NIGERIA: Access Bank, UBA Get Positive Recommendations

 Investors who wish to take advantage of the current bullish run in the Nigerian stock market have been advised to consider Access Bank Plc and the United Bank for Africa Plc (UBA) among their top choice of equities because of the strong fundamentals of the banking stocks.

Citibank, made this recommendation in its equities report titled: “Nigerian Banks- Access and UBA, New Top Picks; GTB and Skye Downgraded,” dated May 31, a copy of which was obtained Monday.

Specifically for Access Bank, the report which placed a ‘buy’ rating and target price of N15 per share (from NGN14) on the bank, anticipated a total return of 40 per cent and strongest potential earnings growth over the forecast period for the bank.

Access Bank’s total assets increased to N1.7 trillion as at December 2012 and the bank is now Nigeria's 5th largest bank with eight per cent asset share. A foremost global ratings agency, Standard & Poor’s Rating Services (S&P), recently upgraded Access Bank’s long-term credit rating to ‘BB-‘from ‘B+’ with a stable outlook.

Similarly, the bank’s long term Nigeria national scale rating was upgraded to ‘ngAA-‘ from ‘ngA’, attesting to its continued adherence to global best practices, sound corporate governance and best-in-class risk management framework.

“Access Bank is the top pick in our universe of Nigerian banks. To reflect the consolidation of Intercontinental bank and its full year 2012 and first quarter 2013 results, we adjust our 2013, 2014 and 2015 earning per Share (EPS) forecasts.

“Our fair value estimate and target price for Access Bank is 15 per share. Our fair value estimate implies 2013 ending price-to-book (P/B) and 2014 ending price-to-earnings (P/E) multiples of 1.35x and 6.6x, respectively,” Citibank explained.

It further stated that in calculating its fair value estimate for Access Bank, it had applied its standard five-year dividend discount model (DDM), saying that the cost of equity assumed was 17 per cent.

It added: “The terminal growth rate we applied to our Access Bank valuation is six per cent; this is in line with all our Nigerian bank valuations. We are confident in Access bank’s ability to build its profit share because of its scope to reduce its funding costs. Among the Tier 1 banks, Access had the highest full year 2012 cost of funding (4.9 per cent of interest bearing liabilities) and this can be explained by its high mix of time deposits (38 per cent of total at FY12).

“Since the acquisition of Intercontinental Bank, the single biggest risk to Access bank reaching our target price has been execution. While the bulk of the key integration risks (like system and personal overlap) have been addressed, the process is not yet completed and therefore problem may arise, particularly with regards to cost reduction programs.

With regards to its systematic risks, we believe that Access Bank, like all Nigerian banks  are at risk of higher funding costs, deterioration in asset quality from the current lows and a global economic correction.”

Similarly, Citibank in the report, raised its 2013, 2014 and 2015 EPS forecasts for UBA by 31 per cent (to N1.64), 18 per cent (to N1.64) and 20 per cent (to N1.82) respectively. It argued that the earnings upgrade for UBA was reflective of the commercial bank’s FY12 earnings beat (30 per cent) and strong first quarter 2013 results.

Presently, UBA is Nigeria's second largest bank by number of branches. Outside of Nigeria, the commercial bank has operations in 18 African countries and three global financial centres.

“The upgrades to our UBA estimates can primarily be explained by higher Net Interest Income (NII), (on the back of stronger asset volumes) and lower risk charge estimates, which are in keeping with its current trends.

“Following our earnings upgrades, we raise our fair value estimate for UBA to N11/share (from N8.50). We expect the UBA equity story to continue to be supported by further consensus upgrades. Note that our 2013 EPS forecasts are 11 per cent, ahead of the Bloomberg consensus figure.

“We believe that UBA has the potential to build-out its profit share to 13 per cent of total by 2017. UBA also has the largest pool of foreign currency deposits (N812 billion or 47 per cent of its FY12 deposits). This will be key as more financing is demanded for power and infrastructure – key long-term growth areas in Nigeria.”

However, the Citibank report downgraded Skye Bank to ‘neutral’, saying that it adjusted its ‘fair’ value estimate of the bank to partially reflect the $320 million Tier 1 capital that the bank had received shareholder approval to raise.

“In our opinion, Skye Bank’s decision to request shareholders’ approval for a significant capital raising (50 per cent of its existing capital base) and announcement of its possible interest in one of the AMCON banks for sale has cast a lot of uncertainty over its investment case,” it argued.

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