Rating Report ( 2019 ) - FMDQ Group€¦ · The rating assigned to Access Bank Plc Access Bank or WKH %DQN UHIOHFWV the %DQN V good profitability & liquidity, as well as an experienced

Access Bank Plc.

Rating Report (2019)

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2015 Developmental Financial Institution Rating Access Bank Plc

Access Bank Plc

Rating Assigned:

Aa-

A financial institution of very good financial condition and strong capacity to meet its

obligations as and when they fall due.

RATING RATIONALE The rating assigned to Access Bank Plc (‘Access Bank’ or ‘the Bank’) reflects the

Bank’s good profitability & liquidity, as well as an experienced and stable

management team. This is in addition to a good brand franchise, buoyed by strong

market share following the 2019 merger with Diamond Bank Plc, which lifted its

industry position within the Tier I bank category. Access Bank Plc’s performance

over the years has been reflective of a dedicated strategy to expand its scope of

offerings and become a global payments gateway, facilitating transactions not just

within Nigeria and across Africa, but between Africa and the rest of the world. This

appetite for expansion has spurred internal initiatives to grow the Bank’s business

both organically and through mergers & acquisitions.

The challenges faced by Access Bank have however largely bordered on funding

costs and operating expenses - both elevated, thus constraining margins vis a vis

industry peers. Having acquired scale, Access Bank needs to demonstrate efficiency,

particularly in view of its stronger pool of low-cost retail deposits. In addition, asset

quality challenges following the merger with Diamond Bank Plc, alongside the

adoption of IFRS 9 principles have also put some pressure on capitalisation.

Access Bank Plc’s total assets and contingents amounted to ₦4.3 trillion as at 31

December 2018, further trending up to ₦ 6.2 trillion as at 31 March 2019, due to

the recent merger. The Bank’s enhanced branch franchise now comprises 762

branches and service outlets across Nigeria and other African countries. This is in

addition to various digital banking initiatives, 3,177 Automated Teller Machines

(ATMs) and 38,028 point of sale (POS) terminals deployed across all operational

regions, driving its commercial and retail business. Access Bank’s asset base largely

comprised liquid assets (28.5%) and a loan portfolio of ₦2.6 trillion (42.4%) as at 31

March 2019 (FYE 2018: ₦1.9 trillion). As at 31 December 2018, asset quality

remained good with a non-performing loan ratio of 2.4%, despite some sectorial

concentration. However, subsequent to year-end 2018, the Bank’s asset quality

deteriorated with its non-performing loan ratio rising to 10.9% at the end of Q1

Outlook: Stable

Issue Date: 02 July 2019

Expiry Date: 30 June 2020

Previous Ratings: Aa-

Industry: Banking

Analysts:

Yomi Akinola

[email protected]

Yinka Adelekan

[email protected]

Agusto & Co. Limited

UBA House (5th Floor)

57, Marina

Lagos

Nigeria

www.agusto.com

2

The Bank of Industry Access Bank Plc

2019 Credit Rating

2019, owing to significant impairments in the erstwhile Diamond Bank’s loan

portfolio. Concerted efforts to recover, restructure or write off impaired loans, whilst

conservatively managing further exposures to high-risk segments - such as oil &

gas, are expected to drive improvements in asset quality over the next 6-18 months.

Funding asset creation is a pool of deposits which grew from ₦2.7 trillion as at 31

December 2018 to ₦4.1 trillion at the end of Q1 2019, with the acquisition of over

₦1 trillion of retail deposits from Diamond Bank. This is in addition to local and

foreign currency borrowings from Intervention Funds set up by the Central Bank of

Nigeria (in local currency) as well as Multilateral Financial Institutions (in foreign

currency) and Eurobond Issuances, all amounting to ₦833.3 billion as at 31 March

2019. Agusto & Co. considers the Bank’s ability to refinance to be good, leveraging

on its brand and track record. Enhancement of the Bank’s deposit mix has also

improved the level of funding costs to 4.4%, post-merger. We believe that staff

retention and culture integration will be instrumental to the Bank’s ability to retain

newly integrated customers, given the antecedent when Intercontinental Bank Plc

was acquired.

We further note that Access Bank’s capitalisation is just adequate for business risks,

as this has come under some pressure from post-merger asset quality challenges.

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

₦517.7 billion in Q1 2019. Core capital also stood well above the ₦50 billion

regulatory minimum for Nigerian banks with international operating licences. The

Bank’s capital adequacy ratio (IFRS 9 full-impact), in line with BASEL II accords,

however, stood at 16.21% as at 31 December 2018 and 16.24% as at 31 March 2019,

just above the regulatory minimum of 15% for internationally licensed banks.

With a good retention ratio (comprising retained earnings after dividend payments

as a percentage of core capital) of 12.2%, for the 2018 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 in 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. Efficiency ratios

are also improving with net interest spread of 46.6% as at 31 March 2019 (FY 2018:

41.0%) and a cost to income ratio of 58.0% also as at 31 March 2019 (FY 2018:

67.4%).

Based on the foregoing, we hereby assign an ‘Aa-’ rating to Access Bank Plc. with

the expectation that the Bank’s risk profile will be upheld by its financial condition

and strong capacity to meet its obligations as and when they fall due, in the near-

term.

3


2019 Credit Rating

Table 1: Background Information

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

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%

•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 non-performing loan level

Weaknesses

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

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

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

Challenges

4


2019 Credit Rating

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 a 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 wholesale banking &

growing retail banking, digital leadership, being a universal payment gateway, enhancing global collaboration

and analytics-driven insights & robust risk management and devoted 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. The Bank is currently using analytics with respect to footfall and

customer transactional patterns as instrumental to strategic decisions for branch rationalisation and customer

onboarding. Thus, some branch closures are expected in 2019 and 2020.

