Access Bank Plc - FMDQ Group€¦ · The copyright of this document is reserved by Agusto & Co. Limited. ... (following the merger of Access Bank Plc with Diamond Bank Plc) , five

Access Bank Plc. ₦30 billion 7 Year Fixed Rate Subordinated Unsecured Notes

2019 Bond Rating Report

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2018 Bond Rating: FBN Quest MB Funding SPV Plc

Access Bank Plc ₦30 billion 7-year Fixed Rate Subordinated Unsecured Notes

Rating Assigned:

A+ RATING RATIONALE

Agusto & Co. hereby assigs a rating of “A+” to Access Bank Plc’s (“Access

Bank”, the Issuer” or “the Bank”) proposed ₦30 billion 7-year, fixed rate

subordinated unsecured notes (“the Issue” or “the Notes”) maturing in 2026,

and callable after 5 years. The rating assigned to the Issue is contingent on

the standalone rating of the Issuer, taking into consideration the

subordinated nature of the Issue. The Notes further rank pari passu without

preference among themselves as well as all claims of holders of

subordinated indebtedness of the Bank, existing and future.

The Issuer’s rating is hinged on the Bank’s good brand franchise buoyed by

strong market share following the 2019 merger with Diamond Bank lifting

its industry position, a good profitability profile, good liquidity, as well as an

experienced and stable management team. The rating is however

constrained by elevated non-performing loans following the merger, high

funding costs vis a vis peers, which the Bank looks to moderate with the

inflow of Diamond Bank Plc’s pool of retail deposits. Furthermore, persistent

elevation in operating expenses vis a vis industry peers, has impacted a

potentially better profitability profile.

We note that Access Bank’s capitalisation remains adequate for business

risks, though this has come under pressure following post-merger asset

quality challenges, alongside adoption of IFRS 9 – Financial Instruments

tenets. Core capital amounted to ₦447.4 billion as at 31 December 2018,

and trended up ₦517.7 billion in Q1 2019, standing well above the ₦50

billion regulatory minimum for Nigerian banks with international operating

licences. The Bank’s IFRS 9 full-impact capital adequacy ratio, in line with

Basel II Accords, stood at 16.21% as at 31 December 2018 and 16.24% as at

31 March 2019. We expect the proposed Issue to buoy capitalisation, given

its Tier II qualification.

Furthermore, with a good retention ratio (comprising retained earnings after

dividend payments) of 12.2% as a percentage of core capital, for the 2018

Outlook: Stable

Issue Date: 13 May 2019

Expiry Date: 30 June 2020 The rating is valid throughout the life of the

instrument but will be subject to periodic

monitoring and review.

Bond Tenor: 7 years

Industry: Banking

Analysts:

Yomi Akinola

[email protected]

Ayokunle Olubunmi, CFA

[email protected]

Yinka Adelekan

[email protected]

Agusto & Co. Limited

UBA House (5th Floor)

57, Marina

Lagos

Nigeria

www.agusto.com

2


2019 Bond Credit Rating Access Bank Plc. ₦30 billion 7-Year Fixed Rate Subordinated Unsecured Notes

financial year, and 5.9% for the three months to 31 March 2019, we consider

the Bank’s profitability profile to be sustainable. Access Bank posted a ₦75.2

billion pre-tax profit for 2018 with profitability and efficiency ratios

improving year-on-year. Return on average assets and average equity for

2018 stood at 1.9% and 17.2% respectively, while subsequent to year-end,

annualised performance from unaudited statements indicate that these

ratios improved to 2.6% and 28.0% respectively.

We hereby attach a stable outlook to the Issue as it reflects our expectation

that the financial condition of Access Bank Plc will remain adequate to meet

the bond obligations.

Table 1: Background Information

*Unaudited Q1 2019 performance ratios for the Bank are annualised.

•Good brand franchise

•Good presence in the corporate segment

•Experienced and stable management team

•Strong industry position

•Retail banking synergies from Diamond Bank Plc, post-merger

Strengths

•Elevated operating expenses

•Obligor and sectoral concentration in the loan book

•High funding costs relative to peers

•Elevated non-performing loan level

Weaknesses

•Curbing operating expenses in view of the merger with a bank that has had a high level operating expenses

•Ensuring that the retail deposits & customers from the merger bank are retained

•Ability to seemlessly harmonise the Bank's culture with the personnel of the Diamond Bank post-merger

Challenges

Financial Data FY 2017 FY 2018 Q1 2019*

Total assets & contingents ₦3.8 trillion ₦4.3 trillion ₦6.2 trillion

Net earnings ₦225.9 billion ₦231.1 billion ₦80.3 billion

Pre-tax return on average assets & contingents (ROA) 1.8% 1.9% 2.6%

Pre-tax return on average equity (ROE) 15.3% 17.2% 28.0%

3



THE NIGERIAN BANKING INDUSTRY The Nigerian Banking Industry is the primary and most developed segment of the financial services sector,

accounting for approximately 2.7% of Gross Domestic Product (GDP) contributions in the year ended 31

December 2018. The industry currently comprises 26 deposit money banks (DMBs) – 20 commercial banks

(following the merger of Access Bank Plc with Diamond Bank Plc), five merchant banks and one non-interest

bank. Of the 20 commercial banks, 9 are licensed to operate internationally while 9 are licensed to operate

nationally while 2 are regional banks. The banks continue to act as the financial engine of the economy

providing a variety of investment and funding solutions to all sectors as intermediaries between

depositors/investors and individuals/entities requiring loans and advances. Five new banking licenses have

been issued recently, however these banks are yet to become operational.

Taking a closer look at commercial banks currently operating in Nigeria, the top five largest banks (all licensed

to operate internationally and referred to as Tier 1 banks) account for over 60% of industry’s total assets and

contingents. They are - Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa

Plc and Guaranty Trust Bank Plc.

