Adesola Adeduntan, FirstBank of Nigeria, MD
  • Experts predict more mergers


Board rooms of Nigerian banks were abuzz last week as news of a potential merger deal between First Bank Nigerian and two other banks filtered out. The other beautiful brides are Heritage bank and Polaris Bank. The deal, if consummated will expand First Bank size and make it the leader in the country and consolidate its control of the southwestern market, where Polaris is strong.

Although initially considered as speculation, however, a statement by the bank on Friday gave impetus to the news. The statement which neither confirmed nor refuted the news, however, admitted the existence of such talk and a possible plan.

Insider sources told Business Hallmark the merger became necessary because Heritage Bank is hugely exposed to First Bank and lacks the capacity to pay back the loans. The source also revealed that the Central Bank of Nigeria (CBN) guaranteed a significant amount of huge loan. The argument is that the CBN is amenable to it as a way of helping First Bank to recoup its funds.

This according to the source may be what has fueled the information. Nevertheless, reports show that Heritage Bank has had a protracted liquidity problem which is threatening its survival.

Whereas the corporate affairs manager of Heritage Bank, Mr Fela Ibidapo denied there was any merger discussion between Heritage Bank and FBN, he added that he had tried to explain that position to many reporters who have been reaching out for information on the issue.

But FBN Holdings in reaction to a media publication, yesterday, which suggested that there are ongoing merger talks between its main subsidiary — First Bank of Nigeria Ltd, and Polaris Bank Ltd, made available via the Nigerian Stock Exchange website,  admitted that it has recently been presented with merger and acquisition opportunities, much like every other commercial bank in the country.

The company also noted that it understands why analysts are speculating that it might currently be involved in merger and acquisition talks, bearing in mind that First Bank is one of the biggest and most liquid banks in the country. Having noted all these, FBN Holdings Plc refused to categorically confirm or deny its supposed involvement in the reported ongoing merger talks with Polaris Bank Ltd.

According to the statement, FBN is choosing to be mindful of its reactions regarding this topic. The company said it believes that inorganic growth such as the one presented by merger/acquisition, will always be a growth strategy for many banks. However, FBN Holdings Plc will only consider the merger/acquisition option if it is able to find an opportunity that guarantees value addition to its shareholders.

Should the company eventually find such an opportunity that is “value accretive” to its shareholders, it will properly communicate the development to the general public, in line with regulatory requirements.

Broad Street watchers had predicted that mergers and acquisitions, or inorganic growth strategy will be the next phase of the banking competitive strategy following two successful mergers executed by Access bank with Intercontinental and Diamond banks, which have pushed it to the top of the ladder on asset base, branch network and customer base.

Only recently, there was speculation about Zenith bank moving toward a merger with Sterling or Unity bank. Although nothing of substance was found in the report, informed sources insisted that it would happen sooner or later.

First Bank, the oldest and stable financial service supermarket is expected to issue its audited statement for 2019. Analysts believe that the M&A would return FBN brand rank to largest by assets, total deposits and loan book.

It is fake news, Rasheed Bolarinwa, spokesperson for Polaris bank had said.

Both Heritage and Polaris banks have had their own share of challenges in the recent past, which has made them potential bride for merger and acquisition propositions. Heritage bank which debuts as a flagship merchant and investment was focused on niche play but given the competitive nature of the industry, many people wondered how it could play big.

It was not long before serious issues of liquidity and transparency in corporate governance reared its head exposing the bank to some unhealthy public scrutiny which has adversely impacted it since them. But its bubble apparently burst after it acquired Enterprise bank under some controversial circumstances. It never seemed to have recovered from it.

The House of Representatives once in the course of its probe announced the discovery of N21 billion and $104.46 million undeclared revenue in two separate accounts outside the Treasury Single Account (TSA) which were allegedly traced to the bank.

The Managing Director of Heritage Bank, Ifie Sekibo, and his counterpart in Aso Savings and Loans Plc, Hassan Usman, were summoned to appear before the Ad-hoc Committee investigating TSA management, implementation and level of compliance.

