Will CBN rescue Access Bank over its delinquent VIP Debtors?

Board disharmony and a persistent breach of governance rules, manifested in the avoidable exposure to the risks and liabilities, including the huge Non-Performing Loans (NPL), portfolio from the pig-headed acquisition of Diamond Bank, is threatening to bring Access Bank to its knees, according to a portfolio review report of Access Bank by Moody’s Investors Service. 

“Access’s b3 BCA reflects the negative pressure on the bank’s solvency profile following its merger with Diamond Bank Plc (Diamond), a bank with a significantly weaker credit profile, which resulted in a higher NPL ratio and lower capital buffers. These challenges are balanced against Access’s strong track record in mergers and acquisitions, the bank’s fair capital buffers, although now lower and its resilient profitability,” Moody’s noted in the report, released on Thursday, August 8, 2019.

According to Moody’s, Access bank was already burdened with a huge portfolio of Non-Performing Loans when it acquired an overburdened Diamond bank. After the acquisition of Diamond bank in March, Moody’s assigned a Senior Unsecured National Scale Rating (NSR) of A1.ng to Access Bank’s issuance of up to NGN15 billion five-year senior unsecured notes. The Senior Unsecured NSR rating was recently reviewed and downgraded, in line with Access Bank’s other downgraded credit profile ratings.

The report noted that the failure by Access bank to redeem its promise to pay back its $400m Eurobond in 2019 two years early as the bond will no longer qualify as capital for capital adequacy ratio purposes, hence uneconomical to continue to pay interest; has set-off alarm bells in the industry. Banking sources told Huhuonline.com that Access CEO, Herbert Wigwe’s recurring insistence to take final decisions on issues of importance, rooted in “ownership” mentality, irrespective of assessed consequences, have aggravated board politics and might precipitate the bank’s collapse.

With the June deadline to pay back its $200m Eurobond inherited from Diamond bank now passed and gone, Access Bank still needs about N240B to pay the cash due to Diamond Bank’s shareholders and pay the $600m (N216B) due to bondholders of both banks in 2019.  As a consequence, the bank is raising fresh debt of $250m and also embarking on an equity rights issue to generate $200m naira equivalent to enable it pay off these obligations.  

Sources at Access Bank who elected anonymity confided to Huhuonline.com that Wigwe was overly confident that Access Bank will muzzle the delinquent debtors of Diamond Bank to repay their debts. That confidence turned out to be a luxurious desire as the so-called VIP debtors simply ignored Wigwe’s threat to publish their names in an apparent naming and shaming campaign. Access had threatened to publish the names of all its delinquent debtors, associated persons and directors of the entities if they failed to pay up in two weeks. Access Bank stated in a statement on its website that the decision was in line with the directive from the Central Bank of Nigeria (CBN) and advised all debtors (including former Diamond Bank debtors) to pay up their past due obligations in order to avoid punitive actions.

Please note that we shall publish our debtors’ names in newspapers in two weeks. Similarly, in the event that these obligations are not fulfilled, we shall take such further actions against such delinquent individuals and companies as we may consider necessary and shall relentlessly pursue full recovery of all our debts. For incorrigible debtors, who continue to pose a risk to our system, we will use all means available and collaborate with our colleagues in the industry to ensure that they are excommunicated from the banking system. Furthermore, all debtors will be sanctioned by the CBN and banned from participating in the Nigerian Foreign Exchange and Securities Exchange Markets, and registered on the Credit Risk Management Systems (CRMS) Bureau as bad debtors making them, their directors and related entities illegible for any credit in the Nigerian Financial Markets,” the statement read.

Access Bank acquired Diamond Bank in a deal worth more than $90 million. The move, analysts said, may make Access Bank Nigeria’s largest bank by customer size and capital base. Business Insider’s analysis of the deal showed it was worth more than the publicly stated $90 million. Bloomberg news estimated the real value of the deal at a figure around $200 million. For Access CEO, Herbert Wigwe, the “merger” with Diamond Bank and its leadership in digital and mobile-led retail banking, “will accelerate our ambition to become a leading corporate and retail bank in Nigeria and a Pan-African financial services champion. This is a huge step towards the delivery of our goal to bring the power of banking to millions of people across Nigeria and an exciting transaction for Access Bank and Diamond Bank’s customers, staff and shareholders,” he noted in March when CBN sanctioned the hostile take-over.

The Moody’s report also noted that Access Bank’s senior unsecured NSR rating was downgraded “to reflect the potential negative pressures on capital and asset risk metrics as a result of Access Bank’s merger with Diamond Bank Plc.” Moody’s also sounded the alarm that the precarious loan default risks are bound to persist because Access Bank’s solvency indicators have deteriorated and funding metrics have been materially strained by the Diamond Bank merger. Access Bank has a very limited angle of manoeuver to improve its capital position in order to support its larger balance sheet, hence “an upgrade is not likely given that Access’s ratings are on review for downgrade,” Moody’s noted.