Following the recent merger, Access Bank 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 currently located at 999C Danmole Street, Victoria Island, Lagos, Nigeria.

5


2019 Credit Rating

Track Record of Financial Performance

As at 31 December 2018, Access Bank Plc’s total assets and contingents amounted to ₦4.3 trillion, having

grown at a compounded annual growth rate (CAGR) of 14.5% over the preceding 5-year period. Subsequent to

year-end and following the merger, the Bank’s asset base (including contingents) expanded to ₦6.2 trillion.

Gross loans and advances have also grown at a similar double-digit CAGR of 11.2% over the last 5 years,

standing at ₦1.9 trillion as at 31 December 2018 and ₦2.6 trillion subsequent to the merger in Q1 2019.

The Bank is licensed to operate internationally; thus, core capital (less revaluation reserves) significantly

exceeds the ₦50 billion regulatory minimum at ₦447.4 billion as at FYE2018 and ₦517.7 billion as at 31 March

2019. Furthermore, the Bank’s capital adequacy ratio of 16.2%, stood above the regulatory minimum of 15%

for internationally licensed commercial banks as at FYE2018 and the end of Q1 2019, following the adoption

of International Financial Reporting Standards 9 relating to classification of Financial Instruments, and

attendant charges made against capital. Also, over the 5 years, Access Bank Plc maintained a capital adequacy

ratio above 16%, continually upheld by retained earnings and Tier II capital till date.

Profitability indicators, pre-tax return on average assets and average equity for 2018 stood at 1.9% and 17.2%

respectively while annualised indicators for Q1 2019 show upticks to 2.6% and 28.0% respectively.

Subsidiaries

Ownership Interest Nature of Business

Access Bank Gambia Limited 88% Banking

Access Bank Sierra Leone Limited 97% Banking

Access Bank Rwanda Limited 75% Banking

Access Bank Zambia Limited 70% Banking

The Access Bank UK Limited 100% Banking

Access Bank Democratic Republic of Congo Limited 100% Banking

Access Bank Ghana Limited 93% Banking

Access Finance B.V 100% Banking

Restricted Share Performance Plan (RSPP) 100% Financial Services

Correspondent Banks

Access Bank Plc maintains correspondent banking relationships with the following global banks.

1. ABSA Capital/Barclays Bank 16. First Rand Bank

2. Access UK 17. ING

3. Bank of Beirut 18. JP Morgan

4. Bank of China 19. KBC Bank

5. Banque Libano 20. Mashreq Bank

6. British Arab Commercial Bank 21. Nordea

7. Byblos Bank 22. ODDO BHF

6


2019 Credit Rating

8. Citibank 23. Société Générale

9. Commerzbank 24. Standard Bank

10. Credit Agricole 25. Standard Chartered Bank

11. Credit Suisse Bank 26. Sumitomo Mitsui Banking Corporation

12. Danske 27. Svenska Handelsbanken

13. Deutsche Bank 28. UBS

14. First Abu Dhabi Bank 29. Unicredit

15. First Bank of Nigeria UK 30. United Bank for Africa New York

Technology

Access Bank Plc.’s business is technology-driven and the Bank looks to further leverage on digitalisation and

analytics to grow its business, enhance the customer experience, deepen market share and improve efficiency

ratios across all aspects of operations. Thus, a two-pronged approach has been adopted technology-wise –

automation of internal processes and digitalisation of the customer experience. This dual-approach is spelt

out in a new 5-year IT strategy bordering on the following points

▪ Digitalise fast & smart

▪ Seamless & unified payments solutions

▪ Best customer service

▪ Advanced analytics & Artificial Intelligence

▪ Strong security posture

▪ Best talent

▪ Modernised scalable infrastructure

The Bank uses a variety of top-of-the-range hardware to integrate various functions of the over 230

applications that have been deployed for day-to-day operations whilst providing adequate security for the

Bank’s ever-evolving operations. Oracle Flexcube Universal Banking System serves as the core banking

application for processing of transactions. Modules of Kastle Banking software are used for treasury and lending

activities while Axe Finance Credit Portal and Resolve CRM are also used in credit risk management activities.

The Bank uses FINTRAK for financial performance monitoring, whilst E-Procure is used to manage procurement

requests, approvals, purchase orders and deliveries and Process Maker is used to provide control on expenditure.

Electronic banking activities are supported with applications such as; CR2 Omni-channel Internet and Mobile

Solution, PayWithCapture Mobile Application, PrimusLite for SME collections, Remita, Payday Loan Solution,

*901#USSD Platform, ATM Monitoring Tool for real-time incidence monitoring and alerts, EGAIN for real-time

online conversations with customers, Ondigo Mobile Application and Radius Go Mobile Application.

Subsequent to year-end, and following the merger with Diamond Bank, the Bank has adopted a number of

applications and solutions from the erstwhile bank which provide strong business promotion synergies, in line

with the Bank’s strategy to grow its presence in the retail market. These include Diamond Webpay and Diamond

Pay facilitating card payments for web-based merchants and salary payments for corporates respectively.

Diamond Y’ellow is also still being used for opening accounts using MTN sim cards. The Bank has further chosen

to maintain the overall interface look and feel of the erstwhile Diamond Bank’s external banking applications

in the short term to ensure smooth customer transition.

7


2019 Credit Rating

Furthermore, Oracle Software and Microsoft SQL Servers are used for managing the database of Access Bank

Plc. The current enlarged Bank now has four data centres post-merger and expects to consolidate these in the

medium term. This is in addition to establishing a Digital Innovation Centre to house various technology-driven

initiatives. The Bank also partners with Africa Fintech Foundry, as well as other players in the Financial

Technology (FinTech) space for innovative digital products.

Looking ahead, Access Bank is expected to make additional IT investments in line with its medium-term

strategy across all its operational regions, on the following three fronts:

▪ Data and Communication – particularly in terms of bandwidth.

