Access Bank Plc ₦15 Billion 5 -Year Fixed Rate Senior Unsecured Green Bond Due 2024 2021 Final Rating Report

Access Bank Plc ₦15 billion 5 -year Fixed Rate Senior Unsecured Green Bond Due 2024 2021 Final Rating Report

Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond .

Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

Rating Assigned: - R ATING RATIONALE Aa- Agusto & Co. affirms the ‘Aa-’ rating assigned to the ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond (‘the Issue’ or ‘the Bond’) of Access Bank Plc (“Access Bank” or “the Bank” or “the Issuer”). The conformity of the nominated Outlook: Stable projects to be funded or refinanced by the Bond with the pre-issue Issue Date: 22 March 2021 requirements of the Climate Bond Standard (Version 2.0) issued by the Climate Expiry Date: 31 December 2021 Bond Initiative in 2017 was done by PricewaterhouseCoopers, a certified green The rating is valid throughout the life of the instrument but will be subject to periodic bond verifier. monitoring and review. The assigned rating mirrors Access Bank’s stand-alone rating of ‘Aa-’ issued by Previous Rating: Aa- Agusto & Co., given that the Bond ranks parri passu with other senior unsecured

obligations of the Bank. The Issuer’s rating, which is subject to annual review, Bond Tenor: 5 years is underpinned by a good brand franchise emanating from its Industry position

as the largest bank in Nigeria by total assets. Good asset quality, improving

Industry: Banking deposit mix, a strong capital base coupled with a stable and experienced management team are some of the other factors reflected in the Bank’s rating. However, the elevated cost profile, concentration in the loan portfolio and the lingering macroeconomic headwinds, accentuated by the COVID-19 pandemic, Analysts: are constraints to the rating of Access Bank Plc. Ayokunle Olubunmi, CFA [email protected] Following the merger of Access Bank Plc with Diamond Bank Plc in March 2019

and the resulting increase in the impaired loan ratio to 10%, the Issuer

Yinka Adelekan prioritised the resolution of the impaired (stage 3) loans. Consequently, the [email protected] impaired loan ratio has maintained a downward trajectory and stood at 4.4% as at 30 June 2020, lower than the 5% regulatory guidance. Notwithstanding the coronavirus outbreak, the impaired loan ratio further dipped by 20 basis Agusto & Co. Limited points to 4.2% as at 30 September 2020. We anticipate further decline in the UBA House (5th Floor) 57, Marina impaired loan ratio in the near term as the Bank pursues aggressive recovery Lagos drive. Nigeria The Access Bank’s merger with Diamond Bank positioned the Issuer as the www.agusto.com largest bank in Nigeria by total assets. However, consolidation of the loan books of the two institutions increased obligor concentration in the Issuer’s

The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited.

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

loan book as the top two obligors each breached the regulatory maximum (20% of shareholders’ equity) as at 30 June 2020. While the Issuer was granted a waiver for the largest obligor, exposure to the other obligor is expected to be reduced below the regulatory maximum threshold before 31 December 2021.

As at 30 June 2020, the Bank’s shareholders’ funds at ₦573.4 billion stood well above the ₦50 billion regulatory minimum for international banks. The capital adequacy ratio (CAR) which stood at 17.6% (FYE 2020: 17.7%) was also higher than the 15% regulatory minimum for international banks. In the near term, we anticipate an increase in the CAR based on the planned capitalisation of dividends from subsidiaries and additional medium-term borrowings sourced from multilateral financial institutions.

Based on the aforementioned, we have attached a ‘stable’ outlook to the rating of the Issue and we will continue to monitor the performance of Access Bank Plc to reassess the impact of the pandemic.

Strengths

•Strong industry position •Good brand franchise •Good liquidity •An experienced management team

Weaknesses

•Concentraion in the loan book by oblior and sector •High cost profile relative to net earnings

Challenges

•Aggressive CRR debits by the Central Bank of Nigeria •The lingering impact of the COVID-19 pandemic on the performance of commercial, SME and retail businesses

