Analysts at S & P global ratings have predicted that Access Bank Plc earnings capacity is expected to improve this year over its plan to merger with Diamond Bank Plc.
Access Bank and Diamond Bank towards the end of 2018 announced a merger, which is expected to close by June 2019, on receipt of regulatory approvals
According to S & P global ratings, “The stable outlook on Access Bank reflects our expectation that the transaction will likely boost the bank’s earnings capacity in the next 12 months, thus cementing its competitive position among top-tier banks in Nigeria.
“It also reflects our expectation that its positive track record in mergers and acquisitions, as well as its risk management framework, will mitigate operational and integration risks associated with the transaction.
“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, leading to RAC weakening below three per cent.
“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, while all other factors remain equal.”
On the Diamond bank, the latest report on S & P global rating said, “the stable outlook on Diamond Bank reflects our expectations that the bank will be in a position to repay its $200 million Eurobond in May 2019.
“We would lower the rating in the unlikely event that the deal does not go through as we believe that the provisioning needs under IFRS 9 will likely be higher than anticipated, or if we were to see an increase in foreign currency liquidity risk.
“A positive rating action is remote. However, we may consider raising the bank’s rating above ‘CCC+’ closer to the merger date.”
S&P Global Ratings thus affirmed its ‘B/B’ long- and short-term issuer credit ratings and ‘ngA/ngA-1’ Nigeria national scale ratings on Access Bank PLC with outlook remaining stable.
“At the same time, we revised our outlook on Diamond Bank to stable from negative and affirmed the ‘CCC+/C’ issuer credit ratings. We raised our long-term Nigeria national scale rating on Diamond Bank to ‘ngBB’ from ‘ngBB-‘ and affirmed the short-term national scale rating at ‘ngB’.
“On Dec. 21, 2018, Access Bank made a binding offer to acquire Diamond Bank. Under the memorandum of agreement, Access Bank will acquire all outstanding shares of Diamond bank in a cash and shares transaction. We expect the deal will likely close by the end of June 2019, and is conditional on receiving regulatory approvals. Upon closure of the deal, Diamond Bank will cease to exist as a separate legal entity.
“We have affirmed our ratings on Access Bank at ‘B/B’ with a stable outlook, based on our view that potential short-term acquisition risks should be offset by Access Bank’s record of accomplishment in mergers and acquisitions. Access Bank has demonstrated its ability to successfully integrate the bank when it acquired Intercontinental Bank in 2011. Access Bank’s forensic approach mitigates the merger risks.
“Over the medium term, we believe that the acquisition should 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 providing approximately 70per cent of deposits and 35per cent of revenues.
“Furthermore, Diamond Bank has 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. 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 expect the merger of the two entities will likely boost earnings capacity, with return on equity increasing close to 20per cent by 2020. However, we expect about 40per cent of nonperforming loans (NPLs), including the past due not impaired (PDNI) loans, to be transferred to Access Bank upon the acquisition.
“We understand that Diamond Bank will write off a large portion of the problem loans by the time of the acquisition. As a result, we forecast that Access Bank’s NPLs ratio post merger will increase to eight per cent in 2019 before reducing to below seven per cent in 2020.
“Similarly, cost of risk will increase to 1.2per cent in 2019 as Access Bank will have to make additional Stage 2 loan impairment provisions to account for the PDNI, which largely relate to the oil and gas sector.
“Access Bank’s market position is set to transform moving into 2019, given Diamond Bank’s solid retail franchise. The combined entity will have total assets of about N5.9 trillion, representing a 19per cent total market share by total assets. Access Bank is planning to close about 80 branches, thus reducing the operating base of Diamond Bank by 30per cent upon the merger.”