We recently downgraded our recommendation on the Access Bank (ACCESS) 10.5% 2021 senior bond to Hold from Buy. This change was primarily driven by valuations – the bond performed quite well in 2019. With a cash price in excess of 111 and a final maturity that is now less than two years away, we see limited room for price appreciation on this bond. We note that reinvestment of proceeds from bank bond redemptions is likely to have contributed to the strong performance we saw in 2018 and 2019, and there are no scheduled maturities or call dates this year.
Access Bank's performance in Q3 19 was solid overall. In that period, the bank reported net income of more than NGN27bn, generating an annualised ROE of over 18%. The total capital ratio remained above 20% and the non-performing loans ratio improved to 6.3%. Reports mentioning the bank in over the last few weeks may have caused some concern. We discuss three recent developments below.
EFCC and Slok Nigeria
The bank denied speculation that the Group Managing Director, Herbert Wigwe, was arrested by the Economic and Financial Crimes Commission (EFCC). According to Access Bank, management was invited for a meeting by the EFCC, to discuss a company called Slok Nigeria (this company is owned by a former state governor, who was sentenced to jail). Access Bank inherited a loan to Slok Nigeria, and its underlying assets, as part of the Diamond Bank transaction. The EFCC also has a claim on Slok Nigeria assets, and therefore called Access Bank management in for a meeting. Access Bank stated that issues related to Slok Nigeria ‘have been resolved.’ We expect more details about the bank’s exposure to Slok Nigeria when Access Bank reports FY 19 results.
Entering Kenya and Cameroon
In October 2019, the Competition Authority of Kenya approved the acquisition of Transnational Bank in Kenya by Access Bank. Access subsequently received approval from the Central Bank of Kenya for the transaction. Transnational Bank disclosed total assets of KES10.1bn (about US$97mn) at end-September 2019, and a 9M 19 net loss of KES23mn. The capital ratios appear high at 19.9% (core capital ratio) and 21.6% (total capital ratio). However, Transnational Bank also reported gross non-performing loans of KES1.87bn (versus gross loans of about KES7bn). Separately, Access Bank announced that it had obtained ‘No Objection’ from the Central Bank of Nigeria for plans to set up a banking subsidiary in Cameroon. Access Bank still requires approval from regulatory authorities in Cameroon.
Entering both Kenya and Cameroon forms part of Access Bank’s plan to become ‘Africa’s gateway to the world.’ We note that on the Q3 19 call, management commented that Access Bank intends to add four countries to its footprint this year. So far, entry into new markets has not been transformational for the group. We expect performance in Nigeria to remain the key driver of group performance for some time.
GMD share sales and changes to the closed period
On 30 December 2019, Access Bank announced that its closed period would commence on 1 January. However, on 8 January, the bank stated that it was suspending this closed period. It was reinstated on 25 January. As the table below shows, the Group Managing Director sold 118.5 million shares between 10 and 22 January. These share sales have understandably raised concerns. The rationale for the disposals is not clear. Focusing on the ACCESS 2021 bond, it is unlikely, we think, that these share sales will have material implications for payments due on this security. However, we think it will be important for management to reassure shareholders and other investors regarding the changes to the closed period and share sales by the GMD when Access Bank hosts its FY 19 conference call.
Table 1: Access Bank – GMD share sales in January 2020
|Date||Volume (#)||Price (NGN)||Total consideration (NGN)||% shares held|
Source: Company statements, Tellimer Research. % shares held is based on end-June 2019 disclosure of total direct and indirect ownership.