Access Plc ₦15 billion 5 Year Fixed Rate Senior Unsecured Green Bond Due 2024 2020 Final Rating Report

₦ 2020 Bond Rating Access Bank Plc. 15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

Access Bank Plc ₦15 Billion Five Year Fixed Rate Senior Unsecured Green Bond Due 2024

ATING ATIONALE Rating Assigned: R R Agusto & Co hereby affirms the ‘Aa-’ rating of Access Bank Plc’s (“Access -Aa- Bank”, “the Bank” or “the Issuer”) ₦15 billion Five Year Fixed Rate Unsecured Green Bond Due 2024 (“the Bond” or “the Issue”). PricewaterhouseCoopers, a certified green bond verifier, has assessed the conformity of nominated Outlook: Stable projects with the pre-issuance requirements of the Climate Bond Standard Issue Date: 14 Feb 2019 (version 2.1) issued by the Climate Bond Initiative in 2017. Expiry Date: 31 Dec 2020 The rating is valid throughout the life of the The rating reflects the standalone ‘Aa-‘ credit rating of Access Bank Plc by instrument but will be subject to annual monitoring and review. Agusto & Co. Limited and the pari passu ranking of the Bond with other senior unsecured obligations of the Bank. Access Bank’s rating is Bond Tenor: Five years underpinned by its strong industry position following its merger with the

erstwhile Plc which was concluded in March 2019. The Issuer Industry: Banking has a good brand franchise, an experienced management team and adequate capitalisation levels. Offsetting these positive rating factors are a deterioration in the asset quality of the combined entity and sectoral Analysts: concentration in the book. The fragile Nigerian macroeconomic Ada Ufomadu environment is also a threat to the banking industry’s asset quality. [email protected] Access Bank Plc’s total assets and contingents amounted to ₦6.2 trillion as at 30 June 2019, a 43.1% growth over FYE2018 on account of the business Ayokunle Olubunmi, CFA combination with Diamond Bank Plc. Thus, the Issuer became the largest [email protected] bank in by total assets as at H1, 2019. The loan book also rose by

34.6% to ₦2.5 trillion; however, asset quality deteriorated markedly post-

merger as evidenced by a non-performing (NPL) ratio of 7.3% (FYE2018: 2.4%). In addition, obligor and sectoral concentration worsened Agusto & Co. Limited during the period. Concerted efforts by the Bank’s management to clean up UBA House (5th Floor) the loan book through various loan work out strategies are ongoing and are 57, Marina expected to reduce the NPL ratio below the regulatory threshold of 5% by FYE2020. Nigeria A major synergy derived from the combined entity was a 78.5% growth in www.agusto.com customer deposits to ₦3.7 trillion as at 30 June 2019, comprising a 100.4%

spike in low cost current and savings local currency (LCY) deposits. Given an

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.

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

improved deposit mix, the Issuer’s weighted average cost of funding moderated to 4.8% from 5.9% in the 2018 financial year. In view of the lower interest rate environment elicited by CBN’s heterodox policies in the fixed income market, we foresee a further decline in the Bank’s funding costs in the short term.

Access Bank’s liquidity profile strengthened in the first half of 2019, as liquid assets more than doubled to ₦2 trillion and represented 71.1% of total local currency deposits as at 30 June 2019. The Issuer’s large liquid asset portfolio provides liquidity should the need arise and benefits from favourable yields in the Open Market Operations (OMO) market.

Access Bank’s performance improved significantly during the period on account of an expanded balance sheet. Driven by a larger loan book and investment portfolio, and a lower interest rate environment, Access Bank’s net interest spread (NIS) improved to 54.4% in the first half of 2019 (H1, 2018: 40.9%). Non-interest income also supported the Bank’s earnings through an expanded customer base, fees & commissions on various transactions and gains on investment securities. In H1, 2019, operating expenses rose by 33.4% to ₦106.8 billion driven by a 513.3% spike in professional fees linked to the merger process, a 49% growth in NDIC charges and a 29.4% increase in AMCON costs. Notwithstanding, the Issuer’s cost to income ratio (CIR) moderated to 64.8% (H1, 2018: 71.3%). Backing out the one-off professional fees from operating expenses, Access Bank’s CIR stood at 62.3%. Overall, Access Bank’s pre-tax return of assets (ROA) and pre-tax return of average equity (ROE) strengthened to 2.2% (H1, 2018: 1.7%) and 23.8% (H1, 2018: 14.7%) respectively in the first half of 2019.

Access Bank’s capitalisation though pressured by write-offs of delinquent loans inherited from the business combination remains just adequate for current business risks. The Bank raised Tier 2 capital of $162.5 million from a syndication of financial institutions post-merger which moderated the impact of the write-offs on capitalisation ratios. A ₦30 billion subordinated bond was also issued in April 2019. Thus, the Issuer’s capital adequacy ratio (IFRS 9 full-impact), in line with Basel II accords stood at 16.55% as at 30 June 2019. However, considering the CBN transitional arrangement, the Bank’s CAR of 21.08% (FYE2018: 17.22%) was well above the regulatory minimum of 15% for commercial with international operating licenses.

Based on the foregoing, we hereby assign a stable outlook to the ₦15 Billion Five Year Fixed Rate Senior Unsecured Green Bond Due 2024 with our expectation that the Issuer’s risk profile will be upheld by its good financial

2

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

condition and strong capacity to meet its obligations as and when they fall due.