Over the last three years, the operating terrain has been challenging for Nigerian banks, on account of various

macroeconomic headwinds, fiscal and monetary policies that have negatively impacted performance of the

Industry. The contractionary monetary stance of the Central Bank of Nigeria which continues to subsist has

limited funds available for lending. In addition, aggressive borrowing of the Federal Government continues to

negatively impact real sector lending sentiments with a crowding out effect. However, in March 2019, the

Central Bank eased earlier tightening policies somewhat, with a 50bps decline in the Monetary Policy Rate

(MPR) from 14% to 13.5%. Whilst we expect this to improve access to credit, the level of interest income earned

by banks, especially from the Corporate Banking segment, is also expected to come under pressure.

A toxic credit environment has also lingered post-recession, reflecting in persistent elevation of banks’ non-

performing loan ratios, above the 5% regulatory benchmark. This is in addition to operating cost pressures

with a high average inflation rate of 12.15% for 2018. Nonetheless, easier access to foreign exchange via the

Investor and Exporters Window and convergence of various foreign exchange rates - Parallel Market, I&E and

NAFEX windows) to between 360 - 364 NGN/USD, compared with wide disparities seen in 2016 and 2017, has

eased trade transactions.

Effective 01 January 2018, International Financial Reporting Standard 9 -Financial Instruments was adopted,

impacting the classification and provisioning for financial assets in accordance with expected credit loss and

loss given default guidelines. This resulted in notable charges against capital and write offs particularly seen

with commercial banks with larger loan portfolios versus merchant banks.

Despite the harsh operating terrain, Nigerian banks have nonetheless been resilient in a highly competitive

environment. In terms of liability generation, the race to mobilise cheaper retail deposits particularly with the

deployment of a variety of technology driven service offerings, has intensified, whilst banks continue to

leverage on multiple cycle short-dated transactions in terms of asset creation. This is alongside continued

pronounced reliance on government security yields. Consequently, the Industry remains attractive with an

estimated pre-tax return on assets of 2.9% and pre-tax return on equity of 25.6% for the 2019 financial year.

4



PROFILE Access Bank Plc (“Access Bank” or “the Bank”) was incorporated in February 1989 as a private limited liability

company and commenced operations in May 1989. The Bank converted to a public limited liability company

in March 1998 and subsequently listed its shares on the Nigerian Stock Exchange in the same year. In February

2001, Access Bank was granted a universal banking license by the Central Bank of Nigeria. Between 2002 and

2007, the Bank embarked on a growth strategy with a view to emerge as one of Nigeria’s leading financial

institutions. This growth strategy saw the Bank embarking on an aggressive capital raising exercise,

commencing with a successful public offer which raised about ₦14.5 billion in 2004, then an Over-The-Counter

Global Depository Receipts (GDR) placement of US$250 million in July 2007 and a third public offer raising

about US$1billion. In October 2011, the Issuer acquired 75% equity stake in Intercontinental Bank and merged

the two institutions in January 2012. This acquisition was to expand the Bank’s retail banking footprint. In

2012, Access Bank successfully raised $350million 5-yr Eurobond and a second $400 million 7-yr Eurobond in

June 2014. An additional $300 million was raised in October 2016 to repay the earlier maturing Eurobond and

support asset creation. The Bank has also successfully raised funding via various avenues including a rights

issue in 2015 and a Climate Bonds Certified Green Bond in 2019.

The Bank’s principal activities include corporate/commercial banking, retail banking, money market products

and services as well as corporate finance, equipment leasing and foreign exchange operations. As at March

2019, the Bank had about 29 million customers, segmented under four strategic business units (SBU) namely;

Corporate & Investment Banking, Commercial Banking, Business Banking and Personal Banking. Each of these

units offers a variety of products and services in line with the Bank’s strategy to emerge as “the world’s most

respected African bank”. The SBUs are each headed by an Executive Director who reports to the Group Managing

Director. The Bank’s medium-term plan is hinged on 6 elements; consolidation of corporate banking & growing

retail banking, digital leadership, universal payment gateway, global collaboration and analytics driven insights

& robust risk management and consumer focus.

Subsequent to year-end 2018, the Bank merged with Diamond Bank Plc thus expanding its business footprint

to 674 branches and service outlets across Nigeria, as well as a total of 88 branches and service outlets across

and other African countries and Europe – Ghana (52 branches), Rwanda (7 branches), Zambia (8 branches),

Gambia (6 branches), Democratic Republic of Congo (8 branches), Sierra Leone (4 branches) and the United

Kingdom (3 branches). This is in addition to four representative offices located in the United Arab Emirates,

India, Lebanon and China. The Bank also has an offshore Special Purpose Vehicle - Access Finance BV-

established for the issuance of Eurobonds.

Access Bank, following the recent merger, now has 3,177 Automated Teller Machines (ATMs) and 38,028 point

of sale (POS) terminals deployed across all operational regions. The Bank also maintains other electronic

banking channels and products such as USSD banking (*901#), virtual banker/chatbot (Tamara), virtual card,

PayWithCapture (Ondigo), PayDayLoan Application, Mobile Banking, Internet Banking, among others.

Access Bank’s head office is located at 999C Danmole Street, Victoria Island, Lagos, Nigeria.

