June 27, 2019
By S & P Global Ratings
- Following the acquisition of Diamond Bank, Nigeria’s Access Bank has upped its market share to 25%, and its cost of funding will likely decline.
- We note however that Access Bank’s asset quality indicators diluted and the operational integration of Diamond Bank is unfinished.
- We are therefore affirming our ‘B/B’ global scale and ‘ngA/ngA-1’ Nigeria national scale ratings on Access Bank.
- The stable outlook points to our expectation that Access Bank will maintain a broadly stable credit profile over the next 12 months.
S&P Global Ratings affirmed its ‘B/B’ issuer credit ratings on Nigeria-based Access Bank PLC. The outlook remains stable. We also affirmed our ‘ngA/ngA-1’ Nigeria national scale ratings on the bank.
The affirmation balances the benefits of the Diamond acquisition for Access’ franchise and prospective cost of funding with the bank’s diluted asset quality indicators and integration risks.
We believe the Diamond acquisition will cement Access’ leading franchise in the competitive Nigerian banking sector. The combined entity has total assets of about Nigerian Naira (NGN) 6.4 trillion (approximately USD17 billion), representing nearly one-quarter of the system’s total assets. We believe Access’ expanded customer and loans base will underpin stronger revenue generation and stability going forward.
At the same time, we see slight pressure on the consolidated bank’s asset quality indicators, because the bulk of Diamond’s nonperforming loans (NPLs) were transferred to Access when the merger became effective on March 19, 2019. We expect that cost of risk will increase to 1.4%-1.5% in 2019, since Access will have to take additional provisions. We also expect the bank to write off about NGN120 billion in 2019 and around 0.5%-1.0% of average customer loans between 2020 and 2021. However, we anticipate that Access’ cost of risk will remain below the sector average, based on our estimate of the sector’s credit losses of 2.8% in 2019 and 2.5% in 2020.
We project Access’ risk-adjusted capital (RAC) ratio will hover around 3%-4% through 2021. Although we consider this RAC level to be weak, we expect the Diamond deal to strengthen Access’ earnings capacity, with core earnings climbing to about 2.5% of managed assets through 2021. We forecast the net interest margin will increase toward 7% throughout the 2019-2021, while fees and commissions will rise by NGN30 billion. Diamond’s retail focus enables the bank to build a low-cost and stable retail deposit base (2.7% in 2017 versus 4.7% on average for peers). In addition, Access plans to close about 80 branches, thereby reducing its operating cost base. Still, we forecast the bank’s cost-to-income ratio to increase to about 60%-63%, reflecting the integration of Diamond, and this compares unfavorably to the best performing banks in the Nigerian banking sector.
Post-merger execution risks are generally pervasive for a transactions of this nature, particularly due to the banking environment within which Access operates and the elevated NPL levels. However, we believe that Access’s integration of Intercontinental Bank in 2011 was successful, and that it boasts a strong management team.
We expect that Access–similar to its rated peers in Nigeria–will continue to see funding that is largely contractually short term. This is manageable, in our opinion, given that the bank’s stable funding ratio remains well in excess of 100% while its broad liquid assets to short-term wholesale funding ratio amounted to 2.77x in first-quarter 2019. Net broad liquid assets covered 47% of short-term deposits at the same date. The bank holds a long position in U.S. dollars, stemming from domiciliary accounts and funding raised in dollars in the past four years.
The stable outlook indicates our expectation that the integration of Diamond will likely translate into higher earnings capacity over the next 12 months with manageable operational and integration risks.
We would lower the ratings, in the next 12 months, if Access fails to successfully integrate Diamond, or if its asset quality deteriorates beyond our expectations. We could also lower the ratings if we see a marked deterioration in the bank’s capitalization, with RAC ratio weakening below 3% for longer than expected. We could also lower the ratings if we were to take a negative rating action on Nigeria (B/Stable/B).
A positive rating action appears remote in the next 12 months, because it would hinge on an upgrade of Nigeria.