Access Bank Plc: Impressive performance enhanced by increased non interest earnings

Access Bank Plc recently released its first quarter result for the period ended March 31st 2015 showing an impressive growth in key financial indicators when compared with performance in the corresponding period of 2014. On the other hand, net interest income dropped by 3.30% to N23.59 billion from N24.39 billion over the period. On the other hand, noninterest income also increased by 72% to N30.37 billion from N17.64 billion in the corresponding period of 2014, which is as a result of increased net gains in financial instruments held for trading.

INCREASE IN GROSS EARNINGS DRIVEN BY STRONG INTEREST INCOME

Gross earnings increased by 34.08% to N76.78 billion in March 2015 from N57.26 billion in March 2014; largely driven by the growth in non-interest income. Non-interest income grew by 72% to N30.37 billion in March 2015 from N17.64 billion in the corresponding period of 2014, coming off the increased net gains in financial instruments classified as held for trading. This translated to an increase in the contribution of non interest income to earnings from 30.80% in the prior corresponding period to 40% in March 2015. However, the Banks fees and commission income reduced by 7.29% to N9.61 billion from N10.36 billion due to the reduction in commission on turnover (COT) rate to N1/mille, effective from January 1st 2015 from N2/mille in 2014. On the other hand, Interest income grew by 17.13% to N46.41 billion from N39.63 billion over the period. The growth in interest income was supported by the competitive size of the loan portfolio despite the slow growth in the loan book as at March 2015. The Bank’s loans and advances increased by 2.76% to N1.141 trillion in March 2015 from N1.12 trillion in December 2014. Improved yield on fixed income securities also contributed to the growth in interest income. Interest expense, however, grew by 49.86% to N22.82 billion in March 2015 from N15.23 billion in March2014 due to the increased regulated interest rate on deposits, the reduction in short term market liquidity and the attendant volatile interBank rates, and the impact of the Eurobond on the overall funding cost.

NOTABLE GROWTH IN PROFITABILITY

The combination of a strong growth in both interest income and non-interest income supported the 28% growth in operating income to N53.96 billion in 2015 from N42.04 billion. Operating expenses however, grew by 24% to N33.57 billion from N27.15 billion over the same period. As a result, the Bank grew pre-tax profit by 23.00% to N16.52 billion in March 2015 from N13.42 billion in March 2014. Net income also grew by 12.78% to N13.67 billion from N12.12 billion over the period.

MODEST IMPROVEMENT IN ASSET QUALITY

The Bank’s total assets grew by 1.52% to N2.14 trillion in March 2015 from N2.10 trillion in December 2014. The increase was driven by the growth in trading & pledged assets over the period driven by significant investments in high yield government securities. Moreover, the investment securities declined by 14.28% to N231.62 billion from N270.21 due to the disposal of a portion of securities classified as available for sale. A breakdown of the Bank’s loans and advances showed that oil and gas sector accounts for a total of 24.5% of the Bank’s loan book (Downstream 11.1%, Upstream 5.6% and Services 7.8%), general commerce accounts for 15.8% and information & communication technology accounts for 8.9%, with other sectors account for the remaining part of group’s loan book. Despite the high exposure of the Bank’s loan book to the oil & gas sector, an improvement in risk assets quality was achieved in the first quarter of 2015 compared to the preceding quarter. Impairment charges on loans reduced by 34%, on a quarter on quarter basis, to N3.0bn in the first quarter of 2015, down from N4.5bn in the last quarter of 2014. This translates to the group’s cost of risk of only 1.0%. Customer deposits also reduced by 4.09% to N1.39 trillion in March 2015 from N1.45 trillion at the end 2014 largely due to the retrenchment of some expensive deposits to reduce funding costs; resulting in a loan to deposit ratio of 73.75% in March 2015, a slight increase from 71.36% in December 2014. The growth in deposits from Banks was primarily driven by outstanding trade-related obligations to foreign Banks. The Bank’s liquidity ratio dropped marginally to 34.6% from 36% in 2014 while capital adequacy ratio (CAR) increased to 19.6% from 18.4% over the period. At a liquidity ratio of 34.6%, the Bank’s liquidity ratio remains above the minimum regulatory requirements of 30% while at a CAR of 19.6%, the Bank’s capital adequacy ratio remains above the minimum regulatory requirements of 15%.

BUY RECOMMENDATION RETAINED ON HIGH UPSIDE POTENTIAL

The CBN’s monetary tightening policies have resulted in limited income generation and high cost of funds within the Nigerian financial system. The CBN has maintained the CRR at a high level with a view to maintaining price stability and support the stability of the Naira exchange rate. In conjunction with the CBN’s broader economic policies, other banking regulatory policies such as the phasing out of Commission on Turnover (COT) and the increase in the high CRR on deposits indicate that Nigerian banks may not be able to grow conventional income streams as usual going forward. Despite the regulatory policies in the banking sector which threaten the Bank’s income generating capacity, we believe the management of the Bank will continue to focus its efforts towards strengthening income generation from financial intermediation. The impressive performance in the first quarter of 2015 attests to this. Also the strong liquidity position of the Bank and potential profitability from increased focus on lending would cushion the effect of the liquidity withdrawals on the performance in the current year. Considering the above, we maintain our earlier full year 2015 projection for gross earnings and net income of N274.64 billion and N49.68 billion respectively, leading to a projected EPS of N1.63. We also projected a dividend per share (DPS) of N0.60. We have determined the price of each stock using price to earnings multiple (PE) of 5.33x, consisting local peers of Access Bank. We arrived at a price of N8.69 for each shares of Access Bank Plc in the financial year 2015; a potential upside of up to 40.69% over the next 6 months. We therefore retain a BUY recommendation on Access Bank Plc.