5



THE ISSUE The Issue is a ₦30 billion 7-year Fixed Rate Subordinated Unsecured Bond Due in 2026, but callable after 5

years. The call feature is subject to regulatory approval and a notice period. According to the Issue Prospectus,

the Issuer shall be entitled on any date after 5 years following the Issue Date, to redeem the Bonds upon giving

the Trustees between 30 - 60 days notice of its intention to do so. The Bonds are direct, unsecured subordinated

obligations of Access Bank Plc and rank pari passu without preference among themselves as well as all claims

of holders of subordinated indebtedness of the Bank. However, in the event of a wind-up of the Issuer’s

business, claims of the Trustees and the bondholders for payment of principal and interest in respect of this

Issue, will be junior to the unsubordinated financial indebtedness of the Issuer. Subscription to the Issue would

be a minimum of ₦10 million (10,000 units at ₦1,000 per unit) and multiples of ₦1 million (1,000 units at

₦1,000 per unit) subsequently.

The coupon rate is expected to be determined through a book building process to qualified institutional

investors and high net worth individuals. However, the Issuer does not anticipate that this will exceed 200bps

above similar tenored government securities.

In addition, applications to dual-list on the Nigerian Stock Exchange and the FMDQ OTC Plc Securities

Exchange platforms are expected to be made.

Purpose of the Issue

Net proceeds of the Issue will be used to further shore up the Bank’s capital following the merger with Diamond

Bank Plc in Q1 2019.

Terms and Source of Repayment

The repayment of the coupon and principal will be fully supported by the Issuer – Access Bank Plc. via a Deed

of Undertaking between the Issuer and the Joint Trustees, on behalf of the Bondholders. Interest payments (in

arrears) as well as principal will be redeemed from the operational cash flows and gross interest revenues of

the Issuer. The principal amount of the Bonds shall be repaid at par, together with any outstanding interest

accrued thereon as a single and complete repayment on the relevant Payment Date, up until the Maturity Date

in accordance with the provisions of the Issue Prospectus and the Trust Deed. The Interest will accrue from

the issue date while interest payments shall be due and payable every 6th and 12th month after the first

interest payment date, up to and including the Call or Maturity Date.

Covenants & Guarantees

During the tenor of the Bond, the Issuer covenants that at all times the notes will rank at least equally with all

other unsecured and subordinated indebtedness and monetary obligations of the Issuer, present and future.

6



Furthermore, according to the Trust Deed, the Issuer covenants with the Trustees that it will, in accordance

with this Deed, at least three (3) Business Days before the Maturity Date, or on such earlier date as the Bonds

may become due and repayable thereunder, pay or procure to be paid unconditionally, or to the order of the

Trustees from immediately available funds, the Principal Amount repayable on that date.

Trustees to the Issue

Coronation Trustees Limited and Stanbic IBTC Trustees Limited have been appointed as Joint Trustees to the

Issue.

In line with the Trustee Investment Act of 1962, trust assets held are duly separated from the accounts of the

Trustees such that trust continues to exist even if the Trustee goes into liquidation. The Securities and

Exchange Commission is also empowered to periodically monitor the activities of Coronation Trustees Limited

and Stanbic IBTC Trustees Limited, hence providing an independent check on these entities.

Coronation Trustees Limited is a wholly owned subsidiary of Coronation Merchant Bank Limited and is

registered at the Securities and Exchange Commission as a trust service provider. Coronation Trustees Limited

develops trust products tailored to meet a range of market and transactional needs. The Trustee’s registered

office is located at 10 Amodu Ojikutu Street, Victoria Island, Lagos.

Stanbic IBTC Trustees Limited is a wholly owned subsidiary of Stanbic ITBC Holding Plc and was registered by

the Securities and Exchange Commission in 2009. Stanbic IBTC Trustees specialise in estate planning and

administration services for high net worth individuals and offers corporate/institutional trust services. The

Trustee’s registered office is located at IBTC Place, Walter Carrington Crescent, Victoria Island, Lagos while its

principal place of business is The Wealth House, Plot 1678 Olakunle Bakare Close, Off Sanusi Fafunwa Street,

Victoria Island, Lagos, Nigeria.

7



REVIEW OF FINANCIAL CONDITION

We have analysed the financial condition of the Issuer - Access Bank Plc using audited financial indicators for the

year ended 31 December 2018, audited financial indicators for Diamond Bank Plc also for the year ended 31

December 2018, as well as unaudited financial performance indicators for the three months to 31 March 2019 given

the merger with Diamond Bank Plc effective 19 March 2019. However, the income statement for the three months

to 31 March 2019 is based solely on the performance of Access Bank alone in line with IFRS 3 (Business Combination).

An expanding asset base

Access Bank Plc’s asset structure as at 31 December 2018 was in line with its medium-term strategy to position

it as the largest banking group in Nigeria. Concurrently, total assets and contingents grew by 13.7% year-on-

year to ₦4.3 trillion as at 31 December 2018, outpacing performance recorded by select industry peers GTBank

Plc (3.5% contraction) and Zenith Bank Plc (0.4% growth). The Bank’s asset base has expanded by a compound

annual growth rate of 14.5% over the last 5 years to 31 December 2018. The bulk of assets were liquid assets

(comprising government securities and money market placement) and loans & advances, collectively

accounting for 67.7% of total assets and contingents. Subsequent to year-end, and following the merger with

Diamond Bank Plc, the Bank’s asset base with contingents as at 31 March 2019 amounted to ₦6.2 trillion, with

liquid assets of ₦1.8 trillion accounting for 28.5%, and gross loans and advances of ₦2.6 trillion accounting

for 42.4%.

Asset creation historically skewed towards corporate entities

The Bank’s asset creation strategy has jointly leveraged on favourable yields on government securities as well

as lending skewed towards corporate customers. As at 31 December 2018, gross loans and advances to

individuals accounted for just ₦37.3 billion of the Bank’s loan portfolio compared with ₦1.7 trillion in loans

and advances to corporate entities and institutions. The Bank’s relatively low penetration in the retail space is

one of its key drivers of the merger with Diamond Bank, in view of Diamond’s good retail franchise. Following

the merger, unaudited financial statements indicate that loans to individuals trended up to ₦85.4 billion while

loans to corporate entities still dominated the Bank’s loan portfolio at ₦2.4 trillion, considering Diamond

Bank’s loan portfolio which totalled ₦787.8 billion as at year-end 2018.

