Post Views: 216 The managements of Access Bank Plc and Diamond Bank Plc, say their eventual merger for which separate court-ordered meetings have been...
The managements of Access Bank Plc and Diamond Bank Plc, say their eventual merger for which separate court-ordered meetings have been slated for March 5, 2019, may happen earlier than June envisaged in the Memorandum of Agreement signed by both parties late last year (READ).
With the nod of the Central Bank of Nigeria (CBN), Securities & Exchange Commission (SEC) and the the Nigerian Stock Exchange (NSE) already secured, among other milestones, including an approval of the Federal High Court, Lagos for the meetings, the management of both banks, last week, said during a conference call that they could begin operations as a single entity as early as May.
Following the court-ordered meetings, SEC and CBN approval are to be obtained in March, 2019; followed by a final sanction of the deal by the Federal High Court the following month.
Addressing a conference call on Thursday, the managements of both banks, last week say they expect that full integration will be attained in October 2019.
The conference call also assuaged investors concerns relating to the merger, while the banks assured of N150.3bn estimated synergy realizable over a three-year period, post-complete integration of the entities.
A breakdown of the figure shows that N62.2bn and N88.1bn will be attained through revenue and cost synergies respectively, while net profit is projected to hit N125bn by 2020, a full year after integration, to be contributed with the lion’s share of N80bn expected from pre-integration Access; N20bn from pre-integration Diamond Bank; and N25bn from the synergy.
This translates to Earnings Per Share of N3.72, representing 34.3% more than the 2018 best consensus estimate of N2.78 EPS.
Access Bank also used the conference call to explain that its planned Extraordinary General Meeting (EGM) was cancelled to raise N75bn via rights issue, which could have had a dilutive effect to shareholders, especially since it will not be required to meet the regulatory capital requirements.
Non-performing loan post-transition period, is anticipated at 14.1% at the end of the ongoing financial year, before being reduced to single digit, helped by the planned write-offs of most of Diamond bank’s stage three impaired loans and aggressive credit recovery methods.
Capital Adequacy Ratio (CAR), of post-transition, is estimated at 19.2%, boosted through earnings recapitalization strategy.
Instead, management hopes to issue a five-year bond worth USD250mn before the end of March, 2019, through both Dollars and dual/local currency issues, even as it assured it had adequate foreign currency liabilities due to mature this year, management stated that it has adequate FX assets to meet up with the obligation. They consist of existing FX derivatives; swaps and options amongst a few, which are maturing in 2019.
Cost of funds is projected to decline by 100bps, just as low-cost deposit could fall by 80%.
The integration activities could bring reduced by about N21bn in interest expenses over the three-year period, just as it lays off expensive deposits, retain low-cost deposits and leverage on the retail brand of Diamond bank.
In a note to clients, analysts at Arthur Stevens Asset Management Ltd, expressed confidence that the combined entity will deliver on the promises of the synergy, given Access Bank’s experience in mergers.
With that experience that has seen Access Bank with Intercontinental Bank as recently as 10 years ago, as well as Marina International Bank and Credit Lyonnais, much earlier, Arthur Stevens does “not envisage too much deviation from projected earnings and other crucial financial forecast.”
The company however expressed concern over the “the manner and ways by which the combined entity will account for its non-performing loan portfolio so as not to impair on future income stream and cash flow.
“Already, there are several indications from the conference call that Access Bank is trying to make sure that pre-merger third-stage non-performing loan ( meaning loans that are really bad and almost irrecoverable) are well accounted for and written down to give an almost clean balance sheet in merger date.
“The cancellation of further capital raise by right issue means that the combined entity will meet its capital adequacy ratio easily and satisfy the regulators. It also lifts a significant burden that has weighed down on the share price of Access Bank since the merger was announced. This will make the shares of the combining entity attractive to investors in the coming weeks; so we expect buying pressure on both stocks.
“If the combined entity can deliver on its synergy promises, we will be seeing tangible increases in it FY19 results and possible profits. We expect a strong profit from the combined entity as new generation banks generally declare profits in the Nigerian investing space.
Also reacting, equity analysts at Lagos-based Lead Capital Limited, taking a realistic view, announced a cut in the emergent Access Bank’s synergy assumption by half, forecasting EPS of N3.73 and fair value estimate of N14.17. This, it added, presents a whopping 114.7% upside potential.
It also recommended “a BUY for Diamond Bank whose shareholders stand to benefit from the increased valuation. We recall that Diamond Bank shareholders would receive a cash consideration of N1 per share and two shares of Access Bank for every seven of Diamond owned.”