Table 1: Background Information 31 December 2018 31 December 2019 30 June 2020** Total Assets & Contingents ₦4,327 billion ₦6,762.6 billion ₦7,196.8 billion Local Currency Deposits (excluding interbank takings) ₦2,218.3 billion ₦3,964.4 billion ₦4,225.9 billion Net Earnings ₦231.1 billion ₦299.5 billion ₦204.7 billion Pre-tax Return on Average Assets & Contingents (ROA) 1.9% 1.5% 1.4%* Pre-tax Return on Average Equity (ROE) 17.2% 16.7% 17.7%* *Annualised **Unaudited

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

THE ISSUE Access Bank developed a Green Bond Framework (GBF) to provide guidelines for funding environmentally friendly initiatives via green bonds. The Bank’s GBF is underpinned by four core pillars; . Use of Green Bond Proceeds . Governance, Process for Identification and Approval of Green Bond Proceeds Usage . Management and Tracking of the Green Bond Proceeds . Reporting

The GBF which is subject to annual review is consistent with the 2017 Green Bond Principles as held by International Capital Market Association (ICMA) and the Climate Bond Initiatives (CBI). Only projects in sectors that are deemed eligible by the GBF can be funded or refinanced by the proceeds of the green bonds issued by the Bank

Table 2: Eligible and Ineligible Sectors Eligible Sectors Ineligible Sectors . Renewable Energy . Nuclear Power Generation . Sustainable Land Use . Coal mining . Energy Efficiency . Weapons and Ammunitions . Clean Transportation . Alcohol . Green Trade . Gambling and other Adult Entertainments . Climate Smart Agriculture . Deforestation . Non-Energy GHG Emission Reduction . Biodiversity Threats . Efficient Green Buildings . Fossil Fuel Energy Generation Projects (including . Sustainable Waste Management Green-Fields Gas Power Plants) . Sustainable Water Management . Climate Change Adaptation

The Issue (or ‘the Bond’) is a ₦15 billion 5-year Fixed-Rate Senior Unsecured Green Bond due in 2024. The Bond was issued in March 2019 and ranks parri passu without any preference with all senior unsecured obligations of Access Bank Plc. The applicable coupon rate is 15.5% and will be paid in arrears semi-annually in March and September until maturity. However, the principal will be a bullet payment at maturity in March 2024.

Use of Proceeds The net proceeds of the Bond which amounted to ₦14.8 billion were used to refinance the one new project and two projects hitherto funded by Access Bank. The eligibility of the projects with the Bank’s GBF and the pre-issuance requirements of Climate Bond Standard (version 2.1) of 2017 was ascertained by the independent assurance report provided by PricewaterhouseCoopers (PwC), a licensed green bond verifier by the Climate Bond Initiative. During the period under review, the facility that funded one of the projects was paid down, earlier than scheduled. As a result, ₦1.7 billion representing 11.3% of the net proceeds was unallocated to any project as at 31 December 2020. As at the same date, the unallocated funds were invested in treasury bills and

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

call deposits as stated in the trust deed.

Table 3: Disbursement Updates as at 31 December 2020

Asset Type Total Amount (₦) Allocated Amount (₦) Unallocated Amount (₦) Water- Flood Defence (“Project A’) 13 billion 13 billion Nil Solar – Generation Facilities (“Project B”) 1.7 billion Nil 1.7 billion Solar – Generation Facilities (“Project C’) 103.7 million 103.7 million Nil Total 14.8 billion 13.1 billion 1.7 billion

Source of Repayment Repayments comprising coupon (in arrears) and principal relating to the Bond are redeemed from the cash flows from the loans refinanced by the Issue. Access Bank, rated “Aa-” by Agusto & Co. also supports the obligations arising from the Bond. The rating assigned to the Issuer is reflective of a financial institution with a very good financial condition and a very strong capacity to meet its obligations as they fall due.

A performance report from the Trustees as at February 2021 reflected coupon payments made in September 2019, March 2020 and October 2020. Correspondingly, no covenant by the Issuer was breached during the period under review.

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

AN OVERVIEW OF SPONSOR’S FINANCIAL CONDITION Growing asset base and satisfactory asset quality notwithstanding the COVID-19 pandemic

As at 30 June 2020, Access Bank Plc’s total assets and contingents stood at ₦7.2 trillion, a 6.4% growth from FYE 2019, driven primarily by an enlarged customer deposit base. In HY 2020, restricted assets expanded by 38.2% to ₦1.1 trillion, the highest growth among the asset classes based on the 500 basis points increase in the cash reserve ratio and the introduction of the discretionary cash reserve policy by the Central Bank of Nigeria (CBN). As at 30 June 2020, the Bank’s restricted assets which are sterile cash deposits that are not available for daily banking operations and held by the CBN, represented 194.5% and 26.5% of shareholders’ funds and local currency deposits respectively. In the near term, we believe Access Bank’s restricted assets will be moderated by the issuance of special securities by the CBN to replace some of the sterile deposits.

