November 3, 2017/Cordros Research
Access Bank Plc (ACCESS) released Q3-17 results, showing gross earnings (9.31% q/q and 18.26% y/y, in line with our estimate) came in lower relative to Q2-17. This follows lacklustre performance across income lines – interest income grew lower than expected (1.69% q/q and 21.84% y/y, 4.32% below our estimate) and non-interest income declined 28.25% q/q (+10.35% y/y), 11.37% above our estimate. However, following significant declines in loan loss provision and opex, PBT (+0.12% q/q and -5.08 y/y – 7.63% below our estimate) grew marginally, while PAT (26.04% q/q and -3.81% y/y – 9.28% below our estimate) grew double-digit, supported by a lower effective tax rate during the quarter.
We update our model with a cut in gross earnings growth forecast to 27.68% (previously 28.26%) for 2017F to N486.88 billion, on expected lower growth in interest income and NIR. We also revise cost of funds and opex estimates higher, but lower cost of risks. On net, we now forecast PBT and PAT growth of 7.00% and 7.50% (previously 22.57% and 23.59% respectively) to N96.66 and N76.80 billion respectively. As a result, our 2017F EPS of N2.65 is now 12.96% lower than the previous estimate.
In line with the persisting high yields on interest earning assets over 9M-17 (+190 bps y/y to 12.90%), we maintained 2017F assets yield estimate of 12.60%. However, we lowered interest earning assets portfolio by 0.31%, resulting in interest income growth of 36.44% y/y (previously 36.71%) to N337.41 billion. We believe the high interest rates environment will keep yields on fixed income securities at current levels and drive interest income over Q4. On the other hand, we have lowered NIR growth to 11.62% (previously 13.40%), reflecting the loss on net trading income in Q3.
Similarly, we believe the high interest rate environment will impact funding cost (rose 180 bps y/y to 5.8% in 9M-17). The surge recorded over 9M-17 broadly reflected the elevated interest charges on customers deposit (12.24% q/q) and borrowings – debt securities issue (+4.97% q/q) and other borrowed funds (+304.72% q/q) – reflecting the impact of the premium on the USD112 million refinancing of matured Eurobond and an additional N59 billion commercial paper issued in H1-17. As a result, we raised our 2017F cost of fund estimate by 16 bps to 5.74% (previously 5.58%), resulting in 53.47% growth in interest expense to N165.96 billion. Overall, we look for 12 bps y/y decline in net-interest margin to 6.12%, on faster increase in interest expense over interest income.
Over 9M-17, NPL ratio rose 41 bps y/y to 2.51% (3 bps above the 2.48% in H1-17), however the additional provisioning of N2.46 billion in Q3-17, was below our estimate of N7.62 billion. We have raised our forecast NPL to 2.55% (previously 2.20%) following the shrinking loan book, but lowered cost of risk estimate to 1.12% (previously 1.32%), resulting in a 3.85% y/y decline in loan loss charges to N21.12billion in FY-17.
While we expect opex to moderate in Q4, we raise estimate for 2017F (26.41% growth, vs. 20.05% previously) to N202.65 billion following the sizeable increase over 9M-17 (34.49%). Our revised forecast translates to an expansion in operational leverage to 5.7x (compared to 5.3x in FY-16) while cost to income ratio is expected to expand 491 bps y/y to 59.34%.
While acknowledging the possible impact of (1) the adoption of IFRS 9 from 2018F (with management guiding to a 30% to 40% impact on credit loss provision, albeit with a lower impact on capital adequacy), and (2) limited room for any significant growth in FX trading and revaluation gains on expected relative stability of the naira, we believe ACCESS’ long position in fixed income securities (investment securities +37.87% y/y in 9M-17 and 19.24% ahead of the level in H1-17) will drive growth in interest income over 2018-2019F. However, we lowered our target price marginally by 3.97% to N11.58 (previous: N12.06) and rolled forward our valuation to 2018.
Our current 12-month TP implies upside potential of 17.46% from current levels; consequently, we recommend a HOLD on the stock. ACCESS is currently trading at 2017F P/BVPS of 0.5x (below the peer average of 0.9x and the 5-year average of 0.6x) and 2017 FP/E of 3.7x (below the peer average of 4.8x and in line with its 5-year average of 3.7x).