Access Bank Eyes Lower Impaired Loans Ratio, Gets Fitch Ratings

By Modupe Gbadeyanka

One of the leading financial institutions in Nigeria, Access Bank Plc, is anticipating to have a reduction in its impaired loans/gross loans ratio to low single digits by end-2020, Business Post has learned.

At the moment, Access Bank has impaired loans/gross loans ratio above the 8 percent average reported by more highly rated domestic peers like Zenith Bank, Guaranty Trust Bank (GTBank) and United Bank for Africa (UBA), all listed on the Nigerian Stock Exchange (NSE).

In March 2019, Access Bank completed its merger with a local tier two lender, Diamond Bank and this resulted in an increase in its consolidated assets of around 30 percent and created Nigeria’s largest bank, with a 23 percent share of deposits (previously 11 percent).

The bank’s franchise is now stronger and Access Bank’s traditional corporate business model is more balanced across retail and SME segments, areas of expertise at Diamond Bank.

In a statement recently, Fitch Ratings, which affirmed the bank’s Long-Term Issuer Default Rating (IDR) at ‘B’ and Viability Rating (VR) at ‘b’, emphasised that the ability of Access Bank to finalise the transaction in a short period of time demonstrated its strong execution skills.

The rating agency stressed that financial profile metrics, particularly in areas such as asset quality and capitalisation, have a higher influence on Access Bank’s ratings and would be monitoring trends in impaired loan write-offs, recoveries and internal capital generation.

“We assess Access’ risk culture as strong compared with domestic peers’ and this framework has proved to be robust over different economic cycles.

“Access Bank’s risk management tools, culture and controls are being implemented across the Diamond network, which we view positively,” it said in the statement obtained by Business Post.

Fitch noted that consolidation of Diamond Bank drove up the stock of impaired loans to N297 billion (end-2018: N55 billion), equivalent to 10.4 percent of total loans at end-March 2019, with only moderate coverage of about 49 percent by specific loan loss allowance.

“Impaired loans are highly concentrated, with the top 20 impaired loans representing around 80 percent of the total stock.

“Management is confident that a number of large impaired loans will be written off in the short- to medium-term and envisages a reduction in the impaired loans/gross loans ratio to low single digits by end-2020,” Fitch said in the statement.

Fitch said it observes that good progress in achieving write-offs, loan repayment and recoveries has already been made, suggesting that asset quality targets may be achieved.

“Currently, Access Bank’s impaired loans/gross loans ratio is above the 8 percent average reported by more highly rated Nigerian banks, namely Zenith Bank, Guaranty Trust Bank and United Bank for Africa.

“Capitalisation was negatively impacted by the Diamond Bank acquisition, which generated N22.7 billion of goodwill. Access Bank’s Fitch Core Capital (FCC)/risk weighed assets ratio fell to 16 percent at end-March 2019 (end-2018: 18.4 percent), well below the 26 percent average for the abovementioned more highly rated Nigerian banks.

“Net impaired loans/FCC ratio increased to 28 percent at end-1Q19 from a negative value at end-2018, albeit we view this level as manageable given Access Bank’s capacity to fully provide for existing impaired loans from annual pre-impairment profits.

“Access Bank’s ability to generate earnings is considerable and management plans to boost core capitalisation through retention of earnings.

“Regulatory capital ratios are being strengthened through subordinated debt issuance but this is not included in our calculation of FCC.

“Access Bank’s loans/deposits ratio improved considerably following the acquisition of Diamond Bank and the deposit mix is more balanced towards low-cost retail and SME deposits, which are proving to be highly stable.

“Access Bank’s higher cost funding base was a rating weakness and the ability to improve the overall funding profile is credit-positive.

“Diamond Bank’s $200 million bond was repaid at end-May 2019 and sufficient foreign currency (FC) liquidity has been earmarked to ensure repayment of additional FC borrowing maturing in 2H19,” the rating firm stated.