S&P’s reverses Diamond Bank’s negative rating

Standard and Poors Global Ratings has affirmed its ‘B/B’ long- and short-term issuer credit ratings and ‘ngA/ngA-1’ Nigeria national scale ratings on Access Bank, thus indicating that the bank’s outlook remains stable.

It has also revised its outlook on Diamond Bank to stable from negative and affirmed the ‘CCC+/C’ issuer credit ratings. The rating agency equally raised its long-term Nigeria national scale rating on Diamond Bank to ‘ngBB’ from ‘ngBB-’ and affirmed the short-term national scale rating at ‘ngB’.

The fresh rating of the two banks by S&Ps indicates that the worst is over after the banks announced a merger agreement on December 21, 2018.

Under the memorandum of agreement, Access Bank will acquire all outstanding shares of Diamond Bank in a cash and shares transaction. It is expected that the deal will likely close by the end of June 2019, and is conditional on receiving regulatory approvals. Upon closure of the deal, Diamond Bank will cease to exist as a separate legal entity.

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“We have affirmed our ratings on Access Bank at ‘B/B’ with a stable outlook, based on our view that potential short-term acquisition risks should be offset by Access Bank’s record of accomplishment in mergers and acquisitions.

Access Bank has demonstrated its ability to successfully integrate the bank when it acquired Intercontinental Bank in 2011. Access Bank’s forensic approach mitigates the merger risks,” said S&P.

Over the medium term, the Agency said the acquisition should help Access Bank strengthen its franchise and revenue generation capabilities.

As at December 31, 2017, Diamond Bank had over 6.5 million retail customers with the retail business providing approximately 70 per cent of deposits and 35 per cent of revenues. Diamond Bank has also established partnerships with several parties to enhance its digital banking offering.

On its reason for the reversal, S&P said it believes that the strategies employed by the Access and Diamond would accelerate the formers position in that space and increase retail transaction volumes.

Diamond Bank’s retail focus enabled the bank to build a low-cost 2.7 per cent in 2017 compared with 4.7 per cent on average for peer banks and stable retail deposit base.

The merger of the two entities is expected to boost earnings capacity, with return on equity increasing close to 20 per cent by 2020.

Also about 40 per cent of nonperforming loans (NPLs), including the past due not impaired (PDNI) loans, are expected to be transferred to Access Bank upon the acquisition. Diamond Bank also will write off a large portion of the problem loans by the time of the acquisition.

As a result, S&P forecasts that Access Bank’s NPLs ratio post merger will increase to 8 per cent in 2019 before reducing to below 7 per cent in 2020. Similarly, cost of risk will increase to 1.2 per cent in 2019 as Access Bank will have to make additional Stage 2 loan impairment provisions to account for the PDNI, which largely relate to the oil and gas sector.

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“We expect credit losses to normalize thereafter to around one per cent, reflecting the good credit quality of Access Bank’s loan portfolio, which comprises about 50 per cent investment grade corporate clients. Access Bank’s asset quality metrics will compare adequately with top peers in Nigeria and regional peers, albeit at the lower end of the range.

“We view the Nigerian banking sector as a risky operating environment (classified in Group ‘10’, the highest-risk category under our Banking Industry Country Risk Assessment), with much higher credit losses anticipated for the sector, at around 3 per cent for 2018,” said S&P.

Moving into 2019, Access Bank’s market position is set to be on the upscale given Diamond Bank’s solid retail franchise. The combined entity will have total assets of about N5.9 trillion, representing a 19 per cent total market share by total assets.

Access Bank is planning to close about 80 branches, thus reducing the operating base of Diamond Bank by 30 per cent upon the merger.

Consequently, cost-to-income ratio will remain high at about 60 per cent, reflecting the integration of Diamond Bank. This ratio compares less favourably with the best performing banks in the sector.

More importantly, Access Bank will acquire Diamond Bank’s deposit franchise, which will support its business by lowering its cost of funding.

Diamond Bank will have to repay its maturing Eurobond principal of $200 million by May this year. The bank is understood to have fully provisioned for the amount. The bank is also in the process of selling its U.K. subsidiary.

Recently, the Central Bank of Nigeria gave its approval to the bank to convert to a national banking license with a minimum 10 per cent capital adequacy ratio, which has reduced the pressure on its regulatory capital.