Buy ACCESS, Hold DIAMBK: We are reinstating our Buy recommendation on the Access Bank (ACCESS) 9.25% 2021 subordinated bond. The US$200mn Diamond Bank 8.75% 2019 bond, on which we reinstate our Hold recommendation, is to be repaid later this month, and Access Bank is expected to call its US$400mn subordinated security in June. We also reinstate coverage on the ACCESS 10.5% 2021 senior bond with a Buy recommendation. We believe technicals should be positive for what will soon be the sole remaining Access Bank bond. The YTM of c6.3% and spread over comparable sovereign bonds of 100-140bps both look attractive in this context. However, we acknowledge that this short-dated security does have a relatively high cash price.
Merger complete, now the real work begins: The merger between Access Bank and Diamond Bank has been effective since March. The transaction created Nigeria’s largest bank, with total assets of NGN6.4tn at end-Q1. Integrating two institutions is almost never easy. There will undoubtedly be challenges in the near term. Improving asset quality is one of these challenges. The NPL ratio was 10% at end-March, which we think was probably better than had been feared, but this ratio was clearly much higher than at the standalone Access Bank. Coverage of 88% gives us some comfort regarding the outlook for asset quality. Further, Access Bank expects the NPL ratio to fall to the prescribed regulatory limit of 5% in two years, through repayments, recoveries and additional write-offs. Another challenge may be limiting customer attrition, given products which were synonymous with the Diamond Bank brand. Access Bank management has said that its branding strategy will take this into account and has highlighted that experience with previous acquisitions means management is particularly well placed to deal with the complexities of merging different entities and customer bases.
Solid Q1 results: Access Bank reported results for the Q1 in April, with Diamond Bank included in balance sheet disclosures. Net income of NGN41bn was almost 90% higher than a year ago, which generated an annualised return on equity of c31%. Strong revenue growth and lower provisions both contributed to the improved bottom-line. For the full year, the combined group aims for flat loan growth and 10% deposit growth. Management also expects a net interest margin of 6%, cost of funds of less than 5% and cost/income ratio of less than 60%. Access Bank management also guides to a cost of risk of under 1.5% and a non-performing loans ratio of less than 10%. Further, management targets a return on equity of 20%. Access Bank has also identified cNGN150bn in synergy opportunities over the next three years – NGN62bn in revenue synergies and NGN88bn in cost synergies.
Risks to our view: Key risks to our positive credit view on the new Access Bank include higher customer attrition levels than anticipated and even worse asset quality in the loan book Access Bank will inherit. A less supportive regulatory environment is also a risk.