Thursday, June 28, 2012 / ARM Research
 

•Fitch Rating Inc. upgraded Access Bank Plc on a number of metrics (see table 1) last week; sequel to its positive rating outlook in October 2011. From its press release, the rating agency appeared to hinge its argument for the upgrade on the increased likelihood of support from the appropriate national authorities should the need arise; citing the perceived increase in the bank’s systemic importance with the acquisition of Intercontinental Bank in Q4 2011. The upgrade puts the bank a notch – in some cases few notches-- closer to its tier-one peers (see Table 2).

•We had noted in our earlier coverage of the bank that its putative entry into the Tier 1 category does confer distinct advantages, particularly with funding costs and operational synergies which take on a heightened importance in an economy with poorly developed capital markets. However, in our view, Fitch’s “systemic importance” rationale may be a little overdone. Indeed, considering the level of exposure banks have to industry counterparties, most banks in the country would probably fall into the “systemically important” category; a feature that was amply manifested in the approach regulators adopted in managing the recent crisis –especially so in the decision to nationalize, rather than liquidate, banks that remained insolvent after repeated shifts to recapitalization deadlines.
 

Table 1: Fitch Ratings on Access Bank

Table 2: Fitch Ratings Summary on Tier-one Banks

…but all appears to be going well operationally

•This is not to say that we disagree with the new ratings boost but our own earlier upgrade of the bank’s outlook had focused more on operational and strategic considerations. Taking the opportunity of the ratings action on Access Bank to reiterate our views on its outlook, we make adjustments for developments in the period since our last update on the heels of the release of the company’s Q1 financials in May.
 

•Incidentally integration, which was highlighted as a major risk by most analysts appears to be taking the more benign path we anticipated. Q1 2012 saw a sharp dip in Access Bank’s Cost-to-Income Ratio (CIR) to 67%, an improvement from 94% in Q4 2011 when it first reported consolidated numbers from the acquisition. Management attributed the marked improvement to further staff rationalization in the period and expects this to filter through into the rest of the year as operating income grows. Non-operational branches, alongside non-banking subsidiaries, are expected to be sold in the course of the year; therefore a boost for non-operating income. 
 

We make some adjustments to our estimate for risk

•Most of our adjustments come from a revision of our assumptions for fixed income yields, which haven’t declined as rapidly as we anticipated. Despite a 7% decline in deposit in Q1 2012 – a deliberate move by management to shed high cost deposits – we forecast a modest 4% rise to N1.2 trillion for FY 2012. Management’s focus on the integration and the bank’s expanded loan recovery operations weighed on our decision to leave our loan-to-deposit ratio unchanged at Q1 2012 level of 52%. Consequently, we anticipate a 5% rise in loan book to N606 billion for FY 2012.
 

•We revised revenue higher on the back of an upward adjustment in yield on loans and liquid assets. The 1pps upward adjustment in the yield come on the back of faster rise in lending compared to savings rates and stickiness in treasury yields.  Increasing our yield on loans and liquid assets for FY 2012 put revenue at N248 billion slightly ahead of our previous N243 billion forecast and representing a 79% YoY growth.
 

•An aggressive management expects CIR to fall to the mid-50s. Whilst we expect this ratio to decline over FY 2012 as more functions are centralized, we retain our 60% CIR estimate - the bank’s best figures over the most recent 8 quarters being 59%. Conversely, we revise our loan loss estimate to 1.2% of net loans from 1.1% in the light of persistence of elevated loan market rates and a still difficult operating terrain in the light of the impact of inflationary and currency pressures—as well as security concerns. This offset much of the benefits of the upward revision in our revenue forecast; amounting to a slight increase in our PAT forecast to N49.8 billion from the previous N48.7 billion.
 

We reiterate our BUY rating on Access Bank

•Following these adjustments, we revise our target price slightly higher to N10.12 from N10.07 which puts yesterday’s close at an implied a 64% discount. The bank’s current PE and P/Bv at 5.9x and 0.6x is also attractive when compared to peer average at 13x and 1.1x, respectively. We maintain our BUY rating on the stock.

 
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ARM ratings and recommendations

ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:

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Source: Company financials, ARM Estimates