Access Bank H1 2015 Result Commentary: This is interesting...

Dear Africa Interested Individuals:

                                                        Access Bank Group has just released its half-year 2015 cumulative result.  Find below my major observations and summarized conclusion.  

I commend Access Bank for the detail provided in how the bank runs its business.  

As I have mentioned in the past banks are free to determine which loans in their portfolio are deemed to have been impaired.  The policy of Access Bank ( in my opinion) makes it harder for loans to be classified as impaired even after the borrower has defaulted on payments.  Non-performing loans ratio came in at 2% and non-performing loans are just 1.1% of total assets.  This is commendable.  My statement is not as a result of the improving asset quality which is also low on an absolute basis.  You will understand better once I am done.  

The auditing firm did not provide an "identification assurance' to the financial statement in my opinion.  The opinion provided is abstract in nature and not exact.  Let me quote for you to buttress my point: "In our opinion the accompanying financial statements give a true and fair view of the state of the financial affairs as at 30 June 2015."  State of financial affairs of what or whom?  It is supposed to state the name of the bank or at the very least "the bank."   

What we know loosely as the balance sheet is labelled as the statement of financial position and what we know loosely as the income statement (profit & loss) is labelled as the statement of comprehensive income.  When the auditor in question typically gives its report it uses the labelled terms and not the loose terms of balance sheet and profit & loss.  In the case of Access Bank H1 2015, the auditor opted for the loose terms and not the labelled terms as expected.  In addition, the auditor did not categorically state as expected that "the statement of changes in equity are in agreement with the books of account."  These changes and omissions are not minor in my opinion and should raise valid concerns to the discerning investor.  Let us move on to other interesting things.  

Access Bank may likely win the award for the best deposit raising bank in Nigeria over the first half of 2015.  The bank increased its deposit base by approximately $1.1Billion over the first six months of 2015.  Net loans increased $786.7m and gross loans increased $818.5m ($472m to banks and $346.5m to customers)over the same period.  Three quarters of its additional deposits were disbursed in the form of loans during H1 2015.  Access Bank was very aggressive about lending and sourcing the deposits to fund the lending.  Banks are created to lend so this should be a welcome development.  So who did Access Bank lend to?

Access Bank gave out gross loan amounts to other banks 36% more than loans to customers and 50% more on a net loan basis. The equivalent of 25% of gross loans disbursed during H1 2015 were reflected as impaired compared to 18% for Zenith Bank over the same period whose net loans disbursed were more at $882m compared to Access Bank at $786.7m.    The percentage interest income Access Bank received on its loans after increasing net loans by $786.7m was 5.96% (H1 2014: 5.44%) compared to 6.78% for Zenith Bank over the same period whose net loans disbursed was 12% higher than Access Bank over the same period.  Zenith Bank's gross loan to deposits is approximately 75% while that of Access Bank is 73%.  Access Bank was able able to achieve a positive loan-value added (unlike Zenith & First Bank) of 0.2% because of its low non-performing loans.  The loan-value added regressed 89 basis points over the past six months (lower than First & Zenith Bank.)  Let us look at interest on deposits and loans as the story unfolds.  

Interest expense (borrowings and deposits) reflected on the income statement tallies with what was actually paid.  I cannot say the same for interest income.  Interest income as stated on the income statement is $24.3m (N4.85B) more than what Access Bank actually received in interest.  After adjusting interest income to reflect actual receipts, interest expense relative to interest income for H1 2015 was 54%.  This reflects the expensive nature on average of the deposits sourced by Access Bank during H1 2015 for lending purposes.  Interest income increased by approximately $83m while interest expense increased by $79.3m from H1 2014 - 2015.  This is a differential of just 5%.  

Interest income accrued on impaired assets for Access Bank is 5X that of Zenith Bank whose net loans are about 60% more than that of Access Bank.  Once again, another sign reflects that booking of interest income was aggressively pursued.

Access Bank got deposits of $1.1B because it needed it badly and was willing to pay a premium to get it.  Deposits typically flock to where returns are higher and this on average was Access Bank.  The bank has not yet gotten the benefit it anticipated from its increased lending sourced from relatively expensive deposits.  The interest payments on loans are not coming in a significant proportion in comparison to the increased lending.  From my analyses, the aggressive lending was in my opinion carried out (beyond the obvious) to reduce the impact of declining loan interest payments on loans disbursed prior to January 1st, 2015 and the benefit (beyond good asset quality numbers) has not yet come to fruition.  Non interest income was 43% higher than Net Interest Income pre-impairment charge.         

In terms of non-interest income, transactional activity actually declined year-on-year, while expenses incurred were 12X higher than as at H1 2014.  Non-interest income got a significant boost from mark-to-market gains on derivative financial instruments.  The H1 2015 figure for derivatives was approximately 20X more than the H1 2014 figure.  The increase in derivative investments year-on-year is equivalent to 90% of pre-tax income for H1 2015.  This is the reason why non-interest income is 43% higher than pre-impairment net interest income despite the drop in transaction activity and increased transaction expense.  

Access Bank received $209m from its equity rights issue embarked upon in Q1 2015. This will bring its financial leverage down to 7X from 8X and align its leverage with that of Zenith Bank.  Access Bank increased its outstanding debt by $67.1m over the first six months of 2015.  Using my debt quality of utilization formula, Access Bank debt utilization quality score declined by 12 basis points over the past six months.  Debt to capital (after addition of fresh equity of $209m) will reduce to 40.5% which still exceeds my safety threshold for banks of 30%; after this point, debt becomes more of a liability than an asset.  

Access Bank needs to work harder on its operational efficiency.  Operating expenses relative to its earnings is 26.3% (improved from 27.1% a year earlier) compared to "struggling" First Bank at 23.7% and Zenith Bank at 20.2%.  

After factoring in the fresh equity, Access Bank is trading at 0.3X book which is even lower than First Bank at 0.4X.  The bank impaired 35% of its non-performing loans on its income statement which is acceptable and equates with First Bank.   

In conclusion, Access Bank was driven to increase its profit and pursued fresh expensive (given the liquidity tightening within the economy) deposits aggressively and gave out the funds with similar aggression (75% of fresh deposits were disbursed as loans during H1 2015.)  I believe the bank will be number one in terms of increase in deposit base over the first six months of 2015 after all banks release their H1 2015 earnings.  The payments on loans disbursed were not as successful as hoped with approximately N1.00 of every N4.00 disbursed being impaired by implication.  This is higher than Zenith Bank whose net loans six months increase is 12% more than that of Access Bank.  

The bank did not earn enough interest income in my opinion for a bank with a 2% NPL ratio.  Fair value unrealized gain on derivatives came to the rescue and this led to a 39% increase in profit attributable to shareholders year-on-year.  Non-interest income also exceeded net interest income pre-impairment by 43%.  Transaction activity slowed which further put strains on profit making outlets.  Real banking did not deliver for Access Bank in H1 2015; derivative financial instruments did.   Make what you want of that. 

I have to run.  GT Bank is up next.   

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