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GAPS IN THE CASTLE WALL OF ACCESS BANK’S AMBITION

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How a downturn in Other Comprehensive Income (OCI) wrecks havoc on Access Bank’s impressive net profit  leading to a loss at the bank’s level .

Three of the five first tier banks, including Zenith ,Guaranty Trust and Access, are ,no doubt , in a fierce battle for the number one slot in the Nigerian Banking industry . At every slightest opportunity , each brandishes its strengths or unique selling points as their testimonials for the coveted position of industry leadership .While Zenith Bank lays claim to leadership in profitability, GTB tags itself as the best managed bank . Now , Access Bank regards itself as the biggest bank by assets and deposit base . However , while the three are competing for the future , the future surely belongs to the player that is resourceful not to those controlling the resources . This is a major challenge for all , but more to Access Bank for now .

Without any controversy, Access Bank Plc has changed the leadership equations of the Nigerian banking industry in the last few years . Since it perfected the acquisition of Diamond Bank and many more ,the battle has been brutal as this sent fear down the spines of top managers of its competitors ; this ongoing year, it is already getting more heated with some incumbent leaders sustaining dangerous injuries . Access Bank is cruising to the top adding more muscles; its message to others is clear : the number one slot belongs to us as this dream is snowballing to a reality . As reported in its half year 2021 results the bank has emerged the largest by its assets, deposit and gross earnings. This scenario has generated serious excitements among analysts .

But, it is not that rosy and the incumbent leaders won’t let go their laurels ;  beyond this ,  a spoiler appears to be on its trail of Access Bank . Although it has cornered the top line with the greater resources at its disposal than its close competitors , it lost the battle at the bottom line.       

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  THE GAPS IN THE BANK’S CASTLE WALL    

 Details  on the strength and weakness of   Access Bank ,an  emerging industry leader  , on some key and critical performance   metrics shed more light   on  its  competitiveness   . Access Bank’s  net income at the end of the first half of 2021 stood at N86,9 billion  against N61 billion  in the corresponding period of 2020 for the Group  and   N58 billion   against N42.6 billion  for the  Bank within the same period. These are the figures that the bank prefers and these figures hit major headlines in some media.

However , to do this is to be economical with the truth . The fact remains that when the other comprehensive income/(loss) for the period is factored into these results , the picture becomes worrying . Other Comprehensive Income    provides a holistic view of a company’s income not fully captured on income statement . At the end of all , its   total comprehensive income/(loss) for the period slumped to N43.7 billion   in 2021 from N78.9  billion    in 2020 for the Group  . Moreover  , a loss of N 9.3  billion  against a profit of N 49 billion was recorded   for the Bank within the same period . By this ,virtually the first tier banks overtook Access Bank at the bottom line where the crown is delivered  ,  the target of the shareholders .

   This is one impact  of the  gaps  in the castle wall that  has continued to raise an eyebrow  against  the bank  particularly when the degree of resources at its disposal is put into consideration . Its merger with Diamond Bank and chain of others across African continent among other expansionary measures have turned it into Nigeria’s largest bank and one of Africa’s top banks. As at June ,2021, it is the biggest lender by assets and customer base . Access Bank Plc announced a total assets to N10.06 trillion for the half year ended June 30, 2021 as against N8.68 trillion reported in full year ended December 31, 2020 indicating 16 per cent increase ; a puffy assets level could indicate improved strengths in mopping up transactions, including a better position in maturity transformation- the stuff banks are best suited for. It can also mean that the bank has applied some elastic to its wings in the form of more customer touch points, branches and Point of Sale devices. For Access , it was all of these and more.

 Also , deposits from customers appreciated by nearly seven per cent to N5.97trillion as at June 30, 2021 from N5.58trillion reported in 2020. Not only in asset  size   and deposit base ,  even it gathered largest earnings . Access recorded a 14 percent jump in gross earnings to N450.6billion compared to N396.8 billion in 2020. Access Bank is keenly followed by Zenith Bank in all these metrics . .

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Even when the other comprehensive income segment is left out and its net income is considered , Access Bank comes next to Zenith Bank in terms profitability despite its leadership in terms assets, deposits and earnings . This is an indication that the management needs to improve on certain to deliver appropriate values that commensurate its resources to live up to expectations of its investors.

