New Access looms over tier one banks – Competitors scramble to reposition




Feelers from the management halls and boardrooms of leading commercial banks in the country indicate that the top banks in Nigeria are currently restrategizing to take resurgent positions in order to address what they see as the looming threat posed by the coming on stream of last month’s merger arrangement involving Access Bank and Diamond Bank.

Described in industry circles as the Tier 1 banks, the affected financial institutions are Guaranty Trust Bank, Zenith Bank, First Bank and the United Bank for Africa,

In the merger outcome that was concluded at the close of the first quarter of 2019, Access Bank and Diamond Bank successfully fused their operations to now become arguably the biggest banking corporation in the country.

This is because the new bank has presently surpassed the erstwhile leaders in the critical area of assets, while also coming a close second to the subsisting leader of the customers’ deposits pack, Zenith Bank.

A breakdown of the current figures gleaned by Eandel outlines that in the category of total assets figure, Access Bank now has a present-day value of N6.40trillion compared to Zenith Bank’s N5.60trillion, First Bank’s N5.35trillion, UBA’s N4.87trillion and GTBank’s N3.29trillion.

On the turf of Customers deposits, the new Access Bank similarly dwarfs all but one of its frontline Tier 1 competitors as it posts a consolidated deposits base of N3.63trillion, which though is a little lower than Zenith’s N3.69t but is yet clearly higher than UBA’s N3.52trillion, FBNH’s N3.38trillion and GTBank’s N2.36trillion.

Another area where Access Bank has soared on account of the merger scheme is in the critical area of customer base. In all, a total of 29 million banking clients are within the new Access Bank radar which is a massive tally indeed.

Equally, the enlarged entity now has under its management 677 branches and it would also be inheriting a combined 32,058 POS machines (compared with Fidelity Bank Plc’s 4,976) as well as 3,099 Automated Teller Machines (Stanbic IBTC has only 569).

And following upon the formal listing of the shares of Diamond Bank as part of the new Access Bank on Friday, the new entity has now also risen to become one of the six most capitalised financial institutions in Nigeria.

At the session, the Nigerian Stock Exchange (NSE) formally listed 6.617 billion ordinary shares of 50 kobo each issued as consideration to shareholders of the defunct Diamond Bank in the name of Access Bank Plc after the required receipt of the notice of the merger and a formal application to that effect. The additional listing of scheme shares led to an increase in Access Bank’s total outstanding shares from the previous figure of 28.93 billion ordinary shares of 50 kobo each to a new figure of 35.545 billion ordinary shares of 50 kobo each.

The listing and delisting of the shares is coming on the heels of the approval of the National Council of the NSE, after the banks had completed the due diligence and merger process including the statutorily required evidence of approvals of their shareholders, approvals of the regulators, sanctions of the Federal High Court, payments of considerations and allocation of the relevant scheme shares.

With these developments, the concern of many in the banking community then is that given the tendency for banks of the present size that Access is playing at, to continue to grow exponentially over time, it would only be a matter of time before the current indicators, and others, would grow further as to widen the presently unfolding gap in the tier 1 bracket.

They are also concerned that the merger is re-stoking the fires for further rounds of banking sector consolidation and merger and acquisition deals which they need to proactively assess and take positions about before they are forced to do so ultimately, but on less beneficial terms.

Interestingly, the new Access Bank’s upsurge is not taking many industry pundits by surprise. At the formal event to announce the merger process and unveil the brand identity of the new Access Bank on March 31, speakers, including the trio of Africa’s richest man, Aliko Dangote, GTB founder, Fola Adeola and former Central Bank of Nigeria Governor and present Emir of Kano, HRM Mohammed Sanusi, affirmed that given their long-term knowledge and interaction with the principal drivers of Brand Access Bank, they were indeed not surprised by the move. They also said that they had no fears that the current merger scheme would work out well in the final analysis and that the bank would continue to grow from strength to strength.

And also not surprised over the outcome is the immediate Access Bank leadership team which had openly spelt it out in its strategy documents over the years that it was keen on taking the inorganic growth path of exploring mergers and acquisitions as its preferred model for ultimately reaching its target of being Africa’s most respected bank.

A tale of ambition and drive

Going beyond talk, the evidence from Access Bank’s practice over the years also bears out its burgeoning ambition. For a bank that was ranked in the 65th position out of the total of 89 banking institutions then operating in the country when the duo of Aigboje Aig-Imoukhuede and Herbert Wigwe and their associates made their takeover pitch in 2002, the story of the Deposit Money Bank’s rise through the past 17 years to its present status as the single biggest player on the nation’s banking firmament is clearly a testament to vision, hard work, team work, drive and determination.

As corroborated from many testimonies by commentators, part of the foundation for the continuing success of Brand Access Bank lies in the fact that the founding team of the new post-2002 Access Bank which was led by Aig Imoukhuede and Herbert Wigwe were not only seriously driven, they also served out their time in understudying other older and neo-emergent operations before making their pitch to open shop. It is a situation of energy and zest that was bottled down for years and waiting for expression.