▪ Upgrade of hardware and equipment

▪ Enhanced Security

DIRECTORS DIRECT & INDIRECT

SHAREHOLDING (Dec 2018)

Mrs. Mosun Belo-Olusoga Chairman 0.012%

Mr. Herbert Wigwe Group Managing Director/CEO 4.983%

Mr. Roosevelt Ogbonna Group Deputy Managing Director 0.108%

Mr. Victor Etuokwu Executive Director, Retail Banking 0.058%

Mrs Titi Osuntoki* Executive Director, Business Banking 0.103%

Dr Gregory Jobome Executive Director/ Chief Risk Officer 0.026%

Ms Hadiza Ambursa Executive Director, Commercial Banking 0.030%

Mr. Adeolu Bajomo** Executive Director, IT &Operations Nil

Ms Chizoma Okoli*** Executive Director, Business Banking Nil

Mrs. Anthonia Ogunmefun Non-Executive Director 0.005%

Mr. Paul Usoro, SAN Non-Executive Director 0.004%

Mr. Abba Mamman Tor Habib Non-Executive Director Nil

Dr Ernest Ndukwe Independent Non-Executive Director 0.002%

Dr Ajoritsedere Awosika Independent Non-Executive Director Nil

Mr. Adeniyi Adekoya Independent Non-Executive Director Nil

Mr Iboroma Akpana Independent Non-Executive Director 0.001%

* Resigned effective 18 March 2019

**Appointed effective 04 January 2018

***Appointed effective 22 March 2019

8


2019 Credit Rating

MANAGEMENT TEAM

Mr. Herbert Wigwe was appointed the Group Managing Director/Chief Executive Officer (CEO) of Access Bank

Plc in January 2014. Prior to this appointment, he served as the Deputy Managing Director and has co-led the

transformation of Access Bank Plc since 2002. Mr. Wigwe was an Executive Director at Guaranty Trust Bank Plc

for 10 years before joining the Bank and started his career at Coopers & Lybrand Associates (now

PriceWaterhouseCoopers). He holds a Bachelor of Science (B.Sc) degree in Accounting from University of

Nigeria, Nsukka and Masters Degrees from University College of North Wales (Banking & International Finance)

and University of London (Financial Economics). He is an alumnus of Harvard Business School Executive

Management Programme and a Fellow of Institute of Chartered Accountants of Nigeria.

Mr. Roosevelt Ogbonna was appointed the Group Deputy Managing Director, effective April 2017. He joined

the Bank’s Board of Directors as an Executive Director heading the Commercial Banking Division in October

2013. Mr. Ogbonna has over two decades of banking experience spanning Treasury, Commercial and Corporate

Banking at Access Bank Plc and GTBank Plc. He is a graduate of the University of Nigeria, Nsukka where he

studied Banking and Finance and a Fellow of Institute of Chartered Accountants of Nigeria. Mr Ogbonna has

also attended various executive courses spanning leadership, credit and risk management.

Other members of Access Bank Plc’s Executive management team include;

Mr. Victor Etuokwu Executive Director, Retail Banking

Dr Gregory Jobome Executive Director/Chief Risk Officer

Ms Hadiza Ambursa Executive Director, Commercial Banking

Mr. Adeolu Bajomo Executive Director, IT & Operations

Ms Chizoma Okoli* Executive Director, Business Banking

*Subsequent to year-end 2018

9


2019 Credit Rating

ANALYSTS’ COMMENTS

We have analysed the financial condition of 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 standalone in line with IFRS 3 (Business Combination).

ASSET QUALITY

Access Bank Plc’s medium-term phased strategy, is to be Africa’s gateway to the world by 2022, through

growing a diversified banking franchise and positioning itself as the largest banking group in Nigeria.

Consequently, the Bank’s asset structure as at 31 December 2018 was in line with this medium-term strategy

with total assets and contingents expanding by 13.7% year-on-year to ₦4.3 trillion as at 31 December 2018.

Growth levels outpaced the 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, this strategy was further demonstrated in Q1 2019, following

a merger with Diamond Bank Plc. Concurrently, Access Bank’s asset base (including contingents) amounted to

₦6.2 trillion as at 31 March 2019, with liquid assets of ₦1.8 trillion accounting for 28.5% of total assets, and

gross loans and advances of ₦2.6 trillion accounting for 42.4%.

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 its total 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 (3.3%)

while loans to corporate entities still dominated the Bank’s loan portfolio at ₦2.4 trillion (96.7%), considering

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

Figure 1: Loans to Individuals versus Corporate Entities (₦ billions)

30

.3

1,7

97

.3

37

.3

1,7

59

.0

85

.4

2,4

89

.7

I n d i v i d u a l s C o r p o r a t e s & O t h e r I n s t i t u t i o n s

FY 2017 FY 2018 Q1 2019

10


2019 Credit Rating

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 upstream and services sub-segments growing year-on-year, while lending to the

refining and downstream sub-segments contracted year-on-year. Oil & Gas downstream obligors’ repayment

ability has been constrained owing to cost unreflective pump prices of petroleum products, particularly

Premium Motor Spirit (PMS/Petrol). We note that promissory notes issued by the Federal Government in

December 2018 in respect of subsidies owed, have enabled some of these obligors paydown on obligations,

against the 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.

Furthermore, in view of the existing level of exposure to real estate obligors, accounting for 11.2% of the

Bank’s loan portfolio, notable growth was seen in lending to this sector in 2018. 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 this is in respect of various schemes and

bailout programmes for state governments and that the underlying credit risk continues to be moderated by

commitments of the Federal Government and the Central Bank of Nigeria.

Foreign currency loans, which made up approximately 39% of the Bank’s loan portfolio, were largely to Oil &

Gas, Manufacturing and General Commerce obligors, with these loans typically hedged or granted to obligors

with foreign currency receivables.

