Access Bank may overshoot last year’s profit in Q3

Access Bank’s third quarter earnings report, which is expected to reach the market in days, may see after tax profit soar above the full year figure of N106 billion the bank posted at the end of 2020. Based on the current growth rate, the bank may register an after tax profit in the region of N130 for its nine months of trading.

The bank closed the half year operations in June 2021 with accelerated growth in profit year-on-year from 28 percent in the first quarter to 59 percent at half year to close at N87 billion. That is already 82 percent of the full year profit figure for last year.

The strength for profit performance came from two angles – accelerated growth in revenue and some cost moderation. Gross earnings sped up in the second quarter and pushed up the year-on-year growth at half year from less than 6 percent improvement in the first quarter to 13.5 percent to stand at N450.6 billion at the end of June 2021.

Interest expenses declined slightly at the end of the review period and therefore moderated relative to a strong growth in interest earnings. Cost of funds claimed a reduced share of interest income at half year at 37.4 percent compared to 49 percent in the same period last year.

Accelerated growth in revenue is driven by interest earnings, which grew by close to 30 percent year-on-year to roughly N320 billion at half year. This is more than three-fold increase from a 9 percent improvement in interest income in the first quarter, representing the key factor in the elevated earnings performance this year.

It is also a sustaining turnaround for the bank from a drop of 9 percent in interest income in the 2020 financial year. The key favourable combination for the bank in the current financial year is the strong growth in interest income with a decline in interest expenses.

The result is reflected in net interest income, which advanced by 58.5 percent year-on-year to N200 billion at half year. This represents an addition of N74 billion to net interest income over the period and a major acceleration from 30 percent increase in the first quarter.

The bank continued experiencing rapid growth in loan impairment charges in the second quarter, a challenge it has been facing since the past two years. Loan impairment expenses have maintained rapid growth from 38 percent in 2019 to 211 percent in 2020 and from 46 percent in the first quarter of the current financial year to 74 percent at half year. Net loan impairment charge surged up from N12.5 billion in the first quarter to the region of N29 billion at the end of June 2021.

Despite the strong growth in net credit loss expenses, the bank was still able to achieve much accelerated growth in net interest income after the charges from 28 percent at the end of the first quarter to 56 percent at half year to close at over N171 billion.

The increase in gross earnings was accounted for exclusively by interest income while non-interest earnings continued to underperform. Against flat growth in the first quarter, non-interest income dropped by about 13 percent to N131 billion at half year.

The bank is experiencing volatile behaviour of non-interest income lines and this is happening for the third year running. There was a net loss of over N23 billion in financial instruments against a net gain of N135 billion in the same period last year.

On the other hand, a foreign exchange loss of over N66 billion at half year in 2020 overturned to a gain of over N68 billion in the same period this year. A net loss of over N4 billion in fair value hedge this year had a zero record in the same period last year. Also, other income fell by as much as 53 percent year-on-year to less than N14 billion over the review period.

The bank’s management found its way through the volatility to achieve accelerated growth in both revenue and profit. The strong growth in interest earnings more than countered the drop in non-interest income and kept gross income advancing.

With some cost moderation, the bank’s management improved the ability to convert revenue into profit. Net profit margin grew from 15.4 percent in the same period in 2020 to 19.3 percent at the end of June 2021.

This is however a decline from 23 percent profit margin the bank achieved in the first quarter. Yet, it remains the highest net profit margin for the bank since 2016.

The gain in profit margin explains the bank’s ability to grow profit far ahead of revenue at 59 percent compared to 13.5 percent. The strong growth in revenue and the increased ability to convert same into profit constitute the critical factor for the bank’s elevated profit performance this year.