Strengths •Strong industry position •Good profitability •Good brand franchise •Experienced and stable management team

Weaknesses •Obligor and sectorial concentration in the loan book •NPL ratio above the regulatory threshold

Challenges •Optimising synergies from the merger with the defunct Diamond Bank Plc •Curbing operational inefficiencies associated with a larger combined entity •The regulatory environment and its impact on the banking industry's performance

Table 1: Background Information

December 2017 December 2018 June 2019 (Audited) (Audited) (Audited)

Total Assets & Contingents ₦3.8 trillion ₦4.3 trillion ₦6.2 trillion

Net Earnings ₦225.9 billion ₦231.1 billion ₦164.8 billion

Return on Average Assets & Contingents 1.8% 1.9% *2.2% (ROA) Return on Average Equity (ROE) 15.3% 17.2% *23.8%

*annualised

3

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

PROFILE Access Bank Plc (“Access Bank” or “the Bank” or “the Issuer”) was incorporated in February 1989 as a private limited liability company and commenced operations in May 1989. The Bank converted to a public limited liability company in March 1998 and subsequently listed its shares on the Nigerian Stock Exchange (NSE) in the same year. In February 2001, Access Bank was granted a universal banking license by the of Nigeria. In 2002, the Bank embarked on a growth strategy with a view to emerge as one of Nigeria’s leading financial institutions. This growth strategy led to an aggressive capital raising exercise which commenced with a successful public offer, generating about ₦14.5 billion in 2004, an Over-The-Counter Global Depository Receipts (GDR) placement of US$250 million in July 2007 and a third public offer of about US$1billion. In October 2011, the Issuer acquired a 75% equity stake in and merged the two institutions in January 2012. Access Bank successfully raised a $350million five-year Eurobond in 2012 and a second $400 million 7-yr Eurobond in June 2014. An additional $300 million was raised in October 2016 to repay the earlier maturing Eurobond and support asset creation. The Bank has also successfully raised funding via various avenues including a rights issue in 2015 and a Climate Bonds Certified Green Bond in 2019.

Subsequent to the financial year-end 2018 and in line with the Bank’s vision to become the largest banking group in Nigeria, the Issuer merged with the erstwhile Diamond Bank Plc and the business combination was officially concluded in March 2019. Thus, Access Bank’s business footprints expanded to 541 branches and 72 cash centres, 2,930 Automated Teller Machines (ATMs) and over 29 million customers as at 30 June 2019. Access Bank also has a total of 94 branches and service outlets in other African countries and Europe – (53 branches), (8 branches), (9 branches), Gambia (6 branches), Democratic Republic of Congo (11 branches), (4 branches) and the (3 branches).

In 2020, Access Bank Plc opened a subsidiary in Douala, Cameroun’s capital. Following the receipt of a “no objection” approval from CBN in October 2019, Access Bank also received regulatory approval for the acquisition of 100% equity stake in Transnational Bank Plc, , also in January 2020.

Table 2: Access Bank Plc’s subsidiaries (as at 30 June 2019)

Ownership Interest Nature of Business The Access Bank UK Limited 100% Banking Access Bank Democratic Republic of Congo Limited 100% Banking Access Bank Sierra Leone Limited 97% Banking Access Bank Ghana Limited 91% Banking Access Bank Gambia Limited 88% Banking Limited 75% Banking Access Bank Zambia Limited 70% Banking

4

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

THE ISSUE Access Bank Plc developed a Green Bond Framework (GBF) to provide guidelines for funding environmentally friendly initiatives using green bonds. The GBF which is subject to annual review is consistent with the 2017 Green Bond Principles as held by the International Capital Market Association (ICMA) and the Climate Bond Initiatives (CBI).

Table 3: Eligible sectors under the green bond framework

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 Green- Sustainable Waste Management Fields Gas Power Plants) Sustainable Water Management Climate Change Adaptation

The Issue is a Five-Year Senior Fixed Rate Unsecured Green Bond of up to ₦15 billion due in 2024, with a coupon rate of 15.5%. The Bond, which was issued in March 2019, ranks pari passu at all times with other senior obligations of the Issuer. Coupons are payable semi-annually in arrears (September and March) - up till the maturity date while the principal will be repaid as a bullet payment at maturity.

Purpose of the Issue During the review period, net proceeds of the Issue (amounting to ₦14.8 billion) were used to refinance projects initially funded by the Bank. These projects qualify as ‘green projects’ under the criteria set out in the Access Bank’s Green Bond Framework (GBF).

PricewaterhouseCoopers (PwC), a licensed green bond verifier by the Climate Bond Initiative provided an independent assurance opinion on the validity of the Issuer’s GBF and assessment of nominated projects in line with pre-issuance requirements of Climate Bond Standard (version 2.1) of 2017. The verification report was limited to Access Bank’s statement of allocation of bond proceeds from the 2019 Green Bond issue as at 30 June 2019.

