ACCESS BANK RIGHTS ISSUE

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1 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Primary Market Watch Capitalising to push strategic growth plan Capital is key to achieving medium term strategic plan: Access Bank Plc is raising N52.63 billion (US$263 million) by way of Rights Issue ( The Offer ), in continuation of its N200 billion (US$1 billion) capital raising program for which its shareholders had earlier granted approval. According to management, the capital raising activity is pivotal to the pursuit of the medium term (five year) strategic plan which the bank unveiled in As one of the most significant of the strategic objectives, Access Bank intends to be World s Most Respected African Bank by 2018 by having the best-in-class technology in Africa, an expanded footprint in Africa s most attractive markets, and by being the preferred African Bank in the UK. Achieving these objectives will require a substantial capital base, which partly underlies the reason for the ongoing Rights Issue. At its Extraordinary General Meeting (EGM) held on October 13, 2014, the bank s management obtained shareholders approval to raise additional capital of up to N68 billion (US$340 million) via Rights Issue. So far about US$400 million (N80 billion) has been raised through Eurobond; the Right Issue is another major stage in the bank s capital raising programme. The terms of the offer are summarised in the table below; Summary of Offer Offer Type Right Issue Issue Price per share (N) 6.90 Expected Gross Proceeds (N) 52,630,713,488 Expected Net Proceeds (N) 51,132,471,586 Qualification Date 23-Oct-14 Allotment 1 new share for every 3 shares held Purpose of Offer 1.) Upgrade of branch network and facilities 2.) Development of IT Infrastructure; and 3.) To augment working capital and loan book expansion plans Status Tradable on the NSE, ranks pari-passu as existing issued shares Opening Date 26-Jan-15 Closing Date 04-Mar-15 Stock Data Bloomberg Ticker: ACCESS Market Price (N) 5.88 Shares Outs (Mn) 22,883 Market cap (N Mn) 131,577 Ownership Structure Analyst Alieza Jo-Madugu* Alieza.jomadugu@cardinalstone.com Team lead Oluwatosin Ojo, CFA* Tosin.Ojo@cardinal-stone.com 12 February 2015 Stanbic Nominees 26.0% Blakeney GP 6.1% Others 67.9% Price Performance ACCESS NSE 12-month (%) -33% -30% 6-month (%) -41% -33% YTD (%) -11% -17% Key Ratios Q1 14 H1 14 9M 14 Net Interest Margin 6.2% 6.9% 6.9% Cost to Income Ratio 64.6% 63.1% 61.2% ROAA 2.9% 2.8% 2.9% ROAE 19.6% 18.3% 18.7% Valuation 2013A 2014E 2015F P/E (x) P/BV (x) Div. Yield 10.2% 16.5% 12.7% One Year Price Performance (rebased) Access Bank group has a total of 366 branches out of which 315 are located in Nigeria, 3 are located in the United Kingdom, whilst the remaining (48) are situated in other African countries - Sierra Leone, Gambia, Zambia, Rwanda, Ghana and the Democratic Republic of Congo. As contained in the Rights Circular, the Bank would open 5 new branches, 6 new e-branches and renovate about 150 branches in different parts of the country. In addition, the Bank would deploy some part of the expected proceeds to infrastructure upgrade and information technology ACCESS ASI Source: NSE Contact details sales@cardinalstone.com Tel: Mobile:

2 Percentage distribution of utilization of right proceeds International Branch Expansion & Expansion, 4.9% Facility Upgrade, Working Capital, 20.2% 36.4% Replacement of Obsolete Infrastructure & Upgrade of Equipment, 22.0% IT & Systems Distribution Upgrade, 8.4% Channels, 8.1% Source: Rights Circular Adequate regulatory capital buffers. In our full year outlook, Caution through the tunnel, we identified Access Bank s need to boost its Tier 1 capital due to the implementation of a Basel II requirement which limits Tier 2 capital to 33% of Tier 1 capital. Furthermore, its capital adequacy ratio of c.17.5% as at FYE 14 is somewhat close to the 16% statutory limit for banks deemed systemically important. Assuming full subscription of the Offer, the net proceeds (N51.27 billion) would significantly shore up the bank s capital base and raise its capital adequacy ratio to c.22%, which will give Access Bank an adequate buffer. The increased capital base will therefore allay fears of capital adequacy issues and also support the bank s strategic growth plan over the next few years. Access Bank s management believes that the capital raised in the Rights Issue and future retained earnings should provide a solid loss absorption buffer, even in the face of the evolving regulatory environment. Given the expected use of proceeds in branch renovation and IT upgrade, we expect faster growth in operating expenses this year which will likely push cost to income ratio higher than the bank s target of 60% by FY 15. With the proceeds of the Rights Issue expected towards the end of H1 15, management acknowledges a major dilutive impact on FY 15 earnings as the capital would only be available for deployment for only about half of the year. We envisage about 27% dilution in our FY 15 EPS projection to N1.49 (from the pre-rights EPS estimate of N2.04), assuming full subscription of the offer and project a 15% FY 15 ROE (slightly lower than management s 16% - 17% range) by FY 15. Capital Adequacy Ratio and RoAE 25% 20% 15% 18% 16% 19% 19% 15% 16% CAR ROAE 21% 20% 18% 19% 18% 17% 22% 15% 10% 5% 0% Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 *Dec-14 & Mar-15 ROAE 's are estimates Sources: Access Bank, Cardinal Stone Research 2

3 What is the right price: The offer price of N6.90 and market price of N5.88 represent a discount of 36% and 49% to the average trailing twelve months (TTM) book value per share of N10.83, and implies a P/BV of 0.60x and 0.54x respectively. Access Bank s share price has been at a significant discount to the Right Issue price, though we have seen some strengthening in the market price since the offer opened. Notwithstanding the fact that the counter is trading at a lower price, the Rights Issue price still offers some discount to the company s average trailing twelve month book value per share. A brief profile Delivering Speed, Service & Security Access Bank Plc began as a private limited liability company on May 11, 1989 and was listed on the Nigerian Stock Exchange ( NSE ) through an initial public offering of its shares in November The Bank was issued a universal banking license by the Central Bank of Nigeria ( CBN ) on February , and applied for and received an approval from the CBN on February 5, 2014 for an international commercial banking license under the new CBN licensing regime. Access Bank in its five year strategic plan declared its intent to be the world s most respected African bank by The lender aspires to rank in the top three position in its chosen markets under several metrics, including profit before taxes, total assets, total deposits, corporate governance, employee satisfaction and customer satisfaction. These objectives will be furthered by deepening and expanding its current strengths in corporate banking and by establishing a proper retail banking business. SWOT Analysis Strengths Strong brand awareness Strong and experienced management (average of more than 24 years of experience) Good Information Technology and E-business platform Good relationship with development finance institutions, multilateral agencies, and international correspondent banks Strong presence in telecoms, midstream and downstream oil and gas sectors Fifth largest bank with N2.3 trillion in total Assets CAGR of 32% in deposits from N205 billion in FY 07 to N1.4 billion in Q3 14 Opportunities Further retail expansion given Nigeria s high unbanked population (c.48%) E-banking opportunities such as mobile money are also vastly untapped Emerging lending opportunities to power and agriculture sectors Weaknesses Low cross-border presence in Africa; operates only in 6 African countries (none of which is considered systemically important in their host countries). Threats Increasing regulatory costs Impact of the rather weak macroeconomic outlook Rising competition in the banking industry 3

