More banks may merge  —Experts predict

Following the ground breaking merger between Access Bank and Diamond bank toward the end of last year, indications have emerged that it may be the precursor to a new development in the banking sector.

Given the disquiet the event has created in the industry especially among the top notch banks whose previous leadership is now under serious threat, experts say that a rat race for the leadership in the industry may have been unwittingly initiated.

Before the merger the industry used to be dominated by three banks, namely, Zenith, GTB and First Bank. However, the merger seems to have upturned this setting as Access bank has emerged the undisputed leader with the concomitant implications for the industry.

Informed observers believe that the previous leaders will not rest on their oars until they reclaim the lost position in the sector which carries with it some privileges and marketing advantages. In this instance, mergers come in handy because of the obvious limitation with organic growth strategy, which takes time to achieve.

They argue that the present leadership position of Access bank could not have been possible with organic growth in the foreseeable future, and this makes merger the inescapable and guaranteed option for leadership aspirations in the sector.

Understandably attention seems to be focused on the smaller and fledgling banks that are barely weathering the storms in the economy as possible targets and beneficiaries of this envisaged new trend. Such banks include Unity bank, Keystone bank, Heritage bank, Sterling bank, FCMB, Fidelity bank and Polaris bank.

Experts say that each and any of these banks are possible candidates for merger with the bigger ones in the quest for the top position. They insist that the industry is ripe for further consolidation to enhance service delivery, financial strength and system stability.

‘’This is a right step in the right direction in terms of taking care of the weak banks. Let the strong ones adopt them. It’s better for the shareholders and especially the economy, in terms of tax,” says Prof. Leo Ukpong, Dean, School of Business, University of Uyo, Akwa Ibom state.

‘’Certainly, there will be especially candidates among the mid tier and third tier banks that will be the targets,’’ posits Mr. Moses Ojo, head, Research and Business Development, Pan-African Capital. According to him, this is what the sector needs to reduce cost of operation and instability in the system, which will increase investors’ confidence.

  It would be recalled that the 2005 consolidation programme of the industry undertaken by the Central Bank of Nigeria, CBN, anticipated not more than 15 banks but ended up with 25 banks in the industry. However, the number has steadily decreased through acquisitions.  Since then, Afribank, Diamond, Finbank, IBTC, Intercontinental, Oceanic, and Spring banks have lost their independent identities through acquisitions.

Incidentally, Access bank has been involved in the acquisitions of two of the banks – Intercontinental and Diamond. Access Bank Plc has never hidden its ambition to be one of the leading Banks in Nigeria and beyond. The lenders target became visible when its attempt to acquire Afribank (Mainstreet Bank) and Union Banks left it with bruises.

The combination, though referred to as a merger, the truth is that Access Bank is parting with $200million in exchange for Diamond Bank.

While the merger documentation is still being perfected, owners of stocks in both banks are making swift adjustments in preparation for the changes that will follow the exchange before the conclusion of the combination.

There is a consensus that the merger was the best option in favour of Diamond Bank which was already drowning into the bottom of the sea.

 At least the merger which would be effective in the first quarter of next year, would be in the best interest of all stakeholders including employees, customers, depositors and shareholders and they are all for the deal and a new beginning.

The combination deal reveals that Access Bank would acquire “the entire issued share capital of Diamond Bank in exchange for a combination of cash and shares in Access Bank via a Scheme of Merger.

  Based on the agreement reached by the Boards of the two financial institutions, Diamond Bank shareholders will receive a consideration of N3.13 per share, comprising of N1.00 per share in cash and the allotment of 2 New Access Bank ordinary shares for every 7 Diamond Bank ordinary shares held as at the Implementation Date.”

“The offer represents a premium of 260% to the closing market price of N0.87 per share of Diamond Bank on the Nigerian Stock Exchange (“NSE”) as of December 13, 2018, the date of the final binding offer’’, the parties to the deal observed.

Prospects of the Deal

The combination, many industry participants agree, will not only enhance Access banks competitive edge in Nigeria and Africa, but also the world. With over N6 trillion in total assets, over 500 branches and other advantages derivable from the merger, the bigger lender is set to dominate the banking space in Nigeria.

Access Bank has clearly by this combination become the biggest bank by total assets which stood at over N6. 2 trillion, a notch higher than that of Zenith Bank and FBNH which were the largest prior to the planned merger.

In terms of Branch network and number of employees, Access Bank is also arguably one of the leading financial institutions. It is also going to harness other potentials from the bank which may include a few sharp personnel. In fact, the union also gives Access Bank one of the best digital banking platforms in Nigeria. In addition, its customer base will become the envy of competitors in due course.

“Together, we would have 27 million customers, which is the largest customer base of any bank on the continent. We would have 33,000 point of sale (PoS) terminals, 3,300 automated teller machines (ATMs) and all of that,’’ said Herbert Wigwe, MD, Access Bank.

 Challenges

 Experts believe that failure rates for M&A are between 50% and 70%. They explained the high failure rate emanates from organisation’s neglect of challenges which may come as land mines. The failure of Skye Bank’s one of the eight systematically important banks is still fresh in the minds of many, and they advise caution.

Nevertheless, Access Bank is expectedly the largest bank by total assets when it consummates its merger with Diamond Bank in the second quarter 2019.Of course, managing a bigger financial institution will be an uphill task given attendant challenges already plaguing the banking industry in Nigeria. Recently, the Nigerian banking industry has been burdened with high non-performing loans, illiquidity, dearth of skilled professionals and lack of good corporate governance.

Another worry will be the banks over- head cost which will definitely grow a notch higher, there will be bloated staff strength. Most importantly, Access Bank will grapple with integrating operating systems, the diverse cultures of these strange bed fellows among other domestic issues.

There is also a frightening level of Non-performing loans in Diamond Bank at over 12 percent in half year 2018, (58 per cent higher than the regulatory threshold of 5 per cent) and that is expected to jump even higher before the end of 2018. These are likely to challenge Access bank’s ability to control its share in issue which will climb to about 37billion and water down its dividend and earnings per share.

 As challenging and tasking these duties may seem, customers are confident and assured by the fact that Access Bank did succeed when it acquired Intercontinental Bank.

‘’One of the benefits we have in this combination is that having done this several times before, we have learned from the mistakes of the past. Integrating Diamond is going to be a lot better than all the other ones we have done in the past. The latest one we did was the Intercontinental transaction, which was a large one and basically gave us all the learning points that we needed to bring to bear as far as this one is concerned’’, Access bank said.

Professor Leo Ukpong, believes that more mergers are likely to come in the wake of this trend but it will be hard to predict the timeline. “I’m not sure when or how it may happen ; but the merger between between Access and Diamond – I think it’s more of acquisition than a merger, it’s Access that acquired Diamond, is to be expected.

‘’I’m surprised that we’ve not had a lot of that in Nigeria, but that’s the right way to go. You know what we have been doing before was to go to AMCON, but AMCON should be the last resort.

In terms of the possibility of other banks doing same down the line, I believe the Central Bank will encourage more of that than putting them in AMCON because it’s better for the economy when bigger banks acquire struggling ones. AMCON is more like government insurance where they go and no matter how poorly the bank is managed, the government will be paying the bill

So, this is the right direction in terms of taking care of the weak banks. Let the strong ones adopt them. It’s better for the shareholders and especially the economy, in terms of tax,” he said.