Why Diamond Bank Opted for a CBN-Managed Acquisition by Access Bank Over the Carlyle Group

Image result for Access Bank combined image Diamond Bank


November 12, 2018

By Proshare Research & Markets


Five (5) months ago, when we became aware of the developments in Diamond Bank Plc, and sought to primarily devote time and resources to understand the nature of the changes that the Central Bank of Nigeria (CBN) was contemplating to deal with the challenges the tier-2 Nigerian banks posed to financial stability.

By August 2018, we caused to be published a Proshare Confidential report on the H1’2018 financial of Nigerian banks, based on returns sent to the CBN as is.

This analysis revealed a concern around the survival of these Tier 2 banks in the long run in general and the need for the CBN to act decisively on its financial stability mandate; given the disposition and realities of its Tier 1 banks, a few that had its own hands full in dealing with legacy challenges apart from new operating environmental issues.

In the time in-between, a lot also happened.

Diamond Bank Plc had to content with a CBN levy over a disputed role with regards to MTN Nigeria causing it to issue a notice on CBN Levy on the London Stock Exchange – Sep 07, 2018

Sometime later in September 2018, as the Nigerian Stock Exchange (NSE) issued letters and was set to suspend Skye Bank, Unity Bank and Fortis Microfinance for non-submission of its financials in violation of the post-listing rules. A day before the ultimatum expired, the CBN Governor wrote in to ask the NSE to stay action on these institutions because the CBN was involved in serious discussions for which such an action by the NSE may complicate/jeopardize.

Weeks later, the CBN acted on Skye Bank Plc, withdrawing its license and issuing a new one to Polaris Bank. This action was represented as important to market stability yet left a lot of unanswered questions about the investor protection mandate of the Securities & Exchange Commission (SEC) and of NSE’s observance of its post listing rules which, at the heart of it, dealt with the investor-market trust and integrity issue.  The CBN governor, realizing this, addressed the issue at the next MPC meeting, firmly establishing that the action could have been better thought through than the execution revealed. Today, we have a defunct bank and a new bank tied by the same assets & liabilities with different regulatory oversight from that action.

Subsequent to this, the NSE suspended the institutions referred to above and others, most of who promptly complied and thus indicated to the market that, the financials were always available. What was the point of holding back if not to conceal condition/state of play?

These developments however revealed a much more serious issue:

  • If the CBN solely managed Skye Bank for two years but could not salvage it or/and secure a willing and able buyer for the bank; there was a condition that goes beyond the financials (especially when not made public as required).
  • If in the case of Fortis microfinance bank where the CBN appointed an interim management but they equally had to resign on account of evidence of malpractices and liabilities in the book that appear to be unresolvable; and international creditors and customer funds technically lost; there may be much more to it than the market knows;
  • If in the case of the stress test conducted by CBN which we found out had three (3) banks failing the minimum regulatory liquidity ratio of 30%, the non-disclosure of the names of such banks in a controlled manner presented signaling challenges.
  • If in the case of Diamond Bank, with its sheer size and base, has its capital eroded due to huge NPLs with no proactive approach to its resolution plans; and continues to engage in communications juggling, what signals should the markets pick from the state of affairs of such an institution?

On October 25, 2018, the NSE published a notification from  Diamond Bank Plc stating that Mr. Oluseyi Bickersteth, the recently appointed Chairman of the board and three (3) Non-Executive Directors (Messrs Rotimi Oyekanmi, Juliet Anammah and Aisha Oyebode) have all resigned from the Board of Diamond Bank Plc with immediate effect for personal reasons. See: Diamond Bank Plc Announces The Resignation of Board Chairman and Three Non-Executive Directors.

These where some of the concerns we were ruminating over when on November 02, 2018, the CBN formally released (and we published) a report titled: Three (3) Commercial Banks Fall Short of The Minimum Regulatory Liquidity Ratio of 30% – CBN and followed this up with a tweet as regards our concerns about Diamond Bank, Heritage Bank and Keystone Bank.

Diamond Bank responded on November 05 that:

“….. the Bank reported a liquidity ratio of 42.2% as at H1’2018 (the period of concern), being an increase of 320 basis point from 39% as at Q1’2018. In addition I note that the Bank’s Liquidity Ratio (LR) remains above the regulatory threshold even as at September 2018. This can be found in the Bank’s presentations to analysts and investors.”

This made us take a further look at the information available from the analyst community about the numbers that is publicly available and some which we had worked with from previous years, especially around its loand positions, exposure to the central bank and matters revealed from the attempt by an institutional investor to take control of the bank. 

It is instructive to note that Diamond Bank does not have a fully constituted board at this moment in time (re: corporate governance at such a crucial time). The CBN is well aware of this and its acquiescence is signal enough for what is going on.