A comparative analysis with some of it’s close competitors confirms this observation Lets consider Zenith Bank . This Bank ‘s deposit from customers within this period grew by +17.64% to N5.77trn from N4.90trn in H1 2020 ; its total assets inched up by +12.34% in H1 2021 to N8.52trn from N7.58trn in H1 2020 while shareholder’s fund was up +15.62% to N1.14trn in H1 2021 from N988.98bn in H1 2020. From the above analysis , it is only in the area of the shareholder fund that Zenith Bank stayed above Access Bank . Also, Zenith Bank Plc’s H1 2021 audited result showed a fall in earnings ; its revenue slipped by – 0.2% to N346bn from N346bn in the previous quarter to stay behind Access Bank . Yet , both Zenith Bank and GTB have demonstrated their leadership

A comparative analysis of Access Bank with Zenith Bank and GTB in the first half of 2021 exposes the limit of resources against resourcefulness. Zenith Bank performance in the first half of 2021 confirms the above facts . Zenith Bank delivered N 117billions  pre tax profit in the first half of 2021 against N114 billions  in the corresponding period of 2020 from gross earnings of N346 billions     in 2021 ; its post tax profits were N106 billions    from the same gross earnings of N346 billions   . But Access Bank delivered N97.5 billions   pre tax profit in the same period in 2021 from gross earnings of N450.6billion ; its post tax profit stood at N87 billions  from the same gross earnings. From the above analysis what is not hidden is that Access Bank ,despite its greater assets and earnings performed   below Zenith Bank at the bottom line . Access Bank could not translate its greater earnings delivered by its leadership in balance sheet size efficiently to a better net profit .

The above developments could be linked to the dexterity of Zenith and GTB in key performance ratios unmatched by Access . Though   in some critical performance metrics  such as  return on assets, cost to income ratio ,  profit margins  , net interest margin and earnings per share ,Access bank displayed some improvements in the first half of 2021 , its  competitors like Zenith and GTB   outperformed it .       These are the gaps in the castle wall  leading to setbacks  where it matters most for it.     Access Bank recorded a moderate improvements in its returns equity and assets as well as on its profit margins ,  however , these are not impressive enough to displace the two market leaders . In the first half of 2021  its ROAA inched up to 1.85 percent while ROAE jumped mildly to 22.8 percent in2 021 from 1.6 percent and 19.1 percent respectively in the corresponding period of 2020 . But while it led the two top banks in ROAE , its ROAA fell below those of Zenith Bank and GT Bank . Zenith Bank registered a ROAA of 2.5 percent while GT Bank had 3.2 percent  showing better profitability .

Even in ROAE where Access bank outperforms its close competitors ,some analysts say there are  more than meet the eye  and this is  raising another line of argument . Some analysts and observers associated improvement of Access Bank in ROAE to higher leverage . Their view is that with the increase in assets to equity ratio by Access  which propelled its  asset  base , there is every tendency for its ROAE to be jerked up and this may not necessarily be because of the bank’s improved profitability but for higher asset to equity ratio leverage . 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 . If a company embarks on higher leveraging in the way to grow its assets , its ROE may be artificially high. This is because as debt decreases equity  this drives the ROE up and may be dangerous if unchecked . When equity shrinks, ROE increases ,when assets increase, ROA decreases. But the smaller the ROA, the less profitable the company . This may be the strategy that drove Access Bank ROAE in the first half of 2021 . Despite the supersonic growth in its assets without a corresponding increase in its equity , its ROA remains less impressive compared to its close competitors with smaller net income .

Not only on ROAA and ROAE , Access Bank profit margins are still uninspiring though they grew marginally in the period under review . In the first half of 2021 , the bank’s pretax profit margin grew to 21.6 percent from 18.7 percent indicating improvement in the cost of operation. Of course , its cost to income ratio improved from 65.8 percent in 2020 to 60.1 percent . This also indicates the bank took more out of gross earnings in the second quarter of 2021 than it did in the equivalent quarter in 2020 .  At this level, this indicates the bank delivered approximately N22 from every N100 of its revenue as opposed to N19 made previously . At its Net profit margin level , it delivered on N19 from every N100 it gathered at the top line as its net profit margin grew to 19.3 percent from 15.4 percent . This represents a 2 percent marginal gain to investors over inflation with Net profit margin at 19.3 percent against a 17 percent inflation rate in June 2021 . These figures at both pre tax and post tax levels ,however, are believed to be relatively less impressive and this is  more so when the figures from its competitors are considered .  Zenith Bank pre tax margin rose marginally to 34 percent in 2021 compared to 33 percent in 2020 while post profit margin was 31 percent against 30 percent in 2020 . For GTB , pre tax margins was 45 percent while its net profit margins was 38 percent in 2021 . Access Bank’s earning per share , or earnings power was equally lethargic . Though Access Bank EPS increased to 248k from 173k between the two periods, however , it equally stayed below its two closest competitors . Zenith’s EPS inched up to N3.38 in 2021 against N3.30 in 2020 while that of GTB was 279 k in 2021

THE ODDS , THE REALITIES DRIVING AACCESS PERFORMANCE

What are the odds , realities , strengths and hopes trailing Access Bank’s leadership ambition ? A detailed analysis of the half year report of Access Bank in 2021 beams a floodlight on the strengths and dark spots of the bank’s activities as these follow the same pattern in last few years . A look at Access Bank income streams and cost handles expose the pedigree of its management and its competiveness of the brand .

