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Unlocking value in the Access Bank – Diamond merger

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It’s the start of the New Year, Nigerian stock are still falling, the feel good vibe around this time of the year is yet to ebb and yet I’m still thinking about the announcement made late last year about a merger between Access Bank and Diamond Bank, with the potential to shake up Nigeria’s financial services sector.

Whenever I think of the Nigerian Banking sector one thought always gets me excited.

This is the pre provision operating profits levels for the industry.

The thinking goes that if only the banks can clean up their books there could be potential upside for investors in financials.

However there is always the fear of falling into a ‘value trap’, or by definition a stock that appears to be cheap because the stock has been trading at low valuation metrics such as earnings multiple, or book valuefor an extended time period. The trap springs when investors buy into the company at low prices and the stock continues to languish or drop further.

The recent Access Bank – Diamond Bank merger has made the new entity to emerge to become the largest lender in Nigeria by assets and other metrics. With its huge bad loan portfolio which would need writing off, there is some similarity the new entity bears with FBN Holdings which used to be the largest bank by assets and is also dealing with bad loans for which impairment charges of N76.1 billion was taken in Q3, 2018.

Naturally the question for investors would be, is this new entity a buy?

I decided to run some numbers comparing all three banks (FBNH, Access and Diamond), separately and then the combined Access and Diamond to see where they stood as at Q3.

 

 

Positives for the merged (Access/Diamond) entity

Low valuation

If you believe that Nigerian banks or at least the largest banks should trade close to their book value then you could argue that N20 per share is closer to fair value for the combined name. Currently Zenith Bank (another bank which we believe will be closer to the new combined Access/Diamond) is trading at 0.92x book value.

Scale

Total assets of over N6trillion, and 29 million customers should give the new Access – Diamond entity enough levers to pull to drive profitability.

Mobile money

The coming mobile money, digital financial inclusion is an opportunity for the new bank given Access adoption of technology and the CBNs mandate to Telcos to partner with banks. Together, the two companies will have 29 million customers, including more than 13 million mobile customers, as well as 3,100 ATMs, 15.9 million cards and around 32,000 PoS terminals. Given how ambitious the Access Bank team driving the merger is, a MTN/Access Bank-Diamond Bank mobile money roll out would not be out of place and the impact on the bottom-line could be huge.

Backward looking negative Sentiment

Most of the negative sentiment that has followed this merger announcement is backwards looking and in our opinion misses the point completely. Investors should instead be asking themselves what kind of Nigerian banking/financial services sector will emerge from 2020 (just 1 year from now), and who will be in the dominant position then to drive profitability. We think Access – Diamond will be a major winner in the evolving financial services landscape.

Nominal growth/unbanked population

The Banking sector (assets) has grown at circa 10% per annum on average since 2010 in Naira terms. This should provide steady lift to profits assuming more financially excluded are gradually being lifted into the formal space using digital financial services DFS.

Profit levers

Looking at the table above, the combined Access/Diamond has a lot of profit levers to pull including operating expenses of N130 billion and Personnel expenses of N58 billion. We expect these to come down with direct impact on topline.

Experience from Intercontinental acquisition

We think the Access Bank team has learnt a lot from the experience of swallowing Intercontinental Bank. One sign of this is reports that the Diamond Bank LOGO will survive the merger. This is a symbolic but effective way to keep a lot of the Diamond Bank customers from porting. Access Bank has absorbed six institutions in the past 15 years. According to management, the same team who led the past successful integration will be responsible for delivering the merger with Diamond Bank and overseeing the transition to the enlarged entity.

Unknowns

We believe that any unknowns from this deal (still awaiting more clarity) will be an upside surprise for Access Bank + Diamond Bank.

Risks

The major risk to our assumptions are execution and possibility of another recession in Nigeria.

Also interest expense should increase in the near term as Access plans a $250m Tier 2 capital raising exercise.

 

PATRICK ATUANYA

Atuanya is Editor, BusinessDay

1 Comment
  1. jaybiz says

    Good insights…

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