margins on CBN dollar sales, which are capped at N0.5/$, relative to much wider margins on alternative card funding sources in H1 2016 limit prospect of sizable revaluation. Accordingly, while we see prospect for recovery in fee incomes, we think this will trail the highs in the first half of 2016. In all, we forecast 2017E NIR at N109 billion (- 17% YoY)
On asset quality, our views regarding further naira weakness in 2017 implies that general commerce is likely to remain a key source of asset quality deterioration.
Elsewhere, in contrast to the rest of the sector, Access (as with GTB) did not fund any of the asset purchases linked to the power sector privatization of 2013, which limits its loan book from a fall-out from current sector headwinds, in our views.
Another source of concern is its ICT book in particular, Access N40billion exposure to Nigeria’s third largest telecommunications operator, Etisalat, following recent media reports about missed payments in February 2017. While details are still emerging, Access stated that the facility was performing as at the end of 2016 and that negotiations are ongoing with the CBN and telecoms regulator. Given the systemic nature of the exposure with 13banks involved, we think the issue is likely to result in restructuring with elongated tenors.
On balance, we think NPL ratio is likely to track higher (2017E: +40bps to 2.5%) which should translate to loan loss charges of N25 billion in 2017E (+17% YoY). Net impact of our model’s revision translate to a 22% YoY and 15% YoY contraction in 2017E PBT and PAT to N71 billion and N61 billion respectively.
Access has had a good run over the last one year and currently trades at a P/E and P/B of 2.7x and 0.4x respectively relative to 3.6x and 0.5x average for peers. In view of the subdued earnings picture, we lower our rating by one notch from STRONG BUY to OVERWEIGHT with our fair value estimate (FVE) at
N7.53 (vs N7.97 previously).
Over FY 17, management forecasts a 300bps YoY expansion in ROE to 20%, hinged on a more upbeat NIM outlook (+80bs YoY) and though unstated in its guidance, subsisting NIR momentum. However, we think a much tamer NGN depreciation picture relative to 2016 (23% vs 53% in 2017), which is sync with Access’ position, means FX translation gains are likely to be thinner than the prior two years. Furthermore, given where interest rates are, we think Access faces more downside to NIMs from funding side which has historically been a source of concern given high share of term funding. To place things in context, despite the one-off disposal of its stake which helped push FY 16 earnings over the line, ROAE declined 300bps. With no assets to sell and with less fuel from currency depreciation for its derivative tank, at least relative to prior years, we think Access faces an uphill struggle to replicate earnings momentum to boost ROAE in 2017.
Wale Okunrinboye email@example.com
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