A fresh round of mergers and acquisition is expected in Nigeria’s banking sector after news of takeovers involving industry behemoths First Bank of Nigeria, the country’s oldest lender, and Zenith Bank Plc surfaced last week.
First Bank is closing in on a deal to merge with Heritage Bank and the troubled Polaris Bank, which is currently under the state asset manager AMCON and has been up for sale since it became a bridge bank in 2018, media reports say. The lender responded in a statement on the Nigerian stock exchange, neither denying nor affirming the claims.
Meanwhile, Zenith, the country’s largest bank by profits and second by assets, is said to have received approval to merge or acquire Union Bank Plc, a medium-sized lender in the country. A deal of such scale would see Zenith regain its position as the largest bank by total assets after falling second to Access Bank with N7.1 trillion.
News of the planned deals come on heels of a recent merger between Access and Diamond Bank in 2018, which birthed the country’s largest bank by customer base and asset. All of this reflects an increase in takeovers of struggling and smaller financiers, paving way for the establishment of institutions with sufficient financial muscle to withstand economic shocks and compete regionally, in line with the central bank’s bid. The regulator last October said seven to nine commercial banks in the country had failed stress test in adequate funding at the end of 2018, while it informed affected lenders to consider merging or sale to prevent a total collapse.
Nigeria has over 20 commercial banks but that figure could shrink significantly with a recapitalization exercise, which has spread to the insurance and microfinance sectors, on the cards. Chances are industry giants – First Bank, Zenith, United Bank for Africa, Guaranty Trust Bank and Access Bank Plc – with a notable disparity in capital, asset and customer bases, would be confident of absorbing several smaller operators.
“I think it is going to be a good thing,” said Tola Odukoya, a financial expert and CEO of FSL Asset Management Limited. “The merger (of First Bank, Polaris and Heritage) to me is welcomed. I am of the opinion that it is better to have 10 percent in a big bank than to have 100 percent in a bank that is drowning.”
More so, reports suggest the Zenith-Union merger could have been started by the Central Bank of Nigeria. Union’s majority shareholder Atlas Mara has been under pressure to exit African markets where it is not the dominant player, creating a headache for the apex bank which would not want to nationalize a bank as big as Union.
As is the norm, there has been no affirmation of the latest mergers at this early stage, and there may not be any until the transactions are cleared by the Securities and Exchange Commission. But analysts say the ongoing evolution in the industry, marked by the creation of a very small circle of big, dominant players, may have adverse consequences on the sector, the economy as well as the provision of financial services in the country.
“If First Bank, with its financial muscle, is able to acquire these other banks that will be good for the country as it will become the biggest bank in the country. But this comes with some drawbacks,” a former Executive Director of Mainstreet Bank, Anor Anyanwu told media outlet Daily Independent, which broke the news of the First Bank merger.
Though mergers are crucial for strengthening the industry and economy in that they save weak banks that fail to meet requirements, larger banks are generally considered more vulnerable to global economic crises because of their size. Moreover, many banks have a regional audience to cater to. Thus, frequent mergers in the banking sector threaten the idea of decentralization and lead to less competition and choice for consumers.
Merging two companies provide the firms with synergies and economies of scale that can lead to greater efficiency and profitability. Sometimes, achieving this requires cost-cutting measures such as downsizing of operations and workforce. In the case of the First Bank merger, job losses may be unavoidable once the transaction is finalized.
“Now that banking is moving away from bricks and mortar branches, some people will lose their jobs and some branches will need to close to achieve profitability,” Anyanwu added on the planned First Bank merger, saying it would lead to a duplication of branches, considering the lender’s country-wide presence.
With mergers come uncertainties and collateral damage affecting workers, shareholders, and customers of the absorbed banks as well as the companies’ varied investments. But beyond this, it is vital for regulators to note that mergers could only give temporary relief but not real solutions to problems like bad loans. And the creation of banks with huge magnitudes could lead to a “too big to fail” problem in the event of an economic crisis.