5

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

The table below summarises how the proceeds of the Bond were disbursed as at 30 June 2019:

Table 4: Disbursement Updates as at 30 June 2019

Asset Type Total Amount (₦) Allocated Amount (₦) Unallocated Amount (₦) Water- Flood Defence (“Project A’) 12.8 billion 12.7 billion 124.4 million Solar – Generation Facilities (“Project B”) 1.7 billion Nil 1.7 billion Solar – Generation Facilities (“Project B”) 103.7 million Nil 103.7 million Water- Irrigation System (“Project D’) 192.4 million Nil 192.4 million Total 14.8 billion 12.7 billion 2.1 billion

Source of Repayment Repayments comprising coupons (in arrears) and principal relating to the Issue, are fully supported by the Issuer and are met by cash inflows from the repayment of loans funded by the bond. The Issuer has an “Aa-” rating by Agusto & Co. Limited, and is subject to annual review. The rating assigned to Access Bank Plc is reflective of an institution with a very good financial condition and strong capacity to meet its obligations as and when they fall due.

A performance report from the Trustees as at June 2019 reflected one coupon payment made in September 2019. Similarly, no covenant by the Issuer was breached during the period.

Covenants & Guarantees As long as the Bond remains outstanding, Access Bank is not permitted to create any charge, mortgage, lien, pledge or other security interest upon any of its assets or any other indebtedness guaranteed by it without the prior consent of the Trustee. Where consent is given, the Bank shall grant the Trustee (on behalf of the green bondholders), equivalent security (ies) as is granted in relation to the indebtedness.

Trustees to the Issue Coronation Trustees Limited (CTL) is the trustee to the Bond. Coronation Trustees Limited is a subsidiary of Coronation Merchant Bank Limited and is licensed by the Securities and Exchange Commission (SEC) to offer corporate trustee services related to corporate bond issuance, consortium/syndicated lending, debentures, collective investment schemes, employee benefit schemes and agency services. Coronation Trustees Limited is located at 10 Amodu Ojikutu Street, Victoria Island, Lagos.

In line with the Trustee Investment Act of 1962, trust assets held are duly separated from the accounts of the Trustee such that trust continues to exist even if the Trustee goes into liquidation. The Securities and Exchange Commission is also empowered to periodically monitor the activities of Coronation Trustees Limited, providing independent oversight.

6

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

Custodian to the Issue Stanbic IBTC Nominees Limited (SINL) is the custodian to the Bond. SINL was incorporated in March 2000 as a wholly-owned subsidiary of Stanbic IBTC Bank Plc, offering various services including global depository receipts; global custody services; corporate action, income collection & proxy services and safekeeping & settlement services for equities, bonds, treasury bills & money market. As at December 2018, Stanbic IBTC Nominees Limited had assets of circa ₦5 trillion under its custody.

7

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

REVIEW OF FINANCIAL CONDITION

ANALYSTS’ COMMENTS In assessing the Issuer’s performance, we have analysed its financial condition using audited financial statements of the combined entity (reflecting the merger between Access Bank Plc and the erstwhile Diamond Bank Plc) for the period ended 30 June 2019.

Enlarged balance sheet and loan book on the back of a business combination Access Bank’s total assets and contingents grew by 43.1% to stand at ₦6.2 trillion as at 30 June 2019, reflecting synergies derived from the business combination with the defunct Diamond Bank Plc which was completed in March 2019. The Bank’s loan book also rose by 34.6% to ₦2.5 trillion as at the same date and accounted for 40.4% of total assets & contingents.

Access Bank’s lending strategy is encapsulated in its risk appetite which remains moderate and in line with its medium-term growth plan. The Issuer’s lending strategy is also guided by regulations, sectoral and product performance and the Bank’s historical performance on each of the sectors and regions of operations. Access Bank lends predominantly to large corporates which accounted for 76.2% of gross loans as at 30 June 2019. As at the same date, approximately 39.6% (FYE2018: 39%) of the loan book was foreign currency-denominated, granted to foreign currency receiving entities or hedged with appropriate derivates instruments.

Figure 1: Loan Book by Sector as at 30 June 2019

Power & Energy Others Agriculture Construction 1% 1% 1% 8% Transport & Finance & Storage Insurance 3% 1% Real Estate General 9% 4% General Oil & Gas Commerce (upstream) 11% 12% Government Oil & Gas (services) 9% 17%

Manufacturing Information & 14% Communication 3% Oil & Gas (downstream) 6%

8

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

The Issuer remains significantly exposed to the oil and gas sector which accounted for 35% of the loan portfolio as at 30 June 2019, up from 29% as at FYE 2018. The oil and gas services subsector singly accounted for 17% of gross loans while upstream and downstream made up 12% and 6% respectively. Although the performance of the oil and gas sector has improved on account of a rebound in crude oil prices and promissory notes issued by the Federal Government in December 2018 in respect of subsidies owed, we believe that the sector remains vulnerable. This is on account of cost unreflective pump prices which adversely affects the cash flows and profitability of downstream operators. Thus, we remain concerned about Access Bank’s exposure to the sector, particularly as it represented 164.3% of shareholders’ funds as at 30 June 2019. Other dominant sectors were manufacturing (14%), general commerce (11%), real estate (9%) and the public sector (9%).

The highest sectoral contributions to Access Bank’s loan book growth in the first half of 2019 were education which grew by 381.3%, power & energy (218.7%) and the oil & gas (75.9%) sectors. Conversely, public sector loans (which are predominantly bailouts given to financially challenged states) declined by a marginal 1.3% as at 30 June 2019 on the back of repayments. We note positively the 59.5% growth in retail loans (“general”) which is reflective of synergies with the erstwhile Diamond Bank Plc and the impact of the Bank’s payday loan product. While we expect to see traction in retail-based lending, we believe that strong risk management practises are required to maintain good asset quality. Nonetheless, we note positively the Bank’s adoption of data analytics in managing its retail loan products. In the short term, we do not anticipate any significant growth in the Issuer’s loan book as the Bank focuses on resolving impaired loans stemming from the merger.

