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Thursday, June 8, 2023

Access Bank a Strong Buy as Lender Projects ROE of 25%-30%

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Access Bank Plc, the largest lender by total assets in Africa’s most populous nation, says it will continue to convert its equity financing into profit and maximize returns for shareholders over next five years.

The lender that adopted a Holding Company structure last year said it expects the return on equity (ROE) to be at least between 25 percent and 30 percent by 2027, even as the industry is beset by a myriad of challenges, according to data glimpsed from its Corporation Strategy.

Analysts say the projections are tenable because the lender has been intensifying its digital platform and customer base to magnify earnings since it acquired Diamond Bank in 2019, in a deal that sent shock waves across the market.

For instance, the ROE increased to 17.70 percent as at nine months September 2022, from 13.60 percent as at December 2017.

Profit before tax (PBT) rose to N147 billion as at September 2022, from N80 billion in 2017, which represents a CAGR of 30 percent.

There has been steady growth across all income lines as strong and diversified revenue growth has been driven by: Expansive retail banking growth and increased velocity of transactions, Optimising value chain of wholesale banking customers, and Prioritizing margin growth through efficiencies.

It is important to note that the outlook for the bank is propitious as analysts have a positive prognosis about future earnings growth that is predicated on the recent diversification effort of the lender, given the recent acquisition of First Guarantee Pension PFA last year, in a move to diversify its revenue streams.

Analysts at research firm Chapel hill Denham in a recent estimate that Access could generate substantially more fees and commission income from the newly acquired PFA (First Guarantee’s asset under management)  than what accrued to the Access Pension Fund Custodian (PFC) in full year (FY) -21 (Operating income: N750.77 million).

The research team led by Tajudeen Ibrahim believes that Access Bank can leverage its large customer base (which stands at 52 million customers )to accelerate the asset under management (AUM) growth of the newly acquired PFA.

“This, in addition to the low retirement savings accounts (July 2022: 9.73mn RSA enrollees) which is a long stretch from where the potential is (total labour force of 64.5mn individuals as of 2021) provides ample opportunity for earnings growth over the medium to long term,” said the research team.

However, the lender operates in an environment beset by inflationary pressures, punitive regulatory environment, high regulatory costs, currency volatility.

While Nigeria’s headline inflation dropped to 21.34 per cent in December from the 21.47 per cent recorded in November, it is still the highest in 17 years.

Of course, the country’s cash reserve ratio (CRR) of 32.50 percent which is one of the highest in the world and capital requirements are preventing banks from growth spurts, although a high yield environment and revenue from internet banking are adding strength to earnings at the moment.

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