And so when the opportunity arose in 2002 to make their pitch for the then smaller Access Bank brand that was already in the market, they disengaged from GTBank where they had already risen to top management positions, latched onto it and threw all that they had into it. The rest as they say is history.

Never say never!

And very importantly also, one of the core issues that has since come to be established in the Access Bank journey so far is the fact that the founding duo (and their associates) were never afraid to dare to reach the top. This indeed has come to resonate strongly as part of the Corporate Culture and DNA of Brand Access Bank, and it is also clearly at play in the present merger with Diamond Bank.

The first evidence that Access Bank was wired to fight showed up when the banking capitalisation exercise began a few months after Aig-Imoukhuede and Wigwe had successfully concluded their takeover bid for the fledgling bank. Rather than see the tough consolidation conditions as a crushing threat and balk, they rather dove straight into the eye of the storm with very audacious takeover bids for top goons in the industry like Union and Afribank.

Years later, when another crisis situation registered with the CBN-ordered audit of the health performance of banks in the system during the Sanusi Lamido Sanusi era, they continued with their daredevil pitching by successfully bidding for and taking over an equally bigger Intercontinental Bank. And now, they have Diamond in the bag.

Understanding the Access/Diamond merger

The fortune hunters that they have now proven themselves to be, pundits say that in making their pitch for Diamond Bank, the management of Access Bank very well knew that, public relations aside, it was not buying the most impressive fatted calf on the shelves.

But having long considered the changing dynamics within the industry and being satisfied that the long-term growth prospects may ultimately outweigh the drag side on Diamond’s books at the moment, they made their pitch.

Taking a historical view of events, analysts surmise that it will be seen that the fact that this same strategy had paid off for it thrice in the past, would have also been a point of comfort for the management, board and shareholders of Access Bank. And it is one that some market watchers are also not faulting:

Commenting on the Access/Diamond merger, Dr Richard Mayungbe a forensic accountant and fraud prevention control expert told Eandel  that the likely outcome of the exercise would be a win-win for the merging entities and beyond them, to almost everyone that is involved.

“The merger will create one of the biggest banks and most centralized financial institution in Nigeria and beyond. The bank will enjoy a pool of experienced human capital and professionals.”

Breaking down the benefits that he foresees, Mayungbe also told Eandel :

“Shareholders will benefit from the large entity and the synergy is expected to bring bigger and better profit. Customers will benefit from the large network where Access had no tools, Diamond bank will play strongly.”

He also sees an improvement in the bank’s service delivery outcome.

Like many other commentators, Mayungbe also makes the point that one of the strongest success factors for the bank remains its leadership.

“Access Bank has built a strong brand name given the roles of Aig Imoukhuede and Herbert Wigwe. Both have made a name and they would boost their shares in the market,’ he says.

What the rivals would be considering

As the peers of the New Access Bank review the current development at their rival bank and try to put a handle on what is to come, one point of focus would be doing a forensic analysis of where Access Bank stands today, what Diamond Bank is practically bringing into the mix and what overall are the strengths and weaknesses of the new Access Bank.

In doing this, many tools are at their disposal but one that seems to be the chief of them all would be the just released 2018 results of Access Bank would chiefly guide them.

The 2018 FY report of the Tier One player shows that, on the plus side, the bank’s assets quality remains quite strong, as the bank closed the year with a most relieving non-performing loans position of 2.5%. Compared with some of its peers in the same Tier 1 bracket that have NPLs in the two-digit range, it underscores the primary fact that its antennas are up even as its risk control systems are working.

Added to this would be the fact of Access Bank Plc’s now proven penchant for strategic hook-ups, what has led some to conclude that the bank has a proclivity for endlessly searching for beautiful brides. A historically proven feat, no analysis would underestimate the variables working in favour of the management in the mergers and acquisition (M&A) space. “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,” an analyst recently remarked about the bank.

Undoubtedly however, the biggest winner of all for Access Bank is that the Diamond-Access Bank Plc merger is re-establishing what some discerning observers have noted as being one of the pre-eminent canons in the Access Bank corporate playbook: ‘When competition became tough, Access Bank Plc bends over and buys-into the future in order to continue to tap unto the unfair advantage situation that comes with increasingly expanding size.’ But is there a point where this strategy would not run out its course? Time will tell even as Eandel  would not be surprised if the new Access Bank reaches over in the next few years to make an audacious bid for a fellow Tier 1 player as say, the United Bank for Africa! That would be the counter-punch, right!

Still on the plus side, the new company would be carrying N2.866 trillion as net loans, compared with Zenith Bank’s gross loans of N2.5 trillion. And with customers’ deposits now hovering around N3.63 trillion, Access would have a good problem: what to do with all of that money!