While on this exercise, Standard & Poor’s (S&P) Global Ratings  on November 07, 2018 issued a release downgrading Diamond Bank on weaker than expected Asset Quality; determines that the outlook is negative..  S&P provided the following as its premise:

  • We believe Diamond Bank’s provisioning needs will be higher than we initially expected, which will put pressure on the bank’s capitalization.
  • Additionally, its foreign-currency liquidity position also remains vulnerable, due to a large upcoming Eurobond maturity in May 2019.
  • As a result, we are lowering our global scale ratings on Diamond Bank to ‘CCC+/C’ from ‘B-/B’ and our Nigeria national scale ratings to ‘ngBB-/ngB’ from ‘ngBBB-/ngA-3’.
  • The negative outlook reflects pressure on the bank’s capitalization and foreign-currency liquidity.

Beyond Analysis

The directors of Diamond Bank may not admit it publicly but our investigations reveal that they are in favour of an M&A with Access Bank Plc rather than to be subjected to the ‘adversarial’ take-over move initiated by one of their foreign investors – The Carlyle Group , an American multinational private equity, alternative asset management and financial services corporation.

There is so much to unpack here.

We however note some of the issues that would have influenced the disposition of Diamond Bank’s directors/ownership is steeped in:

  • The pre-eminent position of CBN’s loans;
  • The ‘ego’ factor as seen in moves around the collaterals of principals in the bank;
  • The long term prospects of what is a legacy project and the need/recognition that value still resides in the entity; and
  • The competitive advantage from numbers, technology and service culture that is waiting to be unleashed.

Yet, it is trite to say that for Diamond Bank Plc, there are serious challenges. Quite many that they can handle as is; nor can CBN resolve on its own!

That the CBN was looking for a resolution would be an understatement. It needed a knight to come save the day but the options of suitors were few – either because of realities, strategic outlook or financials, the field grew narrow daily.

The Diamond Bank Situation

Diamond Bank, with its sheer size and base, had its capital fully eroded due to huge NPLs with no proactive approach to its resolution. The hole created in the capital gap is quite huge and to fill the hole will require:

  • A significant haircut from the CBN;
  • Forbearance of accounts (including NPL’s) against the bank; and
  • A fresh injection of capital that could easily come from an ‘acquisition’.

Diamond Banks’s NPLs appear scary relative to its tiered position; and figures in the public understate  the reality; even as these sums continue to run with high impact/costly funds that erode profitability. 

Their OPEX and associated bills are too wide and it would appear that they have mortgaged the fortunes of the bank as it is; as maturing contingent obligations are also unsettled because of  illiquidity.

The bank has borrowed much more from regulators than it can chew; and have been told that there are no further support will be extended thereafter. This is it.

Breaking The News As A Market Gauge Or Ignoring Rules?

While we believe that the release of the information about this ‘potential deal’ indicates to us that there appears to be a consensus on its inevitability; it is however a curious approach to signalling condoned by the regulatory body.

While some who were aware of the development exercised restraint, the release of the news about conversations which went on thus far and including Friday night / weekend; indicates that the parties or a party is ahead of the market.

Unlike what has been described in the newspapers, an M&A or an outright acquisition as it looks like will take a while to conclude, due diligence and all.

The final figure and nature of the deal will still require a lot of fine tuning but the ship has left the habour and set sail.

This move however is a weak one; ignoring market rules about listed entities. We waited this long to comment hoping to be proved wrong, assuming the press got ahead of the game. This would appear to be a market pulse move; not an ideal way to build market confidence in processes. Diamond stocks will bear the consequence.

In the coming days, the financial analysis will be published and scenarios on deals will also now have to be made public; even as the entities are both publicly listed without any information or/and notification to investors and market stakeholders. This simply reminds you of a pattern as deployed with the Skye Bank Plc move; as with others before now.

In a governance enabled environment, this should not be the case.

Below is the stock activity report on the two concerns as at close of market today:

Proshare Nigeria Pvt. Ltd.

Why Access Bank May Be Interested

This is what they do. This is what they set out to do and they laid out publicly ahead of this year. This is one of many possibilities that strategically favours the bank but benefits the regulators ultimately.

The moves here, is similar to the inorganic growth deployed with the acquisition of Intercontinental Bank Plc that created todays Access bank.

The desire to continue on this trajectory and rapidly build up its retail customer base was well articulated in the Access Bank Plc 2018- 2022 Strategy Plan –The Presentation.

We will expand on this in a later analysis.

For now, this deal should augur well for both parties, allow CBN resolve a challenge and open up the doors for possible other acquisitions by discerning banks of which Access Bank Plc continues to be a front runner given its experience, position, and pedigree.

Proshare Nigeria Pvt. Ltd.

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