4 Risks Threat of low subscription: A potential risk facing Access Bank would be the possibility of raising less than the desired level of capital in this Right Issue, given the premium of the Right Issue price to current market price. Therefore, we think there s a threat to the anticipated subscription level of the offer which management expects will be 100%. Nonetheless, Access Bank s management is persuaded that key long term institutional investors will follow through with their commitments to support the bank s capital raising efforts given its track record of efficient capital use. Oil & Gas Exposure: Access Bank s exposure to the Oil & Gas sector is about 27% of its gross loan book, with the upstream segment contributing only 8%, whilst the downstream and midstream segments account for 11% and 8% respectively. The downstream portfolio will benefit from the fall in crude oil prices, which we think has been substantial enough to more than offset the impact of Naira devaluation. Therefore there s less concern on the bank s exposure to this segment. As disclosed by management, the upstream portfolio has an average breakeven price of US$36/bbl, which implies that the bank is quite comfortable with the upstream exposure at current oil price; hence this will only become a major concern if crude oil prices fall below US$40/bbl. According to Access Bank s management, its most worrisome exposure is in the oil servicing sector (midstream segment) where contracts with oil majors may be renegotiated or terminated as a result of the crash in oil price. The biggest concern in this segment is around a singular obligor with about US$30 million (N6 billion) exposure. Regardless, the bank believes its oil and gas portfolio has been adequately stress-tested and considers a restructuring of the loans the possible worst case scenario. Regulatory risk: A pressing concern regarding regulation is the mounting expectation for further tightening measures in The Monetary Policy Committee (MPC) increased both the monetary rates and cash reserve requirement in the last MPC meeting of 2014 in attempt to curb liquidity and preserve exchange rate stability. However, with little improvement on the demand pressure on the Dollar, there is an expectation of a further rise in interest rates or devaluation of the official exchange rate in H1 15, which will be further detrimental to the net interest margins and profitability of banks. FX Exposure: Access Bank reduced its FX exposure from US$1.3 billion (N260 billion) to U$S350 million (N70 billion) in Q4 14, which according to management was achieved by converting dollar loans of lower tier credit customer to naira facilities. With the conversion, most lower tier customers paid down the loans given the corresponding higher lending rates, thereby shrinking Access Bank s loan book. Thus, as disclosed by the bank, its foreign and local currency exposures remained at Q3 14 levels of 45% and 55% of the bank s loan book respectively. In addition, the bank took the proactive step of advising its top tier corporate credit clients about possible weakness in the Naira ahead of the official devaluation of the Naira at November s MPC, which helped some clients take necessary hedging measures ahead. 4

5 Snapshot of financial performance Net Interest Income (N Billion) Return on Average Equity and Asset 25% 21.3% ROAE ROAA 20% 17.4% 15.2% 15% 15.0% 14.8% 10% % 2.5% 2.0% 2.2% 2.0% 2.0% A 2013A 2014E 2015F 2016F 0% 2012A 2013A 2014E 2015F 2016F Earnings and Dividends per Share (N) Net Asset per Share (N) EPS DPS A 2013A 2014E 2015F 2016F A 2013A 2014E 2015F 2016F Sources: Cardinal Stone Research, Rights Circular 5

6 Appendix 1 Financial Statements (historical and forecasts) 2013A 2014E 2015F 2016F 2013A 2014E 2015F 2016F N'Mn Gross Earnings 206, , , ,810 1,298 1,471 1,660 1,745 Interest Income 145, , , , ,062 1,203 1,264 Interest expenses (68,237) (74,600) (93,052) (98,710) (428) (452) (554) (560) Net interest income 77, , , , Non-interest income 60,825 67,452 76,774 84, Loan loss provisions 6,164 (11,095) (13,242) (14,065) 39 (67) (79) (80) Operating income 144, , , , ,027 1,106 Operating expenses (101,181) (102,957) (117,121) (132,527) (635) (624) (697) (751) Exceptional item Pre-tax earnings 43,796 54,002 55,397 62, Taxation (7,499) (9,720) (9,972) (11,252) (47) (59) (59) (64) Profit after tax 36,298 44,282 45,426 51, Statement of financial position 2013A 2014E 2015F 2016F 2013A 2014E 2015F 2016F Assets Cash and Short term funds 439, , , ,980 2,727 2,761 3,230 3,235 Interbank placements 90,837 96,637 98, , Treasury bills and Govt. bonds 357, , , ,487 2,220 1,645 1,673 2,022 Loans and Advances 786,170 1,063,314 1,180,741 1,288,633 4,878 5,817 6,152 6,394 Other Assets 93, , , , Property and Equipment 67,243 79,457 98, , Total Assets 1,835,466 2,147,495 2,469,620 2,716,581 11,390 11,748 12,867 13,479 Liabilities Customer deposits 1,331,419 1,567,672 1,728,734 1,901,607 8,262 8,576 9,007 9,435 Due to other banks 72,148 42,950 96, , Other Liabilities 60,313 75, , , Taxation 6,937 10,737 14,818 13, Term loan 120, , , , Total Liabilities 1,590,984 1,877,712 2,124,782 2,343,590 9,873 10,272 11,070 11,628 Capital and Reserves Share capital 11,441 11,441 15,255 15, Share Premium 161, , , , ,086 1,034 Minority Interest 1,768 4,929 6,139 8, Other reserves 70,236 92, , , Shareholders' funds 244, , , ,992 1,517 1,476 1,797 1,851 Total liabilities and equity 1,835,466 2,147,495 2,469,620 2,716,581 11,390 11,748 12,867 13,479 Key Ratios 2013A 2014E 2015F 2016F 2013A 2014E 2015F 2016F Profitability Net Interest Margin 7.1% 6.6% 6.3% 6.5% 7.1% 6.6% 6.3% 6.5% Cost to Income Ratio 69.9% 65.6% 67.9% 68.0% 69.9% 65.6% 68.0% 67.4% Cost of Risk -0.8% 1.0% 1.1% 1.1% -0.8% 1.0% 1.1% 1.1% Loan to Deposit Ratio 59.0% 67.8% 68.3% 67.8% 59.0% 67.8% 68.3% 67.8% Non Performing Loan ratio 3.0% 2.5% 2.6% 2.7% 3.0% 2.5% 2.6% 2.7% Return on Average Equity 15.2% 17.4% 15.1% 14.6% 15.2% 17.4% 15.0% 14.8% Return on Average Assets 2.0% 2.2% 2.0% 2.0% 2.0% 2.2% 2.0% 2.0% Valuation Multiples P/E (x) P/B (x) Dividend Yield 10.2% 16.5% 12.7% 14.3% 10.2% 16.5% 12.7% 14.3% N'Mn Sources: Cardinal Stone Research, Rights Circular 6