Core banking segment

, Access Bank is pulling weight and benefiting heavily from its large balance sheet size . Although , banking incomes also come from fee and commissions and trading activities ,the largest volume comes from the core banking activities .

Sequel to this, interest income and net interest income (NII), are the main  targets  that drive   revenues  for the majority of banks worldwide .It can form upwards of 60% of operating income . NII is driven by lending and interest-earning asset volumes, and the net yield available on these assets after taking into account the cost of funding is a determinant of a bank strength . Both the earning assets yield profile and the cost of funding are the key variables in generating overall NII. The overall composition of funding affects significantly net interest margin that reflects how well a company utilizes its assets to produce profit . To outperform competitors , a strong hands in risk control is a must for every bank . This may not be farfetched. NII is sensitive to both credit risk and market risk. Market risk is essentially interest-rate risk for loans and deposits ; interest-rate risk will be driven by the maturity structure of the loan book, as well as the match (or mismatch) between the maturity of the loans against the maturity of the funding. This is known as the interest-rate gap.

In this segment ,  the quality of the management is ultimately exposed by the bank’s net interest  margin  which consequently  shows how  best a banker   lends  safely and profitably ; it is  not by the bank’s volume of assets or equity though both could enhance performance  . Access Bank , no doubt , put up a good fight in its core banking businesses in the period under review .  A total sum of N320 B came from this income segment out of a total or gross earnings of N450 billion . This is the highest figure by any single bank in the industry in the first half of 2021. This ,indeed, is very spectacular in a terrain fraught with low yields  .  

As in the past few years , in the first half of this year , the core banking terrain remained a hard nut for banks with the prevailing low or declining yield environment . Despite this , Access deployed a total net loan of approximately N4 trillion into this economy displaying a large heart for risk . By its performance or exploit in the core banking terrain, it remains undisputed that Access Bank has developed iron teeth to break the metaphorical hard nuts , dismantling both threats from both interest rate and credit rate risks . After the interplay of forces between interests paid and those received, the bank ushered net interest income of N200 billion , a 59 percent growth from N126 billion in 2020 .

Though impressive , Access Bank performance could be adjudged to be unimpressive as indicated by its net interest margin . Between 2018 and 2020 , its half yearly reports indicate its net interest margins were 5.6 percent ,7.7 percent and 4.9 percent respectively .In 2021 ,its half year net interest margin was 6.4 percent . These low margins were the impacts of its depressed assets yields despite its efforts to manage down its cost of funds . In the first half of 2020 , its yields depressed by declining yield on government securities to 9.5 percent from 13.5 percent in the corresponding period in 2019 . The yield was 12.2 percent in2018 . Although, its average costs of funds were managed down with its growing low cost deposit base in the recent time . from 5.8 percent to 4.8 percent and 3.7percent between half year 2018 to 2020 respectively , the spreads were not enough to give it better margins within those periods because of the prevailing low yield environment in Nigeria banking clime . The impacts of low yields is economy-wide . GTB’s NIM was 7 percent while Zenith’s hit 6.5 percent .  .Moreover , while the management maintained a reasonable non-performing loan rate at 4.3 percent , what its set aside in absolute term for loan impairment is huge enough to drag its bottom line and NIM to a point raising eyebrow particularly with its relatively high gross earnings .Its loan impairment skyrocketed to N28,669,006 from N16,465,691 in the first half of 2020 to drag the margin further and consequently the bottom line .  .

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Non- interest income segment

Another income segment where Access Bank is finding it difficult to outperform its competitors as a strong and leading brand is the non interest segment . A good manager of a financial institution or bank usually rev up non interest income items of its balance sheet because it holds the key to stabilizing earnings especially at the time the country is in recession and or when interest rate volatility is a factor .

For Access Bank in the half of 2021 , it was not that rosy in this segment . While it scaled through the challenges of fee and commission, the trading aspect posed as a hard nut difficult for it to break .