The Moody’s report underscored Access Bank’s weak asset quality metrics and relatively fragile loan underwriting standards and risk management processes, insignificant local currency liquidity buffers, and precarious capital buffers; weaknesses which are exacerbated by “Nigeria’s challenging operating environment which negatively affects banks’ asset quality and revenue growth, and concentration risks in the bank’s loan book, including its exposure to loans denominated in foreign currencies.”

The report cited the Central Bank of Nigeria’s (CBN’s) last month’s directive that all deposit money banks (DMBs) should maintain a minimum loan to deposit ratio of 60% by September 30, 2019 to promote investment in the real sector and enhance economic growth. The apex bank also reduced to N2 billion from N7.5 billion the maximum remunerable daily placement by a bank at the CBN Standing Deposit Facility (SDF) at the interest rate prescribed by the Monetary Policy Committee (MPC). At its meeting in July, the MPC retained the monetary policy rate (MPR) at 13.5%, the SDF at 8.5%, the cash reserve ratio at 22.5% and the liquidity ratio at 30%. Obviously, the CBN directive is designed to plump up loanable funds, but the MPR-in-corridor is a strange CBN contraption, which has hamstrung the economy.  

The point must be made and with emphasis that Access Bank does not pay up to 8.5% interest on fixed deposits by customers? Worse still, the remuneration of the SDF is made up of an unmerited fiat printed and inflation-causing subsidy that is doled out on loanable bank deposits, which prospective borrower businesses

and individuals find unattractive owing to Access Bank’s high prime and maximum lending rates. Consequently, with unchanged high MPR, Access Bank will still be unable to serve cash strapped real sector operators with loans under the CBN 60% loan to deposit ratio directive.

The CBN switched focus to boosting economic output post-recession by telling banks to lend more or face a rise in minimum reserve requirements. Access Bank has to walk a tight rope as the bank now poses a systemic risk to the Nigerian economy. Following the hostile takeover of Diamond Bank, Access Bank inherited a 19 million customer-base, comprising 10 million mobile users; 7,000 digital and financial inclusion customers; 277- branch network; and 10.2 million credit/debit cards issued by Diamond Bank. Unfortunately, those assets came with a huge cost to Access bank which also inherited a portfolio of Non-Performing Loans of 12.6%, against 5% industry benchmark, with attendant high impairment charges. Specifically, the huge NPL predisposed Access bank to yearly impairment charges of over N25 billion, with outstanding loans and advances to Diamond customers standing at N749.3billion.

Apart from the assessed poor risk culture, inefficient capital management was also identified as having eaten deep into Access Bank leading to low returns on assets, while cost-to-income ratio is high. Even more worrisome, operating costs of Access bank rose by 6.2 per cent due to foreign exchange rate impact following the devaluation of the naira. Although Access Bank sources said that inherited legacy debts from Diamond Bank remain in the books, there were hundreds of others added by the bank’s current leadership, but worsened by strong defiance of venture into other areas of banking.

While Access bank intends to be the leading retail bank in Nigeria following its acquisition of Diamond, the income from retail cannot accommodate fully provisioning requirements in corporate and business banking. The only option for the troubled Access Bank is to trade its independence by going cap in hand to beg for a bailout by the CBN. The Moody’s report indicated such a possibility was already underway, explaining that the Buhari administration is well aware that Access has become too big to fail. “Access Bank Plc’s (Access) B2 long-term local currency deposit rating incorporates one notch of government support from the bank’s b3 baseline credit assessment (BCA), reflecting our assessment of high probability of government support,” the report concluded.

“Access has a strong track record of acquisition and integration and has a clear growth strategy. Access and Diamond Bank have complementary operations and similar values, and a merger with Diamond, with its leadership in digital and mobile-led retails banking, could accelerate our strategy as a significant corporate and retail bank in Nigeria and a Pan-African financial services champion,” Access CEO, Herbert Wigwe, said in a statement after the hostile takeover of Diamond Bank in March.

It is not easily believable to say that the deal was merger, when Access Bank offered N3.13 per share of Diamond Bank, which was trading at N1.37. If one party is paying the other in cash consideration, by buying the other’s shares, it cannot be called merger; rather it is an acquisition, and in this case, it was a hostile take-over which left the investors of Diamond Bank better as it is, than those of Access Bank, as the load of non-performing loans inherited from Diamond is weighing down Access bank’s lending operations and performance, and as such, a huge threat that could eventually bring the bank down.

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