On December 17, 2018, two of Nigeria’s leading banks, Access Bank and Diamond Bank, announced plans for a $200m merger to establish the country’s largest lender by total assets ($16.7bn). The transaction is one of the first mergers and acquisitions (M&A) in Nigeria’s banking sector to arise without the intervention of the central bank in more than 10 years. It will also go a long way to strengthening the country’s banking system.
The deal will see shareholders in Diamond Bank receive 3.31 naira per share, which will be comprised of 1 naira in cash for each share held and two new Access Bank shares for every seven Diamond Bank shares that are held. As such, Access Bank will acquire the entire issued share capital of Diamond Bank.
According to Bloomberg, this offer represents a 260% premium on Diamond Bank’s December 13, 2018, closing price of 0.87 naira per share. The deal is expected to be completed in the first half of 2019. The merged lender will also constitute Africa’s largest bank in terms of total retail customers, according to a statement issued by Diamond Bank.
An unmissable opportunity
For both parties, the merger is opportune. In the case of Diamond Bank it offers some reprieve from its troubled legacy assets linked to the oil and gas sector. About 51% of its total loan book is linked to Nigeria’s hydrocarbon industry, which has suffered in the lower oil price environment of recent years, while its total ratio of non-performing loans stands at 12.5%, according to a September 2018 investor presentation.
For the international financial adviser representing Diamond Bank on the deal – emerging markets investment bank Exotix – these difficulties had to be framed against the lender’s strengths. “A lot of Nigerian banks have been penalised in terms of their stock prices and we thought the market didn’t recognise Diamond Bank’s potential. We were able to identify the potential universe of partners and we were also able to position and highlight the potential of the value creation that Diamond Bank could offer,” says Chiamaka Ezenwa, head of investment banking for west Africa at Exotix.
Indeed, despite the challenges posed by its legacy loans, Diamond Bank boasts one of the strongest retail banking propositions in Nigeria. This proved to be an enticing prospect for Access Bank. “[Diamond Bank] has one of the strongest brands and one of the fastest growing retail and small and medium-sized businesses in the market. This definitely overshadowed concerns about the legacy oil and gas and power issues on its loan book,” says Ms Ezenwa.
The merger will see the two banks achieve a combined retail customer base of 29 million, with 13 million mobile banking customers, according to information from Diamond Bank. Billing itself as the fastest growing retail lender in the country, Diamond has enjoyed significant year-on-year increases to its retail customer base, agent network, debit and credit card issuances and mobile application transaction volumes over the past 12 months.
“Of the Tier-two Nigerian banks who have a meaningful brand and asset base, Diamond Bank stands out because of the work it has done on its retail banking proposition through investments in technology and, in particular, its mobile banking app,” says Ms Ezenwa.
A two-tier structure
Notably, the deal is expected to widen the gap between Nigeria’s tier-one lenders and the rest of the banking system. In a commentary on the merger written by Fitch Ratings, the agency notes: “The two-tier nature of Nigeria's banking sector will be amplified by the merger of Access Bank and Diamond Bank, which will result in the five largest banks having more than 60% market share measured by assets. The market is already dominated by a few large banks, with smaller banks tending to carve out niche positions focused on individual segments.”
These changing market dynamics are likely to have profound implications for Nigeria’s banking sector. For one, the widening gap between first- and second-tier lenders is heaping pressure on tier-two banks. Unable to compete with the size and scale of their larger peers, these lenders are looking to niche market segments, and unique product and service offerings, to remain competitive. Diamond Bank’s investment in technology, and its widely lauded mobile banking app, are a case in point. But over the long run, this approach may not be sufficient as new pressures from fintech operators and other players begin to impact them from below.
“The gap between Nigeria’s tier-one and tier-two banks is becoming wider. Tier-two lenders are being squeezed by the larger institutions at the top and from new entrants, including fintech start-ups, at the bottom. More consolidation is on the way in Nigeria’s banking market. We expect to see significant change over the next 18 to 24 months,” says Fabrizio Ferrero, co-head of investment banking for Exotix.
A market-driven move
These potential M&A trends also represent a departure from historical norms. In the past, consolidation has largely been driven by the central bank, through the raising its minimum capital requirements on domestic banks. This strategy was used to great effect in the mid-2000s when the Central Bank of Nigeria raise these requirements and ultimately reduced the number of lenders in the market from close to 90 institutions to just over 20. Today, however, it is market forces that are driving the potential for consolidation.
“Previous M&A activity in Nigeria’s banking sector involved the central bank taking over lenders experiencing a crisis and forging a transaction from there. The Diamond-Access deal therefore represents the first true M&A transaction for the sector in at least a decade” says Ms Ezenwa.
Nevertheless, the Central Bank of Nigeria is likely to be pleased with the outcome of the Access and Diamond Bank deal. Though the country is hardly overbanked – 21 lenders serve a growing population of 196 million – the legacy of the economic crisis that ensued after oil prices collapsed still weighs on the banking sector. Access Bank’s acquisition of Diamond Bank, with its troubled loan book, therefore clears up a potential weakness in the system and limits any potential risk of contagion.
“Diamond Bank is not a small bank in the context of the Nigerian banking sector, so this deal is good news for the regulator,” says Akintunde Majekodunmi, a sub-Saharan Africa bank analyst with ratings agency Moody’s.
A united behemoth
Looking ahead, the deal will see Access Bank bolster its ambitions to be a genuine regional behemoth. The synergies to be created will lead to appreciable cost savings, which are estimated by Access Bank to be in the region of N30bn ($83m) per year before tax, to be fully realised three years after completion. Branch consolidation, information technology integration and a centralised headquarters will also see additional operational synergies achieved.
Upon completion, Access is expected to have total assets market share of 15.9% in Nigeria, against the 14.9% of its nearest competitor Zenith Bank, and a market share of customer loans of about 18.2%. Encouragingly, Access Bank has a strong pedigree when it comes to integration projects. In 2012 the lender acquired the troubled Intercontinental Bank and successfully merged and integrated the institution in a relatively short period of time.
“Access Bank emerged as the best partner in terms of its proposal and in terms of the potential strategic fit. It has a successful corporate and investment banking business and it has a strong franchise. We think the combination of Access Bank and Diamond Bank will generate significant synergies and value creation for both shareholders,” says Mr Ferrero.