Figure 2: Loan book growth by sector (June 2019)

Education 381.3% Power & Energy 218.7% Oil & Gas (upstream) 75.9% Oil & Gas (services) 70.2% Manufacturing 61.8% General 59.5% Oil & Gas (downstream) 59.0% Agriculture 44.7% General Commerce 35.6% Others 33.6% Construction 30.3% Information & Communication 26.3% Transport & Storage 22.5% Real Estate 14.9% Finance & Insurance 9.9% Government -1.3%

9

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

Access Bank’s top 20 obligors accounted for 30.1% of gross loans and advances as at 30 June 2019. Though slightly lower than 32.6% as at FYE2018, we consider the level of obligor concentration in the loan book to be a rating concern.

Increased impairment in the loan book elicited by the business combination As at 30 June 2019, Access Bank’s impaired loans spiked to ₦182 billion, from ₦44.1 billion as at FYE2018. The defunct Diamond Bank Plc had grappled with a relatively weaker asset quality as a stand-alone entity which reflected in Access Bank’s loan book post-merger. According to the Bank’s risk rating model, 34.2% (FYE2018: 34.6%) of gross loans were granted to investment grade obligors while standard grade and non- investment grade obligors accounted for 49.1% (FYE2018: 60.2%) and 16.6% (FYE2018: 5.2%) respectively. The changes in the percentage contribution of investment and non-investment grade obligors reflect deterioration in the loan book following the business combination. Nonetheless, approximately 68% of Access Bank’s loans were in the Stage 1 category of the IFRS 9 classification, though lower than 73.5% in 2018. Stage 2 and Stage 3 loans made up 24.7% and 7.3% of the loan book respectively as at 30 June 2019.

Figure 3: Loan book by Stages (IFRS 9)

73.5% 68.0%

24.0% 24.7%

7.3% 2.5%

Stage 1 Stage 2 Stage 3

FYE2018 June 2019

The Issuer’s non-performing loans (NPL) ratio rose to 7.3% in June 2019 (FYE2018: 2.4%) despite a write off of ₦46 billion in the first quarter of 2019 subsequent to the merger. Management has disclosed its intention to reduce the NPL ratio below 5% by December 2020 and we consider this plausible on the back of restructurings, write-offs and aggressive recoveries. Access Bank’s peers, Guaranty Trust Bank Plc (“GTBank Plc’) and Zenith Bank Plc (“Zenith Bank”) both recorded lower NPL ratios of 6.7% and 5% respectively as at H1, 2019. The Issuer’s loan loss coverage ratio was good at 113.8% (FYE2018: 175.2%), excluding regulatory risk reserves of about ₦9.5 billion as at 30 June 2019.

We believe Access Bank’s asset quality requires improvement. We note positively ongoing efforts by the Bank’s management to clean up the loan book which has moderated the volume of impaired loans post-merger. As at 30 September 2019, Access Bank’s loan book grew marginally to ₦2.6 trillion compared to H1, 2019 and loans to deposit ratio at 67.4% was comfortably above the 65% threshold. We believe that maintaining a good asset

10

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond quality will ensure the preservation of capital which is important to the Bank.

Improved deposit mix and funding cost; good liquidity profile One of the major synergies derived from the combined entity is growth in retail deposits, evidenced in a 78.5% increase in customer deposits to ₦3.7 trillion as at 30 June 2019. Worthy of note was a 100.4% spike in low- cost local currency (LCY) current and savings deposits to ₦1.4 trillion, funding 22.8% of total assets & contingents (FYE2018: 16.3%) while foreign currency (FCY) deposits rose by 80.4% to ₦824.5 billion. The Issuer’s FCY deposits funded 83.3% of FCY loans as at 30 June 2019. Access Bank’s deposit growth and improvement in deposit mix are positive rating factors; nonetheless, we believe that staff retention and culture integration will be instrumental in maintaining growth going forward.

Figure 4: Customer Deposits Mix (H1, 2019) Figure 5: Growth in customer deposits (H1, 2019)

LCY LCY LCY savings deposits savings demand 211.4% deposits deposits 20% 19% FCY deposits 80.4%

LCY term deposits 60.3% FCY LCY term deposits deposits 22% 39% LCY demand deposits 45.6%

Access Bank’s total borrowings rose by 14.7% to ₦705.6 billion as at 30 June 2019 driven by intervention funds and on-lending facilities from multinational financial institutions including International Finance Corporation (IFC). During the review period, Access Bank issued an unsecured green bond with a principal amount of ₦15 billion and a ₦30 billion subordinated bond. The subordinated borrowings not only funded the Issuer’s activities but supported the capital adequacy ratio computation.

11

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

Table 5: Access Bank’s long term borrowings as at June 2019

Borrowing Principal Coupon Rate Tenor Issue Date Maturity Date Eurobond $50 million 7% 7 years 27 Mar 2014 27 Mar 2021 Eurobond $300 million 10.5% 5 years 19 Oct 2016 19 Oct 2021 Green Bond ₦15 billion 15.5% 5 years 18 Mar 2019 18 Mar 2024 Local subordinated bond ₦30 billion 15.5% 7 years 23 July 2019 23 July 2026

Access Bank’s weighted average cost of funding (WACF) moderated notably to 4.8% in the first half of 2019 from 5.9% in 2018 due to an improved funding mix and a lower interest rate environment. We expect a further decline in WACF on account of CBN’s policies in the money market and the minimum loans to deposits ratio (LDR) which have culminated in a further decline in yields on fixed income securities, positively impacting the banking industry’s funding costs.