Figure 2: Access Bank Plc Breakdown of Gross Loans (FY 2018)

With respect to obligor credit quality, we note that the bulk of the Bank’s loans and advances as at 31 December

2018, were classified between internal risk rating 1 (corresponding to AAA) and 3 (corresponding to BB).

Investment grade obligors accounted for 34.6% while standard grade and non-investment grade obligors

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%

11


2019 Credit Rating

accounted for 60.2% and 5.2% respectively. Of the Bank’s top 20 largest exposures, 53.2% were investment

grade as at year-end 2018. Agusto & Co.’s opinion is that some ratings do not reflect true realities of obligor

credit quality.

Figure 3: Loan Portfolio by Credit Ratings ₦ billions (FYE 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. An

examination of the Bank’s top 20 obligors which account for 32.6% of gross loans and advances indicates that

only 35.0% represents exposures to investment grade obligors, post-merger. The Bank’s single largest obligor

– a conglomerate with varied operations accounts for 5.1% of the loan portfolio and 28.2% of core capital

while the second largest obligor – an oil and gas services operator accounts for 4.9% of loans and 26.9% of

core capital. We note that breaches of the single obligor limit in these two cases arose from the business

combination with Diamond Bank. These nonetheless present an elevated level of credit risk, especially as

Agusto & Co. is unable to ascertain the current credit quality of the second largest obligor. We consider this a

rating negative.

Figure 4: Access Bank Plc Breakdown of Gross Loans (Q1 2019)

12

.9%

6.4

% 12

.5%

2.8

%

13

.2%

36

.3%

10

.7%

0.6

%

2.6

%

0.2

%

1.2

%

0.6

%

1 ( A A A ) 2 + ( A A ) 2 ( A ) 2 - ( B B B ) 3 + ( B B + ) 3 ( B B ) 3 - ( B B - ) 4 ( B ) 5 ( B - ) 6 ( C C C ) 7 ( C ) 8 ( D )

Standard GradeInvestment Grade Non-Investment Grade

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%

12


2019 Credit Rating

The erstwhile Diamond Bank Plc had grappled with a weak governance structure particularly for asset creation,

inadequate capital management and a concentration of Oil & Gas risks, thus, the combined entity’s stage 3

classified exposures totalled ₦285 billion in Q1 2019, significantly above the ₦44.1 billion reported by Access

Bank as at 31 December 2018, prior to the merger. This is after a write off of about ₦44 billion in Q1 2019.

Stage 3 loans largely comprised exposures to the power & energy and oil & gas services sectors, largely

originating from Diamond Bank’s loan portfolio. Thus, Access Bank’s non-performing loan (NPL) ratio trended

up from 2.4% as at year-end 2018 to 10.9% in Q1 2019. 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 5: Breakdown of non-performing loans by sector (Q1 2019)

Cumulative loan loss provision was however sufficient to cover 82.7% of stage 3 classified loans, which we

consider acceptable. We note that the largest non-performing loan which was related to a power & energy

obligor, has been 63.7% provided for, and the Bank expects to fully provide for this exposure and write it off

in 2019, bringing its non-performing loan ratio down by about 200bps. Any recoveries particularly relating to

the power assets pledged as collateral will subsequently be recorded as write-back income. In addition, the

Bank is deemphasising lending to the Oil & Gas services segment given the level of contribution to non-

performing loans at 30.7%, largely inherited from Diamond Bank.

Figure 6: NPL and Coverage Ratios (FYE 2016- Q1 2019)

Agriculture1.4%

Construction2.3%

Finance and Insurance1.6%General

3.8%

General Commerce6.7%

Others2.4%

Steel Rolling Mills4.0%

Oil and Gas -Downstream

11.2%

Oil and Gas Services30.7%

Oil And Gas -Upstream

11.9%

Real Estate Activities0.4%

Transportation and Storage

0.6%

Power and energy22.9%

96

.0%

68

.3% 17

5.2

%

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

13


2019 Credit Rating

Stage 2 classified exposures totalled a further ₦481.6 billion post-merger (18.6% of gross loans and advances),

also largely relating to Oil & Gas exposures, we note that the Bank is making all efforts to stem further

deterioration in these under-performing loans through restructuring of repayment terms as well as supporting

obligors with asset sales in order to enhance their cash flows.

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

Diamond Bank, asset quality has recorded marked deterioration. Bank’s post-merger NPL ratio is expected to

remain somewhat elevated in the short term as the Bank works through restructuring, write-offs and recoveries.

In Q1 2019, approximately ₦61 billion was written-off, while about ₦4 billion was 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 believe the combined entity’s asset quality requires improvement. We note positively efforts to clean-up

inherited exposures thus preserving further impact on capital. We do not expect any growth in loans in the

short-term as the Bank focuses on cleaning-up its books post-merger through provisions & write-offs, as well

as recovery efforts.

14


2019 Credit Rating

RISK MANAGEMENT

Access Bank Plc.’s overall risk appetite has been internally defined as moderate, with the Bank selectively

accepting risks and willing to accept a comparatively lower level of potential losses on exposures. Risk

management functions are centralised and comprise four layers. Firstly, the Bank’s risk appetite, strategy and

governing policies are defined by the Board of Directors through committees- Board Risk Management

Committee, Board Digital and Information Technology Committee, Board Governance and Nomination

Committee, Board Credit & Finance Committee, Board Remuneration Committee and the Board Audit

Committee, as the first layer of risk management governance. The second layer comprises management

committees – Operational Risk Management Committee (ORMC), Asset and Liability Committee (ALCO), Digital

Steering Committee (DSC), Enterprise Risk Management Committee (ERMC) and Management Credit

Committee (MCC). Access Bank has an independent risk management function headed by the Executive

Director Risk Management/ Chief Risk Officer who reports to the Board of Directors, the CRO serves as the third

layer of risk management governance while the various risk management divisions and business units serve

as the fourth layer through risk champions. This is in addition to the Internal Audit Division of the Bank.

