Key Takeaways From The Conference Call On The Potential Access Bank – Diamond Bank Merger

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Wednesday, December 19,, 2018   08.42PM / By Teslim Shitta-Bey & Saheed Kiaribe of Proshare

 

In a late afternoon conference call today managers of both Access Bank and Diamond Bank addressed investors and the media on issues related to their recently announced joint merger proposal. 

Working through various concerns expressed by analysts on the likely consequence of an increase in operating cost of the new bank and the possible surge in non- performing loans, the combined team of bank executives reassured analysts that neither rising costs nor toxic loans would adversely affect the fortunes of the new banking entity to emerge from the merger process.

 

Highlights

  • Merger will squeeze out operational efficiency by way of leveraging the corporate banking strength of Access Bank and the retail banking network of Diamond Bank, leading to both economies of scope and of scale
  • The new merged bank will be characterized by lower average cost of funds which will be between Access Banks current cost of 5.2% (6.3% in 2017) and Diamond Banks average cost of 4%.
  • The new bank will draw heavily on the digital retail banking experience of Diamond Bank and the operational back office strength of Access Bank
  • Equity ownership of the new bank will be in the proportion of 81% for equity owners of the old Access Bank and 21% for equity owners of the old Diamond Bank
  • To protect capital adequacy ratio of the new bank, Access Bank has received Central Bank of Nigeria approval to raise USD250million in mezzanine or tier II capital to write down the non-performing loans of Diamond Bank, while at the same time raising an additional N75 billion by way of a Rights Issue in the first half (H1) of 2019 in compliance with International Financial Reporting Standards regulation 9 (IFRS 9) concerning risk assets and bank toxic assets provisions.
  • About N6.6 billion has been earmarked to pay erstwhile Diamond Bank shareholders who will get a cash payment of N1.00 for every nominal 50kobo share held and in addition to getting  2 shares in the new Access Bank for every 7 shares held in the old Diamond Bank. This means that the shareholders of Diamond bank would be paid N3.13 per share but this will be split into a cash payment of N1 and a share compensation that amounts to N2.13 or a premium of 150% on today Wednesday 19, 2018’s Diamond Bank stock market closing price of N1.25.
  • The whole merger process will be completed before the end of H1 2019; meaning that the accounts of the respective merging parties for the financial year ended December 31, 2018 will be separate and not reflect the proposed merged assets and liabilities.
  • The new bank is expected to have 27 million customers, 33,000 Point of Sale (POS) machines, and over 3,000 Automated Teller Machines (ATMs) nationwide making it Nigeria’s largest commercial bank

 

 

Chart 1: Nigerian Banks Market Share by Total Assets

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Source: Access Bank – Diamond Bank Investor Presentation, Proshare Research

 

Chart 2: Nigerian Banks Market Share by Loans

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Source: Access Bank – Diamond Bank Investor Presentation, Proshare Research


Chart 3: Nigerian Banks Market Share by Deposits

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Source: Access Bank – Diamond Bank Investor Presentation, Proshare Research

 

Takeaways

  • The merger process will span a period of six months ending  in or sometime before  June 2019
  • Non-Performing Loan (NPL) ratio for Access Bank is presently below 5% but is probably likely to be significantly higher for Diamond Bank; a clearer picture of Diamond Banks NPL position will emerge by the first quarter of 2019.
  • Access Bank will provide about N180 billion to pay off and clean up Diamond Bank’s bad loan position. This will put pressure on Access Bank’s existing shareholders and increase mezzanine (tier II) Capital exposure. However, to reduce the impact of this quasi-equity on Access Bank’s books it presents a large retained earnings reserve of USD400million to provide financial buffer.
  • Interest Cost to Interest Income ratio for Diamond Bank is among the lowest of its peers and could serve as  a basis of reducing the cost to income ratio of the larger post-merger entity in coming years 
  • Post-merger guidance evolution may take a few more weeks going into the New Year, 2019.
  • Access Bank is working with Diamond Bank to put loan recovery governance programmes in place to reduce the size of toxic assets and improve the management of these assets
  • Both banks are cautious on projections related to revenue synergy but they are more optimistic and confident on cost synergy that will be achieved early into the merger. Cost synergies are likely to be in the region of N30 billion.

Analysts and stock brokers have quickly responded to the conference call by being bullish on Diamond Bank shares as they continue to perceive hidden value from the purchase price and share conversion ratio between Diamond Bank and the new Access Bank, but are less aggressive on Access Bank’s stock as they see challenges with the appropriate pricing of Diamond Bank shares and the inherent premium.

 

Today saw market price of Access Bank close at N7.90 while Diamond Bank closed at N1.25. Access Banks market value went up 6% between the close of business last week and today’s mid-week Conference call announcement while Diamond Bank’s share price spiraled upwards by 36%.


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End of Day Data & Charts

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For further information:

·         Visit Access Bank Plc IR Page in Proshare MARKETS

 

·         Visit Diamond Bank Plc IR Page in Proshare MARKETS


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Access Bank Conference Call

The conference call is accessible as an audio webcast through the Investor Relations section of Access Bank Plc’s website 

 

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