Access-Diamond Bank merger to lead to N150bn in synergies

…as Access cancels planned N75bn rights issue

In a deal that would create Africa’s largest bank by customers, the synergy opportunities for Access-Diamond Bank deal are estimated at N150.3 billion, managements of both lenders revealed yesterday.

The synergy gains will span from 2019 through 2021.

BusinessDay gathered from the conference call held Thursday that the merger is now scheduled to be completed two months earlier than the previously stated transaction timeline.
Revenue collaborations are projected at N62.2 billion, of which N40.9 billion, accounting for more than 65 percent, is expected to come from enhanced product offering and cross-selling. Expanded digital channels are put at N8.4 billion; improved corporate and commercial share, N6.7 billion; while treasury sales and digital market expansion are expected to be N6.2 billion.
Responding to the new development, Ayodeji Ebo, managing director, Afrinvest Securities Limited, said the projections are realistic considering the banks’ knowledge of the Nigerian market.

“It is not impossible to achieve the projections but there is need for the new entity to understand both Diamond and Access Bank customers,” Ebo told BusinessDay.

Furthermore, cost synergies are estimated at N88.1 billion. This comprises consolidation of procurement and management facility with an estimate of N40.1 billion, representing 46 percent share; cost of funds reduction through lower deposit pricing and improved mix is projected at N21 billion; IT integration and consolidation, N12.6 billion; branch consolidation, N13.5 billion; while the synergy value of integration of support functions is projected at N500 million.

However, there are some outstanding pre-merger events, including court ordered meetings expected to hold in February 2019, SEC and CBN approval expected to be obtained in March 2019, and a court sanction and deal completion by April 2019.

Overall, management expects that both firms will begin to operate as a single entity and integrate processes as from May 2019 and attain full integration by October 2019.
“There is need for key account officers of Diamond Bank to persuade their customers to stay with the new bank,” Ebo said.

On non-performing loans (NPLs) concerns, both banks highlighted that DIAMONDBNK’s Q3’18 numbers were adjusted to reflect additional impairment of N150 billion, placing its current NPL ratio at 40.4 percent.

For the combined entity, this translates to a pre-merger NPL ratio of 14.1 percent based on 9M’18 numbers.

“Although management is currently unable to estimate the amount of NPLs that will eventually be transferred to the combined entity, it is optimistic of achieving a single digit NPL ratio by FY’19. It hopes to achieve this by additional write-off of fully provisioned facilities and aggressively pursuing recoveries through the year,” CardinalStone Research said.

Management suggested at the conference call that there is no more need for its initially proposed tier-1 capital raise through rights, as it believes it has sufficient retained earnings and tier-2 capital (over $250 million to be drawn down by Q1’19) to consummate the deal.
BusinessDay analysis of the strength of the new bank revealed that the merger would see the first-hand entity consolidate on individual strengths of both banks, emerging the biggest lender with 15.9 percent market share of the banking sector by assets.

Also, the combination of Access Bank, which is a leading wholesale banking business, and Diamond Bank, a leading retail banking franchise in Nigeria, would take both banks up from the 4th and 7th places, respectively, as market’s largest recipient of deposits with the new entity dominating the market with a 14.8 percent share of total deposits.

With Access Bank’s 10 million customer base and Diamond Bank’s 19 million as at the end of the three months period to September 2018, the new entity would have a total of 29 million customers.

The new entity would enjoy an increase in market share, but since the CBN would make it very difficult for the merged lenders to close down some of its branches to lower costs, it is likely that the combined cost base of the new entity with 675 branches would exceed that of First Bank with 895 branches.

As part of the agreement reached by the Boards of both financial institutions regarding the merger, Diamond Bank shareholders will receive N1.00 in cash for each share held in Diamond Bank and two Access Bank shares for every seven shares held in Diamond Bank.

This implies that a total of 6.62 billion ordinary shares of Access Bank would be issued to Diamond Bank shareholders post-merger.


Endurance Okafor & Oluwasegun Olakoyenikan

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