Fee and Commissions

Fee income is very popular with bank senior management because it is less volatile and not susceptible to market risk like trading income or NII. There is also no credit risk because the fees are often paid up front. Other benefits include the opportunity to build up a diversified customer base for this additional range of services. It is also attractive because it provides an opportunity for the bank to cross-sell new products and services to existing customers, and the provision of these services does not expose the bank to additional credit or market risk.

Fee income represents diversification in a bank’s revenue base. Fee and commission income inched up to N74 billion   from N52 billion  ; its Fee and commission expense followed the same trend as it increased to N15 billion  from N11 billion  leaving it with Net fee and commission income N58.7 billion  from N 40 .6 billion 

Trading Income

But Access bank did not find it easy in milking money from its trading activities in the period under review . Net loss on financial instruments at fair value hit N23.3 billion  in 2021 as opposed to a whooping gain of N134.8 billion in the first half of 202 0 . Despite a gain from the Net foreign exchange at N 68.2 billion   against a loss of N 66 billion   in the corresponding period of 2020 , this could not absorb this loss as another loss of N4 billion   from the Net fair value hedge compounded the pain . This is not unexpected. Trading income is the most volatile income source for a bank. It also carries relatively high market risk, as well as not inconsiderable credit risk. Even a record of consistent profit in trading over a long period is no guarantee of future losses arising out of market corrections or simply making the wrong bet on financial markets. Within the period under review , losses on derivatives and fixed income securities, as well as a y/y reduction in loan recoveries unleashed heat on Access Bank .

High cost to income

High cost to income ratio is a traditional headache and weak point of Access Bank yet to be addressed which is working against its bottom line . Significant elements of cost are provisions for loan losses, which are a charge against the loan revenues of the bank. .Though as at the first half of 2021 , its cost to income stood at 60.1 percent , a decline from 66 percent in June ,2020, this is still too cold for comfort . Its competitors usually take advantage of this over it; ; GTB and Zenith Bank cost to income ratios were 49 percent and 56percent respectively in the first half 2021 . Moreover , their better cost of funds are additional advantage that give them better resource leverage in the last few years .

THE FEAR

The inability of Access to convert its whooping resources to commensurate values for its shareholders has continued to raise heated controversy . Either by envy or otherwise , to some critics , the top managers of this bank are described merely a bunch of opportunists with inordinate ambition .  It started with the Acquisition of  the rested Intercontinental Bank .The bank’s fortunes , to them , are merely driven by series of acquisitions and may not be sustainable as it could not embark on acquisition indefinitely . Whether by envy or otherwise as stated above , what is undisputable is that there are elements facts  in their argument . Getting big for bigness’ sake without converting it to commensurable value is irrational and a proof . Moreover , just as bigness without stretch and leverage is obesity, smallness without stretch and leverage is impotence .  . It is not cash that fuels the journey to future but the emotional and intellectual energy of every employee. The point the critics are making is that assets are resources and critical success factors and could not be equated with core competencies needed to outperform competitors once they are not unique .Assets and equity are just the basic resources which are the same as competitors just as threshold competencies are those actions and processes that a company must be good at just to be considered as a potential player in the industry ; to be strategically capable , the resources must be unique and competencies must be core . Only “unique” resources and core competencies that are different to competitors and more difficult to copy can deliver industry leadership .

But they might be  wrong  too.  Access is catching up fast dragging fear down the spines of  the managers of  some top banks .   Despite the above challenges , no doubt about it , with its strategic acquisitions Access Bank has gathered strong reputation, technological richness and deep pockets ; these are features of a strong firm . With the all these , it could hire the most talented people in their industry , have sizable market shares and a worldwide distribution channels.. These are critical success factors (CSFs) that are fundamental to an organisation’s success . . By its chains of acquisitions , its critical success factors have been enhanced in the recent years . These factors have ,indeed, delivered to it leadership in some key and critical areas and this is confirmed by its current financial position .

But Access Bank needs more than building its assets . The lesson from this scenario for Access Bank management is clear : foresight, stretch, and leverage provide the energy and rationale for proactive advantage building and industry re-engineering . This is because starting resource positions are very poor predictor of future industry leadership. A firm can sit atop mountain of cash and command legions of talented people, and still lose its preeminent position. Likewise, a firm can sometimes overcome resource handicaps and successfully scale the heights of industry leadership.

The missing gap between Access Bank and the coveted number one position is its inability to leverage its resources effectively and competitively . Resource Leverage , no doubt , springs an aspiration that takes little notice current resource constraints . Getting to the future first is more a function of resourcefulness than resources . Moreover , resourcefulness stems not from an elegantly structured strategic architecture, but from a deeply felt sense of purpose, broadly shared dream , a truly seductive view of tomorrow’s opportunity.

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