Access Bank Plc’s gross earnings growth moderated to 22.31% YoY in H1:2020 (from 31.02% in Q1:2020) due to a relatively weak second quarter outing. Interest income underperformed in Q2:2020 by 29.15% YoY due to a 14.99% decline in investment securities and lower investment assets yield.
The growth (+191.45% YoY to NGN150.03bn) in non-interest was, however, sufficient to push gross earnings up 22.31% to NGN396.76bn. Access Bank robust and growing retail business has proved invaluable in shielding fee-based income from adverse regulations as fee-based income (net) grew 8.16% YoY to NGN4.59bn.
The main drivers of non-interest income however were gains on financial instruments, particularly derivative instruments which grew by 5,695.81% and accounted for 68.81% of total non-interest income in H1:2020.
This implies that a significant portion of non-interest income is exposed to high-risk instruments, a potentially negative situation. As we expected, foreign exchange losses worsened relative to H1:2019 due to the devaluation of the Naira as its USD position was short.
The outlook for Access Bank’s interest income is modest in view the low yield environment and the bank’s restructuring programme, which covered 17% of the loan book in H1:2020. On the other hand, we expect fee-based income to continue to gain traction owing to the pick-up of business activities and the bank’s growing retail strength.
For other non-interest income lines such as derivative gains and FX losses, the outlook is uncertain given the volatility in the FX environment the relatively stable outlook for FX H2:2020. Hence, we maintain a moderately bullish outlook for gross earnings in 2020FY.
Access Bank net interest margin declined significantly to 4.90% from 7.70% in H1:2020, as lower yields offset the impact of lower cost of funds.
High operating costs continue to limit the bank’s EPS, and although management claims to have realized NGN54.50bn in cost synergies since its merger with the defunct Diamond Bank Plc, the impact on overall cost profile remains to be seen.
However, the sharp growth (+40.04% YoY) in OPEX recorded In H1:2020 is partly explained by high inflationary pressures and the impact of the unconsolidated period in H1:2019 financial results. Higher impairment charges (+237.43% YoY) in H1:2020 owing to volatile economic business outlook, and higher regulatory costs also contributed in keeping cost profile high.
Cost-to-Income ratio thus climbed 420bps to 65.80% while Profit after tax (PAT) declined marginally by 1.36% to NGN61.03bn. In H2:2020, we expect a decline in impairment charges on the back of improving business environment. This should ease the pressure of elevated OPEX on bottom line, pushing it up 3.29% in 2020FY.
Cashflows Impacted by the Pandemic significant increase in operating assets during the period drove operating cashflow deficits by 957.87% to NGN525.76bn in H1:2020 from NGN49.70bn in H1:2019. This was compounded by slowdown in collections