On a recent Monday, Nigeria woke up to the news that Access Bank had agreed to acquire all issued share capital of Diamond Bank in a deal that will see Diamond bank shareholders a consideration of N3.13 per share and puts the total value on the acquisition at around N72 billion.
Significant as it seems, the entire value of the transaction is less than the annualized 2018 profit of Access Bank which analysts expect to be around N83.9 billion. This puts the Diamond bank acquisition cost at only about 85.8 percent of the annualized 2018 profit for the year.
At completion of the merger between the two banks, Access bank will snatch the crown from Zenith bank as the largest bank in Nigeria by asset in 2019 but will likely (for now) fail to steal the pride from Zenith bank as the most profitable bank in Nigeria based on analyst’s expectation.
The average return on asset for Access Bank between 2013 and 2017 was 2.03 percent. Assuming the acquisition of Diamond bank and the expected write-offs in bad debt from the legacy bank does not hurt their ROA performance in 2019, the expected profit for the year in 2019 may likely be around N121.8 billion on an asset base of N6 trillion which is a 97 percent increase from the reported 2017 profit after tax but will be around N56 billion lower than the expected 2018 profit after tax of Zenith Bank and GTBank who are both expected to deliver PAT around N192.2 billion and N189.6 billion respectively.
The ability for these two banks to remain significantly more profitable than Access bank despite a smaller asset base is down to “cost efficiency”. The cost to income ratio for GTBank and Zenith bank last year was 38.1 percent and 52.7 percent respectively versus Access bank who reported cost to income ratio of 62.1 percent.
“It is very unlikely that the synergy from the merger will start to show in 2019 immediately after the merger, to think that you can benefit from cost management so early on is far too optimistic,” said Maju Eldad, Lecturer in Economics department at Federal University of Kashere, Gombe.
“I believe Access bank took the right decision to acquire Diamond bank. It was significantly undervalued and presented a big growth opportunity for Access bank who will now become Nigeria’s largest bank. I think this merger will help produce significant gains for their shareholders in terms of profitability and cost efficiency over time. It won’t be unlikely that other Tier 1 banks will be looking to acquire either a struggling Tier 3 bank or a significantly undervalued Tier 2 bank now that Access has shown the easy road to growth,” Eldad added.
By this acquisition Access bank will become the largest bank in Nigeria with an asset base of N6 trillion. Behind them will be Zenith bank (N5.6 trillion), First bank (N5.3 trillion), UBA (N4.5 trillion) and GTBank (N3.4 trillion). Each of these banks is expected to earn above N56 billion in 2018 full year profit after tax.
IFEANYI JOHN
