Experts affirm Access Bank rating stable over merger with Diamond Bank

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Stories by Kayode Tokede

Experts at S & P Global Ratings have affirmed Access Bank Plc rating at stable outlook over the financial institution proposed plan to merge with Diamond Bank Plc on April 1, 2019.

The merger between Access Bank and Diamond Bank became effective on March 19, 2019, on receipt of shareholders, Central Bank of Nigeria (CBN), Securities & Exchange Commission (SEC), and judicial approvals.

They 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 report by S & P Global on Thursday disclosed that, “. 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 ($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 N23.1 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 N6.1 trillion, representing almost a 20per cent 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 70per cent of deposits and 35per cent 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.

The report further said, “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 (2.7per cent in 2017 compared with 4.7per cent on average for peer banks) and stable retail deposit base. We forecast the net interest margin to increase significantly toward  seven per cent throughout the 2019-2021 forecast period, while fees and commissions will rise by N30 billion.

“Access Bank is planning to close about 80 branches, thus reducing Diamond Bank’s operating base by 30per cent in 2019. We forecast the cost-to-income ratio to increase to about 60per cent-63per cent, 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,” the report explained.

The report explained that 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.”

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