Examining lending activity by sector, Access Bank’s exposures as at 31 December 2018 were largely to obligors

in the Oil & Gas, General Commerce, Real Estate & Construction and Manufacturing sectors, as well as

Government entities. Cumulatively, Oil & Gas exposures-downstream, upstream, services and refining

accounted for 29.0% with all the sub-segments growing year on year, with the exception of lending to the

refining and downstream sub-segments. Oil & Gas downstream obligors have suffered constrained repayment

ability from cost unreflective pump prices of petroleum products, particularly Premium Motor Spirit

(PMS/Petrol), though promissory notes issued by the Federal Government in December 2019 in respect of

subsidies owed, have enabled some obligors paydown on obligations against these discounted notes. Although

the Bank’s exposure to the Oil and Gas sector at 29% is low compared to peers, we believe there is

concentration to this sector as it represents 113% of shareholders’ funds as at 31 December 2018.

8



Notable growth was seen in lending to real estate obligors in view of the existing level of exposure to this

sector accounting for 11.2% of the Bank’s loan portfolio. Given tepid real estate activity, we are cautious about

further exposures to this segment. Loans to government entities continued to stand prominent at 13.2% of the

Bank’s loan portfolio. We understand that is in respect of various schemes and bailout programmes for State

Government and that the underlying credit risk continues to be moderated by commitments of the Federal

Government and the Central Bank of Nigeria.

Figure 1: Access Bank Plc Breakdown of Gross Loans (FY 2018)

Subsequent to year-end 2018 and following the merger, lending to the oil & gas sector continued to dominate

the Bank’s loan book accounting for 33.7% and 168.6% of shareholders’ funds as at 31 March 2019.

Figure 2: Access Bank Plc Breakdown of Gross Loans (Q1 2019)

Agriculture

0.9%

Construction

8.2%

Finance and

Insurance

1.2%General

4.0%

General Commerce

11.2%

Government

13.2%Information and

Communication

3.1%

Other

manufacturing

(Industries)

3.4%

Cement

1.3%

Conglomerate

2.1%

Food

Manufacturing

0.6%

Steel Rolling Mills

4.5%

Oil & Gas

Downstream

4.9%

Oil & Gas

Services

14.1%

Oil & Gas

Upstream

8.1%Crude Oil Refining

1.9%

Real

Estate

11.2%

Transport and

Storage

4.0%

Power and Energy

0.5%Others

0.5%

Agriculture

1.7%

Construction

6.9%Finance and

Insurance

5.9%

General

4.5%General Commerce

9.6%

Government

8.7%Information and

Communication

2.7%

Manufacturing -

Others

3.0%

Cement

1.2%

Conglomerate

2.3%

Steel

Rolling

Mills

4.6%

Food

Manufacturing

1.2%

Oil and Gas -

Downstream

6.0% Oil and Gas

Services

15.1%

Oil And Gas -

Upstream

10.8%

Oil and Gas -

Refinery

1.8%

Real Estate

Activities

6.8%

Transportation

and Storage

2.8%

Power

and

energy

3.0%

Others

0.6%

9



Inherited impaired exposures

Following merger with Diamond Bank Plc, the Bank’s stage 3 classified lifetime ECL impaired exposure totalled

₦285.0 billion in Q1 2018, significantly above the ₦44.1 billion reported as at 31 December 2018, and largely

comprised exposures to the power & energy and oil & gas services sectors. Thus, Access Bank’s non-performing

loan (NPL) ratio trended up from 2.4% as at year-end to 10.9% in Q1 2019, owing to Diamond Bank’s impaired

exposures. At this level of impaired credits, NPL ratio, stood at double the 5% maximum regulatory threshold

and higher than its peers; Zenith Bank and GTBank at 4.8% and 7.2% respectively.

Figure 3: Breakdown of non-performing loans by sector (Q1 2019)

Cumulative loan loss provision was however sufficient to cover 82.7% of impaired loans, which we consider

acceptable.

Figure 4: NPL and Coverage Ratios (FYE 2016- Q1 2019)

In our opinion, Access Bank’s stand-alone asset quality is satisfactory. When we consider the merger with

Diamond Bank, we note asset quality parameters such as the non-performing loan ratio and coverage have

Agriculture1.4%

Construction2.3%

Education0.1%

Finance and Insurance1.6%General

3.8%General

Commerce6.7%

Information and Communication

0.3%

Manufacturing - Others1.9%

Steel Rolling Mills4.0%

Oil and Gas -Downstream

11.2%

Oil and Gas Services30.7%

Oil And Gas - Upstream11.9%

Real Estate Activities0.4%

Transportation and Storage

0.6%Power and energy

22.9%

Others0.1%

96

.0%

68

.3% 1

75

.2%

82

.7%

1.8

%

4.3

%

2.4

%

10

.9%

0.0%

50.0%

100.0%

150.0%

200.0%

F Y 2 0 1 6 F Y 2 0 1 7 F Y 2 0 1 8 Q 1 2 0 1 9

0.0%

5.0%

10.0%

15.0%

Coverage Non-Performing Loan Ratio

10



deteriorated. The Bank’s post-merger NPL ratio is expected to remain somewhat elevated in the short term as

the Bank works through restructurings, write-offs and recoveries. In Q1 2019, approximately ₦61 billion was

written-off, while about ₦4 billion had been recovered. In our opinion, given the operating terrain of Nigeria,

recovery efforts are typically arduous tasks, strewn with prolonged litigation proceedings and sub-par

realisable value of non-cash collateral.