Figure 6: Weighted Average Cost of Funds (FY2016-June 2019)

5.9%

5.2%

4.8%

4.3%

2016 2017 2018 June 2019

As at 30 June 2019, Access Bank had a large liquid asset portfolio of over ₦2 trillion, twice its position as at FYE2018. Dominated by government securities, liquid assets as a percentage of total LCY deposits (excluding interbank takings) was good at 71.1% and was in excess of the 30% regulatory minimum. We consider Access Bank’s improved liquidity profile to be good. Furthermore, the Issuer’s liquid asset portfolio benefits from favourable yields in the OMO market which strengthens profitability. In addition, we view positively the Issuer’s contingency funding plan which is in place as part of its Recovery and Resolution Plan.

Stronger earnings backed by growth Access Bank’s audited financial statements for the period ended 30 June 2019 showed stronger earnings compared to the corresponding reporting period in 2018. Interest income rose by 52.5% to ₦241.6 billion on account of a larger loan book and investment portfolio. Interest expense also increased, but by a lower rate of 17.9%, resulting in a net interest spread (NIS) of 54.4% (H1, 2018: 40.9%). Nonetheless, Access Bank’s NIS stood lower than is Tier 1 counterparts (GTBank: 78.8%, Zenith Bank: 65.4%). We anticipate stronger margins in the

12

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond short term driven by the lower interest rate environment which has moderated funding costs materially. Net impairment charge moderated to ₦3.2 billion during the period due to writebacks.

Supporting the Bank’s core lending business was non-interest income from its digital footprints on an expanded customer base, fees & commissions on various transactions and gains on investment securities. However, significant losses were recorded from the spot leg of derivatives transactions. Thus, non-interest income declined by 32.5% to ₦36.6 billion and represented less than 1% of total assets & contingents. We expect stronger and diversified earnings from the Issuer’s ancillary businesses as Access Bank continues to invest in the digital space.

In December 2019, CBN reviewed downwards charges on key banking transactions on the premise of consumer protection framework and its authority to improve financial inclusion. This change will moderate growth in non-interest income, to some extent, for the entire banking industry.

Elevated costs associated with business expansion; however, profitability remains good During the reporting period, Access Bank’s operating expenses (OPEX) rose by 33.4% to ₦106.8 billion. Key drivers of OPEX growth were a 29.4% y/y increase in AMCON costs1, a 49% growth in NDIC charges and a 513.3% spike in professional fees linked to the merger process. Management disclosed that integration costs amounted to circa ₦6 billion in H1, 2019. However, the impact of elevated expenses was moderated by a 46.8% growth in net earnings which translated in a cost to income ratio of 64.8% (H1, 2018: 71.3%). Compared to other Tier 1 banks Access Bank’s CIR was high (GTBank: 35.3%, Zenith Bank: 55.1%). However, when we back out one-off professional fees associated with the merger, Access Bank’s CIR moderates to 62.3%.

Figure 7: Cost to Income Ratio (June 2019)

64.8%

55.1%

35.3%

Access Zenith GTBank

In the short term, we expect Access Bank’s OPEX to remain elevated by investment in technology, business expansion and probable operational inefficiencies elicited by an enlarged entity.

1 The banking sector resolution cost paid to AMCON was reviewed to 0.5% of total assets & contingents as against 0.5% of total assets

13

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

In the period ended 30 June 2019, Access Bank recorded a pre-tax profit of ₦58 billion, 80.1% higher than profits recorded in the first half of 2018. As a result, annualised return on average assets (ROA) and annualised return on average equity (ROE) strengthened to 2.2% and 23.8% respectively (H1 2018: ROA of 1.7% and ROE of 14.7%). We consider Access Bank’s profitability to be good, reflecting a stronger earnings profile and management’s drive. While we expect this level of profitability to be sustained in the short term, we recognise that maintaining good asset quality and actualising the synergies of the combined entity is imperative for long term growth.

Capitalisation remains good for current business risks Access Bank’s shareholders’ equity strengthened by 18% to ₦527.9 billion as at H1, 2019, following the combination with the erstwhile Diamond Bank Plc. During the review period, the Issuer raised Tier 2 capital of $162.5 million (approximately ₦59.1 billion) from a syndicate of financial institutions and issued a subordinated bond of ₦30 billion. Thus, Tier 2 capital stood at ₦93.4 billion as at 30 June 2019.

The Issuer’s Basel II computed capital adequacy ratio (CAR) remained good at 21.08% (FYE2018: 17.22%) and stood well above the regulatory minimum of 15% for commercial banks with international operating licenses. CAR was upheld by a stronger capital base bolstered by additional debt issuances and stronger retained earnings despite the growth in risk-weighted assets. Without the adjusted impact of the regulatory transition arrangement of IFRS 9 implementation, Access Bank’s CAR of 16.55% was slightly above the regulatory threshold as at 30 June 2019.

We believe Access Bank’s capitalisation is just adequate for its current business risks. In view of the Bank’s loan book which is currently undergoing resolutions, we note that capital may be pressured in the short term. We are of the opinion that the Bank needs to shore up capital to create sufficient buffer for unforeseen risks.