Speaking to newsmen in Abuja, Chairman of the committee, Abubakar Danburam, said: “Today, we are supposed to meet with Heritage Bank and Aso Savings with regard to the Treasury Single Account (TSA).

“As you can see, none of their management or staff is here. Our independent investigations have revealed that contrary to what Heritage Bank submitted to us, they also have two undisclosed accounts in the TSA.

“The one with Nigerian Export and Import (NEXIM) Bank has $104 million, while a second one with the Nigerian Maritime Administration Safety Agency (NIMASA) has $46,000.

“Yet, there is another N21 billion, which also forms part of our enquiry. We want to know why they did not reveal those accounts to this Committee”. The funds were said to be the life wire of the bank.

Also, the case of Polaris bank is well documented as it is a bridge of the CBN after pumping over N760 billion into the bank to revive it and appointed a new management team and board after sacking the board led by Mr Tunde Ayeni which wrecked the bank. Informed observers had wondered how long it will remain a bridge bank under the CBN control and how the investment of the apex bank would be recouped.

Industry analysts believe that the combination will give birth to a super financial institution which would retain its leadership position and add value to its teaming shareholders. However, some of them have expressed discomfort with the word merger instead of out-right acquisition.

’’We are keeping our fingers crossed to see the outcome whether it is a merger or otherwise’’, some of them said.

’’First Bank is already a strong bank and big. It has the capability to shelter those small banks. But they should do their due diligent thoroughly before embarking in the combination’’ Dr Richard Mayungbe said adding ‘’ the owners of the banks must be happy’’.

In his view, former Managing Director of the defunct ACB International, Chief Emma Nwosu told Business Hallmark in a telephone interview that though he was not armed with the figures of the three banks to determine their values, the merger would lead to something better for merging partners.

‘’The merging banks must have seen some advantage in the combination. I know that it will give First Bank a comparative advantage to compete. However, we are waiting for more information on the deal’’, he said.

Polaris which was formerly Skye bank is strong in the west and has several state government banks such as Eko bank, owned by Lagos state, National bank owned by the Odua Group etc as legacy banks.

Recently, on the back of successful balance sheet repairing efforts by the management, FBNH Plc bolstered performance as operating profit jerked up from N65.265 billion in 2018 to about N74 billion in 2019.

Of particular interest in the result is the fact that the group maintains stance on balance sheet repair throughout, and manage risk appetite within internal guidance more rigorously in spite of regulatory pressure.

More of the banking arm deposits was sterilised but the Group achieved benefits associated with balance sheet efficiency, improved assets quality and brand equity – all of which helped the earnings position in 2019.

Meanwhile, in the stock market, FBNH market capitalisation berthed at N215.371 billion on 35,895,292,792 shares outstanding as the stock traded at N6 on Thursday. Whereas balance sheet efficiency came at the front, there was an aggressive deposit mobilisation that saw customers deposits increased of 15% to N4.004 trillion.

Impairment charges booked in the period was more than half lower than what was booked in the financial year 2018. Though both stage 1 and stage 2 impairment allowance increased but stage 3 dropped significantly, down by about 278% from N374.681 billion to N97.107 billion.

“The management decision is simply to clean up the balance sheet and leave the herculean task of cleaning messes out of its strategic focus”, an equity analyst told Business Hallmark.

The Group’s unaudited financial statement showed that after three to five years of its internal operation restructuring, particularly the release of legacy non-performing assets from its portfolio, earnings have been strengthened. Higher loan volume pushed the Group earnings.

Meristem Securities analysts had predicted moderate growth in loan volumes but hope it will support interest earnings while interest expense should trend downwards. The analysis revealed that the group raked in N440.622 billion from its portfolio interest yielding assets class as income, surged 1.43% from N434.410 billion in 2018.

Analysts observed a surge in the cost of obtaining funds in the period as competition in the banking sector and rivalry among top banks hit peak point in 2019. It was gathered from the account that payment to providers of fund that was used to finance the group interest yielding assets increased 2.66% year on year.

Apparently, the management key strategic decision to pursue balance sheet efficiency as its core focus in 2019 yield results for the leading financial boutique. Assets quality increased thus occasioned a massive decline in the amount of impairment charge on credit losses booked in the year.

