Strong Earnings improvement only translates to 3% PAT growth
ACCESS recently posted its Audited FY’19 results, reporting strong growth in Gross Earnings, thanks mainly to the business combination with Diamond Bank. The bank posted a 26% y/y growth in Gross Earnings to ₦666.8 billion (Vetiva Estimate: ₦738.2 billion), driven by a 41% increase in Interest Income. Notably, the bank reported a Net Interest Margin of 6.6%, an improvement on FY’18 NIMs of 5.3%. However, the bank’s performance still trails the Tier-1 average NIMs of 7.5%. Meanwhile, earnings missed our estimate due to a 12% decline in Non-Interest Income. This was occasioned by an ₦83.9 billion loss on foreign exchange investments caused by the unwinding of the bank’s FX derivative contracts which matured in Q4’19.
Furthermore, the bank recorded a 38% y/y increase in loan loss provisions to ₦20.2 billion (Vetiva Estimate: ₦17.8 billion); a result of the 39% y/y increase in Loan book. Finally, the bank’s Opex increased by 33% y/y to ₦271.6 billion (Vetiva Estimate: ₦265.8 billion), a result of the increase in personnel, premises and equipment costs. Overall, the bank posted a PAT of ₦97.5 billion (Vetiva Estimate: ₦141.6 billion) a 3% y/y increase, giving an EPS of ₦2.74 (FY’18: ₦3.25).
Weak Q4 performance drags FY profits
The bank’s Q4’19 performance dragged FY profits, realizing ₦153.1 billion (Vetiva Estimate: ₦224.5 billion) in Gross Earning, a 19% q/q drop. Interest Income came in flat q/q at ₦131.8 billion, while Interest Expense moderated 16% q/q to ₦64.8 billion, giving a Net Interest Income figure of ₦67.0 billion – a 22% q/q increase. However, these gains were tempered by a 63% q/q drop in Non-Interest Income to ₦21.3 billion, brought about by FX losses incurred during the quarter. Furthermore, provisions worsened by 67% q/q, all of which dragged PAT by 76% q/q to ₦6.8 billion. Going forward, we expect Net Interest Income to moderate 5% y/y, due to the weaker yield environment and greater economic uncertainty hampering loan book growth.
Meanwhile, we foresee a 16% y/y improvement in Non-Interest Income, driven by our expectation of lower FX trading losses in FY’20; this due to the bank’s net position and change in FX strategy.
Further cost synergies to subdue Opex growth in 2020
While ACCESS recorded a 33% y/y increase in Opex due to merger activities, we expect the bank to tame Operating costs in 2020, due to further cost synchronizations and operational synergies, therefore, we forecast flattish growth in Opex for FY’20. Furthermore, our loan book expectation of 2% y/y, coupled with the significant provisions incurred in FY’19 leads us to project a 9% increase in provisions to ₦21.9 billion (FY’19: ₦20.2 billion), whilst we expect a further 4bps improvement in NPL ratio to 5.4% (FY’19: 5.8%), driven by further write-offs and recoveries.
TP revised to ₦11.35 (Previous: ₦12.38)
Due to the significant misses in ACCESS’ FY results, we have made significant adjustments to our FY’20 PAT estimate. We forecast FY’20 PAT of ₦103.1 billion, with an EPS projection of ₦2.90 and a 12-month target price of ₦11.35. Thus, we maintain our BUY rating on the stock. The bank’s shares have lost 24% YTD and are currently trading at a P/B of 0.5x vs a Tier-I average of 0.6x.