Access Bank: Narrow, winding path to profit

Access Bank followed a narrow and winding path of revenue improvements and disappointments as well as rise and fall in key expense lines to convert a decline in pre-tax profit into an improvement in the bottom line at the end of the third quarter.

The bank grew interest income by 11.6% but interest expenses grew close to twice as fast and prevented the increase from flowing down into profit.
There was a significant drop in loan loss expense and net fee income improved but neither the cost-saving nor the gain in income reached the bottom line. A big net loss on investment securities last year turned to a big net gain this year but this was countered by a drop from a huge foreign exchange income to a loss over the same period.

A 55% drop in tax expenses accounted exclusively for the 11.5% after-tax profit improvement the bank recorded at the end of the third quarter. This isn’t giving quite a comforting position for the bank for the current year after closing 2017 operations with a profit drop.

Gross earnings amounted to N375.23 billion for Access Bank at the end of the third quarter, a modest year-on-year improvement of 2.8%. The 11.6% growth in interest income and a 282% leap in net gains on investment securities were flattened by a 125% drop in foreign exchange income.

Revenue growth is expected to step up at full year with gross income projected to be in the region of N500 billion for Access Bank at the end of 2018. That would be an increase of 9% over the revenue figure of N459 billion the bank posted at the end of 2017.

High volatility in key income lines has marked the bank’s earnings story in recent years. Foreign exchange income has fluctuated widely from 86% drop in 2016 to a massive growth last year and now into a huge loss so far this year. There is a sharp swing from a net loss on investment securities last year to a big gain this year. There is also a sudden shift from a 60% drop in other income last year to a 127% upsurge at the end of the third quarter.

The fluctuation in revenue lines is also recorded on the side of cost and interest cost is the major culprit. From a major slowdown in 2016, a sharp increase in interest expenses has posed a major challenge for the bank for the second year. At N151.55 billion, interest expenses grew by 22% year-on-year at the end of the third quarter, close to twice the improvement in interest income.

Interest expenses have continued to claim increasing proportions of interest income from less than 44% in 2016 to 49% in 2017 and further to 55% at the end of the third quarter of the current year – the highest margin ever seen so far. The result is slowing growth in net interest income from 32% to 17.5% and further down to flat growth of 1.2% over the same period.

Impairment charges for credit losses are equally changing direction after standing as a major wage on the flow of revenue into the bottom line for two years. Net loan loss expenses dropped by 35% to N8.35 billion at the end of September 2018 against increases of 54% in 2016 and 57% in 2017.

The bank’s management squeezed operating cost to the extent of cutting down personnel and administrative expenses. That still could not remedy fully the impacts of rising interest expenses against revenue disappointments. Pre-tax profit declined by 3.6% to N70.27 billion at the end of September.

A drop of 55% in tax expenses was the critical factor that changed the bank’s earnings story. It turned the decline in pre-tax profit into an 11.6% growth in after-tax profit to N62.91 billion at the end of the third quarter. That is already above the bank’s full-year after-tax profit figure of N61.99 billion at the end of 2017. Net profit margin is up from 13.5% at the end of 2017 to 16.8% at the end of September 2018.

The full year profit outlook for the bank is uncertain in the light of possible buildup of loan impairment expenses in the final quarter. Last year the charges rose rapidly from N12.82 billion at the end of the third quarter to N34.5 billion at full year. If that pattern is repeated this year, a good part of the profit seen at the end of the third quarter isn’t likely to be available at the end of the year.

The bank earned N2.18 per share at the end of the third quarter, improving from N1.97 per share in the same period last year. It paid an interim cash dividend of 25 kobo per share at the end of half-year trading in June. A final cash dividend of 40 kobo per share or better is expected from Access Bank at full year.