We consider Access Bank’s asset quality satisfactory, given the merger with Diamond Bank, but positively view

efforts to clean-up the combined entity’s exposures and preserve further impacts on capital. Whilst proceeds

of the Issue are not yet earmarked to be matched with specific assets, the Bank continues to prioritise returns

and credit risk.

Strong topline upholds earnings profile

Access Bank Plc’s earnings profile has remained good over the years. Interest income for the 2018 financial

year amounted to ₦313.1 billion, a strong 14.0% growth over prior year, largely driven by interest income on

loans and advances, which accounted for 72.0% of interest income, despite a decline in the overall size of the

Bank’s loan portfolio year on year. This speaks to a focus on multiple cycle trade transactions which dominated

the industry in the period. Such cycles were seen in movements in the general commerce and overall

commercial banking portfolio over the review period. Examining the Bank’s operating segments, we note that

commercial banking operations particularly contributed to earnings, accounting for 42.9% of interest income

in the 2018 financial year. Retail earnings contributed the least in view of the low level of participation in the

retail space up until the merger with Diamond Bank in Q1 2019.

Access Bank’s interest expenses trended up by 29.2% to ₦184.9 billion in 2018. Despite a lower interest rate

environment in 2018 compared with 2017, this growth was on account of a year-on-year rise in tenured

deposits mobilised from customers, as well as interbank takings. Interest expense on interbank takings more

than doubled to ₦36.6 billion in 2018, while interest expenses on customer deposits grew by 30.3% to ₦106.0

billion in 2018. Thus, Access Bank’s net interest spread1 (NIS) deteriorated somewhat in 2018 to 41.0% (FY2017:

47.9%), reflecting high funding costs. Access Bank’s NIS has typically been below its peers on account of

elevated funding costs. We expect that following the merger, the strong pool of low-cost deposits mobilised

by the erstwhile Diamond Bank will enhance Access Bank’s net interest spread. The Issuer’s NIS for Q1 2019

stood at 46.6%, given an interest income of ₦94.7 billion against a ₦50 billion interest expense. This was

better than Q1 2018 performance which yielded a spread of 42.6%.

Stable fee and commission income support gross earnings

Earnings diversity has improved with non-interest income accounting for 48.9% of net earnings. Despite a

₦31.2 billion foreign exchange revaluation loss, Access Bank’s net non-interest income amounted to ₦113.6

1 Net Interest Spread is calculated as the difference between interest income and interest expense for a period as a percentage

of interest income.

11



billion as at 31 December 2018. Earnings from credit related fees as well as from fixed income derivatives

however moderated the impact of this FX loss on auxiliary income. We further note that Access Bank’s e-

business services is gaining some traction with e-business income and commissions on virtual products

totalling ₦10.9 billion versus associated e-banking expenses totalled ₦8.2 billion, translating to an e-banking

margin of approximately 25%. In addition, Diamond Bank’s historically strong income from fees charged for

miscellaneous services, including a broad e-banking platform and short-term credit facilities, is expected to

boost auxiliary income of the combined entity.

A moderated cost profile further bolsters profitability

Access Bank was able to rein its operating expenses in 2018 despite increased operating activity, particularly

following announcement of the proposed merger in Q4 2018. Operating expenses declined by 3.0% year-on-

year to ₦155.8 billion in 2018, with staff costs accounting for 25.9% and other miscellaneous administrative

and business expenses including banking sector resolution cost (AMCON and NDIC premium) accounting for

the remainder of 74.1%. The Bank’s cost to income ratio (CIR) thus moderated to 67.4% (FY2017: 71.2%).

Nonetheless, CIR remained above the industry average of 60.3% for the same period, above peer GTBank Plc

who reported a CIR of 33.1% in 2018 and above Zenith with a CIR of 50.8%. The Bank’s recurring earning power

of 2.0% measured in pre-impairment operating profit to total assets and contingents, stood lower than peers

GTBank (6.2%) and Zenith (3.6%).

Nonetheless, Access Bank posted a ₦75.2 billion pre-tax profit for 2018, 15.5% better than the pre-tax profit

of ₦65.1 billion reported in 2017. Profitability ratios pre-tax returns on average assets and average equity also

improved marginally to 1.9% and 17.2% respectively (FY2017 – ROA: 1.8%, ROE: 15.3%), though remaining

below most of its Tier 1 peers.

Subsequent to year-end and subsequent to the merger with Diamond Bank, unaudited financial results for the

quarter ended 31 March 2019 indicate improved efficiency with a net interest spread of 46.6% and an improved

cost to income ratio of 58.0%. Furthermore, with a pre-tax profit of ₦33.7 billion for the three months, and

despite a larger asset base, annualised returns on average assets an equity also improved to 2.6% and 28.0%

respectively for Q1 2019 (Q1 2018 – ROA: 2.2% and ROE: 18.5%).

Figure 5: Efficiency and Profitability Ratios FY 2016 – Q1 2019

55

%

48

%

41

% 47

%

73

%

66

%

64

% 71

%

67

%

58

%

33

%

51

%

3%

2%

2% 3% 6

%

3%

20

%

15

%

17

%

28

% 35

%

28

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

AccessFY 2016

AccessFY 2017

AccessFY 2018

AccessQ1 2019

GTBankFY 2018

ZenithFY 2018

NIS CIR Pre-tax ROA Pre-tax ROE

12



We consider Access Bank’s profitability to be good, upheld by a continued strong earnings profile. Given the

addition of lower cost retail deposits to its liability profile, we expect the Bank’s net interest spread to improve

though moderated by Eurobond obligations maturing in 2019. This is alongside moderating operating

expenses, further boosting profitability. Going forward, we expect Access Bank to embark on various

restructuring exercise to fully run the merged entity. This would entail streamlining branches and staff

rationalisation to enhance operational efficiency. We believe the Bank’s CIR will remain high in the near term,

compared to peers.

