Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or Damp Squib?

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Highlights – FT

Diamond Bank plc had struggled with a deterioration of about 90 per cent as its commercial loan book (heavily exposed to the struggling oil and power sectors).
Diamond shares fell more than 50 per cent after downgrades by both Moody’s and Standard & Poor’s
Diamond Bank had legacy issues and a loan book that was not properly managed.
Diamond Bank would write off all its bad loans before the merger goes through.
Access has offered N3.13 a share for Diamond, against a recent price of just N0.87. It will pay N1 a share in cash and swap two new Access shares for every seven Diamond shares.
Proposed new bank would have a customer base of 27m, including 12m with mobile accounts (not discounted for account holders in both banks),
Access Bank to launch a subordinated rights issue of about $200m to keep its capital well above regulatory requirements

Takeaways

Diamond Bank would cease to exist (no final position known on its logo) .
Uzoma Dozie, Diamond’s chief executive, will resign but other senior executives are set to stay.
As many as 100 of the banks’ combined 650 branches would be shut with more than 1,000 of the merged entities’ 6,800 staff expected to lose their jobs.
The combination of Access’s strong management and Diamond’s broad retail franchise would allow for synergies.
The merged entity would be a leader in mobile banking and has a decision on its hands – . Diamond runs its mobile banking with MTN while Access has a deal with Airtel.

A Lofty Deal or a Damp Squib?
• A switch to National Banking License… In our recently published equity commentary on Diamond Bank (See report: Overblown fright or Justified concerns), we had stated three options the bank’s management will adopt to keep the bank operational and meet its obligation to lenders. While we had considered the possible acquisition by a bigger bank, the management of both banks in separate press releases refuted the claim. Consequently, as with one of our options, Diamond Bank got approval from the CBN to operate as a national bank following the sale of its UK business, a development that was perceived to have saved the bank from capitalization needs and continue operations on a better footing.

Estimating The Transaction Multiples

As at 9M 2018, Diamond bank’s book value stood at N217.1 billion with a book value per share (BVPS) of N9.37, we estimate a transaction price to book multiple (P/B) of 0.3x compared with the market valuation of 0.1x P/B.

Given our thought that the transaction is strictly equity based, we assume a situation wherein the un-provisioned part of the non-performing loan is adjusted for through equity to leave the books with performing assets.

As such, based on current NPL of N99 billion and total credit charge loss of N54 billion, we estimate an equity charge of N45 billion by Diamond bank over Q4 18 to leave the book value at N172.1 billion and BVPS of N7.4 with implied transaction price to book multiple of 0.4x.

How they Stack up Post-Consolidation

The notice by Access indicated that the bank will issue additional shares of 6.6 billion shares to accommodate the shareholders of Diamond bank. Assessing the impact on current outstanding shares of Access bank of 28.9 billion, we estimate increase in total shares post consolidation to 35.5 billion. Accordingly, we estimate that the potential dilution from the merger of 19%. Furthermore, post-merger, Carlyle Group, Kunoch Holdings and Diamond Partners will own

3.3%, 1.7% and 1.1% of the enlarge Access bank respectively.

Expected Moderation in Cost of Funds

During our engagement with management of Access Bank in November, they guided to the bank’s plan to gradually close out on expensive borrowings.

Specifically, the CFO stated that the bank could refinance its expensive Eurobonds if presented with the opportunity and any other available opportunity that could result in a significant moderation in its funding costs.

Notably, as at 9M 18, Access cost of funds stood at 5.6% compared to Tier 1 average of 4.0%, following contraction in cheaper deposit (current and savings account) mix by 195bps to 45% which resulted in 18.5% YoY jumps in interest on customers deposits, 1.0x YoY growth in interbank placements, and 73.8% YoY increase in borrowing cost.

However, Diamond cost of funds remains the lowest among peers at 4% (coverage Tier 2 average of 5.4%) despite a 260bps YoY contraction in CASA composition to 78.3% over 9M 18.

Accordingly, we see some benefit to Access in terms of moderation in funding cost from the acquisition of Diamond and estimate that Access’s cost of funds could moderate to ~5.1% with a CASA mix of ~55.3% post consolidation.

However, given the reaction to the bank in recent months, we are cautious on the level of cheaper deposits composition being inherited by Access bank. For context, over the last five quarters, Diamond bank has lost CASA deposits of N247.6 billion, reflecting a 22.8% decline YoY to N836.7 billion in Q3 18 from N1.1 trillion in Q3 17. Also, given the lower credit rating of Diamond bank, in terms of corporate deposits, we do not rule out the possibility of erosion in Access bank’s credit rating.

What’s the immediate Impact?

In summary, while this acquisition appears positive for shareholders of Diamond Bank, we are of the view that the transaction will be undesirable for Access Bank in the near term, giving bottlenecks in terms of collapsing of structures as well as dilution impact on profitability metrics.

That said, we await meeting with Management of Access Bank for further details and discussion on this acquisition and would communicate our views in due course.

Any benefit for the core investors in Diamond?

Following the exit of Actis in August 2014 and the need for recapitalization of the bank in November 2014 via a rights issue, Carlyle Group, became the largest single shareholder in Diamond with transaction valued at $147 million (N7.38 per share).

Accordingly, we estimate that on current price of N1.07, the Group is taking a bad hit on the investment to the tune of N20 billion. Accordingly, we believe that the consideration price of N3.13 could reduce Carlyle loss in the venture to ~ N11.4 billion in the short term. However, post consolidation and integration of the shareholders into the enlarged Access bank, we believe the change in the fortune of Carlyle in the venture will be determined by the gains from the integration.

Source / Credit: Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or a Damp squib? – ARM Research. Contact Oluwasegun Akinwale via Oluwasegun.akinwale@arm.com.ng

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Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

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