7 Disclosure Analyst Certification The research analyst(s) denoted by an * on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analysts denoted by an * on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report accurately articulate the research analyst(s) independent views/opinions, based on public information regarding the companies, securities, industries or markets discussed in this report. (2) The research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report. Analysts Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Investment Banking and Asset Management. Investment Ratings CardinalStone employs a 3-step rating system for equities under coverage: Buy, Hold, and Sell. Buy % expected share price performance Hold +0.00% to % expected share price performance Sell < 0.00% expected share price performance A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least % between the current price and the analyst s target price. An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of +0.00% and %, A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns of less than 0.00% is expected, between the current price and analyst s target price. CardinalStone Research distribution of ratings/investment banking relationships as of January 12, 2014 Rating Buy Sell Hold % of total recommendations 73% 15% 12% with investment banking relationships 80% 0% 29% Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any security recommended herein. You can contact the analyst named on the front of this note for further details. Frequency of Next Update: An update of our view on the company (ies) would be provided when next there are substantial developments/financial news on the company. Conflict of Interest: It is the policy of CardinalStone Partners Limited and its subsidiaries and affiliates (individually and collectively referred to as CardinalStone ) that research analysts may not be involved in activities that suggest that they are representing the interests of Cardinal Stone in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are structured to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in CardinalStone s Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, based on the research analyst s published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests. 7

8 Company Disclosure: CardinalStone may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests which CardinalStone has with companies or in securities discussed in this report are disclosed hereunder: Company Disclosure Access Bank Plc a. The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company b. The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company c. CardinalStone is a market maker in the publicly traded equities of the Company d. CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly disclosed offer of securities of the Company e. CardinalStone beneficially own 1% or more of the equity securities of the Company f. CardinalStone holds a major interest in the debt of the Company g. CardinalStone has received compensation for investment banking activities from the Company within the last 12 months h. CardinalStone intends to seek, or anticipates to receive compensation for investment banking services from the Company in the next 3 months i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution j. The Company is a client of CardinalStone k. The Company owns more than 5% of the issued share capital of CardinalStone l. CardinalStone has other financial or other material interest in the Company Important Regional Disclosures The analyst(s) involved in the preparation of this report may not have visited the material operations of the subject Company (ies) within the past 12 months. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a Non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any Non-U.S. analyst contributors: The Non-U.S. research analysts (denoted by an * in the report) are not registered/qualified as research analysts with FINRA; and therefore, may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an *) is a Non-U.S. Analyst and is currently employed by Cardinal Stone. Legal Entities Legal entity disclosures: CardinalStone Partners is a member of The Nigerian Stock Exchange (NSE) and is authorized and regulated by the Securities and Exchange Commission (SEC) to conduct investment business in Nigeria. 8