About bank merger, experts are more critical than optimistic

Experts in the banking sector send out messages of caution for any merger between strong and weak banks as part of financial sector reforms announced by the Bangladesh Bank.

The BB governor in a recent meeting asked managing directors and chief executive officers of the country's public and private banks to prepare for mergers, but industry representatives say such attempts will give rise to issues surrounding non-performing loans, capital adequacy ratio, use of resources, dilution of earnings, liquidity, and many others.

Unless the authority pays heed to the matters and helps solve them by giving policy support and unless a merger is deemed benefiting for both the parties, the reform will hardly bear any fruit, experts say.

And there are examples of mergers that went in vain.

Earnings of a transferee bank, which will get the ownership of the other bank or transferor, will be diluted after the merger, said Mohammad Ali, managing director of Pubali Bank.

In consequence, existing shareholders of the transferee will be likely to be deprived of due dividends. "Shareholders may seek legal remedy," said Mr Ali.

The transferee may also face the risk of not meeting the required capital adequacy ratio.

For example, if a bank having a negative capital adequacy ratio of 1 is merged with another one with capital adequacy ratio of 15, the capital ratio of the entity coming out of the merger will be 7. But banks must have minimum capital adequacy of 12.5 as per Bessel-III.

If a bank's capital adequacy falls below the stipulated level, it will face difficulties, for example in L/C (letter of credit) opening, added Mr Ali.

The party that had good reputation before merger may also see it falter.

The most important and difficult job will be to track down rescheduled assets of the troublesome banks, according to Mr Ali.

While talking to the FE, Managing Director of Mutual Trust Bank (MTB) Syed Mahbubur Rahman insisted that the reform plan will only be enforceable if well-performing banks see any opportunity of gains from the scheme.

"Tax benefit may be one but the capital shortfall of a transferor company will be a big concern."

According to the BB, around 40 of 61 banks in the country have been performing well, but the remaining 21 are weak and may be subject to mergers and acquisitions.

The BB already introduced 17-point Prompt Corrective Action (PCA) for the weak banks, establishing benchmarks for various financial indicators. Banks failing to meet the standards would be subject to penalties and mergers.

The indicators will be evaluated based on the financial reports for 2024, and by March 2025, weak banks will be identified, said the BB.

Before the execution of a merger plan, the transferee company will conduct a third party audit to assess the asset base of the transferor.

The post-merger entity will also go for lay-offs as it will not need resources of both the transferee and the transferor.

For example, if a branch of the transferee and the transferor each is located in a particular area, one of them may be closed. Similarly, ATM booths may become redundant.

"So, a conflict will arise if the central bank does not allow job cuts," said Mr Rahman.

Against the backdrop, well-performing banks will put up resistance against such a reform and will only feel forced to take measures if instructed by the central bank.

The objective of any merger is to drive up revenue, reduce costs, and improve operational efficiency, but in this case the BB's main target is to cut down non-performing loans that have built up over time due to corruption, mismanagement and lack of governance.

At present, average NPL ratio is 5.93 of private banks and 21 of state-run entities. The BB aims to bring industry average NPL ratio to less than 8 per cent from 9 per cent.

Lessons learnt

Bangladesh Shilpa Bank merged with Bangladesh Shilpa Rin Sangstha to form Bangladesh Development Bank in 2009.

In the last 14 years, the bank could not reduce non-performing loans.

The lender's bad loans grew 2.63 per cent year-on-year to Tk 9.32 billion last year, which was 42.46 per cent of the bank's outstanding loans as of December 2023, much higher than the industry average, according to the BB data.

Shamima Nargis, chairman of Bangladesh Development Bank, in the annual report for 2022 said the lender's huge non-performing loans were a major barrier to income generation.

[email protected], [email protected]