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Access Bank Plc - Non-interest revenue spurred earnings in 9M 2020

• Access bank released it 9M 2020 unaudited results, showing an expansion in PBT and PAT by 15.69% YoY and 15.68% YoY respectively. Although we saw a decline in net interest income as well as higher loan loss provisioning (+222.7% YoY), higher Non-interest revenue (+106% YoY) spurred earnings during the period.
• Over 9M 2020, interest income moderated by 7.34% YoY to N375.3 billion, reflecting lower interest income on loans to customers (-8% YoY) and a decline in interest income on investment securities (-15% YoY) – a fallout of lower yield environment. Unsurprisingly, interest expense declined by 8.11% YoY following a 24% YoY moderation in interest expense on deposit from customers to N93.6 billion. Overall, the fall in interest income resulted in a decline in net-interest income by 6.63% YoY. Net interest margin moderated by 170bps YoY to 5.1% in 9M 2020, mirroring faster decline in asset yields by 336bps YoY to 9.7%, relative to cost of funds, which moderated by 160bps YoY to 3.6%.
• Notably, Non-interest revenue rose significantly by 106% YoY to N201 billion, anchored by growth in trading income (+2431% YoY to N84.2 billion), higher fee and commission (+31% YoY) and foreign exchange gains (+145% YoY to N12.6 billion). To shed more light, higher trading income from derivative instruments which printed at N43 billion, compared to a loss of N19 billion in the prior period, in addition to improved trading income on fixed income securities drove overall trading income higher. Meanwhile, cost to income ratio declined by 175bps YoY to 62.1% due to a faster rise in operating income by 29.2% YoY, compared to operating expense (+25.6% YoY). Similar to other banks, the increase in operating expenses is due to higher regulatory fees as AMCON levy and NDIC rose by 56% and 27% YoY respectively, amongst other line items.
• On asset quality, NPL ratio moderated 160bps YTD to 4.2% (H1 20: 4.4%) on the back of a N70.1 billion write-off and restructuring of loans during the review period. Meanwhile, Access bank booked higher loan loss provisioning (+222.7% YoY to N34.2 billion), which was evidenced in cost of risk, rising by 78bps YoY to 1.5%. Capital adequacy ratio improved by 30bps in 9M 2020, printing at 20.3% relative to FY 19: 20%, comfortably above the regulatory limit of 15%.
• The quarterly numbers also showed improvement as PBT rose by 51.1% QoQ, while significant moderation in taxes further supported the bottom line, with PAT expanding by 105% QoQ to N41.3 billion. Contrary to the 9M 20 performance, we observed a sturdy rise in net interest income by 29.8% QoQ on the back of higher interest income (+11.9% QoQ) and a fall in interest expense (-3.9% QoQ). Meanwhile, Non-interest revenue moderated by 5% QoQ due to losses on trading instruments (-196% QoQ). On other fronts, operating expenses fell by 13.6% QoQ mirroring the recognition of AMCON levy H1 2020, while loan loss provisioning rose 125.5% QoQ to N17.7 billion.
• With NIR running ahead of our full year estimate, we made an upward adjustment to N272.5 billion (previously: N157.2 billion). We also adjusted operating expenses upwards to N342 billion and cost of risk to 1.5%. The impact of our adjustment is an increase in PAT by 10% YoY to N106.8 billion over FY 2020 (previously: 3.7% YoY expansion in PAT to N101.1 billion). We now have a FVE of N12.52/ share (previously: N9.8/share) translating to a BUY rating on the stock based on last closing price. However, we are not too optimistic on the stock given the volatile nature of the earnings as well as high operating cost