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As second quarter earnings season approacheses, Fitch Ratings has revised the outlook on Nigeria-based Access Bank Plc.’s Long-Term Issuer Default Rating (IDR) to stable from negative and affirmed the rating at ‘B’ as the lender builds headroom to absorb risks to its asset quality, profitability and capital.

Nigerian banks will be releasing their financial performance scorecards from this month onward and expectation for improved earnings outing has increased. Though, separate reports from the Nigerian investment banking space have spelt that impairment credit surge could be a downside to profitability in the second quarter.

Fitch Ratings recent report on Access Bank indicates that the Nigerian lender now has a stable outlook with a strong ability to withstand certain risks against asset quality, profitability and capital position.

Access bank’s viability rating (VR) has also been affirmed at ‘b’, saying that the outlook revision reflects the view that risks to the bank’s credit profile have receded since the onset of the Covid-19 crisis, as reflected in its resilient financial metrics in 2020 and first quarter of 2021 with the expectation that these trends will continue.

“Our action also reflects our view that the bank has sufficient headroom at the current rating level to absorb risks to its asset quality, profitability and capital under our base case, resulting from operating environment pressures”, Fitch stated.

It explained that Access’s IDRs and senior debt ratings are driven by its intrinsic creditworthiness, as defined by its ‘b’ VR.  The VR takes into consideration business concentration and sensitivity to Nigeria’s volatile operating environment, mitigated by sound profitability and adequate capitalisation for its risk profile and ensuing reasonable loss-absorption capacity.

Fitch said the bank’s asset quality has continued to hold up, supported by substantial non-loan assets – largely comprising cash balances at the Central Bank of Nigeria (CBN) (mainly restricted deposits) and government securities – regulatory forbearance on loans, and proactive management of legacy assets at Diamond Bank acquired in 2019.

Access’s impaired (IFRS 9 Stage 3) loans ratio at the end of Q1 2021 printed at 4.4% as Fitch said this compares well with peers, while total reserve coverage is healthy at 87%.

It was noted that the bank impaired loans have fallen due to loan repayments, restructurings, loan conversion to naira from US dollars, and write-offs.

Nevertheless, Stage 2 loans – concentrated in the oil sector – remain high, although they have fallen to 12.6% of loans in Q1 2021from 22% in the first half of 2020, reflecting the improving economic outlook.

“We believe migration risk relating to Stage 2 loans should be limited, given the restructuring of a significant proportion of the loans”, Fitch said.

However, the bank’s total oil-related exposure remains significant at 28% of loans, though in line with the sector, and foreign-currency loan exposure since 2019 has more than halved to 16% at end of Q1 2021.

Also, Fitch Ratings noted that Access bank operating profit to risk-weighted assets (RWA) is sound, printed at 6.1% in Q1 2021, up from 3.3% in the financial year 2020, and has been supported by lower funding costs, reflecting improved current and savings accounts (CASA) deposits in 2020, increased scale following the Diamond acquisition, and higher oil prices.

“Non-interest revenue should continue to grow, driven by customer-driven trading income and fee income as economic activity picks up”, Fitch hinted. Nevertheless, profitability underperforms the highest-rated peers in Nigeria, due in part to integration costs from Diamond Bank.

“We expect loan-impairment charges to remain high in 2021, although lower than in 2020 when Access reported a one-off charge at its UK subsidiary”.

Access’s capitalisation is adequate, as reflected in a Fitch Core Capital (FCC) ratio of 17.7% at end of Q1 2021, albeit below more highly rated peers. Buffers over regulatory minimums are solid with a total capital ratio of 22.2% versus the 15% regulatory minimum.

However, Access’s tangible leverage ratio of 8.0% in Q1 2021 is below the highest-rated peers, although Fitch Ratings expects it to improve as the profitability outlook recovers. Also, the bank’s capitalisation is noted to be sensitive to risk weighted asset (RWA) inflation from likely naira depreciation and concentration risk.

In Q1 2021, the top 20 loans accounted for 1.73x FCC; 70% in Stage 1, although Fitch noted that RWA inflation risks should be mitigated by lower foreign-currency exposure than peers and rising internal capital generation.

Fitch Ratings said Access bank funding profile has continued to benefit from its expanded retail franchise following the Diamond Bank acquisition.

The bank’s CASA deposits rose to 63% of the deposit base by end of Q1 2021 from 58% in 2019, driving down funding costs.  Fitch believes there is scope to increase the share of CASA further to a level more in line with peers, while funding costs could also fall further as outstanding Eurobonds are refinanced at lower rates.

“The bank has good overall balance sheet liquidity but takes foreign currency liquidity risk (and counterparty risk) through substantial currency swaps with the CBN.

“We consider foreign-currency liquidity to be only adequate, notwithstanding potential liquidity available from the broader Access Bank group, in light of the tight foreign currency conditions in Nigeria. Naira liquidity is supported by large cash placements (excluding restricted deposits at the CBN) and government securities”, the Ratings stated.

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