Adequate capitalisation for current business risks

Access Bank’s core capital amounted to ₦447.4 billion as at 31 December 2018, excluding revaluation reserves

and ₦517.7 billion as at 31 March 2019, following combination with Diamond Bank Plc. Core capital stood

well above the ₦50 billion regulatory minimum for Nigerian banks with international operating licences.

Revenue reserves accounted for a third of core capital. The Bank’s retention ratio2 stood good at 12.2% of core

capital for the year to 31 December 2018 and 5.9% for the three months to 31 March 2019. Given growth in

risk weighted assets as well as asset quality challenges owing to the merger, the Bank’s IFRS 9 full impact

capital adequacy ratio in line with Basel II Accords stood at 16.21% as at 31 December 2018 (FY2017: 18.18%)

and 16.24% as at 31 March 2019. Though CAR stood below peers, it remained above the regulatory minimum

of 15% for internationally licenced commercial banks.

We note that subsequent to year-end, Access Bank raised $162.5 million (approximately ₦59.1 billion) in Tier

2 capital from a syndication of financial institutions. Thus, Tier 2 capital amounted to ₦56.5 billion as at 31

March 2019 after backing out a revaluation deficit of ₦2.6 billion. We believe the proposed issue of ₦30 billion,

qualifying as Tier 2 capital, will improve the Bank’s capitalisation ratio vis-a-vis the current level of risk

weighted assets and inherited impaired exposures by at least 100bps.

Figure 6: Core Capital (₦ billions) and CAR (FYE 2016 - Q1 2019)

In our opinion, Access Bank’s capitalisation is just adequate for current business risks, and we note that capital

may come under further pressure in the near term given the resolution of impaired loans in the merged

Diamond Bank.

2 Retention ratio – retained earnings for the year after dividend payments as a percentage of core capital

41

9

43

0

44

7 51

8

19.5% 18.2% 16.2% 16.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0

200

400

600

FY 2016 FY 2017 FY 2018 Q1 2019Core Capital CAR

13



Funding profile expected to improve post-merger

Access Bank Plc’s operations have been predominantly funded through deposit liabilities sufficient to fund

61.8% of total assets and contingents as at FYE 2018 and 66.2% as at 31 March 2018. With a leaning towards

corporate entities and institutions, the Bank has in recent years attempted to drive its retail banking business.

As at 31 December 2018, total deposit liabilities amounted to ₦2.7 trillion trending up to ₦4.1 trillion at the

end of Q1 2019 and subsequent to the merger with Diamond Bank Plc. We note that Access Bank has over the

last two years been somewhat active in the local and foreign currency interbank market in order to manage

liquidity pressures and support customer FCY demands. Deposits from financial institutions amounted to

₦616.6 billion as at 31 December 2018, further trending up to ₦682.0 billion in Q1 2019, compared with

₦276.1 billion as at 31 December 2017. When we strip out deposits from financial institutions, total deposits

liabilities amounted to ₦2.1 trillion as at FYE 2018 and ₦3.4 trillion as at 31 March 2019. Local currency

deposits accounted for approximately 68.6% while customer foreign currency balances accounted for 31.4%

as at 31 March 2019.

Access Bank’s deposit mix has over the years been in favour of high cost tenored deposits which accounted for

61.8% of LCY deposits (less interbank takings), with low cost demand and savings deposits accounting for only

38.2% of LCY deposits. (improving to about 42.2% in Q1 2019). This profile adversely kept the Bank’s weighted

average cost of funds (WACF) elevated with an estimated value of 5.9% for 2018 (FY2017: 5.2%). The Bank’s

WACF stood higher than peers GTBank’s estimated WACF of 3.9% and Zenith Bank’s of 2.9% for the same

period. Subsequent to year-end and the merger, owing to the acquired cheaper retail deposit pool thus

improving its deposit mix, WACF stood at 4.4%. The merger with Diamond Bank has significantly improved its

pool of low-cost deposits with particular emphases on savings account.

With investments in technology as well as the merger with Diamond Bank which managed a strong retail

banking franchise, retail participation is expected to improve markedly and aid Access Bank’s historically high

cost of funding.

Borrowings aid liability profile particularly in foreign currency

There continue to be mismatches in Access Bank’s loan/deposit labilities structure particularly with a maturity

profile above 3 months – customer deposits were not sufficient to fund loans with corresponding maturity

profiles above 3 months. Similarly, FCY denominated customer deposits only covered 51.4% of FCY loans, thus

some currency mismatch exists. We however note that borrowings provide a buffer in addition to behaviourally

longer-term deposits. Access Bank’s borrowings totalled ₦614.9 billion as at 31 December 2018, increasing to

₦833.3 billion as at 31 March 2019. Borrowings comprised tier II funding and trade finance facilities from

multilateral financial institutions (MFIs), the Central Bank of Nigeria and the international financial market, as

well as two Eurobonds totalling $600 million, with one inherited from Diamond Bank ($200 million) maturing

in 2019. Overall, foreign currency borrowings accounted for approximately 62.1% of total borrowings as at FYE

2018, while local currency borrowings accounted for the remainder of 37.9%.

