By Dipo Olowookere

Renowned rating agency, Moody’s Investors Service, has warned that Access Bank may experience negative pressures on its capital and asset risk metrics as a result of its merger with Diamond Bank Plc.

This disclosure was made in a statement issued recently, where it announced that it was placing the ratings of the Nigerian lender under review for downgrade.

Moody’s said it was looking to lower the B2 long-term local currency deposit rating of Access Bank as well as its B3 long-term foreign currency deposit rating, its b2 Baseline Credit Assessment (BCA) and Adjusted BCA, its B1 long-term Counterparty Risk Rating (CRR) and its B1(cr) long-term Counterparty Risk Assessment (CRA).

However, Moody’s said it was placing Diamond Bank Plc’s Caa1 long-term deposit ratings, its caa3 BCA and Adjusted BCA, its Caa1 CRR and its Caa1(cr) CRA on review for upgrade.

In late 2018, Diamond Bank and Access Bank announced their intentions to merge to become a big and formidable entity.

In its statements, Moody’s said it was reviewing the banks’ ratings following the approval of their announced merger by the Securities and Exchange Commission (SEC) on January 18, 2019, after a preliminary approval of the transaction by the Central Bank of Nigeria (CBN) in December 2018.

“Access Bank’s ratings are placed on review for downgrade to reflect the potential negative pressures on its capital and asset risk metrics as a result of the merger, while Diamond Bank’s review for upgrade reflects the expected convergence of its creditworthiness and ratings with those of Access Bank upon completion of the transaction,” the agency said.

Moody’s explained that its primary driver underpinning the decision to initiate a review for downgrade of Access Bank’s ratings is the expected weakening of the bank’s solvency profile, driven by a lower tangible common equity (TCE) ratio amid higher asset risks.

It noted that Access Bank will acquire a large balance sheet (about N1.6 trillion as of September 2018), mainly consisting of net loans (about N730 billion), which will increase its risk weighted assets, while Diamond Bank’s undercapitalization will likely strain Access Bank’s TCE.

Moody’s expects Access Bank’s post-merger TCE ratio will decline to around 10%, reducing the bank’s loss absorbance buffers. The TCE would also decline below the median for global peers with b2 BCA.

In addition, the rating agency expects Access Bank’s asset risk to increase because of the additional risk assets it will acquire from Diamond Bank.

The rating agency views Diamond Bank’s risk management and underwriting procedures as weaker than those of Access Bank and therefore expects a higher formation of nonperforming loans (NPLs) from Diamond Bank’s loan book that Access Bank will acquire. The rating agency also expects substantial operational risks to be introduced by this sizeable acquisition.

For Diamond Bank, the review for upgrade is driven by the fact that upon completion of the merger, Diamond Bank’s assets, liabilities and undertakings will be assumed by Access Bank, a stronger entity, who will become the obligor of former Diamond Bank’s creditors.

The review on both banks will conclude upon the legal completion of the merger and will take stock of any new relevant information that might be available at that time.

For Access Bank, the rating agency says that the review for downgrade will focus on (1) the impact of a successful completion of the merger on Access Bank’s solvency ratios (asset risk and capital metrics), (2) the extent to which the merger will improve Access Bank’s profitability and funding and liquidity profiles, and (3) any integration challenges that will arise from onboarding Diamond Bank’s assets and liabilities and staff.

The review will assess how Access Bank will implement measures to increase its capital buffers to enable it to absorb new credit losses that will come from Diamond Bank’s loan book. The rating agency will assess any plans by Access Bank to reduce its risk assets and improve its capital upon completion of the merger.

The review will consider the impact of Diamond Bank’s loan book on Access Bank’s asset quality, including the amount of NPLs that Access Bank will inherit from Diamond Bank, and the level of provisions of the NPLs, although management indicated that a large portion of Diamond Bank’s current NPLs will be written off before conclusion of the transaction.

Moody’s said it will also assess the positive impact of Diamond Bank’s largely retail deposit book to Access Bank’s deposit structure and tenor.

As of September 2018, Access Bank would acquire N1.1 trillion customer deposits from Diamond Bank, providing it with deposits that are cheaper than its current cost of funding. The rating agency will consider the impact of possible revenue enhancements and any long-term cost savings, viewed against short-term restructuring costs.

The review will also take into consideration material implementation challenges associated with the acquisition of a large bank such as Diamond Bank.

As of September 2018, Diamond Bank’s total assets constituted 34% of Access Bank’s assets and Moody’s estimates that Diamond Bank’s total assets will contribute about 23% of merged entity total assets.

Access Bank will need to successfully integrate its newly acquired staff and IT and processing platforms while ensuring that the business does not suffer during the integration period. Moody’s recognizes Access Bank’s good track record in mergers and acquisitions.

Moody’s said the review for upgrade on Diamond Bank’s deposit ratings reflects the prospects that the rated deposits and liabilities of Diamond Bank will benefit from Access Bank’s stronger risk profile, and the rating agency will align Diamond Bank’s long-term deposit ratings with those of Access Bank. These are currently B2 on review for downgrade for local currency, and B3 on review for downgrade for foreign currency.

The rating agency will assess the extent to which Diamond Bank’s current solvency weaknesses that are a result of its high NPLs, low provisions and low capital will be addressed by the merger.

The rating agency will also consider the implication of the merger to Diamond Bank’s foreign currency liquidity, in light of the significant refinancing needs in the first half of 2019.

Moody’s said it will withdraw Diamond Bank’s ratings upon completion of the merger because Diamond Bank will cease to exist as a separate legal entity.