Wednesday, Mar. 27, 2013

Bank Faces New Challenges of Rapid Growth

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February 21, 2013

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In 2011, when Access Bank acquired Intercontinental Bank, the competitive league of the Nigerian banking industry changed significantly. In that year, Access Bank jumped over Guaranty Trust Bank and Union Bank to become Nigeria’s 4th largest bank by asset base.

The latest audited accounts of the bank shows that the size of the balance sheet more than doubled at 103.1% to N1.63 trillion in 2011. Before then the bank’s total assets were down by 22% from the peak of N1.03 trillion in 2008 , having been eroded by huge credit losses in 2009. The bank however has come to face major challenges associated with high growth in asset and liability numbers.

Interim reports indicate that progress is being made in some major areas where the bank’s performance quality has deteriorated. These include the quality of risk assets, the ability to maximise asset yield and the ability to convert revenues into profit. The bank is also likely to begin regaining some lost ground in capital adequacy ratios as well as retail service efficiency.

However, the high growth in gross credit volume with its acquisition of Intercontinental Bank has worked adversely on overall risk asset quality standard. Gross loans and advances of the bank rose by 30.4% in 2011 to N606.6 billion, which was a kind of defiance of the cautious approach in the banking industry in the post financial crisis trading.

Members of its new competitive league threaded the path of caution within the same year. First Bank increased its gross credit volume by only 3.9% in the year. Zenith Bank grew its gross loans and advances by 16.6% and GTB by 16.4%. UBA grew its gross risk assets volume by only 6% in 2011.

The result of the comparatively rapid growth of Access Bank is that it could not improve its overall credit quality in 2011. Bad and doubtful debts grew at one of the fastest rates in the banking industry in the year at 52.5% to N57.5 billion – a resurgence after a 53.3% drop in 2010. Some moderation in loan loss provisioning in the third quarter interim report last September raises hopes that the bad debts situation is getting under control.

The high rise in non-performing loans had lowered the bank’s overall credit quality in 2011, as the proportion of classified loans increased from 8.1% in 2010 to 9.4%. This was a contrary move to the general improvement in the risk asset quality in the banking industry in 2011. The overall credit quality however remains healthy despite the decline.

While new provisioning for credit losses [net] rose by 57.3% to N7.4 billion in the year, outstanding reserve for classified loans failed to grow as rapidly as classified loans. That reduced the level of coverage of outstanding provisions to classified assets from 94.3% in 2010 to 89.2% in 2011.

Also classified loans rose to 33% of equity resources of the bank in 2011 from 21.6% in 2010. The ratio had fallen from 48.2% in December 2009. The ratio of provisions/bad debts is expected to improve in 2012 while a reasonable transfer to the reserve account could moderate the threat of bad debts to the equity capital.

The doubling of the total assets figure of the bank has not been matched by equal growth in revenue yield of the assets. The ability to maximise revenue per naira of outstanding assets has weakened. At 52.5%, the bank’s gross earnings grew far less rapidly than the 103.1% growth in total assets. Asset turnover ranked among the highest in the banking industry in 2009 at 0.12 but this weakened to 0.11 in 2010 and further to 0.08 in 2011 – the lowest in four years.

The decline in asset turnover is a direct effect of the poor contribution of loans and advances to gross earnings. Interest income from core lending business grew by 23.6% to N70.3 billion in 2011 against the rise of 30.4% in gross lending volume. The contribution of interest income from loans and advances to gross income declined from 62.4% in 2010 to 50.6% in 2011.

On the average, the bank earned 12.7 kobo in interest income per naira of assets in lending in 2011, a decline from 13.2 kobo in 2010. This is a continuing decline from 15.8 kobo in 2009, which runs contrary to expectations in a high interest rate situation in the economy.

Nevertheless, financial analysts believe that the decline in asset turnover may be remedied in 2012 with the strong growth in gross income recorded in the third quarter. The bank’s third quarter report shows a major leap of 88% in gross earnings to N162.28 billion over the corresponding quarter in 2011. Based on that growth rate, the bank’s gross income is estimated to be in the region of N220 billion at the end of 2012. That will be a leap of about 58% over the full year figure in 2011.