14



Good liquidity position

The Bank’s liquid assets totalling ₦1.1 trillion as at 31 December 2018, grew by 28.3% year and further trended

up to ₦1.8 trillion as at 31 March 2019, largely in respect of government securities. Liquid assets (when we

back out interbank takings) stood at 66.8% of total LCY deposits as at 31 December 2018, improving in Q1

2019 to 73.1%. In the same vein, net loans to total LCY deposits stood at 44.8% (when we back out loans

funded by medium term borrowings) as at FYE 2018 and 56.3% at the end of Q1 2019.

In our opinion, Access Bank’s liquidity position is good and we consider the Bank’s ability to refinance to be

good leveraging on its brand and track record.

OWNERSHIP, MANAGEMENT & STAFF

In the 2018 financial year, Access Bank had a total of 807,321 shareholders with 928 being foreign and the

remainder domestic shareholders. Issued and paid up shares totaled 28.9 billion units. One shareholder –

Stanbic Nominees Nigeria Limited held 16.46% of shareholding in the period as custodian for various investors.

In addition, the Bank’s Board of Directors controlled approximately 5.3% of shareholding. Subsequent to year

end, issued and paid up shares totaled 35.5 billion as at 31 March 2018, augmented by the Diamond Bank

merger. Access Bank offered Diamond Bank shareholders 2 shared for every 7 held in the erstwhile institution

as well as ₦1 for every share held.

A 15-member Board of Directors governed Access Bank Plc in 2018 comprising seven (7) Executive Directors

including the Group Managing Director and the Group Deputy Managing Director, alongside 8 Non-Executive

Directors including four Independent Directors. The Bank’s Board is chaired by Mosun Belo-Olusoga while

Herbert Wigwe remains the Group Managing Director. During the year Mr Ade Bajomo was appointed as an

Executive Director in charge of Information Technology Operations, effective 04 January 2018. Subsequent to

year-end 2018, Titi Osuntoki, the Executive Director covering Business Banking, resigned her appointment with

the Bank. Subsequent to year-end, Mrs Chizoma Okoli was appointed Executive Director, Businesses Banking

in March 2019, in her stead. Prior to this appointment Mrs Okoli had been an Executive Director at Diamond

Bank since 2016. We expect further changes to the Bank’s Board and Management structure in the near term.

Access Bank’s Board operates through seven standing committees - Risk Management Committee, Audit

Committee, Governance and Nomination Committee, Remuneration Committee, Digital and Information

Technology Committee, Credit and Finance Committee and Technical Committee on Retail Expansion.

Supporting Board oversight functions are management committees - Management Credit Committee, Asset

and Liabilities Committee, Enterprise Risk Management Committee, the Operational Risk Management

Committee, the Criticised Assets Committee and the IT Steering Committee.

Access Bank employed an average of 3,399 persons in 2018, 12.8% more than the prior year, and had a staff

count of 7,486 persons as at 31 March 2018, including the personnel of the merged Diamond Bank. Staff cost

15



per employee for 2018 trended up marginally to ₦11.9 million while productivity was competitive - measured

in net earnings per staff, this improved year-on-year to ₦68.0 million. Net earnings per staff was sufficient to

cover staff costs per employee 5.7 times, above the industry average of 4.7 times but lower than peers GTBank

(9.3 times) and Zenith (6.7 times). The staff of Diamond Bank have been integrated into Access Bank. The staff

of Diamond Bank have been integrated into Access Bank. We believe that the ability to retain these personnel

remains to be seen, given the antecedence with its prior merger.

We consider Access Banks Plc’s staff productivity to be good. Nonetheless, we expect staff costs from both

retained staff of Diamond Bank and severance payouts to however impact operating expenses in the short

term.

MARKET SHARE Access Bank in 2017 disclosed a 5-year medium term plan (2018-2022) which is aimed at positioning it as the

largest banking group in Nigeria with robust capitalisation and globally acceptable governance structure.

Placing itself on an even firmer footing within the Tier 1 category, Access Bank merged with Diamond Bank

Plc in Q1 2019 adding over ₦1 trillion in customer deposits to its portfolio and vying for the position of largest

bank in Nigeria with an asset base of ₦6.2 trillion as at 31 March 2019.

Market share of LCY deposits (exclusive interbank takings) is now estimated at 12.12% with a net loan market

share of approximately 14.9%.

Table 2: Market Share Indicators

Access Bank

FY 2017

Access Bank

FY 2018

Access Bank

Q1 2019

GTBank

FY 2018

Zenith Bank

FY 2018

Total Assets & Contingents 10.2% 10.7% 14.0% 7.7% 14.2%

LCY Deposits 9.2% 9.9% 12.2% 8.4% 13.0%

Total Loans & Leases (net) 12.3% 12.3% 14.9% 7.4% 11.9%

We consider Access Bank’s market share strong and expect the Bank’s growth trajectory to subsist in the short-

medium term.

16



OUTLOOK Access Bank Plc’s performance over the years has been reflective of its expansion appetite, consequently we

have seen marked growth of its core intermediation business in terms of deposit liabilities, and the Bank’s loan

portfolio. The challenges faced by the Bank have largely bordered on cost of funding and operating expenses,

both elevated, and thus constraining margins vis a vis industry peers. More recently, asset quality challenges

following the merger with Diamond Bank Plc, alongside adoption of IFRS 9 principles have put some pressure

on capitalisation.

Our outlook is hinged on performance expectation of the combined Access Bank and Diamond Bank entity

following the March 2019 merger. We thus expect the following:

▪ Lower funding costs arising from a better distributed deposit mix in favour of low-cost demand and savings

deposits. This will support an uptick in the Bank’s net interest spread but is contingent on the ability of

the Bank to retain retail accounts acquired through the merger and grow same.

▪ Asset quality challenges will linger in the short-term as the merger is fully consummated, characterised

by restructurings, allocation of additional provisions as further write offs and recovery efforts are made.

