Access Bank Ratings Affirmed; Outlook Stable; Diamond Bank Ratings Discontinued On Effective Merger


Thursday, March 28, 2019 03:20 PM / S&P Global Ratings

  • The merger between Nigeria-based Access Bank PLC and Diamond Bank PLC became effective on March 19, 2019, on receipt of shareholder, regulatory, and judicial approvals. 

  • Upon the merger, Diamond Bank's assets and liabilities, including all creditor liabilities, were transferred to Access Bank while Diamond Bank's legal entity was dissolved without being wound up.

  • We are affirming our 'B/B' long-term issuer credit ratings and 'ngA/ngA-1' Nigeria national scale ratings on Access Bank and discontinuing our 'CCC+/C' issuer credit ratings and 'ngBB/ngB' Nigeria national scale ratings on Diamond Bank.

  • We are raising our global scale long-term issue rating on Diamond's senior unsecured debt due on May 21, 2019 to 'B' from 'CCC+', reflecting that Access Bank had acquired all Diamond Bank's assets, liabilities, and undertakings, including any outstanding creditor liabilities.

  • The stable outlook on Access Bank reflects our expectation that it will maintain a broadly stable credit profile over the next 12 months. Under our base case, we anticipate that the bank is to likely successfully complete the integration of former Diamond Bank.


S&P Global Ratings discontinued its 'CCC+/C' long- and short-term issuer credit ratings and its 'ngBB/ngB' Nigeria national scale ratings on Diamond Bank PLC. The outlook was stable at the time of the discontinuance. 

At the same time, we affirmed the 'B/B' long- and short-term issuer credit ratings and 'ngA/ngA-1' Nigeria national scale ratings on Nigeria-based Access Bank PLC. The outlook remains stable. 

We also raised the issue credit rating on former Diamond Bank's senior unsecured debt (US$200 mil 8.75% notes due May 21, 2019) to 'B' from 'CCC+'. 

The ratings discontinuance follows the completion on March 19, 2019 of the merger of Diamond Bank PLC with Nigeria-based Access Bank PLC. This took place in parallel with the transfer of all assets and liabilities, including any creditor liabilities, to Access Bank from Diamond Bank under the merger scheme. We understand that senior creditors of former Diamond Bank's Eurobond (US$200 million 8.75% notes due May 21, 2019) are now exposed to Access Bank's creditworthiness and therefore we raised the rating on the debt to 'B'. We expect Access Bank to repay the debt obligation on its due date. 

The deal had received all shareholder, regulatory, and judicial approvals at the time of publication. Under the merger scheme, Access Bank acquired all the outstanding shares of Diamond Bank in a cash and shares transaction. As of March 19, 2019, Diamond Bank's shareholders are entitled to receive a cash consideration (Nigerian naira [NGN] 1/Diamond Bank share, equivalent to NGN23,1 billion) and a share consideration (two Access Bank shares for seven Diamond Bank shares). In addition, upon the deal completion date, Diamond Bank ceased to exist as a separate legal entity without being wound up. 

The affirmation of our 'B/B' ratings on Access Bank is based on our view that short-term acquisition risks are likely to be offset by the bank's track record and orderly approach to mergers and acquisitions. Access Bank has demonstrated its ability to identify and select accretive assets, and it successfully integrated Intercontinental Bank after acquiring it in 2011. 

We believe the Diamond Bank deal will cement Access Bank's market leading position in the top-tier of the competitive Nigerian banking sector. The combined entity has total assets of about NGN6.1 trillion, representing almost a 20% total market share. The combined entity boasts the largest franchise by customer base, loans, and customer deposits. We believe the deal could expand Access Bank's customer and loans base compared with peers, underpinning stronger revenue stability during an economic downturn in Nigeria (relying on its non-interest revenues base) and earnings growth as Access Bank deploys its scalable banking platform effectively. 

Over the medium term, we believe that the deal will help Access Bank strengthen its franchise and revenue generation capabilities. On Dec. 31, 2017, Diamond Bank had over 6.5 million retail customers with the retail business accounting for approximately 70% of deposits and 35% of revenues. Diamond Bank has also established partnerships with several parties to enhance its digital banking offering. We think these strategies will accelerate Access Bank's position in that space and increase retail transaction volumes. 

Access Bank's corporate franchise will also benefit from the bank's more competitive positioning as well as Diamond Bank's deposit franchise, which will likely lower its cost of funding. Diamond Bank's retail focus enabled the bank to build a low-cost (2.7% in 2017 compared with 4.7% on average for peer banks) and stable retail deposit base. We forecast the net interest margin to increase significantly toward 7% throughout the 2019-2021 forecast period, while fees and commissions will rise by NGN30 billion. 

Access Bank is planning to close about 80 branches, thus reducing Diamond Bank's operating base by 30% in 2019. We forecast the cost-to-income ratio to increase to about 60%-63%, reflecting the integration of Diamond Bank. This ratio compares less favorably to the best performing banks in the sector. The combined bank's improving efficiency will be a key differentiator in our view of its business position compared with peers, providing that it continues to demonstrate revenue stability and earnings growth. 

All nonperforming loans (NPLs) are to be transferred to Access Bank as a result of the deal on the effective date. 

Similarly, cost of risk will increase to 1.4%-1.5% in 2019 as Access Bank will have to make additional Stage 2 and 3 loan impairments. We forecast that Access Bank will write off about NGN120 billion in 2019 and net charge-offs will average 0.5%-1.0% of average customer loans between 2020 and 2021. We expect credit losses to normalize thereafter at around 1.0%-1.2%, reflecting the good credit quality of Access Bank's loan portfolio, which comprises about 50% investment-grade corporate clients. To put this in context, we expect credit losses in the sector to reduce to 2.75% in 2019 and 2.5% in 2020. Access Bank's asset quality metrics will compare adequately to top peers in Nigeria and regional peers. 

We therefore expect the deal to boost Access Bank's earnings capacity with core earnings increasing to about 2.5% of managed assets through 2021.  However, we forecast our risk-adjusted capital (RAC) ratio to range between 3% and 4% through 2021 on the back of higher risk-weighted assets and impairments charges. 

The stable outlook on Access Bank reflects our expectation that its positive track record in mergers and acquisitions, as well as its risk management framework, will likely mitigate operational and integration risks associated with the transaction. It also reflects our expectation that the transaction will likely translate into higher revenue stability and earnings capacity in the next 12 months, thus cementing its competitive position as the leading banking franchise in Nigeria. 

However, we would lower the ratings on the bank if its asset quality were to deteriorate below our expectations for the sector average, due to quicker loan growth or higher impairments, leading to RAC weakening below 3%, and if revenue stability and earnings growth were undermined. 

A positive rating action appears remote in the next 12 months, because it would hinge on an upgrade of Nigeria as well as an improvement in banking risks in Nigeria, with all other factors remaining equal. An improvement of the bank's stand-alone credit profile would not lead us to raise the global scale rating as we do not rate Nigerian banks higher than the sovereign foreign currency ratings (B/Stable/B) because of the likely direct and indirect influence of sovereign distress on their operations, including their ability to service foreign currency obligations.


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