In the review period, Access Bank created a specialised Anti-Fraud Unit in addition to the existing six

subdivisions of the risk management group, headed by the CRO. These subdivisions are Digital Risk

Management, Enterprise Risk Management, Information System, Compliance, Nigeria Risk and Subsidiaries

Risk.

We highlight three key risks the Bank strives to manage. These include

▪ Credit risks

▪ Market risks including liquidity risks

▪ Operational risks including Information Technology and Business Integration risks

Credit Risk: With exposures to credit risks through the Bank’s lending activities, functions in this regard are

guided by internal policies spanning Credit Risk Management, Credit Risk Mitigant Management, Credit Risk

Rating, Country & Cross Border Risk Management Policy, Internal Capital Adequacy Assessment Process

(ICAAP) and Enterprise-wide Risk Management policies. The Bank employs credit approval authority limits for

both new credits and renewals of existing credits, and deploys a risk rating process for obligor and facility risk

ratings which takes into account both financial and non-financial indicators, including support

adjustments/enhancements and collateral adjustments. The Bank’s 1-8 numerical risk rating scale (with + and

– qualifiers) is also mapped to three categories - investment grade, standard grade and non-investment grade.

Following the adoption of International Financial Reporting Standards 9 -Financial Instruments in 2018,

exposures were further classified in each of the three categories to reflect Stage 1, Stage 2 and Stage 3

performance classifications. The Bank’s policies stipulate that internal ratings should be reviewed at least

annually and as at when there are material changes to the fundamentals of an obligor’s profile. We however

note that ratings assigned to some obligors by the Bank will be lower, should credit quality and current market

realities be unreservedly reflected. The Bank’s policies also stipulate sector and obligor exposure limits, though

15


2019 Credit Rating

we also note breaches in respect of these limits arising from the business combination with Diamond Bank. In

addition, there is a large concentration of oil & gas exposures.

Recognising the poor risk culture of the erstwhile Diamond Bank Plc, as part of the merger process Access

Bank carried out an in-depth review of exposures of the erstwhile bank by subjecting them to the Bank’s credit

review process, and harmonising related credit risks with the Bank’s internal rating scale. This is in addition to

obtaining independent opinions on the exposures from financial advisers and accountants of repute.

Market & Liquidity Risk: Exposures to market risks arise from changes in key prices and rates including interest

rates, equity prices and foreign exchange rates, as well as liquidity challenges. Exposure to the various market

risks are largely through the Bank’s trading portfolio as well as management of assets and liabilities. Whilst

risk appetite and limits guiding trading and non-trading activities are defined by the Bank’s Board of Directors

and guided by policies in line with regulatory limits, the Bank continues to be proactive in managing market

risks and liquidity risks. In the review period, Access Bank developed and documented scenarios for assessing

its liquidity position over various time horizons as part of an Internal Liquidity Adequacy Assessment Process

(ILAAP) initiative, ahead of BASEL III regulations. Specifically, for its trading portfolio, the Bank employs fixed

income & FX open position limits, interbank placement and takings limits, management action triggers, stop-

loss limits, dealer limits and value-at-risk limits. Specific to its non-trading portfolio, the Bank utilises repricing

gap analysis, liquidity gap analysis, earnings-at-risk and sensitivity analysis. These are in addition to a variety

of stress tests and back-testing done regularly on both trading and non-trading portfolios.

Operational Risk: With operational risks evolving in modern banking, particularly on account of digitalization,

the measurement and mitigation of such risks -which emanate from people, processes and systems, have been

enhanced industry-wide, Access Bank inclusive. In the normal course of the Bank’s day-to-day business,

management of operational risks is done through four sub-units – Risk Monitoring & Loss Database

Management, Business Continuity Management & Outsourcing Risk, Risk analysis and Profiling and

Information & Technology Risk. Operations are guided by policies documents and manuals that are reviewed

annually. The Bank’s operational risk management framework sets out management & control responsibilities,

measurement & management methodologies, risk even data collection & reporting process as well as risk &

control self-assessment (RCSA) programme, with key risk indicators (KRIs) set.

Also reporting to the CRO is the Bank’s compliance team, ensuring adherence to internal policies and regulatory

provisions. In the 2018 financial year, Access Bank paid a total of ₦20 million as penalties for contravening a

number of regulatory provisions relating to KYC, bank charges applied, violation of ATM guidelines, risk-based

supervision and analysis of fraud and forgeries for two months. This stood better than the ₦78 million paid in

the prior year.

Furthermore, with an intensifying digitalisation strategy for both back-end processes and customer interfaces,

geared at positioning Access Bank as a leader in digital banking and analytics, the Bank has and continues to

make significant investments in information technology systems, for operational efficiency. Following the

merger with Diamond Bank, the Bank’s scope of operations has expanded, spanning Point-of-Sale (POS)

machines deployed, Automated Teller Machines (ATMs), branches, staff strength and a variety of technology-

based applications from both Diamond and Access Bank, requiring a new enhanced level of risk management.

16


2019 Credit Rating

Thus, upgrades of communication networks, equipment and security are being done across all operational

locations in phases. In addition, the Bank responds to changing cyber threats through processes that guide

Strategic Ownership & Governance, Insider Threats, Security Infrastructure, Reporting and Security Assessment

procedures.

In 2018, there were 5,122 incidents recorded on account of fraud and forgeries involving ₦7.7 billion, leading

to a total loss of ₦121.4 million. Despite the jump in number of attempts from the prior year, actual losses

from fraud and forgeries were slightly tempered year-on-year (FY2017: ₦196.5 million). Subsequent to year-

end, Access Bank recorded operational losses totalling ₦230.9 million, 67.4% of which were legal losses

relating to the erstwhile acquired Intercontinental Bank Plc, while 18.4% was on account of income reversals

and 14.2% or ₦20.9 million was on account of fraud and cash shortages. Furthermore, Diamond Bank, in Q1

2019 and prior to consummation of the merger, recorded operational losses totalling ₦127.4 million, largely

attributable to income reversals (48.7%) and fraud (44.0% or ₦56.1 million).

