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Weighing the viability of the proposed FBN merger

After we got people to read our FUGAZ story on the state of Tier 1 Nigerian banks, we deservedly got smoked from a certain corner of the internet. Yes, people with understandable vested interest in First Bank felt our article was unfair by disregarding FBN’s position and our summation that it is truly no longer the first in Nigeria and it’s only a matter of time before it is disassociated from the fUGAZ league.

Well, well, well… FBN finally released their full year report (PBT: N83.5Bn) for fairness’ sake we will have someone else review the performance that took so long to be released, and how our initial synopsis on them might be true. Sksksksksksksksk.

PS: This may be more technical than the previous post.

Introducing Tuslow

Firstbank of Nigeria Limited (FBN) used to, for many decades, be Nigeria’s biggest bank in terms of both assets and profitability. This position has however been steadily eroded in the last decade due the a combination of FBN’s stagnation and with the explosive growth of players such Zenith, GTB and Access bank.

FBN’s profit after tax for 2018 (40 billion NGN) ranked number 6 in the industry (behind all the other 5 tier 1 banks, and Stanbic IBTC which is considered a tier 2 player).

It is now so far behind the likes of GT and Zenith that reclaiming its spot at the summit of the Nigerian banking industry would be difficult by organic growth alone.

News emerged last month that FBN would be making a move to acquire Heritage and Polaris banks and many saw the statement released by FBN afterward (which did not confirm nor deny the rumors) as confirmation that things were already being put in motion.

Falling Behind

No longer the first? Oops

FBN has in the last 10 years, seen its previously commanding lead in the banking sector erased, from customer base, to gross earnings and profit.

Looking at the numbers from 2010 and comparing them to that of Zenith and GT Bank, some of the reasons for this become obvious.

*FBN only reported financial data for the first 9 months of 2010

FBN was the market leader in terms of asset base, gross earnings and profit in 2010, but from 2011, their problems became apparent. Their large revenue was not translating into enough profit. In terms of profit after tax (PAT), the gap between Zenith & GT and FBN has only continued to grow, this despite FBN earning more revenue than Zenith (until 2017) and making N118Bn more than GT in 2019. This points to operational inefficiencies.

A look at the profitability and efficiency ratios paint an even gloomier picture.

As a matter of fact, looking at this data, one can’t help but marvel at the lean mean machine that is GT Bank. It consistently punches above its weight, raking in profits far higher than FBN and almost as much as Zenith despite having far lower total assets, customer deposits gross earnings. Its efficiency (and FBN’s inefficiency) is seen when looking at ROA and NPM. It is able to translate more than 40 percent of earnings to profit by keeping operating costs down and maximizing the use of its assets.

Another drag on FBN’s profitability has been poor lending decisions. Since 2015, the bank has expensed out over half a trillion in impairment charges. The 2015 oil price crash and recession hit the entire banking sector hard, but none more than FBN. Impairment charges on the income statement were a whopping N226Bn in 2015. Zenith and GT on the other hand were much less impacted by the recession and still managed to grow profits during that period, this is presumably due to better credit policies than FBN.

FBN’s Proposed Solution For Catching Up

It is now clear that it would be difficult for FBN to become number 1 again through organic growth, which is probably why it is seeking to do so through acquisitions. If FBN were however looking cautionary tales on how acquisitions could go wrong, it need look no further than Polaris and Heritage.

Polaris Bank (formerly Skye Bank) acquired Mainstreet Bank in 2014 and that acquisition, along with very poor corporate governance practices -over N100Bn in loans granted to the former chairman of the board, and $6.8m diverted by him to his law firm- led to its downfall(lol birds of a feather lol).

After acquiring Mainstreet bank, Skye went from position of N10Bn PAT in 2014, to a loss of N40Bn the following year. These actions prompted the CBN to take over and inject over 1.5 Trillion into the bank. They have finally released their 2019 figures (N27.8Bn), and it looks like the bank’s position has been stabilized(for now).

Heritage Bank Limited (HBL) is another one that has reportedly struggled after acquiring more problems than it could handle (in the form of Enterprise Bank). HBL has not released financials since 2015, however, last year, investigation by Proshare found some of the problems of the bank to include:

  • High amount of NPLs
  • Half year loss before tax for 2018 of N38.5bn and loss for the month of December of the same year of N4.4bn
  • A debt to equity ratio of -0.17, with a negative shareholder’s fund position.

The investigation also revealed that HBL is fraught with corporate governance issues, with directors “allegedly involved in a series of poor performing insider loan transactions, and little known about such resolutions”(and yet they’re donating billions? Hmmm)

Verdict

FBN acquiring these 2 banks would surely shoot it to number 1 position in terms of total assets and customer deposits, but it is hard to see any benefits after that. Strategic mergers and acquisitions generally only yield positive results if the synergies gained from the transaction are greater than the costs, and looking at these potential acquisitions, I only see more costs that would weigh the bank down long term with very little in term of synergies. FBN would be better served by first solving its operational inefficiency and then pursuing healthier M&A opportunities.

Stay safe and wash your hands.

Witten by Tuslow

Edited by JS and Okiki.

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Jay Skywalker

Jay Skywalker

I can be found on the corridors of Finance and Technology, empowerment through education and fostering political harmony in Nigeria. These are notes to myself.