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Key Takeaways from Access Bank-Diamond Bank Stakeholders Conference Call

Stock & Analyst Updates	7543 VIEWS
Stock & Analyst Updates
7543 VIEWS

Thursday, January 24, 2019 06:50 PM /By Teslim Shitta-Bey and Saheed Kiaribe

Highlights

In an effort to keep stakeholders updated on ongoing pre-merger activities between Access and Diamond Bank management of both institutions held a joint conference call meeting today Thursday January 24, 2018. The following were the topical highlights of the call:

Release of fresh transaction timeline:

Table 1 Access Bank /Diamond Bank merger transaction timeline

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Source: Access Bank-Diamond Bank Conference call meeting January 24, 2019

The two banks have set out a schedule of activities as pre-shareholder merger approval touch points which include:

Capturing quick wins (such as the use of each banks ATM cards on each other’s platforms without the usual interbank transaction charges)
Preparing a day one to 100 day activity schedule
Preparing value creation plans
Designing operating model post-merger
Designing the corporate architecture of the new larger banking institution that may come into being by Q2, 2019
Creation of an Integration Management Office (IMO) to handle the human capacity, branch harmonization and technical integration issues that will need to be addressed
Continuous stakeholder engagement to provide a smooth brand, operational and investor relationship transition

By May 2019 the two banks on approval by their shareholders and the courts should finalize the technical legal details of the merger. This would lead to effective official integration of both banks and a rebranding initiative for the new entity created.

At the end of Q3 or beginning of Q4 the two banks would have been forged into one institution with a single culture, Information Technology (IT) platform and commencement of run date for value creation that observers believe may require another 16 to 18 months to achieve.

Key discussion Points:

Stakeholders were worried that both banks had started an integration process before the court ordered meeting of their existing shareholders. The management of both banks noted that formal integration had not commenced that what has been started is the planning for integration which is a step required to ensure the success of the merger process which is expected to commence technically in April 2019. The ongoing engagements between both banks it was said by their managements was to ensure that when merger approvals were finally obtained from shareholders the institutions would have a ready plan and schedule in place to reduce merger friction and protect the quality of customer service delivery.

Stakeholders were troubled by the huge non-performing loan profile of Diamond Bank and its implications for the profitability and stability of the new prospective bank. Both bank managements emphasized that though the burden of Diamond Banks large non-performing loans would increase the NPL ratio of the new entity, the challenge would only be temporary as aggressive recovery exercises were ongoing and adequate provisions were being made for a certain amount of loan write-offs against recent earnings. Access Bank’s recent NPL was 4.7% (compared to the statutory maximum of 5%) while Diamond Banks NPL was 40%. The combined entity is expected to have an NPL of 14.1% or roughly 3 times the CBN required maximum rate.

Investors were particularly concerned about the ability of the merger to squeeze value and guarantee competitive returns on equity (ROE). Of the Integration Management Office of the bank noted that even though both banks would be presenting separate audited accounts for 2018. The books look good and should be strong post-merger. The faith of the banks comes from the assumption that the combination will do the following:

Result in a N62bln synergy saving on the revenue side. N 40.9bln will come from extended product offering; N8.4bln from expanded digital channels; N6.7bln from the extension of market share in corporate and retail banking markets;N6.2bln to be dug from Treasury sales and expansion of digital channels .
On the expenditure side, the managers believe that savings of N88.1bln would be made. N40.5 bln or about half of the savings is expected to come from procurement and Facility management; N21bln to come from cost of funds reduction through lower deposit pricing; N12.6bln from IT integration; N13,5bln from branch consolidation; and another N500million would be squeezed from the integration of support functions. This would bring total integration savings to N150.1bln.

The merger managers were of the opinion that going forward the savings would improve investor’s equity returns as the merger would allow for both economies of scale and of scope as fixed costs would be shared over a much larger depositor and borrower base.

Chart 1 Access Bank/Diamond Bank market share by deposits

Source: Central Bank of Nigeria (CBN)

Chart 2 Access Bank/Diamond Bank market share by loans

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Source: Central Bank of Nigeria (CBN)

Based on a review of the books of both banks, Access Bank has decided not to go ahead with its earlier plans to raise Tier I capital by way of a Rights Issue of 75bln. The technical advisers to the merger believe that with a clearer understanding of the relative position of the books of both banks there is no longer a need to raise fresh primary equity. But the bank would still go ahead with the drawdown of $250mln in Tier II, 5 year bond issue. Reducing new equity Issue would improve