In Q1 2019, an Integration Management Office, with officers from various business divisions of both Access

and Diamond banks, was set up to anticipate/identify and record other business integration risks and propose

mitigants for implementation post-merger.

We consider Access Bank’s risk management to be adequate for its current business risks and expect that the

Bank’s internal controls will be largely sufficient to stem marked losses that may arise from the merger with

Diamond Bank. We also note that internal ratings must continually be monitored and reviewed where

applicable to ensure they reflect current realities.

EARNINGS

Access Bank Plc’s core earning streams are nested under the Bank’s corporate and investment banking business,

commercial banking business, business and personal banking business, with various liability generation and

asset creation products. Maintaining an overall strong earnings profile over the years, the Bank strives to

further diversify its banking franchise in view of its strategy to emerge as Africa’s gateway to the world by

2022. In the same vein, gross earnings have improved at a compounded annual growth rate of 7.2% over the

last 5 years, amounting to ₦426.6 billion in the 2018 financial year and ₦134.0 billion in the three months to

31 March 2019. This growth was jointly driven by the Bank’s corporate & investment banking and commercial

banking businesses, both from lending activities and investment securities, as well as ad-hoc fees earned on a

variety of product offerings/financing solutions.

Interest income in 2018 totalled ₦313.1 billion, representing a strong 14.0% growth over the prior year.

Interest income was buoyed 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 in 2018. Examining the Bank’s

operating segments, we note that commercial banking operations, particularly contributed to earnings,

17


2019 Credit Rating

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 March 2019.

Whilst retail contributions are expected to improve in the near-term, corporate banking activity is still expected

to be dominant.

Figure 7: Interest Income by Business Segment (FY 2018)

Figure 8: Interest Income by Business Segment (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 deposits from financial institutions. Interest expense on deposits

from financial institutions 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%.

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

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 are 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. Diamond Bank has over the last 5 years recorded a net non-

interest income between ₦37 billion and ₦46 billion Thus, we expect to see even better earnings diversity in

the near term even as Access Bank continues to make significant investment in the digital banking space.

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

Corporate

&

Investme

nt

Banking

39.2%

Commerc

ial

Banking

42.9%

Business

Banking

8.5%

Personal

Banking

9.4%

Corporate &

Investment

Banking

24.1%

Commerci

al

Banking

49.1%

Business

Banking

10.6%

Personal

Banking

16.2%

18


2019 Credit Rating

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%. We expect operating expenses to

trend up in the short-term on account of the following:

• Enlarged operations having merged with a Bank that has had a historically high operating expenses vis a

vis income, with its CIR above 80%.

• Increased investments in technology/IT infrastructure, though eventual transaction-driven earnings in this

regard will eventually boost profitability.

• An expanded operational footprint as the Bank works to rationalise branches and deploy technology for

more efficient operations.

• A jump in banking sector resolution costs paid to Asset Management Corporation of Nigeria (AMCON)

arising from a larger asset base, given that AMCON charges represent 0.5% of total assets and contingents.

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. Furthermore, the Bank’s recurring earning power of 5.9% measured in pre-impairment

operating profit to average assets and contingents, stood lower than peers GTBank (9.1%) and Zenith (7.1%).

Subsequent to year-end and following 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 and equity also improved to 2.6% and 28.0%

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

Figure 9: 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

19


2019 Credit Rating

Examining the profitability of operating segments, Access Bank’s corporate & investment banking segment

has steadily generated satisfactory returns on segment assets. We however expect better performance of its

personal banking segment going forward, given the strong retail business returns generated by Diamond Bank

as highlighted by segment performance in Figure 11.

Figure 10: Access Bank Segment ROA (FY 2017 - Q1 2019)

Figure 11: Diamond Bank Segment ROA (FY 2017 - FY 2018)

We consider Access Bank’s overall 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. Furthermore, due to the Bank’s new enlarged structure, its capacity to take on significant transactions

and earn related income has been enhanced. Whilst we expect short-term efficiency ratios such as CIR to be

high, we anticipate that as the Bank embarks on various internal restructuring exercises to fully streamline the

merged entity (including branch and staff rationalisation), eventual moderation of operating expenses will

boost profitability.

4.3

%

1.3

%

1.0

%

3.8

%5.5

%

1.1

%

5.9

%

12

.2%

9.1

%

0.6

%

0.3

%

4.0

%

C o r p o r a t e & I n v e s t m e n t

B a n k i n g

C o m m e r c i a l B a n k i n g B u s i n e s s B a n k i n g P e r s o n a l B a n k i n g

FY 2017 FY 2018 Q1 2019

-0.3

%

5.2

%

7.9

%

43

.0%

-7.7

%

10

.2%

13

.0%

53

.0%

C orp o ra te B ank ing T reas u ry B us ines s B ank ing R e ta i l B ank ing

FY 2017 FY 2018

20


2019 Credit Rating

CAPITAL ADEQUACY

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

and ₦517.7 billion as at 31 March 2019 following the 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 the 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.

Figure 12: 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 from the merged

Diamond Bank portfolio. We believe it is imperative to shore up capital in the short-term thus creating a buffer

for the current level of risk, pending further organic accretion to retained earnings which will uphold core

capital more sustainably. The Bank has disclosed plans to do so by raising Tier II capital in Q2-Q3 2019.