▪ Overall profitability will remain good, albeit contingent on the Bank’s ability to sweat the current expanded

asset base and price appropriately.

Agusto & Co. hereby attaches a “stable” outlook to Access Bank Plc’s proposed ₦30 billion 7-year, fixed rate,

subordinated unsecured notes with the expectation that performance of the Issuer will uphold obligations

relating to the Issue.

17



FINANCIAL SUMMARY

18



19



ACCESS BANK PLC UNAUDITED

KEY RATIOS CONT'D 31-Mar-19 31-Dec-18 31-Dec-17

ASSET QUALITY

76 Performing loans (₦'000) 2,333,333,759 1,815,967,414 1,846,546,202

77 Non-performing loans (₦'000) 284,959,869 44,143,720 82,496,445

78 Impaired Credits/Total loans - Gross 10.9% 2.4% 4.3%

79 Loan loss provision/Total loans - Gross 9.0% 4.2% 2.9%

80 Loan loss provision/Non-performing loans 82.7% 175.2% 68.3%

81 Risk-weighted assets/Total assets & contingents 50.6% 53.9% 61.7%

CAPITAL ADEQUACY

82 Adjusted capital/risk weighted assets 13.1% 13.8% 19.2%

83 Tier 1 capital/Adjusted capital 117% 137% 94%

84 Total loans - net/Adjusted capital (Times) 17% 18% 24%

85 Capital unimpaired by losses (₦'000) 517,246,980 447,401,183 429,971,253

CAPITAL ADEQUACY STRESS TEST

86 Total shareholders' funds (N'000) 410,106,794 321,365,064 450,902,188

87 Cumulative loan loss provision (actual reserves) 235,566,487 77,356,156 56,330,908

88 Equity before all provision (line 86 + line 87) 645,673,281 398,721,220 507,233,096

89 Required reserves** 433,882,102 159,271,958 194,811,071

90 Equity after required reserves (line 88 - line 89) 211,791,179 239,449,262 312,422,025

91 Equity after required reserves/risk weighted assets 6.8% 13.4% 13.3%

STAFF INFORMATION

86 Net earnings per staff (₦'000) 10,724 67,987 74,968

87 Staff cost per employee (₦'000) 1,165 11,893 13,864

88 Staff costs/Operating expenses 18.7% 25.9% 26.0%

89 Average number of employees 7,486 3,399 3,013

90 Average staff per branch 13 11 10

OTHER KEY INFORMATION

91 Legal lending limit(₦'000) 103,449,396 89,480,237 85,994,251

92 Other unamortised losses(₦'000) NONE NONE NONE

93 Unreconciled inter-branch items (₦'000) DR/(CR) NONE NONE NONE

94 Number of branches 589 314 314

95 Age (in years) 31 30 29

96 Government stake in equity - - -

Estimate Estimate Actual

MARKET SHARE OF INDUSTRY TOTAL 2019 2018 2017

97 Lcy deposits (excluding interbank takings) 12.1% 9.9% 10.6%

98 Total assets & contingents 14.0% 10.7% 10.9%

99 Total loans & leases - net 14.9% 12.3% 14.1%100 Net earnings 8.5% 10.8% 10.8%

101 Profit before tax 2.7% 6.9% 9.1%

102 Cash dividend 8.2% 8.9%

100 Non Interest Income 3.0% 10.5% 12.7%

101 Net Interest Income 1.9% 6.4% 7.8%

*Annualised for unaudited income statement for the 3 months to 31 March 2019

*: **This is calculated as 100% of non-performing loans, 5% of performing loans (including direct credit substitutes disclosed

as contingent assets) and 1% for all other assets excluding cash, federal government obligations, placements with

discount houses and balances at CBN.

20



RATING DEFINITIONS

The first four categories of ratings are investment grade while the last four ratings are speculative grade. The ratings from Aa to C may be modified by the addition of a plus or minus sign to show relative standing within the category.

Aaa Bonds rated ‘Aaa’ are judged to offer highest safety of timely payment of interest and

principal. Though the circumstances providing this degree of safety are likely to change,

such changes as can be envisaged are most unlikely to affect adversely the

fundamentally strong position of such issues.

Aa Bonds rated ‘Aa’ are judged to offer high safety of timely payment of interest and

principal. They differ in safety from ‘Aaa’ issues only marginally.

A Bonds rated ‘A’ are judged to offer adequate safety of timely payment of interest and

principal; however, changes in circumstances can adversely affect such issues more than

those in the higher rated categories.

Bbb Bonds rated ‘Bbb’ are judged to offer sufficient safety of timely payment of interest and

principal for the present; however, changing circumstances are more likely to lead to a

weakened capacity to pay interest and repay principal than for bonds in higher rated

categories.

Bb Bonds rated ‘Bb’ are judged to carry inadequate safety of timely payment of interest and

principal; while they are less susceptible to default than other speculative grade bonds

in the immediate future, the uncertainties that the issuer faces could lead to in

adequate capacity to make timely interest and principal payments.

B Bonds rated ‘B’ are judged to have greater susceptibility to default; while currently

interest and principal payments are met, adverse business or economic conditions

would lead to lack of ability or willingness to pay interest or principal.

C Bonds rated ‘C’ are judged to have factors present that make them vulnerable to default;

timely payment of interest and principal is possible only if favourable circumstances

continue.

D Bonds rated ‘D’ are in default and in arrears of interest and principal payments or are

expected to default on maturity. Such bonds are extremely speculative and returns from

these bonds may be realized only on reorganization or liquidation.

www.agusto.com

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Nigeria.

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Access Bank Plc - FMDQ Group€¦ · The copyright of this document is reserved by Agusto & Co. Limited. ... (following the merger of Access Bank Plc with Diamond Bank Plc) , five