ACCESS BANK : THE HOPE ,THE FEAR BEHIND HIGH DEBT DRIVEN ASSET POWER

The ability of a company to meet its long-term debts and financial obligations measured by  solvency ratios , no doubt , is a critical element  of a bank health situation . . From these metrics, it is easy to separate an aggressive management from a risk averter.In recent time ,Access Bank has demonstrated a large heart for risk ; it has chosen to be a big time risk taker judging by its acquisition spree and excessive use of debt against equity. Although these two strategies could lift some corporate entities beyond ordinary imagination, like two edged sword ,they could lead some to the corporate graveyards too .For Access Bank this disposition is generating both fear and hope .

Ordinarily, banking industry is naturally a high leveraged because of its high level of debt over equity .When a bank is driven by a desire for better profitability and growth, it often opts for the former strategy using more debt heavily as against equity and such a bank is said to highly leveraged.But such a decision may be very risky in the time of economic downturn.

Herbert Wigwe of Access Bank is surely a believer of this strategy . Wigwe is an ambitious CEO and a challenger too with large heart for risk ;. he neither content to follow nor afraid of orthodoxy, his desire is to rewrite the rules of the game .Like other CEOs in the corporate world , he sets his visions and missions , and crafts his own strategic architecture or road map for Access Bank Plc to translate his dreams to reality. No doubt, it remains undisputable that a major priority driving the leadership ambition of Access Bank Plc led by Mr Wigwe is acquisition. But high debt is his main driver of this strategy .

Access Bank than any other tier one bank is highly leveraged and very aggressive to outperform others ..A look into Access bank asset industry leadership revealed shows the impact of enormous use of debt . This is not to raise alarm on Access Bank but to call for caution.

. This is vividly displayed a bank’s volume of debt relative its equity, capital and assets .But a supersonic flight of its assets relative to it equity is generating fears at another angle . Access Bank has been jerking up its assets but not doing the same to its equity and therefore the bank is driven more dangerously by high level of debt .. The seed to this fear is sown in its asset –equity ratio . Asset ,equity ratio or equity multiplier is a financial leverage ratio that measures the portion of company’s assets that are financed by stockholder’s equity

. This ratio was 7.05 in 2015 , 7.67 in 2016 , 8.02 in 2017, 10.10 in 2018 and 11.71 in 2019 .Its three and five years averages were 9.95and 8.91 respectively .

Driven by similar ambition to its spate of acquisition , this ratio has continued to rise over the last two years and in the industry this bank controls the highest ratio with 13:1 currently This means that only 13 % of the assets have been funded with equity, and a massive 87% has been funded with debt. .

. When these figures are juxtaposed with other tier one banks , this latest figure is the industry’s highest .For GTB, between 2014 and 2018 it ranged it ranged between 6.29,6.10, 6.17, 5.25 and 5.70 respectively while three and five years averages were 5.71and 5.9 . And for ZENITHBANK’s Assets to Equity ratio is currently (8x) . ; GUARANTY’s current Assets to Equity ratio (6x)

Asides its asset to equity ratio , its total debt to total equity ratio is 259.86 ; total debt to total capital, 72.21; Total Debt to Total Assets 22.27 ; Long-Term Debt to Equity 97.26 ; Long-Term Debt to Total Capital 27.03 and Long-Term Debt to Assets 0.08

Confirming its higher leveraged position are the comparative analysis of its figures with GTB and Zenith Bank Plc . For GTB the Total Debt to Total Equity is 27.98 while its Total Debt to Total Capital 21.87 . Its total debt to total assets , 4.52 ; long- term debt to equity 6.82 ; long- term debt to total capital 8.72 and long- term debt to assets 0.01 .

For Zenith Total Debt to Total Equity is 120.16 Total Debt to Total Equity 120.16 .Total Debt to Total Capital 54.58 ; Total Debt to Total Assets 15.82 ; Long-Term Debt to Equity 46.65 ; Long-Term Debt to Total Capital 21.19 . From the above statistics Access Bank Plc is the most highly leveraged bank among the tier one banks However , despite GTB and Zenith lower leverages ,they are not doing badly relative to Access .The import of this is that a bank does not have to be unduly leveraged to be profitable .

The asset to equity ratio reveals the proportion of an entity’s assets that has been funded by shareholders. The inverse of this ratio shows the proportion of assets that has been funded with debt .A low ratio indicates that a business has been financed in a conservative manner, with a large proportion of investor funding and a small amount of debt. A low ratio should be the goal when cash flows are highly variable, since it is quite difficult to pay off debt in this situation. A higher ratio is tolerable when a business has a long history of consistent cash flows, and those cash flows are expected to continue into the future.

A high asset to equity ratio can indicate that a business can no longer access additional debt financing, since lenders are unlikely to extend additional credit to an organization in this position. Also, if a business has a high ratio, it is more susceptible to pricing attacks by competitors, since it must maintain high prices in order to generate the cash flow to pay

There is no crime in the use of debt as supplement to equity ,however. , an abuse it has proved to be dangerous and liken .to moving on landmine . For this ,, regulatory authorities monitor and frown with this disposition.. Many have paid heavily and burnt their fingers for their lack of caution ; abuse it has proved to be dangerous liken .moving on landmine . As a measure of the ratio of assets to owner’s equity, they are an explicit indication of risk exposure. .The financial crash of 2008 highlighted the extent of risk taking by certain banks when measured using leverage ratios. Lehman Brothers leverage ratio increased from approximately 24:1 in 2003 to over 31:1 by 2007. Such aggressive asset growth generated tremendous profits during the boom years, but exposed the bank to such an extent that even a 3% or 4% decline in the value of its assets would eliminate completely its equity. This duly happened

Yet some still prefer it . The reason behind this may not be far to seek : Equity financing is a greater risk to the investor than debt financing is to the lender, the cost of equity is often higher than the cost of debt . Debt can be a less expensive source of growth capital if the Company is growing at a high rate . However , analysts are getting worried and calling for some element of caution .Their view may not be farfetched . Managing the capital base, and ensuring its sufficiency, as well as controlling the level of leverage, are vital to the well-being of the bank. Although , higher leverage produces a higher RoE, so it can become tempting for senior management to gear up ever higher, with more and more debt, in an effort to generate higher shareholder returns. But this is of course a risky strategy, because in a market downturn a high level of borrowing causes debt-servicing problems.

Whether high or low both have their strength and weakness . The bank has translated the hope behind the ambition to reality with its competitive profitability and leadership in assets . This is a kudos to the management .

Herbert Wigwe has proved his flair for high risk taking by the spate of acquisition which other avoid like leprosy .And the strategy has given additional wings to Wigwe to soar and overtake some incumbent leaders in the industry .In the last financial year 2020, it emerged the biggest bank by assets and revenue; its customer base took a swing giving it another lead in customer deposit

Ordinary, banking industry is naturally high leveraged for its high level of debt over equity .;However , regulatory authorities monitor them with eagle eyes because of the danger in its abuse

This may not be farfetched . . Banks will have to be run on principles that ensure that they survive throughout the business cycle. This will call for more enlightened strategy and management, as well as an inherent conservatism. If bankers wish to run a proprietary trading outfit, or wish to maximise market share and return on capital, or outperform their peers, then they should go and work at a hedge fund. Those who manage a retail deposit-taking institution will need to remain aware of the responsibilities they bear.

From the point of view of bank practitioners, the most important task is to address the issues of capital, liquidity and risk management, and work them into a coherent strategy that is designed to produce sustainable returns over the business cycle