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

41

9

43

0

44

7 5

18

19.5% 18.2%16.2% 16.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0

100

200

300

400

500

600

FY 2016 FY 2017 FY 2018 Q1 2019

Core Capital CAR

21


2019 Credit Rating

LIQUIDITY AND LIABILITY GENERATION

Access Bank Plc’s operations have been predominantly funded through deposit liabilities, sufficient for 61.8%

of total assets and contingents as at FYE 2018, and 66.2% as at 31 March 2019. With a leaning towards

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

with a view to deepening its low-cost deposit base.

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, largely foreign

currency takings from international banks to fund trade transactions 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) as at 31 December 2019, while low-cost demand and savings

deposits accounted 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 at approximately 5.9% in 2018

(FY2017: 5.2%). The Bank’s WACF stood higher than peers, GTBank’s estimated 3.9% and Zenith’s 2.9%, for the

same period. Subsequent to year-end, the Bank’s WACF declined to 4.4%, owing to the acquired cheaper retail

deposit pool which improved its deposit mix. The merger has significantly enhanced Access Bank’s low-cost

deposit base with particular emphasis on savings accounts. 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 sustainably improve Access Bank’s historically high cost of funding. Furthermore, it

is worthy of note that in a bid to preserve the value of Diamond Bank’s retail franchise for continued low-cost

liability generation, the Head of Retail from the erstwhile Diamond Bank joined the Access Bank team in Q1

2019.

Table 2: Comparable Weighted Average Cost of Funds

4.3%

5.2%5.9%

4.4%

3.0% 3.5%

3.9%3.9%5.0%

2.9%

6.4% 5.8%

5.2%

FY 2016 FY 2017 FY 2018 Q1 2019Access GTBank Zenith Industry Average

22


2019 Credit Rating

There are mismatches in Access Bank’s loan/deposit liabilities 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 also 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 capital qualifying funding and trade finance

facilities from multilateral financial institutions (MFIs). This is in addition to on-lending facilities from the

Central Bank of Nigeria, two Eurobonds totalling $700 million, and a Eurobond of $200 million inherited from

Diamond Bank. With the $200 million Eurobond maturing in Q2 2019 along with an inherited obligation to

AFREXIM of $100 million, Access Bank has disclosed full availability of funds to repay these borrowings when

due. This is in addition to a planned 2019 early redemption of the Bank’s $400 million Eurobond originally due

in 2021. 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%.

Table 3: Breakdown of borrowings (Q1 2019)

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

trended up to ₦1.8 trillion as at 31 March 2019, largely driven by investments in government securities. Liquid

assets stood at 66.8% of total LCY deposits (excluding interbank takings) 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% as at FYE 2018 (with

loans funded by medium-term borrowings backed out), and 56.3% at the end of Q1 2019.

In addition, as part of Access’ Recovery and Resolution Plan (RRP), the Bank has a ₦30 billion and a $50 million

contingency funding plan in place, in addition to a crisis management team as stipulated by the RRP. The Bank

defines a crisis as one where liquidity ratios fall below internal limits and these have graduated levels of

severity from low to high stress levels. The Bank also only utilizes no more than 70% of lines, leaving 30% for

contingencies.

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. The merger with Diamond Bank also puts it in good stead in

this regard.

Multilateral

Financial

Institutions

29.0%

Eurobond

42.1%

Intervention

Funds

28.8%

23


2019 Credit Rating

OWNERSHIP, MANAGEMENT & STAFF

In the 2018 financial year, Access Bank had 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 a 16.46% stake, in custody for various investors. In addition, the Bank’s Board

of Directors controlled approximately 5.3%. Subsequent to year-end 2018, issued and paid-up shares totaled

35.5 billion as at 31 March 2019, augmented by the Diamond Bank merger. Access Bank offered Diamond Bank

shareholders 2 shares 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, Mrs. Titi Osuntoki, the Executive Director covering Business Banking, resigned her appointment

with the Bank. Also subsequent to year-end, Mrs Chizoma Okoli was appointed Executive Director, Business

Banking in March 2019, replacing Mrs Osuntoki. 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 2019, including the personnel of the merged Diamond Bank. The Bank

is in the process of harmonizing HR policies and practices, as well as harmonizing the culture of the combined

entity through various capacity building exercises and townhall meetings/employee engagement sessions.

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

measured in net earnings per staff which 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 4.6 times3 but lower than

peers, GTBank (12.0 times) and Zenith (6.9 times). Currently, 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, as well as recent movements of staff to other financial institutions. Staff

productivity indicators post-merger are however expected to be better reflected in the Bank’s FY 2019

performance.

3 Agusto & Co.’s 2019 Banking Industry Report

24


2019 Credit Rating

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

staff of Diamond Bank and salary realignments to impact operating expenses in the short term. Continued

efforts to automate processes are expected to drive improvements in efficiency in the medium-term.

Table 4: Staff Productivity Indicators

Access

FY 2018

GTBank

FY 2018

Zenith

FY 2018

Average number of employees 3,399 3,394 6,253

Staff cost per employee ₦11.9 million ₦7.0 million ₦9.1 million

Net earnings per staff ₦68.0 million ₦83.8 million ₦62.4 million

Staff costs/Operating expenses 25.9% 25.1% 28.6%

Net earnings per employee / Staff cost per staff 5.7 times 12.0 times 6.9 times

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

banking group in Nigeria with robust capitalisation and global best practice governance structure. Pillars for

the 5-year strategic plan prioritise growth in its retail business (to be seen in the cost of funds profile),

analytics-driven insights, robust risk management, digitally led operations, customer-focused operations,

establishing the Bank as a universal payments gateway between Africa and the world.

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 the

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 5: 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% 11.3% 14.0% 8.1% 15.0%

LCY Deposits 9.2% 10.0% 12.2% 8.5% 13.1%

Total Loans & Leases (net) 12.3% 14.1% 14.9% 8.5% 13.8%

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

medium term. We positively view increased leverage on digitalisation (both in terms of internal processes and

for reaching clients), alongside the acquisition of Diamond Bank’s retail business. These are expected to drive

market share going forward.

