N700bn Financial Support To Aid Unity, Providus Banks’ Merger

Following the proposed merger between Unity Bank Plc and Providus Bank Limited, capital market stakeholders have said this will lead to a strong synergy.

The Central Bank of Nigeria (CBN) has granted approval for a pivotal financial accommodation to support the proposed merger between the Banks. This strategic move is designed to bolster the stability of Nigeria’s financial system and avert potential systemic risks.

The CBN in its first bailout under Olayemi Cardoso, is giving out N700 billion financial support towards the merger between Unity Bank Plc and Providus Bank Limited.

The two banks, which have been working on a merger since last year, had on Tuesday gotten approval of the apex bank for a financial accommodation for the stability of the new entity that will emerge from the union.

A letter to the banks detailing the terms and structure of the financial accommodation, outlines a 20-year term loan designed to ensure the operational stability of the merged entity. According to the document, the N700 billion 20-year loan will have an interest rate of Monetary Policy Rate (MPR) minus 11 per cent, with a minimum rate of six per cent.

Payments will be semi-annual with a principal moratorium of five years, meaning no principal payments are required for the first five years. Starting from the sixth year, the new entity will repay the loan in 15 equal instalments until maturity.

The terms also require that Unity Bank settle existing obligations of N303.7 billion from the bailout funds. This includes a N92.00 billion exposure from First Bank of Nigeria related to clearing obligations, Another N51.70 billion financial accommodation from the CBN N25 billion under the Anchor Borrowers Programme.

Others include N135.00 billion obligation to NIRSAL (Nigeria Incentive-Based Risk Sharing System for Agricultural Lending). These obligations are to be deducted from the N700 billion financial accommodation.

The remaining balance of N396.30 billion from the financial accommodation will be invested in a 20-year Federal Government of Nigeria (FGN) bond.

The investment will qualify as a Tier 2 capital instrument, contributing to the shareholders’ funds of the new entity. Asides these, Unity Bank’s current CRR shortfall of N117.90 billion will be waived ensuring that Providus Bank’s CRR balance post-merger will serve as the opening balance for the new entity.

Commenting on the merger, managing director/CEO, Sofunix Investment & Communications, Sola Oni said the key issue about the merger is synergy, saying looking at the comparative advantage of Bank A and Bank B.

He added that given the current situation in the country, especially the directive by the Central Bank that banks should capitalise, we are definitely going to witness a series of mergers and acquisitions, particularly mergers.

“The primary goal is to have an entity that is stronger and that is able to meet the minimum capital requirement. But for now, in order to really have more information on this measure, one needs to look at the scheme of arrangement,” Oni said.

Speaking on this, the vice president, Highcap Securities Limited, David Adnori stated the merger between Unity Bank and Providus Bank is a good combination. Both of them are small banks and there could be some synergy in the proposed merger.

He pointed out that if the assets and resources are combined, then they will get stronger.

The managing director of APT Securities and Funds Limited, Mallam Kurifi Garuba stated that this is a merger imposed by the regulator, and nobody knows the bank more than the regulator.

“So, since CBN decided to merge them, they have the wisdom, and they know why they decided to do it that way. It is common knowledge that Unity Bank has been in negative shareholder funds year after year.”

Kurifi explained that “even after the merger, CBN said they are going to refund $700 million to be paid in 15 years with a moratorium of five years. This tells us how bad the situation is, but CBN wants to save the financial system, so they decided to do that.”

He noted that “if the bank is liquidated, the shareholders will lose their investment. But with this merger, the shareholders will not lose their investment. They will get something. So, for us in the capital market, we welcome the merger.

He added that rather than liquidating the bank, like what happened to Heritage Bank, merger is a good decision.

The managing director of Lancelot Ventures Limited, Mr Adebayo Adeleke stated that “I think the merger signifies a very good way to go, especially with the backdrop of the recapitalization programme of CBN.

“So definitely for those who have been very keen watchers of the capital markets, especially the banking sector, Unity Bank has actually been on some form of life support. And if not for some very strong and highly influential shareholders, the regulatory arm will have fallen on it a long time ago.”

Adeleke emphasised that “CBN has given Unity Bank so much room and forbearance, and with the recapitalization exercise, this is a good option for the Bank.

“So, we believe that there should be a level playing field for all banking operators and CBN is in a position to provide that level playing field. However, we also look at the fact that banking is a very delicate industry, and people’s life savings are involved, talking about depositors.”

He added that for depositors not to lose confidence in the banking industry, I think a merger proposal is the way out and we should also be looking forward to seeing more of such mergers over the next one or two years.

Unity Bank is a listed Company with a share price of N1.51 per share as at August 7, 2024, with 11.689 billion outstanding shares on the Nigerian Exchange. While Providus Bank is a limited Company.