Access Bank Rated Strong Buy, Analysts Estimate 33% Upside
Nigeria’s largest bank by total assets, Access Bank Plc, has been rated a strong buy, though equity analysts spotted that the group’s high cost of funds is of grave concern to the upside potential in the financial year 2022.
Apart from pressures on funding costs, Pan Africa lender Access bank Plc was exposed due to the failure to hedge its derivatives assets which resulted in about N86 billion loss. The loss was recouped from its non-interest revenue-related business. And, the group recorded a large gain from its strong net dollar position which resulted in about N86 billion gain.
In its recent equity report on Nigeria’s largest bank by total asset (Ticker: AccessCorp), ARM Securities analyst Oluwadara Olunuga is projecting a 33% at the reference market price of N9.60.
The financial service group has been pursuing aggressive growth by acquisition across the region while it seeks to become Africa’s gateway to the global markets. In its first-quarter 2022 earnings release, Access Bank Plc posted a 33.1% gross earnings growth while pretax profit spiked 8.5% respective year on year.
In the period, Gross Earnings printed strong at ₦295.7 billion while the bank converted part of its to profit before tax which printed at ₦65.1 billion. ARM Securities analyst said the result was supported by impressive performance on both the interest and Non-Interest income legs.
In the period, Access Bank’s interest income increased 20.8% to ₦173.7 billion, owing to increased income from fixed-income assets that jumped 56% to ₦46 billion and income from loans, up 12% to ₦92 billion, according to the equity note.
This performance echoes the bullish sentiments in the fixed income market in the first quarter of the year and the 31.6% expansion in the loan book, Olunuga said in the report.
Overall, total assets increased by 33.4% year on year to ₦12.1 trillion. As reported across peers, interest expense soared 73.2% to ₦86.3 billion due to a surge in interest paid on customer deposits by 156% to ₦54 billion.
In the period, customer deposits grew by 31.8% to ₦7.5 trillion compared to a faster rise in interest paid on the deposits, resulting in a surge in annualized Cost of Funds.
Specifically, at the end of the first quarter of 2022, Access Bank Plc.’s funding costs surged 79 basis points to 3.8%.
The group net interest income declined 7.0% to ₦87.4 billion due to the sharper rise in interest expense and the net interest margin dropped 1.81 percentage points to 3.8%. For the group’s non-interest revenue (NIR), ARM Securities said the performance was splendid, as the revenue line grew 55.8% to ₦122.0 billion in the period.
“We observed this as depicting an impressive outing in Fee & Commission that expanded 44.5%, realized foreign exchange gains of ₦85.8 billion compared with ₦1 billion that was taken through the account in the first quarter of 2021. READ: UBA, GTB Get Strong Upside as Banks Top Analysts Buy Rating
“…. and ₦17.5 billion gain on hedging instruments as against ₦5 billion reported in the comparable period in 2021. These gains largely masked the ₦85.5 billion loss on non-hedging derivatives and bolstered NIR growth”, ARM Securities explained.
Amidst the rising headline inflation rate, the group operating expenses increased 28.1% year on year to ₦117.2 billion driven by sharper growth in personnel expenses, AMCON charges, and IT&E-Business expenses.
Detail from its unaudited result for the first quarter showed that Access Bank personnel expenses inched upward 45.8% with other pressures from a 26.8% jump in AMCON charges while spending on IT and E-business expenses grew 44.6%.
At the end of the first quarter, Access bank group see its cost-to-income ratio soar 4.0 percentage points to 59.8%.
“We observed that topline growth was enough to amplify profitability, evidenced by the 8.5% and 9.2% growth in PBT and PAT to ₦65.1 billion and ₦57.4 billion, respectively”.
Nonetheless, analysts spotted that efficiency ratios – return on equity and return on asset were down to 20.9% and 3.8% in Q122 from 26.5% and 5.6% in the corresponding period in 2021.
ARM Securities Olunuga call this a testament to the impact of a not-so favourable regulatory environment, and how it continues to impair profitability per unit of total assets and shareholders Fund.
The analyst said Access Bank, given its size, is poised for growth in topline and increased profitability, saying already, the bank gross earnings and profits, when annualized, slightly exceeded ARM Securities estimates for the financial year 2022.
“We expect this performance to be sustained through the year. In addition, cost of funds, relative to its peers, remains a major concern”. Rated strong buy, ARM Securities set a 12-month target price of ₦12.80 for ACCESSCORP, a 33.3% upside to its current close of ₦9.60.