Though the ability to convert revenues into profit also waned in 2011, Net profit grew by 40.8% to about N15.83 billion at the end of 2011. This is well below the 52.5% growth in revenue in the year, resulting in a decline in net profit margin. Net profit margin declined from 12.3% in 2010 to 11.4% in 2011, still far below the pre-financial crisis peak of 27.4% attained in 2008.

There was however a strong gain in profit margin in 2012 from 15.8% in the third quarter of 2011 to 21.6% at the end of last September. After tax profit grew much faster than revenue at 156.9% to N35.09 billion over the same period. Based on the growth rate in the third quarter, the bank’s after tax profit may triple at about N48 billion at full year.

The bank earned N1.53 per share at the end of third quarter against 88 kobo for the 2011 full year and could close at about N2.0 per share at full year. This is an indication of a major improvement in dividend payment capacity. The bank has already paid an interim dividend of 25 kobo per share and investors can hope for more when the full year result for 2012 is announced.

 

The decline in asset turnover and profit margin explain the decline in the rate of return on total assets of the bank in 2011. Return on total assets was down from 1.4% in 2010 to 1.0% in 2011. Return on equity however improved from 6.4% to 9.1% over the same period. The improvement in return on equity follows a marginal decline in equity base in the year, as general reserve, which has been negative since the bank’s loss in 2009, increased further in negative value.

Profitability ratios declined generally in the year after some improvements in 2010. Net assets per share has continued to trend downwards. Net assets per share closed at N9.70 in 2011, down from N9.80 in 2010 and N10.30 in 2009. Each employee of the bank contributed an average of N3.4 million to the bank’s pre-tax profit in 2011, a sharp fall from N9.2 million in 2010. This is nowhere close to the bank’s peak record of N15.5 million achieved in 2008.

The bank’s capital adequacy ratios have fallen, as the sharp rise in asset base has not been matched with increase in equity resources. Instead, the equity base declined marginally at about N174 billion at the end of 2011. The indication is that the stake of the owners in the expanded bank has declined significantly.

The equity figure now amounts to just 10.6% of total assets, a fall from 21.7% in the preceding year. This is a sustaining drop from the peak equity/asset ratio of 25.9% in March 2009. This means that the level of safety normally provided by a bank’s equity base, has declined for Access Bank.

The bank can now only sustain a drop of 10.6% in the value of its assets before depositors’ funds would be encroached upon by losses. Management needs to remedy this weakness in order to improve the bank’s competitiveness for high volume business.

The increased risk of the bank is also indicated by the reduced dependence on equity for risk assets expansion. The bank’s equity base represents 31.5% of the expanded loans and advances portfolio against 40.6% in 2010. This is a continuing decline from the peak equity/loans and advances ratio of 69.9% in 2008. Equity capital has also declined from 31.7% of total deposits to 14.2% over the review period.

In the retail market, the acquisition of Intercontinental Bank has paid off in terms of improved competitive visibility. Almost over night, Access Bank’s retail branch network has more than doubled from 148 in 2010 to 306 at the end of 2011. This means a strong leap in the bank’s market share. The bank now carries a deposit portfolio [inclusive of due to banks] of about N1.23 trillion, a rise of 122.7% from its total deposits figure of N550.96 billion in 2010.

Growing big overnight has created its peculiar challenges as well. In terms of retail service quality, the bank has faced some challenges in fixing some key integration hitches. For a good part of the time, the bank is inaccessible on the global ATM network. Its internal ATM services also need to be improved.

Customer queues have lengthened in major branches, which is a direct result of increased market share. Often customer accounts details, especially for Intercontinental Bank customers, cannot be accessed beyond the time of the integration of the accounts in January 2012.

Access Bank’s Profitability Ratios 2008 – 2011

 

Source: Computed from the bank’s last audited accounts

*March 31, 2011

 

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