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Initial View - Access Bank Plc - Regulatory capital still strong, but worrisome NPL

• Opening the Q1 earnings season, Access bank at the close of market yesterday released its Q1 2019 numbers with consolidated balance sheet number of the acquired Diamond Bank. However, given that the merger was concluded on the 19th of March, the gains from earnings of Diamond bank during the period was accounted for as part of acquired reserves. Irrespective, the released number was quite strong, with EPS expanding 28% QoQ, following double-digit growth across income lines (net interest income: +12.3% QoQ and non-interest revenue: +23.7%) as well as lower loan-loss provisioning (-46.5% QoQ to N3.4 billion). However, reflecting the consolidation of the balance sheet, the combined entity’s NPL ratio expanded to 10% from Access’ reported FY 18 of 2.5%.
• Some CASA synergy from consolidation. From a low of 50% share of total deposits, current and savings account (CASA) share of deposits expanded to 57% over Q1 19. Surprisingly, in value terms, the increases in both demand and savings account was higher than the expected additions from consolidation with Diamond. For context, the CASA reported by Diamond bank over 9M 18 printed at N836.7 billion which adjusted for full year CASA position of Access in FY 18 of N1.28 trillion, suggest combined CASA of N2.11 trillion. However, the reported CASA is N125 billion ahead of estimate at N2.24 trillion.
• Regulatory position still strong, but worrisome NPL. In line with guidance during the merger update conference call, additional N155 billion in loan loss provision was transferred from Diamond to Access, with total provisioning expanding to N243 billion (Access FY 18: N88.2 billion), which coupled with the increase in NPL book by more than fourfold to N284 billion, the enlarged Access coverage ratio weakened to 85% (Access FY 18:160%). Post consolidation of the balance sheet, capital adequacy ratio (CAR) adjusted for the CBN forbearance on the full impact of IFRS 9 stood at of 22.51% (FY 18: 20.78%). However, adjusting for the full impact of IFRS 9, CAR settled at 19.00% (FY 18: 19.90%).
• Strong performance across income lines. On net interest income, the gains stemmed largely from decline in interest income of (+3.3% QoQ) and slower growth in interest income (+4.1% QoQ). On the former, the moderation emanated from lower interest on interbank takings (-19% QoQ) and slower growth on interest on customers deposit, which is reflective of the organic growth in deposits over the quarter, in our view. On interest income, we are however worried, given that most of the gains was propelled by interest on financial assets measured at fair value through profit and loss (FVPL). For context, while interest on loans grew by just 1.2% QoQ, investment securities surged 31% QoQ, with gains largely from Financial assets at FVPL which came in at N15.6 billion compared to N1.0 billion in Q4 18.
• NIR remained resilient, expanding 24.4% QoQ to N46.8 billion stemming largely from lower unrealized FX on derivative instruments of N4.7 billion, compared to loss of N18.7 billion in the prior quarter. However, we note that net fee income (-16% QoQ) declined – due to lower credit related fees, commission on financial service, virtual products, FX transactions and E-business income.
• The stock currently trades at a current P/B of 0.36x which is at a discount to peers of 0.74x. Our last communicated FVE on ACCESS is N11.80, however, we have a HOLD rating on the stock. We will revisit our numbers after further analysis and discussion with management.
• Q1 2019 analyst and investors conference call: Access would be hosting a conference call today at 14:00hrs Lagos (09:00hrs New York, 14:00hrs London, 15:00hrs Johannesburg).. For more details,
• More analysis to follow.