Dec 25 (Lagos) -
- A switch to National Banking License... In our recently published equity commentary on Diamond Bank (See report: Overblown fright or Justified concerns),
we had stated three options the bank’s management will adopt to keep
the bank operational and meet its obligation to lenders. While we had
considered the possible acquisition by a bigger bank, the management of
both banks in separate press releases refuted the claim. Consequently,
as with one of our options, Diamond Bank got approval from the CBN to
operate as a national bank following the sale of its UK business, a
development that was perceived to have saved the bank from
capitalization needs and continue operations on a better footing.
- …and then a Scheme of Merger. To
our surprise, news broke over the weekend of a possible merger between
both banks, with the management of Access Bank Plc and Diamond Bank Plc
yesterday separately issued releases on the Nigerian Stock Exchange
(NSE) stating the planned acquisition of Diamond by Access with a
consideration price of
N3.13/share. This is on the consideration of N1.00
in cash for one share of Diamond bank held and 2 new shares of Access
for every 7 shares of Diamond. Accordingly, we estimate total cash
consideration of N23 billion and new allotted shares of 6.6 billion units in Access Bank. We note that the consideration price is 213% above the closing market price of N1.0 per share of Diamond yesterday.
- Estimating the transaction multiples. As at 9M 2018, Diamond bank’s book value stood at
N217.1 billion with a book value per share (BVPS) of N9.37,
we estimate a transaction price to book multiple (P/B) of 0.3x compared
with the market valuation of 0.1x P/B. Given our thought that the
transaction is strictly equity based, we assume a situation wherein the
un-provisioned part of the non-performing loan is adjusted for through
equity to leave the books with performing assets. As such, based on
current NPL of N99 billion and total credit charge loss of N54 billion, we estimate an equity charge of N45 billion by Diamond bank over Q4 18 to leave the book value at N172.1 billion and BVPS of N7.4 with implied transaction price to book multiple of 0.4x.
- How they Stack up Post Consolidation. The
notice by Access indicated that the bank will issue additional shares
of 6.6 billion shares to accommodate the shareholders of Diamond bank.
Assessing the impact on current outstanding shares of Access bank of
28.9 billion, we estimate increase in total shares post consolidation to
35.5 billion. Accordingly, we estimate that the potential dilution from
the merger of 19%. Furthermore, post-merger, Carlyle Group, Kunoch
Holdings and Diamond Partners will own 3.3%, 1.7% and 1.1% of the
enlarge Access bank respectively.
- Expected Moderation in Cost of Funds.
During our engagement with management of Access Bank in November, they
guided to the bank’s plan to gradually close out on expensive
borrowings. Specifically, the CFO stated that the bank could refinance
its expensive Eurobonds if presented with the opportunity and any other
available opportunity that could result in a significant moderation in
its funding costs. Notably, as at 9M 18, Access cost of funds stood at
5.6% compared to Tier 1 average of 4.0%, following contraction in
cheaper deposit (current and savings account) mix by 195bps to 45% which
resulted in 18.5% YoY jumps in interest on customers deposits, 1.0x YoY
growth in interbank placements, and 73.8% YoY increase in borrowing
cost. However, Diamond cost of funds remains the lowest among peers at
4% (coverage Tier 2 average of 5.4%) despite a 260bps YoY contraction in
CASA composition to 78.3% over 9M 18. Accordingly, we see some benefit
to Access in terms of moderation in funding cost from the acquisition of
Diamond and estimate that Access’s cost of funds could moderate to
~5.1% with a CASA mix of ~55.3% post consolidation.
- However,
given the reaction to the bank in recent months, we are cautious on the
level of cheaper deposits composition being inherited by Access bank.
For context, over the last five quarters, Diamond bank has lost CASA
deposits of
N247.6 billion, reflecting a 22.8% decline YoY to N836.7 billion in Q3 18 from N1.1
trillion in Q3 17. Also, given the lower credit rating of Diamond bank,
in terms of corporate deposits, we do not rule out the possibility of
erosion in Access bank’s credit rating.
- What’s the immediate Impact? In
summary, while this acquisition appears positive for shareholders of
Diamond Bank, we are of the view that the transaction will be
undesirable for Access Bank in the near term, giving bottlenecks in
terms of collapsing of structures as well as dilution impact on
profitability metrics. That said, we await meeting with Management of
Access Bank tomorrow (Click here for conference detail) for further details and discussion on this acquisition and would communicate our views in due course.
- Any benefit for the core investors in Diamond?
Following the exit of Actis in August 2014 and the need for
recapitalization of the bank in November 2014 via a rights issue,
Carlyle Group, became the largest single shareholder in Diamond with
transaction valued at $147 million (
N7.38 per share). Accordingly, we estimate that on current price of N1.07, the Group is taking a bad hit on the investment to the tune of N20 billion. Accordingly, we believe that the consideration price of N3.13 could reduce Carlyle loss in the venture to ~ N11.4
billion in the short term. However, post consolidation and integration
of the shareholders into the enlarged Access bank, we believe the change
in the fortune of Carlyle in the venture will be determined by the
gains from the integration.
reporting for easykobo.com on Tuesday, Dec 25 2018 from Lagos, Nigeria
Source - analysts at ARM SECURITIES LIMITED. ALL RIGHTS RESERVED. THIS ARTICLE IS COPYRIGHT OF ARM SECURITIES LIMITED AND NOT TO BE REPRODUCED OR REPRINTED WITHOUT EXPRESS PERMISSION OF ARM SECURITIES LIMITED.