OWNERSHIP, MANAGEMENT & STAFF During the review period, the shareholding structure of the Bank changed following the merger with Diamond Bank Plc. The merger involved Access Bank Plc acquiring the entire issued share capital of Diamond Bank Plc in exchange for a combination of cash and shares in Access Bank via a Scheme of Merger. Based on the Scheme of Merger, Diamond Bank shareholders received:

1. A cash consideration of ₦1 (one naira) per Diamond Bank share representing a total cash amount of 23,160, 388, 968 and, 2. The allotment of 6,617,253,991 new Access Bank Plc shares, representing the two new Access Bank ordinary shares for every seven Diamond Bank shares.

As at 30 June 2019, Access Bank had a total of 35.5 billion issued shares held by 923,509 investors. One shareholder- Stanbic Nominees Nigeria Limited held a 14.9% equity stake on behalf of investors. In addition, the Bank’s Board of Directors controlled approximately 4.4% of the Bank’s equity as at 30 June 2019.

14

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

Access Bank is governed by a 15-member Board of Directors comprising seven Executive Directors and eight Non-Executive Directors (three of whom are Independent). The Bank’s Board was chaired by Mrs Mosun Belo- Osagie during the reporting period. However, following the completion of the maximum 12-year term limit permitted by the Central Bank of Nigeria’s code of corporate governance for banks and discount houses, Mrs Mosun Belo-Osagie stepped down as Chairman in January 2020 and Dr (Mrs) Ajoritsedere Awosika was appointed in her stead.

Dr. Awosika joined the Board of Access Bank Plc in April 2013 as an Independent Non-Executive Director and has been the Chairman and Vice-Chairman of the Board Credit and Finance Committee and the Board Audit Committee respectively in addition to membership of other Board Committees.

During the review period, Mrs. Titi Osuntoki (Executive Director, Business Banking Division) resigned from the Board effective March 2019 and Mrs. Chizoma Okoli was appointed subsequently. Mrs Okoli was an Executive Director in the defunct Diamond Bank Plc. She has over 27 years’ experience in the banking industry spanning commercial and consumer banking, corporate banking and financial institutions. She is presently the Executive Director, Business Banking.

Mr. Herbert Wigwe is the Group Managing Director/Chief Executive Officer of the Bank and is supported by Mr. Roosevelt Ogbonna who is the Group Deputy Managing Director.

During the period ended 30 June 2019, Access Bank employed an average of 6,368 persons, 87.3% higher than the staff strength in 2018- including the staff of the merged Diamond Bank Plc. Thus, staff cost rose by 26.7% compared to the corresponding period in 2018. Net earnings per staff which improved to ₦51.8 million (H1, 2018: ₦33.9 million) sufficiently covered staff cost per employee 7 times compared to 6 times in 2018. We consider this coverage level to be good, compared to the banking industry’s average of 4.5 times.

In our opinion, the Issuer’s staff productivity is good and we expect better performance as both banks integrate fully in terms of culture and efficiency. In addition, we believe the Bank’s management team is experienced and competent.

OUTLOOK Access Bank Plc has grown markedly over the last few years, adopting both organic and inorganic means to achieve its medium-term growth plan. The business combination with Diamond Bank, though still unveiling has positioned the Bank as Nigeria’s largest in terms of total assets as at 30 June 2019. We expect this stance to be upheld by a good management team, a stronger retail presence and good brand equity.

According to the Issuer’s forecasts in the short term, pre-tax profit is expected to rise by 32.9% in 2020. In addition, a 7.7% growth in the balance sheet is anticipated, with minimal growth in the loan book. However, a marked 71.2% rise in impairment charge is expected by the Bank’s management compared to the period ended 31 December 2019. This confirms our concerns about the Bank’s deteriorated asset quality post-merger.

15

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

Overall, we consider the Issuer’s projections to be feasible barring negative changes in the regulatory environment.

We attach a ‘stable’ outlook to the Issuer, adjudging the Bank to have adequate capacity to settle obligations as and when due. This outlook is driven by our expectations that the Bank’s profitability will remain good in the near term, thus, strengthening its capital base, vis a vis current business risk.

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

16

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

FINANCIAL SUMMARY

ACCESS BANK PLC AUDITED

30-Jun-19 31-Dec-18 31-Dec-17 STATEMENT OF FINANCIAL POSITION AS AT ₦'000 ₦'000 ₦'000

ASSETS 1 Cash & equivalents 472,553,797 7.6% 291,897,279 6.7% 274,000,476 7.2% 2 Government securities 1,343,251,622 21.7% 731,856,597 16.9% 531,725,259 14.0% 3 Stabilisation securities 211,345,903 3.4% 46,392,634 1.1% 28,157,562 0.7% 4 Quoted investments 5 Placements with discount houses 6 LIQUID ASSETS 2,027,151,322 32.7% 1,070,146,510 24.7% 833,883,297 21.9%

7 BALANCES WITH NIGERIAN BANKS 8 BALANCES WITH BANKS OUTSIDE NIGERIA

9 Direct loans and advances - Gross 2,503,940,149 40.4% 1,860,111,134 43.0% 1,929,042,647 50.7% 10 Less: Cumulative loan loss provision (207,065,241) -3.3% (77,356,156) -1.8% (56,330,908) -1.5% 11 Direct loans & advances - net 2,296,874,908 37.1% 1,782,754,978 41.2% 1,872,711,739 49.2% 12 Advances under finance leases - net 13 TOTAL LOANS & LEASES - NET 2,296,874,908 37.1% 1,782,754,978 41.2% 1,872,711,739 49.2%