Access Bank’s loans and advances which stood at ₦3 trillion (FYE 2019: ₦2.8 trillion) remained the largest asset class and represented 41.7% of total assets and contingents as at 30 June 2020. As at the same date, the issuer’s largest exposure was to the oil and gas, manufacturing and general commerce sectors which together accounted for 57.7% of the loan book. We are concerned by the impact of the volatile crude oil prices on the performance of the oil and gas loans which represented 156.3% of the Bank’s shareholders’ funds as at 30 June 2020. The manufacturing and general commerce sectors have both been adversely impacted by the illiquidity in the foreign exchange market and declining consumer purchasing power on account of the lingering COVID- 19 pandemic. We believe increased monitoring of exposure to these sectors is required to keep the volume of impaired loans low.

Figure 1: Breakdown of the Loan Book as at 30 June 2020 Power & Energy Trans & Storage 1% 3% Others Real 1% Estate 9% Manufacturing Oil & Gas 16% Info & Com Upstream Oil & Gas 6% 56% Oil and Gas Services Govt 32% 23% 7% Gen Comm 10% Crude Oil Refining Agric Oil & Gas Downstream 5% 1% 16% General Construction Finance & Insurance 5% 8% 1%

As at 30 June 2020, Access Bank’s top 20 customers accounted for 39.5% of the gross loans and advances. Exposures to the top two customers at 32.4% and 31.7% respectively of the shareholders’ funds breached the 20% threshold of the CBN. While the Bank was granted a waiver for one of the exposures, the Issuer has until December 2021 to reduce the concentration to the other obligor. We note that exposure to one of these

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

customers spiked with the Diamond Bank merger and the subsequent aggregation of the loan books of the hitherto two entities. Nonetheless, we believe these large exposures elevate the credit risk of the Issuer.

During the period under review, Access Bank continued with the resolution of its challenged loans, largely emanating from the merger with Diamond Bank Plc, through restructuring, write-offs and the sale of collaterals. As a result, stage 2 and stage 3 loans reduced by 30.9% to ₦773.2 billion and represented 25.8% (FYE 2019: 39.6%) of gross loans as at 30 June 2020. The Issuer’s impaired loan (stage 3 loans to gross loans) ratio declined to 4.4%, down from 6.1% recorded as at FYE 2019. As at 30 June 2020, the Bank’s impaired loan ratio stood lower than the 5% regulatory guidance and those of selected peers; Guaranty Trust Bank Plc (GTBank) and Zenith Bank Plc (Zenith Bank) with 6.1% and 7.8% respectively. We note positively the gradual reduction in the impaired loan ratio which spiked to 10% immediately after the merger in March 2019.

Figure 2: Impaired Loan Ratio (30 March 2019 – 30 Sept 2020)

10.9%

6.9% 6.6% 6.1% 5.9% 4.4% 4.2%

Q1 2019 HY 2019 Q3 2019 FYE 2019 Q1 2020 HY 2020 Q3 2020

As at 30 June 2020, Access Bank’s cumulative provisions for stage 2 and stage 3 loans stood at 13.2% and 36.2% respectively. When we consider the additional provisions in shareholders’ equity, the coverage ratio for stage 3 loans rises to 43.4%%; which we consider low.

We believe Access Bank’s asset quality is just satisfactory. Subsequent to the review period, the Issuer’s stage 3 loans maintained a downward trajectory, declining to ₦129.2 billion and the impaired loan ratio also dipped by 20 basis points to 4.2% as at 30 September 2020. Notwithstanding, we believe adequate monitoring of the loan book is required, given the lingering pandemic and the adverse impact on the economy.

