Diamond-Access Bank Plc: Is it a good time to anticipate?

Diamond-Access Bank Plc: Is it a good time to anticipate?

Is it the time to anticipate? First, for a high return on equity. That the new Access Bank Plc would be able to tame its ugly cost structure and deliver strong profit? Is it about time to see the largest bank in all key metric areas except profit; improving its fundamental and influencing investor’s sentiments in the stock market? Trading below N10 may not be what investor bargain for when they bought shares of the bank few years ago.

In its 2018 audited result, Access Bank Plc was able to convert about 25% of its gross earnings to pretax profit where its peers did about three times. Perhaps, it may be a good time to anticipate that conversion rate would be strengthened if there is ever a synergy in the Diamond-Access Bank Plc “marriage made in heaven”.

Cost raised its ugly head against the bank performance in 2018. Access Bank Plc incurred N62.2 on every N100 made in 2018, its audited financial statement has shown. The bank cost of funds closed the year at 5.5%, above Tier 1 capital average. The bank assets quality is strong, as the bank closed the year with non-performing loans at 2.5%.

By design, Access Bank plc is a “polygamist” with proclivity for beautiful brides. Historically proven, no analysts would underestimate bunch of variables is working together for the management feat in merger and acquisition (M&A) deals. “It is like, nobody does it better than Access Bank Plc when it comes to sighting good deals but time would tell if Diamond Bank is a good bride”; a banking analyst said at a discussion forum.

It is official, Diamond- Access Bank Plc is the largest bank in Nigerian banking sector, at about N6.5 trillion in total assets or c. $23 billion in dollar term. When competition became tough, Access Bank Plc decided to buy-in an unfair advantage that comes with size. Then, merger with Diamond Bank Plc presents an opportunity, though forced on it as a result of heavy toxic assets.

On that basis, critics think the deal is overrated on the back of more than 40% non-performing loans loads on Diamond Bank Plc. Others think for Access Bank to make meaningful impact in the Tier 1 class, it needs to expand rapidly in line with its strategic growth plan.

In its audited result for 2018, Access Bank seems to be groaning under heavy operational cost. On every N100 income the bank made, N62.2 was incurred, as against N61.9 in 2018. This is more than double amount GTB incurred and of course Zenith Bank cost as proportion of the income was a mile away from 60%.

Would Diamond-Access bank Plc produce cost efficient operation? It is unlikely as deals like this comes with unanticipated teething issues. Meanwhile, the merger would however impact the market. Already, by the industry trend, numbers have shown that large size banks are crowding out the smaller ones. But, Access Bank would not blink to gain synergy that comes with consolidating its financial position.

Number of listed banks has been technically reduce with Skye Bank and Diamond Plc out of the game. Now, it has size. But it needs speed. The question to be answered by the growth strategist at Access Bank Plc include: Would this combination translate to cost reduction, efficient use of resources and capital appreciation for shareholders?

In the Tier 1 capital class, Access Bank Plc has been the less profitable. Cost efficiency has been out of reach, though the bank has always have significant chunk of the market share. Return on equity has not been the best, neither has the bank produced some sort of capital appreciation so desire by the shareholders. But one thing distinguish Access Bank irrespective of all its market and operational short-comings: It is focus. Management key desire has been to grow the bank inorganically.

Read also: Ticking Debt Clock: How Much Can Nigeria’s Economy Absorbs?

Some eight years after Access Bank Plc acquired defunct Intercontinental Bank Plc, it has now concluded a merger deal with the Diamond Bank Plc. Herbert Wigwe, the Chief Executive Officer/Managing Director of the bank said that the M&A is a marriage made in heaven. However, it is not clear whether the combination would produce sufficient synergy that will jerk up the bank’s share price in the stock market.

In the new company, Diamond-Access Bank Plc, shareholders structure would be at 81:19 ratio. That is, owners of Access Bank would shed 19% of the value of the enlarge bank to shareholders of defunct Diamond Bank Plc.

How will Diamond-Access Bank Plc harness the combination value to improve profitability going forward? How would the new company fundamental change the market perception? The enlarged entity now has under its management 677 branches (compare with Sterling Bank 179 ) serving 29 million customers (as against Stanbic IBTC’s 2 million customers) using 32,058 POS (compare with Fidelity Bank Plc 4,976)  with 3,099 Automated Teller Machines (Stanbic IBTC 569).