14 INTEREST RECEIVABLE 15 OTHER ASSETS 184,272,070 3.0% 102,881,884 2.4% 85,446,927 2.2% 16 DEFERRED LOSSES 17 RESTRICTED FUNDS 629,063,812 10.2% 522,931,292 12.1% 354,986,209 9.3% 18 UNCONSOLIDATED SUBSIDIARIES & ASSOCIATES 113,320,641 1.8% 111,203,496 2.6% 87,794,631 2.3% 19 OTHER LONG-TERM INVESTMENTS 264,236,125 4.3% 281,572,709 6.5% 175,202,549 4.6% 20 FIXED ASSETS & INTANGIBLES 234,673,752 3.8% 96,623,740 2.2% 89,658,627 2.4%

21 TOTAL ASSETS 5,749,592,630 92.9% 3,968,114,609 91.7% 3,499,683,979 91.9%

22 TOTAL CONTINGENT ASSETS 442,539,896 7.1% 358,862,448 8.3% 306,494,255 8.1%

23 TOTAL ASSETS & CONTINGENTS 6,192,132,526 100% 4,326,977,057 100% 3,806,178,234 100%

CAPITAL & LIABILITIES

24 TIER 1 CAPITAL (CORE CAPITAL) 527,933,220 8.5% 447,401,183 10.3% 429,971,253 11.3% 25 TIER 2 CAPITAL 93,414,892 1.5% (6,601,426) -0.2% 114,707,471 3.0%

26 Foreign Currency Borrowings 608,271,497 9.8% 614,933,824 14.2% 504,957,847 13.3%

27 Demand deposits 686,090,265 11.1% 471,311,117 10.9% 467,532,904 12.3% 28 Savings deposits 725,915,863 11.7% 233,133,888 5.4% 183,541,975 4.8% 29 Time deposits 1,438,653,785 23.2% 897,253,488 20.7% 899,365,314 23.6% 30 Inter-bank takings 653,559,385 10.6% 616,644,611 14.3% 276,140,835 7.3% 31 TOTAL DEPOSIT LIABILITIES - LCY 3,504,219,298 56.6% 2,218,343,104 51.3% 1,826,581,028 48.0% 32 Customers' foreign currency balances 824,502,533 13.3% 457,040,437 10.6% 360,333,520 9.5% 33 TOTAL DEPOSIT LIABILITIES 4,328,721,831 69.9% 2,675,383,541 61.8% 2,186,914,548 57.5%

34 INTEREST PAYABLE 35 OTHER LIABILITIES 191,251,190 3.1% 236,997,487 5.5% 263,132,860 6.9%

36 TOTAL CAPITAL & LIABILITIES 5,749,592,630 92.9% 3,968,114,609 91.7% 3,499,683,979 91.9%

37 TOTAL CONTINGENT LIABILITIES 442,539,896 7.1% 358,862,448 8.3% 306,494,255 8.1%

38 TOTAL CAPITAL, LIABILITIES & CONTINGENTS 6,192,132,526 100% 4,326,977,057 100% 3,806,178,234 100% Proof

BREAKDOWN OF CONTINGENTS 39 Acceptances & direct credit substitutes 442,539,896 7.1% 358,862,448 8.3% 306,494,255 8.1% 40 Guarantees, bonds etc.. 41 Short-term self liquidating contingencies

17

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

ACCESS BANK PLC AUDITED

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30-Jun-19 31-Dec-18 31-Dec-17 ₦'000 ₦'000 ₦'000

42 Interest income 241,617,080 86.8% 313,074,156 73.4% 274,670,641 69.0% 43 Interest expense (110,252,757) -39.6% (184,857,410) -43.3% (143,133,607) -35.9% 44 Loan loss expense (3,165,199) -1.1% (10,702,144) -2.5% (29,149,849) -7.3% 45 NET REVENUE FROM FUNDS 128,199,124 46.1% 117,514,602 27.5% 102,387,185 25.7% 46 ALL OTHER INCOME 36,634,095 13.2% 113,574,409 26.6% 123,490,934 31.0%

47 NET EARNINGS 164,833,219 59.2% 231,089,011 54.2% 225,878,119 56.7%

48 Staff costs (23,144,355) -8.3% (40,425,816) -9.5% (41,773,512) -10.5% 49 Depreciation expense (9,899,656) -3.6% (13,711,396) -3.2% (11,445,781) -2.9% 50 Other operating expenses (73,766,924) -26.5% (101,703,653) -23.8% (107,518,690) -27.0% 51 TOTAL OPERATING EXPENSES (106,810,935) -38.4% (155,840,865) -36.5% (160,737,983) -40.4%

52 PROFIT (LOSS) BEFORE TAXATION 58,022,284 20.9% 75,248,146 17.6% 65,140,136 16.4% 53 TAX (EXPENSE) BENEFIT (7,617,977) -2.7% (1,651,851) -0.4% (13,804,676) -3.5%

