The Central Bank of Nigeria (CBN) has approved the merger between Providus Bank and Unity Bank. The announcement was made by the Acting Director of Corporate Communications, Hakama Sidi, on Tuesday.
It read: “The Central Bank of Nigeria (CBN) has granted approval for a pivotal financial accommodation to support the proposed merger between Unity Bank Plc and Providus Bank Limited. This strategic move is designed to bolster the stability of Nigeria’s financial system and avert potential systemic risks.”
This approval is noteworthy as it is the first merger endorsed by the CBN following its directive for financial institutions to increase their minimum capital requirement.
Key Parties Involved:
- Unity Bank Plc: Started operations in 2006, formed from the merger of nine banks.
- Providus Bank Limited: Started operations in 2016.
- Central Bank of Nigeria (CBN): The regulatory body overseeing the merger and providing financial support.
There have been strong indications for over a year on plans by Providus Bank Limited to acquire a majority stake in Unity Bank Plc. The development has been part of Providus Bank’s expansion plan and, importantly now, a bold initiative to shore up its capital base amidst the current recapitalization challenge.
Unity Bank commenced operations in January 2006, one of Nigeria’s retail banks with 213 business offices spread across the 36 States and Federal Capital Territory. In 2018, there was a botched move by Milost Global Inc., a New York-based private equity company to invest $1billion in the bank and since then the bank has been seeking a partner. It recently posted negative results in its released financials for the 9-month period ended September 30, 2023.
FINANCIAL SUPPORT TO COVER UNITY BANK’S TOTAL OBLIGATIONS
The statement also noted that the financial support provided by the CBN was important for addressing Unity Bank’s total obligations to the Central Bank and other stakeholders.
According to the statement, the CBN’s action aligns with the provisions of Section 42 (2) of the CBN Act, 2007. The statement noted:
“The merger is contingent upon the financial support from the CBN. The fund will be instrumental in addressing Unity Bank’s total obligations to the Central Bank and other stakeholders. It is unequivocal to state that the CBN’s action is in accordance with the provisions of Section 42 (2) of the CBN Act, 2007. This arrangement is crucial for the financial health and operational stability of the post-merger organization.”
In a separate letter addressed to the Managing Director of Unity bank, The CBN approved a financial package worth ₦700billion to support the proposed merger between Unity Bank Plc and Providus Bank Limited. It outlines a 20-year term loan designed to ensure the operational stability of the merged entity, Interest Rate as MPR (Monetary Policy Rate) minus 11%, with a minimum rate of 6% and Repayment to be semi-annual, with a principal moratorium of five years (meaning no principal payments are required for the first five years), and from the sixth year, a repayment of 15 equal installments until maturity.
It requires that Unity Bank’s settle existing obligations of ₦303.70billion from the bailout funds. The obligations include;
- ₦92billion exposure from First Bank of Nigeria related to clearing obligations,
- ₦51.70billion financial accommodation from the CBN underthe Anchor Borrowers Programme.
- Others include ₦135.00 billion obligationto NIRSAL (Nigeria Incentive-Based Risk Sharing System for Agricultural Lending).
These obligations will be deducted from the ₦700 billion financial accommodation. The remaining balance of ₦396.30 billion from the financial accommodation will be invested in a 20-year Federal Government of Nigeria (FGN) bond.
The letter also states that Unity Bank’s current Cash Reserve Ratio (CRR) shortfall of ₦117.90billion will be waived ensuring that Providus Bank’s CRR balance post-merger will serve as the opening balance for the new entity.
BENEFITS OF THE MERGER
- Enhanced Capital Base: The merger will result in a stronger capital base for the bank. This is crucial for any bank’s stability and growth, as it allows for more lending opportunities and the ability to absorb potential losses.
- Diversification of Services: With the merger, the bank can offer a more diverse range of services. This diversification can attract new customers and meet more of the existing customers’ needs.
- Operational Synergies: The merger can lead to operational synergies, where the combined operations of both banks can be more efficient than they were separately. This might include streamlining administrative processes and leveraging technology for better customer experiences.
- Risk Management: A larger, merged bank can manage risk more effectively. With a broader asset base, the risks are spread out, which can lead to greater stability in the face of economic fluctuations.
- Strategic Growth: The merger can be a strategic move for growth, allowing the bank to compete more effectively in the Nigerian banking sector and potentially expand into new markets.
- Compliance and Regulatory Approval: Meeting the CBN’s regulatory requirements is a significant benefit. A merger is an effective way to comply with these regulations, which might be challenging for smaller banks to achieve independently.
In a joint statement signed by the management of Providus Bank and Unity Bank, the companies said the proposed merger represents a strategic and complementary union that will leverage the strengths of both banks to create a leading financial institution in the industry with footprints in retail, corporate, commercial, and digital banking. The statement read;
“The combination is driven by a shared vision to provide an unparalleled banking experience to our customers. By combining Unity Bank’s extensive branch network and deep-rooted customer relationships with Providus’s digital prowess and innovative spirit, we aim to deliver a seamless blend of traditional and modern banking services.
Our customers will benefit from an expanded suite of products and services, greater convenience, and improved access to banking solutions across various channels. The integration of our digital platforms will offer enhanced security, faster transactions, and a more personalized banking experience.”
MARKET IMPACT
The newly merged bank is expected to play a significant role in the Nigerian financial market, leveraging its strengthened position to drive growth and innovation. The merger sets a precedent for future mergers in the Nigerian banking sector to meet the CBN requirements, highlighting the importance of strategic mergers to enhance financial stability.
The CBN also emphasized that no Nigerian bank currently faces a precarious situation comparable to that of Heritage Bank, which was recently liquidated. Note that Heritage Bank’s license was revoked after efforts to find a buyer were unsuccessful.
“The CBN remains committed to safeguarding depositors’ interests and ensuring the smooth functioning of the banking sector through proactive measures and strategic interventions. The CBN’s decision underscores its dedication to maintaining financial stability and promoting confidence in the banking system during this transformative period,” the Central Bank said.
MARKET SENTIMENTS
Several key players in the Banking Industry gave their opinions on the merger, stating that it was a good move to restore faith in the public, opposed to a situation where two banking licenses would be revoked, in reference to the Heritage Saga.
While it might seem like a biased position that the CBN gave out bailout funds to Unity Bank in contrast to its earlier stance of operating a different system of allowing low-performing banks to close down, it is noteworthy that the situation with Heritage Bank in Nigeria is primarily related to financial performance issues, its inability to improve financial performance and inability to find a buyer, which posed a threat to the sector’s stability.
In contrast, Unity Bank found a buyer in Providus, which indicates that its circumstances were different, due to the fact that its financial position was not as precarious as that of Heritage Bank or possibly, that it possessed a more attractive business model for potential buyers.