Access Bank’s Slowdown In Second Quarter Slashes Full Year Profit Forecast.
MICHAEL MOSES.
Access Bank is still basking in the euphoria of its merger with Diamond Bank that has catapulted it to an enviable height in the banking landscape on the continent. In the excitement of the time however, it has lost its first quarter profit growth momentum in the second quarter and the full year profit outlook for the bank has now faltered.
Like the saying that the rewards for hard-work is more work, the bank put more work in its gross earnings which accelerated in the second quarter, but Access added just about one-half of the first quarter profit figure in the second quarter, which slashed the big leap in profit margin made in the first quarter.
A step up in interest earnings provided the steam for the revenue acceleration in the second quarter, leading to a leap forward from a year-on-year growth of 15 percent in the first quarter to 28 percent at half year ended June 2019. On the other hand, profit growth shrank from 86 percent year-on-year to 59 percent over the same period.
The summary of the bank’s earnings performance at half year is that while revenue accelerated, management’s ability to convert the earnings into profit weakened considerably in the second quarter. While the bank continues to maintain impressive year-on-year growth numbers, the full year profit growth indicators have moderated.
Three major expense lines made incursions into revenue in the second quarter and therefore accounted for the erosion of profit margin at half year. The biggest incursion into revenue came from other operating expenses, which jumped from N36 billion in the first quarter to N80 billion at half year, claiming an increased share of gross income at 25 percent.
Personnel expenses made a similar jump and also claimed an increased share of revenue at about 10 percent over the same period. The third major rising cost is interest expenses, which claimed over 36 percent of gross earnings at the end of half year operations, up from 33.7 percent in the first quarter.
Access Bank closed half year operations in 2019 with gross earnings of N324.4 billion – a year-on-year growth of 28 percent. It is a towering growth by industry standard in a season of lingering earnings constraints in banks. A substantial increase in earning assets following the acquisition of Diamond Bank is providing the strength to push up revenue. Interest income is leading the way so far, rising by one-third to N226 billion at the end of June 2019.
Based on the accelerated growth rate in the second quarter, the full year revenue outlook for the bank has improved. We mark up gross earnings projection from N645 billion to N650 billion for Access Bank in 2019. This indicates an expected increase of 23 percent in gross earnings for the bank at the end of the 2019 financial year.
The improved ability to convert revenue into profit seen in the first quarter weakened in the second. At N63 billion at half year, after tax profit slowed down from 86 percent growth in the first quarter to 59 percent increase year-on-year at the end of June. It was an addition of N22 billion to the N41 billion profit the bank posted at the end of March.
The bank lost profit margin in the second quarter, reversing a big leap achieved in the first quarter. Net profit margin had expanded from 18 percent in the 2018 full year to a height of almost 26 percent at the end of the first quarter. It fell back to 19 percent at half year.
Profit outlook for the bank at full year remains quite good but the growth expectation has weakened considerably. The initial profit projection of N160 billion is revised down to N125 billion for Access Bank at the end of 2019. That still indicates a strong growth of 31 percent from the closing net profit figure of N95 billion in 2018.
Profit slowdown reflects inability to keep costs at the moderated level that permitted the leap in profit margin and profit figure in the first quarter. At about N118 billion, interest expenses accelerated from 6 percent increase in the first quarter to 16 percent at half year and claimed an increased share of gross earnings at over 36 percent.
An equally accelerated growth in interest income from less than 16 percent in the first quarter to 33.3 percent at the end of June 2019 partly countered the rising cost of funds. This enabled a major acceleration in net interest income from 27 percent in the first quarter to 82 percent, amounting to N155 billion at the end of the period. This is a key operating strength for Access Bank in a year of generally decelerating net interest income in the banking industry.
Further operating strength that came from loan recoveries in the first quarter was maintained in the second. Net loan impairment expenses increased its pace of decline slightly from 32 percent in the first quarter to 33.5 percent, amounting to N4.9 billion.
Cost saving from operating expenses however could not be maintained in the second quarter. Personnel and other operating expenses grew significantly from the first quarter levels – leading to an increase in operating cost margin and consequent decline in profit margin. Total operating cost claimed 38 percent of gross earnings, rising from 34 percent in the first quarter.
The bank earned N1.93 per share at half year against N1.38 per share in the same period last year. The full year expectation is N3.51 per share for Access Bank in 2019 compared to N3.28 per share at the end of 2018. The bank has announced an interim cash dividend of 25 kobo per share to equity holders. Qualification date is 23rd September and payment date is 3rd October 2019.
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