Lower fund-based income on the back of the prevailing low-interest rate environment

During the half-year ended 30 June 2020, Access Bank recorded ₦82.3 billion as net revenue from funds (NRFF), 35.8% lower than the amount recorded in HY 2019. The prevailing low-interest rate environment resulted in a 26.1% decline in net interest income to ₦97.1 billion despite the loan growth recorded during the period. As a result, the net interest spread (NIS) dipped to 47.3% from 54.4% in the prior year and remained significantly

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

lower than the 83.9% and the 72% recorded by GTBank and Zenith Bank respectively. Given the prevailing low-interest rate environment and improvement in the deposit mix, the Issuer’s weighted average cost of funds improved to 3.7% from 4.8% from the prior year. The Bank’s impairment charge spiked by 366.6% to ₦14.8 billion and represented 7.2% (FY 2019: 1.3%) of interest income, reflecting the pandemic induced downturn in the macroeconomic environment during the period under review. In the near term, we believe the gradual increase in the prevailing interest rate will support an improvement in NRFF as loans are typically repriced faster compared to deposits. We also expect the impact of the improved deposit mix to be more prominent.

Higher non-interest income on the back of better balance sheet optimisation

In the period ended 30 June 2020, Access Bank’s non-interest income spiked by 234.1% to ₦122.4 billion, notwithstanding the net foreign exchange loss of ₦69.5 billion recorded. Non-interest income as a percentage of total assets improved to 1.4% from 0.6% in the prior period, reflecting a better optimisation of the asset base. Net gain on financial instruments spiked 38.4 times to ₦131.4 billion, spurred opportunities provided by the prevailing low interest rate. Notwithstanding the downward review of bank tariffs by the CBN, electronic banking income grew by 104.4% to ₦20.1 billion. We anticipate further improvements in non-interest income in the near term on the back of the volatilities in the interest rate environment which provides opportunities for improved trading income. Enhancement of the electronic banking channels should also support non- interest income.

Figure 3: Non-Interest Income (HY 2020)

Electronic Banking Others Income 5% 10% Account Maintenance Fees 3%

Credit Related Fees 6% Bad Debt Recovered Gain on Financial 11% Instruments 65%

Higher cost-to-income ratio relative to peers

During the period ended 30 June 2020, Access Bank’s operating expenses grew by 45.7% to ₦155.7 billion based on additional costs associated with a larger bank. Accordingly, the Issuer’s cost-to-income ratio (CIR) at 76% was higher than 64.8% recorded in the prior year, GTBank’s 42% and Zenith Bank’s 55.4%. We expect the CIR to remain above those of the selected peers notwithstanding the cost management initiatives of the Bank which we believe will moderate CIR in the medium term.

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

Overall, Access Bank’s profit before taxation for the half-year ended 30 June 2020 declined by 13.7% year-on- year to ₦49.1 billion. Similarly, profitability ratios were also lower with annualised pre-tax return on average assets (ROA) and annualised pre-tax return on average equity (ROE) of 1.7% (HY 2019: 2.2%) and 17.7% (HY 2019: 23.8%) respectively. The Issuer’s profitability ratios were lower than those of GTBank (ROA: 4.8%, ROE: 30.1%) and Zenith Bank (ROA: 2.8%, ROE: 23.7%) but better than the Industry averages.

Adequate capital for current business risks

As at 30 June 2020, Access Bank’s shareholders’ funds stood at ₦573.6 billion, a 6.3% growth from the prior year based on accretion of a portion of earnings to reserves. At this level, the Issuer’s capital stood well above the ₦50 billion regulatory minimum for Nigerian banks with international authorisation. As at 30 June 2020, tier 1 (core) capital) represented 88.3% of total capital, higher than the 75% regulatory minimum. However, the Bank’s capital adequacy ratio (CAR) dipped to 17.6% from 20.1% in the prior year due to the increase in its risk-weighted assets. GTBank and Zenith Bank posted higher CAR of 24.9% and 19% respectively. Nevertheless, the Issuer’s CAR remained higher than the 15% minimum threshold of the Central Bank of Nigeria for banks with international authorisation and the proposed 16% for systemically important banks (SIBs).

