Access Bank, FCMB & Ecobank Nigeria; how much better are they after acquisition?

Dear Africa Interested Individuals:

                                                         Six years ago, Lamido Sanusi (then CBN governor) used his executive powers to take over control of 8 banks in two batches.  Six of the eight banks were later on sold to other existing banks while one was sold to a core investor who recapitalized it and the other is still awaiting sale by the Asset Management Company of Nigeria.

I remember being on a conference call four years ago with Access Bank CEO when the acquisition of Intercontinental Bank was announced.  Size and the capabilities it provides clearly stuck out as the driving force behind the acquisition.  So, four years on, how is the merged entity doing compared to when either bank was independent and immediately after the merger?  Given that size is most clearly evidenced by assets and performance is most clearly evidenced by profit, the ratio pre-tax income to assets will guide our discussion in this article.    

Access Bank was a much smaller bank than Intercontinental Bank when it took over the bank in 2011.  As at Q1, 2008, Intercontinental Bank was 40% larger than Access Bank.  The pre-tax income of Intercontinental Bank as February 2008 was approximately 150% larger than that of Access Bank as at March 2008.  Revenue of Intercontinental Bank was about 200% more than that of Access Bank over the same period.  Despite this, Access Bank only increased its outstanding shares by 27.9% to acquire all of the Intercontinental Bank Group.  This implies that Intercontinental Bank shareholders were given 1 share of Access Bank for every 3.6 shares of Intercontinental Bank they owned.  

For FY 2010, Access Bank (alone) achieved pre-tax income equivalent to 2% of its assets.  Intercontinental Bank achieved pre-tax income equivalent to 3.3% of its assets as at February 2008.  Access Bank achieved 1.8% as at March 2008.  FY 2012, (the first full operating year as a merged bank) Access Bank (merged) achieved pre-tax income equivalent to 2.57% of its assets and by FY 2014 (two years later) this had dropped by ten basis points to 2.47% despite assets growing by approximately 21%, pre-tax income only grew by 16% point-to-point.  Access Bank has been able to extract more pre-tax income from its merged assets than alone.  It has not been able to achieve the height of the bank it acquired that extracted 3.3% pre-tax income from its assets.  In addition, the merged entity has slightly regressed in extracting profit from its assets as the merged entity became more solidified over time.  The pre-tax income of the merged Access Bank for FY 2014 is only 14% larger than that of Intercontinental Bank for FY February 2008.  Access Bank did improve itself by acquiring Intercontinental Bank; no doubt about it.  Access Bank added less value to itself as a merged entity than it destroyed through the combination of both banks in my opinion.  I will not be able to explain this further for sake of time.  

First City Group fully acquired Fin Bank in 2011/2012.  First City Group (FCMB alone) achieved pre-tax income of N20.5B as at April 2008.  As at December 2014, FCMB merged achieved pre-tax income of N23.9B.  Over an almost seven-year period and three years after taking over Fin bank, FCMB's merged pre-tax income only increased by N3.4B.  As at April 2008, FCMB alone achieved pre-tax income equivalent to 4.4% of its assets.  This declined to 1.68% as at December 2010 and became negative in FY 2011 as FCMB declared a loss.  As at April 2007, Fin Bank achieved pre-tax income equivalent to 1.8% of its assets.  As at FY 2012, FCMB (merged entity)  achieved pre-tax income equivalent to 1.8% of its assets which is the same as Fin Bank alone in 2007.  As at December 2014, FCMB achieved pre-tax income equivalent to 2.05% of its assets.  Overall, FCMB has done better on its own at a point in time; it has not even come close to achieving this as a merged bank.  

FCMB's performance alone was in rapid decline just before the acquisition of Fin Bank was completed.  The acquisition of Fin Bank helped FCMB to smoothen over the cracks in its operations just in time in my opinion.  The merged FCMB has improved its ability to extract pre-tax income from its assets by 26 basis points (1.79% - 2.05%) from FY 2012 - 2014.  The merged entity has progressed; FCMB (alone) has been set back by the merger in my opinion and has also lost its identity in the process.  FCMB, based on its increase in outstanding shares, granted Fin Bank shareholders 1 share in FCMB for every 6.7 shares held in Fin Bank.  FCMB was 5% larger than Fin Bank as at April 2008; Fin Bank's deposit base was 56% larger than that of FCMB as at April 2008 (N391B vs N251b.)  Both banks had an April fiscal year-end at the time.  Fin Bank was taken over by the CBN and eventually FCMB one year after successfully raising about N90B ($750m at the time) in a hybrid equity offer which was formally approved by the SEC in August 2008.     

Ecobank Nigeria acquired Oceanic Bank.  Oceanic Bank as at September 2007 was 134% larger than Ecobank Nigeria (alone) as at December 2010 in terms of assets.  Oceanic Bank achieved pre-tax income equivalent to 2.2% of its assets as at September 2007.  Ecobank Nigeria as at FY 2010 (the last fiscal year as a single entity) achieved pre-tax income equivalent to 0.48% of its assets.  For FY 2011, the first year as a merged entity, pre-tax income equivalent to 1.66% of its assets was achieved. This declined to 0.4% in 2012 and 1.62% in FY 2014 which is still below the figure achieved for the first year of the merger in 2011.  Oceanic Bank alone achieved pre-tax income of N23.1B as at September 2007.  The merged entity (Ecobank Nigeria & Oceanic Bank) achieved pre-tax income of N28.7B as at December 2014 which is seven years later and three years after the merged entity commenced operations.  

The merged entity has regressed from its starting point in 2011, while Ecobank Nigeria has added less value to itself as a merged entity than was destroyed through the merger of both banks in my opinion. Drastic cost-cutting measures are currently being undertaken at the Nigeria unit of ETI in the group's quest to extract value from its largest cluster which is still huffing and puffing three years after acquiring a bank more than double its size.  Ecobank Nigeria's assets increased by 144% after acquiring Oceanic Bank in 2011 and have increased by a further 63% since then.  The pre-tax income of the combined bank as at December 2014 is only 25% larger than that of Oceanic Bank as at September 2007. 

All three acquisitions are transactions of circumstance instead of transactions of discovery like Lafarge and Holcim.  All three merged banks are bigger as expected, but not better (more financially efficient.)  In no situation, has the combined entity been able to extract pre-tax income relative to asset base more than at least one of the parties alone pre-merger.  Sometimes in life, what is available is not necessarily what is needed.  

And with this, I sign out from FREE Africa Research blogging.  It has been an interesting and fun journey.  For those clamoring for the continuity of the status quo, find someone that is willing to bankroll the blog on an annual basis for the benefit of everybody and contact me.  There should still be some big shots out there that stand for something good.   

                               The TRUTH can be bullied, but never defeated. Remain blessed.      

                                          The Real Understanding of The Hegemon