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Recession, adverse credit conditions impacted Access Bank earnings in 2017–Wigwe

The Group Managing Director of Access Bank Plc., Mr. Herbert Wigwe, has given clear explanations on why the return of high yield to investors was affected in the 2017 financial year.

In his remarks at the bank’s recent Annual General Meeting (AGM) on Wednesday in Lagos, he argued that “Our operating performance in 2017 was impacted by the residual effects of macro-economic conditions of 2016, characterised by slow economic expansion and adverse credit conditions, which resulted in making conservative provisions on our loan book. Despite the macro and regulatory headwinds, our underlying business remained strong as reflected in the gross earnings growth of 20 percent to N459 billion in 2017.

He was however, quick to argue that Access Bank grew its loan book to position it for improved earnings, whilst driving deposit mobilization from targeted segments to diversify our funding base, he added.

According to him, “We are having increase in all indices, in Earnings Per Share, Cost of Risk, Capital Adequacy Ratio which are the major keys, financial institutions are measured, is plus for our bank. Looking at the topline of major banks, we are doing well. Our new 5 year growth corporate strategic plan will capture what we did not achieve in 2013 to date. We are among the three topline bank in the domestic economy. We shall continue to invest in our staff training. As a customer friendly institution we have set-up an IVR center and ombudsman complain call center to tackle complaints from customers.

Chairman of the Bank, Mosun Belo Olusoga also used the opportunity to assure shareholders of sustained growth in the coming years and assured that the bank management will grow the bank to an enviable position going forward.

However, a closer look at the released figures revealed critical issues of industry importance.

During the AGM, the bank released Q1-2018 results which indicated a decline in its pre and post-tax profits from the same period in the previous year, by 0.57% and 1.30%, to NGN27.44 billion and NGN22.12 billion, respectively. Notably, following revision in operating expenses in the previous year, 2017’s PBT and PAT were restated lower. Ex the revision, Q1-2018’s pre-tax and post-tax profits would have been much lower, by 12.08% y/y and 15.00% y/y respectively. Quarter-on-quarter, the bank recorded significant increase in PBT (+283.09%) and PAT (+259.29%), from the low based Q4-17 performance (which was its worst quarterly performance since Q4-2012).

Interest income grew by 20.5% y/y and 29.21% q/q to NGN95.59 billion, while asset yield declined by 10 bps y/y to 12.40%, despite a 28.27% jump in our computed interest-earnings assets – implying a lower yielding mix of assets. However, interest earned on customer loans (which makes up 77.6% of total interest income) rose by 28.66%, even as customer loans rose slower by 10.99% y/y (+0.34% q/q).

On the other hand, Interest expense recorded an upturn of 39.20% y/y (+59.18% q/q), owing to 30.44% y/y increase in interest paid on customer deposits (NGN33.37 billion) and 30.40% y/y increase in interest paid on borrowings (NGN2.22 billion). Notably, customer deposits and borrowings in the quarter were higher by 24.39% y/y (11.63% q/q) and 11.89% y/y (+10.43% q/q) respectively. On balance, net interest income was higher (4.48% y/y and 6.37% q/q) at NGN44.65 billion. Also, cost of funds was 70 bps higher y/y at 5.80%, causing the NIM (whilst also noting the decline in asset yield) to shed 90 bps to 5.80%.

Growth in NIR (+14.578% y/y, +105.59% q/q) was also positive at NGN41.80 billion, driven largely by the 399.44% y/y (+253.83% q/q) surge in net trading income. Gains on derivative instruments was 4.3x its value last year at NGN26.67 billion, while returns on fixed income instruments turned positive (NGN959.50 million), from a loss position (-NGN620.14 million) in the previous year. Net fee and commission income also grew 34.60% y/y (-11.27% q/q) to NGN15.86 billion, following a 55.12% y/y rise in credit related fees and commissions. These muted the significant 140% drop in forex income to a deficit of NGN6.82 billion, owing to a 30.43% decline in forex trading income.

Unlike its tier 1 peers so far (GUARANTY: -51.96% to NGN1.64 billion, ZENITHBANK: -42.01% to NGN4.57 billion, and UBA: -53.14% to NGN1.45 billion), ACCESS’ impairment charges increased y/y by 55.19% but was 77.08% lower than the high-based Q4-17 value at NGN4.96 billion. Coupled with the slower rise in customer loans, by 10.99% y/y, cost of risk also increased 20 bps to 0.90%.

Total Opex increased by 11.61% y/y and 61.32% q/q to NGN54.05 billion, following a 17.27% rise in other operating expenses. Other operating expenses, as stated earlier, was the sole revision in 2017 figures, following an 87.57% increase in AMCON fees to NGN7.74 billion. Ex the revision, opex would have been higher 20.61%. The rise in opex, and the slower pace of growth in operating income (+9.13% y/y), translated to the increase in cost-to-income ratio by 40 bps to 62.15% — highest among its Tier 1 peers so far after UBA’s 64.06% (ZENITH: 54.20% and GUARANTY: 38.46%).

CAR dropped by 170 bps to 19.30%, following IFRS 9 implementation, wherein NGN78.32 billion was deducted from Retained earnings’ opening balance. However, the CAR remains well above the CBN’s 15% requirement, but ranks behind GUARANTY’S 24.57% and slightly below ZENITHBANK’s 19.9%.

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