Good liability generation capacity and strong liquidity profile

Access Bank leverages its good brand franchise, large branch network and electronic channels in deposit liabilities generation. As at 30 June 2020, the Issuer’s deposit liabilities amounted to ₦4 trillion, an 8.7% growth from the prior period, and funded 71.9% (30 June 2019: 69.9%) of total assets. Savings deposits grew by 40.4% and crossed the ₦1 trillion mark to stand at ₦1.1 trillion. Demand deposits also expanded by 29.2% to ₦1.7 trillion as at 30 June 2020, as the Bank deepened its foothold in the retail segment while maintaining a strong presence in the corporate segment. As part of the Issuer’s cost management measures, high-cost term deposits declined by 23.1% to ₦1.2 trillion. As a result, the deposit mix improved with low-cost deposits accounting for 69.1% (30 June 2019: 56.3%) of total deposits, albeit lower than GTBank’s 91.6% and Zenith Bank’s 89.4%.

As at 30 June 2020, Access Bank’s liquid asset portfolio comprising cash and equivalents, government securities and other money market securities amounted to ₦1.9 trillion. The liquid asset portfolio contracted by 7.4% year-on-year as the prevailing low-interest rate environment moderated the appetite for money market securities. Notwithstanding, the Bank’s liquidity ratio at 61.57% was higher than the 30% regulatory minimum for Nigerian banks.

We consider Access Bank’s liability generation good and ability to refinance to be strong.

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

OUTLOOK Access Bank intends to leverage its larger size and improved brand franchise in liability generation, risk asset creation and profitability. The Issuer plans to consolidate on its growing low-cost deposits and further improve the deposit mix. Expanding the customer base, deepening customer relationships, strengthening the electronic banking channels, growing the scale of operations with the acquisition of banks in other African countries (particularly in East and South African regions) and maximising opportunities from the African Continental Free Trade Agreement (AfCFTA) are some other initiatives to support the liability generation of the Bank over the medium term.

Access Bank has over the years contended with high operating expenses as reflected in its elevated cost-to- income ratio (CIR) compared with its tier 1 peers. The Issuer plans to reduce its CIR over the medium term by growing its operating income while reining in operating expenses. The anticipated increase in the prevailing interest rate, rising volume of low-cost deposits, budding electronic banking volumes, improving fixed income trading income are expected to support operating income. The expected uptick in the volume of high yield retail loans and income from the anticipated increase in trade volume as the global economy gradually reopens will also support operating income. Institutionalising some of the efficiencies gained during the pandemic, disposal of non-core assets among other initiatives are expected to moderate operating expenses going forward. Nonetheless, we expect the Bank’s CIR to remain higher than its peers.

Agusto & Co. hereby attaches a stable outlook to the Access Bank Plc’s ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond based adequate capitalisation ratios, good liability generation and strong ability to refinance while profitability and asset quality are expected to improve.

For more comprehensive information, kindly refer to the credit rating report of Access Bank Plc.

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

FINANCIAL SUMMARY

2021 Bond Credit Rating Access Bank Plc ₦15 billion 5-year Fixed Rate Senior Unsecured Green Bond

RATING DEFINITIONS

Aaa Bonds rated ‘Aaa’ are judged to offer highest safety of timely payment of interest and principal. Though the circumstances providing this degree of safety are likely to change, such changes as can be envisaged are most unlikely to affect adversely the fundamentally strong position of such issues.

Aa Bonds rated ‘Aa’ are judged to offer high safety of timely payment of interest and principal. They differ in safety from ‘Aaa’ issues only marginally.

A Bonds rated ‘A’ are judged to offer adequate safety of timely payment of interest and principal; however, changes in circumstances can adversely affect such issues more than those in the higher rated categories.

Bbb Bonds rated ‘Bbb’ are judged to offer sufficient safety of timely payment of interest and principal for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for bonds in higher rated categories.

Bb Bonds rated ‘Bb’ are judged to carry inadequate safety of timely payment of interest and principal; while they are less susceptible to default than other speculative grade bonds in the immediate future, the uncertainties that the issuer faces could lead to in adequate capacity to make timely interest and principal payments. B Bonds rated ‘B’ are judged to have greater susceptibility to default; while currently interest and principal payments are met, adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal.

C Bonds rated ‘C’ are judged to have factors present that make them vulnerable to default; timely payment of interest and principal is possible only if favourable circumstances continue.

D Bonds rated ‘D’ are in default and in arrears of interest and principal payments or are expected to default on maturity. Such bonds are extremely speculative and returns from these bonds may be realised only on reorganisation or liquidation.

A "+" (plus) or "-" (minus) sign may be assigned to ratings from Aa to C to reflect comparative position within the rating category. Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus) sign.

www.agusto.com