Analyst cuts Access Bank price target, cites puffy operating cost, weak outlook
Vetiva’s analyst, Joshua Odebisi, has advised investors to buy Access Bank Plc in spite of a marginal downward review to price target. The lender’s stock has lost 36% year to date and currently trading at a price to book ratio of 0.4times as against the Tier-1 average of 0.5times.
In the first quarter of (Q1) 2020, Nigeria’s largest bank by total assets reported a flat profit, though the lender’s operating expenses increased. Analysts observed a bloated personnel cost, maintenance and other related overheard may be putting pressure on the bank’s earnings.
The group’s earnings jerked up 31% year on year, but increased operating expenses recorded dampened this strong earnings improvement.
Vetiva’s analyst Odebisi explained that the significant increase was mainly due to a low base from Q1’19, as the bank was yet to complete its merger with the defunct Diamond bank at the time.
However, the bank’s performance in interest income growth of 19% to ₦131.9 billion and non-interest income of 58% increase at ₦77.9 billion was noteworthy. Most notably, the bank reported a 320% year on year spike in gains from investment securities to ₦82.9 billion.
This helped to offset a ₦54.7 billion loss on foreign exchange trading and revaluations. On the other hand, the bank recorded a 153% increase in loan loss provisions to ₦8.5 billion, higher than Vetiva’s estimate of ₦5.5 billion, a result of the bank’s expanded loan book.
The lender recorded a 65% spike in operating expenses to ₦95.3 billion, driven by a weaker base in Q1 2019, as well as a higher wage bill. These came in addition to a 55% jump in asset management corporation (AMCON) charges to ₦17.5 billion.
As a result of this, the bank reported a 3% growth in pretax profit to ₦46.3 billion as against Vetiva’s estimate of ₦43.5 billion and a flat profit after tax of ₦41.0 billion.
This resulted to return on average equity of 26.3% compared to the reported return on average equity of 30.9% in Q1 2019.
Meanwhile, analysts expect management’s cost-saving strategy to rescue profits in the financial year 2020 as high operating costs of the new ACCESS bank continue to hamper profitability.
Amidst the prospect of further moderation in earnings occasioned by the weak economic outlook for 2020 and the poor yield environment, the bank’s cost to income ratio has risen from 53.2% in Q1 2019 to 62.2% in Q1 2020. In the financial year 2019 audited result, lender’s cost as proportion of income had settled at 65.0%.
“While the bank is far from the worst performer among its peers, this issue threatens to further stifle profit growth if not properly addressed”, Vetiva’s analyst explained.
Therefore, management’s guidance on cost-cutting measures to address the challenges are positive and could offset the decline in earnings expected in the coming quarters. Going forward, Vetiva stated that is expects a slight moderation in operating expenses to ₦268.8 billion as against ₦272.6 billion.
“The moderation is driven by cost synergies that the bank will continue to realize over the course of the year. This is with regard to branch rationalization and lower subscription fees and charges and other overhead costs”, the firm remarked.
Target price revised
Based on its assessment, Vetiva said it has revised Access Bank target price downward, from ₦11.35 to ₦11.14. “As a result of our revised expectations for the banking sector amidst COVID-19 outbreak, we have adjusted some line items in our FY 2020 estimates”, the firm stated.
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Given the development in the economy and the lender’s 2020 guidance, Vetiva capital stated that it has lowered interest income forecast to ₦457.1 billion, from ₦515.9 billion. As well, interest expenses line was adjusted downward to ₦230.3 billion from ₦252.1 billion.
Meanwhile, the investment firm increased its non-interest income forecast to ₦175.4 billion compared to its previous estimate of ₦150.7 billion. On the downside, analysts raised the firm’s loan loss provision projection to ₦37.6 billion.
Again, the lender’s profit after tax estimate was lowered to ₦90.4 billion from ₦103.1 billion, with an EPS projection of ₦2.50 and a 12-month target price of ₦11.14.
Analyst cuts Access Bank price target cites puffy operating cost, weak outlook