54 PROFIT (LOSS) AFTER TAXATION 50,404,307 18.1% 73,596,295 17.2% 51,335,460 12.9%

55 NON-OPERATING INCOME (EXPENSE) - NET 56 PROPOSED DIVIDEND (7,560,647) -2.7% (18,803,180) -4.4% (18,803,180) -4.7%

57 GROSS EARNINGS 278,251,175 100% 426,648,565 100% 398,161,575 100%

58 AUDITORS PWC PWC PWC 59 OPINION CLEAN CLEAN CLEAN

KEY RATIOS 30-Jun-19 31-Dec-18 31-Dec-17

EARNINGS 60 Net interest margin 54.4% 41.0% 47.9% 61 Loan loss expense/Interest income 1.3% 3.4% 10.6% 62 Return on average assets* 2.2% 1.9% 1.8% 63 Return on average equity* 23.8% 17.2% 15.3% 64 Operating Expenses/Net earnings 64.8% 67.4% 71.2% 65 Gross earnings/Total assets & contingents 5.3% 10.5% 11.2%

EARNINGS MIX 66 Net revenue from funds 77.8% 50.9% 45.3% 67 All other income 22.2% 49.1% 54.7%

LIQUIDITY 68 Total loans & leases - net/Total lcy deposits 47.9% 54.8% 64.4% 69 Liquid assets/Total lcy deposits 71.1% 66.8% 53.8% 70 Demand deposits/Total lcy deposits 19.6% 21.2% 25.6% 71 Savings deposits/Total lcy deposits 20.7% 10.5% 10.0% 72 Time deposits/Total lcy deposits 41.1% 40.4% 49.2% 73 Inter-bank borrowings/Total lcy deposits 18.7% 27.8% 15.1% 74 Interest expense - banks/Interest expense 21.8% 19.8% 10.3%

75 NET FOREIGN CURRENCY ASSETS (LIABILITIES) (824,502,533) (457,040,437) (360,333,520)

18

2020 Bond Credit Rating Access Bank Plc. ₦15 billion 5-Year Fixed Rate Senior Unsecured Green Bond

ACCESS BANK PLC AUDITED

KEY RATIOS CONT'D 30-Jun-19 31-Dec-18 31-Dec-17

ASSET QUALITY 76 Performing loans (₦'000) 2,321,960,277 1,815,967,414 1,846,546,202 77 Non-performing loans (₦'000) 181,979,872 44,143,720 82,496,445 78 Impaired Credits/Total loans - Gross 7.3% 2.4% 4.3% 79 Loan loss provision/Total loans - Gross 8.3% 4.2% 2.9% 80 Loan loss provision/Non-performing loans 113.8% 175.2% 68.3% 81 Risk-weighted assets/Total assets & contingents 50.0% 53.9% 61.7%

CAPITAL ADEQUACY 82 Adjusted capital/risk weighted assets 14.3% 13.8% 19.2% 83 Tier 1 capital/Adjusted capital 104% 137% 94% 84 Total loans - net/Adjusted capital (Times) 19% 18% 24% 85 Capital unimpaired by losses (₦'000) 527,933,220 447,401,183 429,971,253

CAPITAL ADEQUACY STRESS TEST 86 Total shareholders' funds (N'000) 517,003,871 394,834,250 450,902,188 87 Cumulative loan loss provision (actual reserves) 207,065,241 77,356,156 56,330,908 88 Equity before all provision (line 86 + line 87) 724,069,112 472,190,406 507,233,096 89 Required reserves 330,283,366 159,271,958 194,811,071 90 Equity after required reserves (line 88 - line 89) 393,785,746 312,918,448 312,422,025 91 Equity after required reserves/risk weighted assets 15.1% 16.6% 13.3%

STAFF INFORMATION 86 Net earnings per staff (₦'000) 48,495 67,987 74,968 87 Staff cost per employee (₦'000) 6,809 11,893 13,864 88 Staff costs/Operating expenses 21.7% 25.9% 26.0% 89 Average number of employees 3,399 3,399 3,013 90 Average staff per branch 11 11 10

OTHER KEY INFORMATION 91 Legal lending limit(₦'000) 105,586,644 89,480,237 85,994,251 92 Other unamortised losses(₦'000) NONE NONE NONE 93 Unreconciled inter-branch items (₦'000) DR/(CR) NONE NONE NONE 94 Number of branches 314 314 314 95 Age (in years) 31 30 29 96 Government stake in equity - - -

Estimate Actual Actual MARKET SHARE OF INDUSTRY TOTAL 2019 2018 2017 97 Lcy deposits (excluding interbank takings) 17.8% 10.0% 9.2% 98 Total assets & contingents 16.2% 11.3% 10.2% 10099 NetTotal earnings loans & leases - net 10.0%18.2% 14.1%9.3% 12.3%9.3% 101 Profit before tax 7.5% 9.7% 7.6% 102 Cash dividend 2.7% 6.8% 9.5% 100 Non Interest Income 4.0% 12.4% 12.4% 101 Net Interest Income 6.6% 6.4% 6.9%

*Annualised for audited income statement for the 6 months to 30 June 2019

19

2020 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 realized only on reorganization or liquidation.

The first four categories of ratings are investment grade while the last four ratings are speculative grade. The ratings from Aa to C may be modified by the addition of a plus or minus sign to show relative standing within the category.

20

www.agusto.com

© Agusto&Co. UBA House (5th Floor) 57 Marina Lagos Nigeria. P.O Box 56136 Ikoyi +234 (1) 2707222-4 +234 (1) 2713808 Fax: 234 (1) 2643576 Email: [email protected]