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2019 Credit Rating

OUTLOOK The next 12 months will see Access Bank Plc’s merger with Diamond Bank fully consummated, with integrated

and expanded operations spanning people, systems and processes. This is well in line with the Bank’s medium-

term strategy, both in terms of core intermediation business as well as transactional and digital services. Given

expected synergies from the merger, including the additional pool of low-cost retail deposits and business

footprint, the Bank’s outlook is hinged on the expected performance of the combined entity. This will be largely

characterised by lower funding costs stemming from a better deposit mix, and lingering asset quality

challenges as the Bank restructures, recovers or write-offs impaired loans.

In particular, our expectations are:

▪ On the asset side, the Bank has projected a marginal 4.1% growth in its loan portfolio by FY2019. Given

the asset quality challenges and expected write-offs, as well as tepid growth in the macroeconomy, we do

not expect any marked expansion in the Bank’s loan portfolio, with cycle driven transactions taking the

front seat, as asset quality issues are being resolved.

▪ On the liabilities side, deposits are expected to be maintained at the current level, with no marked changes

from Q1 2019 as the Bank endeavours to strengthen its customer relationships particularly those being

integrated from the erstwhile Diamond Bank.

▪ In terms of profitability, we expect that profitability will remain good buoyed by an improved net interest

spread of above 50%, given the cheap retail deposits acquired. Albeit this is contingent on the Bank’s

ability to sweat the current expanded asset base and price appropriately. Considering improved ability of

the Bank to take on derivatives transactions on account of its size and capacity as well as e-banking income

generation which was Diamond Bank’s forte, the Bank’s earnings capacity remains strong. However,

operating expenses in the short-term from branding, IT and administrative costs, as well as additional

provisions for substandard loan exposures (as the Bank strives to improve asset quality post-merger), may

impact profits. Nonetheless, it is expected that accretion to retained earnings will remain good thus

organically buoying core capital.

Agusto & Co. hereby attaches a “stable” outlook to Access Bank Plc with the expectation that the Bank’s

profitability will remain good in the near term, upholding accretion to capital, vis a vis current business risks.

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2019 Credit Rating

FINANCIAL SUMMARY

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2019 Credit Rating

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2019 Credit Rating

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) 483,575,980 321,365,064 450,902,188

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) 719,142,467 398,721,220 507,233,096

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

90 Equity after required reserves (line 88 - line 89) 285,260,365 239,449,262 312,422,025

91 Equity after required reserves/risk weighted assets 9.1% 13.4% 13.3%

STAFF INFORMATION

86 Net earnings per staff (₦'000) 42,897 67,987 74,968

87 Staff cost per employee (₦'000) 4,659 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 Actual Actual

MARKET SHARE OF INDUSTRY TOTAL 2019 2018 2017

97 Lcy deposits (excluding interbank takings) 12.1% 10.0% 10.6%

98 Total assets & contingents 14.0% 11.3% 10.9%

99 Total loans & leases - net 14.9% 14.1% 14.1%100 Net earnings 10.0% 10.8% 10.8%

101 Profit before tax 2.7% 9.7% 9.1%

102 Cash dividend 6.8% 8.9%

100 Non Interest Income 3.0% 12.4% 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.

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2019 Credit Rating

RATING DEFINITIONS

Rating Category Modifiers

A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category. Therefore, a

rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus)

sign.

Aaa A financial institution of impeccable financial condition and overwhelming capacity to meet obligations as and

when they fall due. Adverse changes in the environment (macro-economic, political and regulatory) are unlikely

to lead to deterioration in financial condition or an impairment of the ability to meet its obligations as and when

they fall due. In our opinion, regulatory and/or shareholder support will be obtained, if required.

Aa A financial institution of very good financial condition and strong capacity to meet its obligations as and when

they fall due. Adverse changes in the environment (macro-economic, political and regulatory) will result in a

slight increase the risk attributable to an exposure to this financial institution. However, financial condition and

ability to meet obligations as and when they fall due should remain strong. Although regulatory support is not

assured, shareholder support will be obtained, if required.

A A financial institution of good financial condition and strong capacity to meet its obligations. Adverse changes

in the environment (macro-economic, political and regulatory) will result in a medium increase in the risk

attributable to an exposure to this financial institution. However, financial condition and ability to meet

obligations as and when they fall due should remain largely unchanged. In our opinion, shareholder support

should be obtainable, if required.

Bbb A financial institution of satisfactory financial condition and adequate capacity to meet its obligations as and

when they fall due. It may have one major weakness which, if addressed, should not impair its ability to meet

obligations as and when due. Adverse changes in the environment (macro-economic, political and regulatory)

will result in a medium increase in the risk attributable to an exposure to this financial institution.

Bb Financial condition is satisfactory and ability to meet obligations as and when they fall due exists. May have

one or more major weaknesses. Adverse changes in the environment (macro-economic, political and regulatory)

will increase risk significantly.

B Financial condition is weak but obligations are still being met as and when they fall due. Has more than one

major weakness and may require external support, which, in our opinion, is not assured. Adverse changes in the

environment (macro-economic, political and regulatory) will increase risk significantly.

C Financial condition is very weak. Net worth is likely to be negative and obligations may already be in default.

D In default.

www.agusto.com

© Agusto&Co.

UBA House (5th Floor)

57 Marina Lagos

Nigeria.

P.O Box 56136 Ikoyi

+234 (1) 2707222-4

+234 (1) 2713808

Fax: 234 (1) 2643576

Email: [email protected]

Documents

Rating Report ( 2019 ) - FMDQ Group€¦ · The rating assigned to Access Bank Plc Access Bank or WKH %DQN UHIOHFWV the %DQN V good profitability & liquidity, as well as an experienced