December 18, 2018 05.59AM / Equities Sales Desk
Access Bank Plc announced yesterday of a signed memorandum of Agreement with Diamond Bank regarding a potential merger. This is apparently on the back of a competitive process undertaken by Diamond Bank to select a preferred bidder.
This deal is impressive and should potentially create Nigeria’s largest bank.
Here are some thoughts on the potential merger.
Big Premium but, still well below book value
At N3.13 per share, Access are paying 260% premium to Dec 13, 2018 share price of N0.87 for Diamond Bank. At 3Q18, Diamond Bank had total equity of N221,609.5m, which was N9.57 per share. So, at N3.13, the bank is being bought at 0.33x book.
What will this mean in terms of size? This will clearly be the largest bank in Nigeria with 16% deposit share and 18% loan share –achieving Access Bank’s long term goal of becoming the biggest bank in Nigeria.
…but will it deliver value?
Diamond Bank’s 9M18 annualized RoE was 1% and its cost/income ratio was 95.6%. On a positive note, this would suggest that the cost synergies could be high, but realizing these synergies will be tough.
…consolidation lessons learnt…..
While the Access Bank merger with Intercontinental Bank delivered on scale, it did not result in even half of what had been promised. Will be looking to how this merger delivers on both.
Huge cost base
On an annualised basis, Access and Diamond Bank will have a combined cost base of N300bn (+US$820m). FBN’s annual cost base is N234bn with 895 branches. Diamond Bank and Access will have a combined branch network of 675 branches - well below FBN. Note that both banks’ networks are concentrated in Lagos and urban centres and the CBN makes it very difficult to close branches down in Nigeria and thus it’s going to be a massive task cutting that down to size.
Some doubts over capital
At FY17, Access bank had N2,311bn of RWAs and Diamond Bank had N1,157bn of RWAs. So, with total FY17 capital of N420bn, Access Bank’s pro forma CAR would fall to 12% if it is acquiring Diamond Bank. However, if the accounting treatment of this deal is as a merger of equals, then its proforma FY17 CAR would be 18%. It would however appear that the CBN does not see any potential concern in and around this issue.
Asset quality red flags
What’s interesting is that Diamond are willing to sell despite the recent approval from the CBN reducing their CAR requirement from 15% to 10%. This, to us, indicates that the bank still has underlying asset quality issues. Unlike the Intercontinental transaction (where Access acquired a clean balance sheet thanks to the AMCON absorption), this transaction is likely to result in a higher NPL ratio for the combined entity. Don’t forget that Geotmeric Power is still a sizeable loan on Diamond Bank’s balance sheet.
As in Kenya, it looks like the regulator does not have the capacity to resolve yet another bank failure putting the onus on private banks – i.e. tapping them for assistance. It’s not a big surprise that Access Bank is the chosen one (and will get extra brownie points in the process) – management have been close to the regulator over the last ten years and their ambition has always been to be the biggest bank in Nigeria. It’s unlikely, in our view, that GTB and Zenith showed any interest given their consistent strategy to grow organically vs M&A.
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