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Responding to the Access Bank-Diamond Bank merger 11 Jun 2019

Access Bank Plc and Diamond Bank Plc completed their “merger” in April 2019, up to two months ahead of the set deadline. The integration of the two businesses, operations and brands by Access Bank – the surviving brand – demonstrated its expertise and experience in mergers and acquisitions (M&A) and branding.
    
As a customer of the two banks until the horizontal merger, I have experienced the seamless integration by Access Bank. The only exception has been that the Diamond Bank banking app has continued to run (as I write at the end of May) together with Access Bank app. From my user experience, it would be a tough choice for the bank to determine which app to retain, because both apps have good functionalities and they are user-friendly.

The public quibbled about whether Access Bank acquired Diamond Bank or it was truly a merger. Either is true. During a joint media briefing by the CEOs of the two banks in February, Uzoma Dozie of Diamond Bank said Access Bank was “acquiring the entire issued share capital of Diamond Bank in exchange for a combination of cash and shares in Access Bank through a Scheme of Merger.”

The communication of the transaction as a merger was strategic. It followed a growing norm for preserving financial and branding values in such transactions. Since a merger transaction could fall through before its completion, efforts are made to preserve maximum value of both entities. In the event the transaction goes through, the public communication optimizes the value on-boarded by the surviving brand.

The Access Bank-Diamond Bank merger promises considerable benefits. Access Bank has become the biggest bank in Africa by customer base. It now serves over 29 million customers in 12 countries. The enlarged distribution network of the bank will help optimize its costs and improve profitability. Access Bank can also better leverage its much bigger balance sheet.

More exciting is the talent pool. The bank's manpower strength has increased to 27,000. This, indeed, is a boon for innovation. In the 21st century, innovation has become the new category of 'capital' for businesses, including incumbent banks, who are facing disruptive innovations from non-bank, technology-based and low-cost new entrant financial services providers.

Access Bank's commitment to sustainability has distinguished it in the Nigerian banking industry. It now has a bigger canvass for continued implementation of its multiple-award-winning sustainability strategy. More communities, locally and in Africa, will benefit from the embedding of social and environmental responsibility in the bank's operations and project finance. A wider network of banking professionals will also gain acquaintance with the principle of sustainable banking through Access Bank.

How will the other tier-1 Nigerian banks, namely First Bank, Zenith Bank, UBA and Guaranty Trust Bank, respond to the emergence of a much bigger Access Bank? They will certainly respond, either through organic or inorganic growth strategies. Access Bank has newly triggered a reprise of the race to being the biggest African bank by some indicators. We are likely to see in the foreseeable future, another M&A involving tier-1 and tier-2 Nigerian banks. By following up its acquisition of Intercontinental Bank in 2011 with the M&A deal with Diamond Bank in 2019, Access Bank itself may not even rest on its acquisition oars.

This scenario should reignite the debate about too big to fail (TBTF) financial institutions. The aforementioned biggest banks in Nigeria, including Access Bank, are each systemically-important and TBTF. Collectively, they account for about 60 percent of both the gross credit in the market and total deposits.

This poses significant risk to the banking sector. Should any of these big banks become distressed, which would not be unheard of in the annals of the world's banking industry, the entire Nigerian banking system – and the larger economy – could face a formidable threat. The 2008 global financial crisis – which led to the so-called “lost decade” characterized by global economic slowdown in its aftermath and which called the foresight of academic economists into question – accelerated with the collapse of Lehman Brothers, a U.S. financial conglomerate that, indeed, proved to be too big to fail.

Three years ahead of the crisis, the 89 banks in Nigeria at the time were compelled to fuse into 25 “mega” banks, in the first phase of the banking industry consolidation reform of the Central Bank of Nigeria (CBN). The reform raised the mandatory capital base of banks from N2 billion to N25 billion, with 18 months stipulated for compliance. In the second phase of the reform, the CBN incentivized further capital growth by promising banks that they would have a slice of its foreign reserves to manage, on attaining $1 billion capitalization.

But it became apparent later in 2009 that, playing up the importance of size, the CBN failed to emphasize the management of macroprudential risks by the big banks it midwifed. The banks also embraced excessive credit risks. The board of most of the banks existed to rubberstamp the decisions of the CEOs. With the collapse of global growth, investor appetite and commodity prices in the wake of the global financial crisis, the reckoning came for Nigerian banks. The new regime at the CBN had to intervene with N650 billion at the first instance to save distressed banks, some of which were systemically-important.

The CBN has since recognised the risk posed by banks that are TBTF. Nevertheless, the central bank otherwise appears to upraise the risk. As exemplification, it maintains a stance that no bank will be allowed to fail. At the same time, since the bailout of some distressed banks in 2009, the CBN has continued to approve major M&As in the banking industry. These include the acquisition of an unsound tier-2 bank by another, which would logically have created an unsound tier-1 bank.

One must admit that the issue of TBTF is difficult to address. There is no simple solution for it. Limiting the growth of a private sector institution appears incompatible with the capitalist economic ideology. But if it doesn't offend capitalism for bank regulators to impose a minimum capital requirement, imposing upper limits to bank size shouldn't.

The CBN and shareholders of the banks must avoid pandering to big size. They must ensure that prudential risks (macro and micro) remain on the radar and well managed in the banks. Whereas a big bank may be better able to take advantage of some business opportunities, its failure may be painful and very difficult to manage.