Nigeria Banking Sector Coverage - December 2011 'Bad ... - Imara

In its 9M 11 results to September, Access Bank continued
to see an increase in earnings momentum, with gross
earnings increasing by 5.40% y-o-y to NGN 82.2bn. Funded
income largely drove income growth, increasing by
26.68% on a net basis as the bank benefited from a rising
interest rate environment allied with an improved deposit
mix, factors which saw interest income rise by 7.12% and
interest expense fall by 18.67%. NIMs improved to 8.3%
compared with 6.8% at Q3 10 and 7.5% at FY 10.
Non-interest income growth was far less palatable,
however, up just 0.56% to NGN 20.5bn, a scenario which
was attributed to a sluggish market for government
securities. The position was improved from H1 11,
however, where that line item actually recorded negative
growth of 15%. Operating income growth was thus
somewhat diluted to 16.65%, ending the 9M period at
NGN 62.0bn.
Operating expenses continued to be well controlled by
Access, rising by just 8.82% to NGN 36.8bn, leading to a
notable improvement in the cost to income ratio from
63.66% to 59.38%. Adjusting for the AMCON levy, which
was accrued at NGN 1.8bn, management notes that
operating cost growth would have been an even more
impressive c3.5% y-o-y, as the group remains focused on
cost management and operational efficiencies.
Provisions registered an increase y-o-y of 68.11% to NGN
8.7bn, as the impact of the mandatory 1% general
provision (NGN 5bn) came through the numbers.
Attributable earnings closed the period at NGN 12.9bn,
representing an increase of 34.89%, or annualised EPS of
96 kobo, from 62.9 kobo in FY 10.
Balance sheet growth was 4.18% from the half year, with
total assets at NGN 1.0tn. Net loans and advances to
customers went up 6.97% to NGN 548.1bn, while
investment securities rose by 25.01% to NGN 130.2bn with
the group receiving AMCON bonds for NPL sales. Oil and
gas remained the highest class of loan exposure at 25%,
while also having the largest NPL contribution at 41%. A
large oil and gas loan was mainly responsible for the
skew, (more than likely to Zenon) and management
stated that this position will have been sold to AMCON by
the end of Q4. NPL’s were down to 8% q-o-q from 9% at
H1 11. Customer deposits growth was flat at 1.18% to
NGN 646.6bn, attributed to a reduction in high cost
deposits in a bid to improve margins. The CAR ended the
period at 23%, slightly higher than the 22% at H1 but
below FY 10’s 26%.
2.0%
3.0%
14.0%
19.0%
18.0%
Loans and Advances Sectoral Split (Q3 11)
25.0%
19.0%
Oil & Gas
Manufacturing
General Commerce
Information & Communication
Government
Finance and Insurance
Other
Outlook
Access has been a reasonably well run operation
historically, but its roots as more of a
corporate/wholesale bank have perhaps kept it from
achieving as much as it could have in terms of growth.
In a bid to give it more scale and enable it to compete
more favourably against the first tier banks, Access
successfully submitted a plan to the CBN to take over
one of the rescued banks, Intercontinental Bank, by
way of a scheme of merger, which has subsequently
been approved by both sets of shareholders. Under
the terms of the merger, AMCON was to recapitalise
Intercontinental Bank to a zero NAV, via an injection
of NGN 548bn in financial accommodation. Access
would then inject NGN 50bn as equity into the bank,
via an SPV, giving it 75% ownership. AMCON would be
a 15% shareholder with the original Intercontinental
shareholders remaining with 10% of the reconstituted
entity. Until the date of merger, (12 month execution
plan), Intercontinental will continue to operate as a
subsidiary of Access.
We see the case for this transaction for Access, as this
will effectively leapfrog it into the top 3-5 banks in
Nigeria, giving it an additional 366 branches and a
pool of cheap deposits that will reduce its relatively
high dependence on the wholesale market and bring
down its cost of funds. As management pointed out on
an investor call, this acquisition for Access is primarily
a “funding” strategy. The bigger scale should also
allow Access to write bigger ticket business, while
non-interest income will benefit from the increased
transactional volumes that a wide retail network will
bring. As with any takeover/merger, risks will remain
regarding how long it would take for synergies to have
an impact on the bottom line, and of course to
integrate the different cultures, people and
processes.
The forecasts presented in the scheme IM suggest that
the merger will be accretive for Access by FY 12,
where Intercontinental is forecast to record
attributable earnings of NGN 8.1bn.
Valuation and Recommendation
Using a DCF valuation, we value Access Bank at NGN
11.65 per share, without taking into account the
acquisition of Intercontinental. A coverage based PBV
average based on the last published post merger proforma
accounts suggests a valuation of NGN 10.21 per
share. In our view, Access looks best placed to benefit
from M&A activity relative to its peers. BUY.
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