Total Assets of Diamond-Access Bank Plc would exceed N6.5 trillion after consolidation. This means that the first half of financial year 2019 result may likely push to assets of the bank to N7 trillion mark, perhaps the first in the history of Nigerian banking. At the CBN rate, Access Bank Plc assets would be around $23 billion in the first half.

The new company would be carrying N2.866 trillion as net loans, compare with Zenith Bank gross loans at N2.5 trillion. Customers deposits now at N3.63 trillion. Of course, Herbert would have to know how to make these assets work in favour of its shareholders. The fact that a deal is closed successfully brings forth another challenges – integration and synergy to improve bottom line.

Before the deal, Access Bank Plc was less profitable compare with peers in the Tier 1 class. Access Bank Plc stock traded below N6 on Friday. The bank has now formally close the merger deal but silent on possibility for change of name. However, something is offing.

Though Herbert Wigwe described merger deal with defunct Diamond as “Marriage made in heaven”; analysts at the Broadstreet are saying that it is better that the deal is well consummated at the Broadstreet where investors will place value on the stock of the bank.

At 14.6%, Zenith Plc was the leading bank in terms of market share by total assets. Followed closely by 13.9% was FBNH and then Access Bank 11.8%. By loans size, Access Bank led the pack with 13.3% market share by loans, followed close by FBNH 12.9%, and Zenith 12.3%. FBNH however led the pack in terms of deposit base, held 14.1% of the market share by deposits followed by Zenith Bank 13.7% and UBA 13.2%.

Growth by acquisition is the choice Access Bank Plc has made. And the bank is good at it. The bank performance scorecard in the last few years show that except by acquisition, assets growth remain below Tier 1 class average.

The success of the recent merger and acquisition, M & A, deal has disrupt existing ranking in the banking sector with the merger deal. The bank now rank ahead of Zenith Bank; thus push FBNH to third rank in terms of total assets, and deposits. Although, even if the bank result is consolidated today, its profitability is still less than what Zenith Bank and GTB did in 2018.

How will Herbert Wigwe influence the direction of the bank performance in 2019? Would the enlarge entity do better than historical achievements? Size could be a factor in the competitive space, but creativity and innovative strategies command profit performance. Thinking GTB, it is not as big as many Tier 1 capital bank but rank first in terms of profitability. In 2018, GTB made more than N215 billion as pretax profit. This is combination of the pretax profit of Access and UBA.

In 2018 audited result

Access bank gross earning clocked N528.745 billion. That was 15% upsurge from N459.076 billion the bank did in 2017. Though the bank recorded 52% increase in earnings per ordinary share, its dividend payment declined 23% year on year. Analysis of the bank numbers show that 32% increase in pretax profit, from N78.169 billion in 2017 to N103.188 billion was supported by a 57% decline in impairment charge the bank booked in 2018.

The bank has strong assets quality with non-performing loans sliced to 2.5% from 4.8% in 2017. The carrying value of the bank loans and advances berthed at N2.136 trillion in 2018 from N2.064 trillion, representing a 3% increase. It means that just about N2.50 from N100 invested in loan assets are exposed to default risk.

The bank capital adequacy ratio sliced to 19.9% as against 20.1% in 2017. This is still above 15% benchmark for international banks. Then, the bank liquidity position improved from 47.2% to 50.9% when CBN asked bank to maintain minimum of 30%.

In the Tier 1 class, Access Bank Plc has somehow high cost structure. Between 2017 and 2018, cost portion of its income rose to 62.2% from 61.9%. This means, Access bank incurred N62.20k on every N100 it generated as income in 2018. This was against N61.90 it used to generate every N100 in 2017. That is to say, for every N100 generated in 2018, extra 30kobo was spent over cost incurred in 2017.

Funding mix

Access Bank Plc funded its operation with N4.95 trillion. The funding mix include customers’ deposits which accounted for 52% of the bank funding source in 2018. This was followed by N995 billion deposits by financial institutions and the bank’s N491 billion shareholders’ funds. The bank also used interest bearing loans in addition to debt securities issued.

VIAJulius Alagbe, Economic/Financial Analyst
SOURCEJulius Alagbe
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