But then it would not be a new challenge as on current loan size count, Access Bank leads the Tier 1 pack with 13.3% market share by loans, followed by FBNH with  12.9%, and Zenith’s 12.3%.

On the gross earnings turf, Access Bank’s gross earnings clocked N528.745 billion in 2018. This was a 15% upsurge from the N459.076 billion the bank had posted 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 a 32% increase in pretax profit, from N78.169 billion in 2017 to N103.188 billion which was supported by a 57% decline in impairment charges that 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’s loans and advances berthed at N2.136 trillion in 2018, up from N2.064 trillion recorded in 2017 and representing a 3% increase year on year. It means that just about N2.50 from every N100 invested in loan assets are exposed to default risk.

In FY 2018 also, the bank’s capital adequacy ratio was sliced to 19.9% as against 20.1% in 2017. This is still above the 15% benchmark for international banks. However, the bank’s liquidity position improved from 47.2% to 50.9% whereas the CBN had put the peg at a minimum of 30%.

On the turf of funding mix, Access Bank Plc funded its operation with N4.95 trillion in 2018. The funding mix includes customers’ deposits which accounted for 52% of the bank’s 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.

Negative blinkers

But then, Access Bank is not altogether sitting on a bed of roses. Compared with its peers in the Tier 1 class, Access Bank Plc has a somewhat high cost structure. Between 2017 and 2018, the cost portion of its income rose to 62.2% from 61.9%. This means that Access Bank incurred costs of 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 30 kobo was spent over cost incurred in 2017.

Given the close connections between costs incurred and profits made as well as the adjoining point of overall profitability score, the bank may need to look once more towards GTB for inspiration. Though GTB is not as big as many Tier 1 capital banks, it ranks first in terms of profitability. In 2018 for example, GTB made more than N215 billion as pretax profit. This sum is the combination of the pretax profit of Access and UBA.

Indeed, beyond expanding size factors, profitability has been a drag of sorts for Access Bank Plc over the years and this comes out quite starkly in the 2018 accounts where it posts a final 50 kobo return for every share of the company held by subscribers to its stock.

While an explanation may reside in the fact of its inorganic growth strategy which invariably raises its cost bar (for example the bank has made provisions currently to spend a princely 30 billion annually for three years to finance the current integration with Diamond Bank), there should also be more work done on elements of cost structure so as to guarantee a higher return on equity and improved rewards for its loyal investor corps.

It is at this point then that we will be seeing the emergence of the largest bank in all key metric areas, including the very critical profit axis. And without any doubt, such improved positioning will very likely have a beneficial effect on the basic trading price of the company’s stock.

Another area that will be boosted by paying closer attention to profitability would be the ratio of its gross earnings to pre-tax profit. In its 2018 audited result, Access Bank Plc was able to convert just about 25% of its gross earnings to pretax profit where its peers did much better.

Still on costs control, on present form, Access Bank Plc incurred N62.2 costs on every N100 made in 2018, meaning that its cost of funds profile closed the year at 5.5%, which is well above the Tier 1 capital average.

There is equally the tricky point about how Access Bank would practically manage some of the negatives that it is inheriting from the merger with Diamond Bank Plc in the form of what some analysts have described as the latter’s ‘heavy toxic assets.’

On that basis, some critics believe the deal is overrated, particularly  when the more than 40% non-performing loans load that had weighed on Diamond Bank Plc before now. But then there is also a view that the deal has come at the right time to help Access Bank make meaningful impact in the Tier 1 class, given the demand of expanding rapidly in line with its strategic growth plan.

Pre-eminently then, some of the questions to be answered by the growth strategists at Access Bank Plc at the moment are already spelt out: would this combination translate to cost reduction, efficient use of resources and capital appreciation for shareholders?

Overall however, Eandel  checks indicate that the Diamond-Access Bank Plc merger is being viewed as generally a win-win for the immediate merging entities, the banking public, shareholders, the industry, the nation and the African continent.

While Diamond Bank has found space to wriggle out of the difficult jam in which it had been held in and which was actually bordering on liquidation, Access Bank has found more space to continue to explore its strategic growth and size ambitions.

As for the banking public, the hope is that with financial systems stability being basically maintained and reinforced by this deal, there is more room to look forward to benefitting from the enhanced competitiveness that the unfolding sceptre of even larger banks promise.

Ditto the industry which now has fewer mainstream banks to watch over, as well as a nation and continent that hopes to draw on the promise of bigger banks to finance its development objectives and growth projections.

And the early signs are there as can already be gleaned from industry trends, where the numbers show that large-sized banks are already crowding out the smaller ones even as the number of listed banks has been technically reduced with Skye Bank and Diamond Bank Plc now out of the game. So who is going out next? And who would be making the specific move to bring this about? The New Access? Or one of its Tier 1 rivals whose strategic conclusion at the moment would be ‘eat or be eaten?’ it’s a game of chess. It is the game of life. ‘And the beat goes on.’

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