Zenith Bank Plc has reportedly been given the green light to merge or acquire Union Bank Nigeria Plc.
According to a reliable source, talks are on-ongoing between parties from the two commercial banks and a tentative arrangement may have been reached to commence due diligence.
Reports from Daily Independent suggest Nigeria’s oldest bank FirstBank was also on track to merge or acquire Polaris and Heritage Banks respectively. The bank issued a press release on the Nigerian stock exchange that did not deny the claims but also did not confirm if it is true.
Zenith Bank Plc which presented its 2019 full-year audited financials through the Nigerian Stock Exchange last week in line with the post-listing requirement of the Nigerian Stock Exchange, as well as global best practice in good corporate governance practice.
The timely presentation is expected to allow investors and traders to plan and take investment decisions about the future performance of the bank.
Comparatively, the earnings report came slightly late, when compared to the presentation date of the 2018 numbers.
Union Bank owners Atlas Mara with a 49% stake has been under pressure to exit their African holdings.
Last year (February), Atlas Mara co-founder Bob Diamond announced he was resigning his post as Chairman of the company. The company said it was looking at selling off banking assets in countries where it was not the dominant player.
Earlier in January, Union Bank sold its United Kingdom subsidiary to MBU Capital Limited. The London-based management investment firm acquired Union Bank UK after emerging as the most preferred bidder. According to the bank, “This sale is aligned with Union Bank’s strategy to geographically streamline its business operations to focus on growth opportunities in Nigeria.”
Union Bank also recently raised N20 billion in series 3&4 commercial paper after successfully raising N24.3 billion through the issuance of the Series 1 and 2 of its N100 billion commercial paper programme.
We believe for Zenith Bank a potential merger could be for two main reasons. Firstly, a merger firmly solidifies Zenith Bank’s position as the largest bank by total assets after falling second to Access Bank with N7.1 trillion. It also gives Zenith Bank control over several juicy assets and right of ways owned by Union Bank from its legacy years.
It could also have been instigated by the CBN, which cannot phantom another nationalization of a bank the size of Union Bank. Sources inform Nairametrics that the apex bank is favourably disposed to this move.
CBN directive on capital base
Last year, Central bank Governor Godwin Emefiele gave a directive on commercial banks’ minimum capital bases are now insufficient because of the sustained slump in the value of the oil-dependent nation’s currency, the naira.
Following an oil price slump in 2014 and the ensuing recession and currency crisis, the country’s banks have been wary of extending loans to the real economy, preferring to tie their money up in safer treasury bonds.
To deter this practice and ramp up growth, the Central Bank said July 3 that banks would need to maintain a loan-to-deposit ratio of 60% by the end of September, and that those failing to do so would face “a levy of additional cash reserve requirement equal to 50% of the lending shortfall of the target [ratio].”
The Central Bank’s move to force banks to lend more is “significant because over the past two years we’ve seen banks develop apathy in terms of credit creation, which has hampered domestic economic growth,” said Jerry Nnebue, an equities analyst at CardinalStone, an asset management firm in Nigeria’s commercial capital Lagos.
“Banks have tended to overly concentrate their liquid assets in money markets and treasuries, so the central bank is trying to force banks to lend more to the real economy in order to accelerate growth.”
This “rush” to expand lending just to meet regulatory requirement may increase banks’ nonperforming loans because of the fragility of the economy, said Ayodele Akinwunmi, head of research at FSDH Merchant Bank in Lagos.
“Banks may sell down some of their fixed income securities in order to meet new loan requirement. This may increase the yields on the fixed income securities while the prices drop.”
“Nigerian banks also operate in very risky environments, so that requires bigger capital buffers to protect lenders against economic volatility and credit losses. It’s the price of doing business in Nigeria and other high-risk economies.”
Ayodele Akinwunmi, head of research at FSDH Merchant Bank in Lagos, said the planned capital increase was motivated by a desire to ensure that credit flows through the economy more easily.
Higher capital requirements
CardinalStone’s Nnebue also said raising minimum capital requirements for banks makes sense given that efforts to increase loan-to-deposit ratios “could drag some banks on the capital adequacy front.”
Emefiele told local media in June that banks’ minimum capital bases were insufficient due to the sustained slump in the value of the Nigerian naira since the last increase in capital requirements in 2005. It has fallen to 364 naira to the dollar as of Aug. 20, 2019, from 138 naira in August 2005. According to local newspaper Vanguard, new capital base requirements for national banks and those with international licences could increase to 57 billion naira and 230 billion naira, respectively.
Union Bank Results; In a notification that was sent to the Nigerian Stock Exchange (NSE), the banking group recorded a 10.3% growth in profit. The profit before tax as of December 31, 2019, was N20.35 billion as against the N18.45 billion that was achieved for the corresponding period for 2018.
Zenith Bank, on the other hand, reported a record profit after tax N208 billion out of a gross earning of N662 billion. Zenith Bank’s net assets of N941.8 billion dwarfs Union Bank’s net assets of N252 billion as of 2019.
Union Bank share price closed at N6 with a market cap of N174 billion as on Friday, March 13th. Zenith Bank closed at N11.90 or N373 billion and trading at a price to earnings multiple of 1.79 compared to Union Bank’s 7.28x.