In number, impairment book at the Group level slid to N41.711 billion in 2019. This translates to more than 52% decline when compared with N86.911 billion booked in 2018.

Analysts at Coronation Merchant Bank had forecasted earnings growth for FBNH in its 2020 outlook. Coronation analysts said they expect FBNH to boost returns as the management has kept a lid on impairment charge provisions.

FBNH has grappled with non-performing loans and had taken significant impairment charges over the last five years. Analysts estimated cumulative impairment charges booked in the period to about N530 billion.

“Most of these impairment charges were derived from exposures into oil and gas clients”, analysts said.

The Group reported a decline in net insurance premium from N15.541 billion in 2018 to N11.388 billion. The harsh economic environment that permeated the whole of the financial year 2019 necessitated an increase in operating expenses. This was derived on the back of increased overhead account in assets maintenance as well as personnel cost.

Surprisingly, the Group was able to reduce directors’ emolument in the period from N4.007 billion in 2018 to N3.3 billion in 2019. Both regulatory cost and maintenance expenses steeply increased. Other operational costs and loses pushed operating expenses forward among other overheard like outsourced cost, underwriting expenses etc.

Thus, operating expenses ballooned to N190.364 billion in 2019. This represents a 28.65% increase year on year when compared with N147.976 billion in 2018. At about 4% growth, profit for the year expanded to N61.947 billion as against N59.667 billion made in 2018.

FBNH total assets expanded more than 11% in the year from N5.568 trillion to N6.181 trillion at the end of the financial year 2019. Increase in cash and balances with the Central Bank of Nigeria contributed greatly to the expansion of the total asset. This is more likely due to increased cash reserve ratio on account of the bank’s inability to meet the apex bank loan to deposit ratio.

The unaudited report shows that cash and balances with the CBN berthed at N1.023 trillion as at the end of the financial year 2019. In the prior year, it was N653.335 billion. FBNH note to financial statement revealed that of the sum, N842.928 billion (as against N525 billion in 2018) was the mandatory reserves deposit with the apex bank not available for daily use. This is a percentage of customers deposits held with the CBN.

There was a push in loans and advances to customers, surged by 14.5% from N1.683 trillion in 2018 to N1.877 trillion in 2019. This came at the time when the group engaged in aggressive customers’ deposits mobilisation. Customers’ deposits surged by 15% year on year, from N3.486 trillion in 2018 to N4.004 trillion a year after.

Thus, excluding deposits and loans transaction with banks, FBNH loan to deposit calculation according to the numbers in its unaudited report shows that the group did not meet 65% target set by the apex bank. By this calculation, loans to deposit sit at 47%, which analysts considered well below the regulator’s benchmark.

But the group finance less project in 2019 when compared with 2018 in terms of value and of course volume. Project finance dropped by more than 400% from N476.525 billion to N29.059 billion. However, the unaudited result revealed that overdrafts to customers were boosted. This short term loans increased by more than 92%, from N273.824 billion to N366.036 billion in 2019.

That, however, explained the surge in cash and balances with the CBN in the period. At its earnings conference with analysts in the second half of 2019, the management had stated that it would not build risk assets above its risk appetite.

FBNH reduced its investment securities by 12.87% year on year. In 2018, FBNH invested N1.663 trillion in securities, notably Treasury-Bills, Government Bond others but regulations and lower yield douse its position. Now, its unaudited financial statement shows total investment securities settled at N1.449 trillion.

To reduce the burden of cost on its operation, the management deleverages the balance sheet. Total borrowing for the year was reduced to N240.308 billion as against N338.214 billion in the comparable period in 2018.

By capitalising its retained earnings, FBNH’s strengthened its capital position. Its retained earnings surged to N51.091 billion compare to N4.373 billion in 2018. At the same time, its fair value reserve of N139.097 billion in 2019 as against N77.276 billion in 2018 helped shareholders fund increase.

Overall, FBNH total equity base surged to N642.617 billion in 2019. This represents an uptick of more than 21% above N530.647 billion carry forward into the year in 2018. Heritage and Polaris Bank are considered by analysts as marginal players in the sector. The combination would throw lifeline to the duo.