How bank mergers can work

Across the world, bank mergers or acquisitions are supposed to create added synergy. In our part of the world, however, they are often undertaken out of necessity.

I was a member of the global acquisition team with Andy Prebble when Standard Chartered Bank acquired ANZ Grindlays Bank, and later worked with Peter Sullivan on post-merger integration, especially asset and liability amalgamation. For us at Standard Chartered, the acquisition was of significant strategic importance. After the merger, we focused on systems, processes and platform integration, along with raising profitability through stronger client ring-fencing and improved risk management.

The most recent merger proposal in Bangladesh reflects a pressing need for action due to the Bangladesh Bank's determination to instil discipline and oversight in a financial sector plagued by irregularities. Reports suggest the central bank has plans to merge ten banks, beginning with five Islamic banks.

Mergers are often seen as tools to strengthen the banking sector. By consolidating resources, expertise and market presence, merged entities can achieve economies of scale, enhance efficiency and diversify product offerings. This is particularly relevant in Bangladesh, where 61 scheduled banks operate, yet 10 to 20 are considered weak due to poor governance and loan irregularities.

The challenges are significant, especially for stronger banks. Integrating different cultures, systems, and processes can be complex and may divert management's attention. Technology integration is also tricky. On top of this, assuming the liabilities of weaker banks, including their non-performing loans (NPLs), could strain the balance sheets of relatively stronger entities.

Valuation lies at the heart of any merger, with clear consequences for shareholders. Shareholders of stronger banks may have to absorb weaker banks' lower valuations, take on their NPLs and accept lower dividends due to weaker performance.

One of the most discussed cases in Bangladesh was the proposed merger between Padma Bank and EXIM Bank, for which a memorandum of understanding was signed under the previous government. Although the government pushed for it, many analysts, including the World Bank, said it could be premature and questioned whether it would succeed.

After that, discussions arose about absorbing the ICB Islamic Bank into a stronger institution. Frozen deposits, capital shortages, high default loans and liquidity crises had all contributed to its fragile position. History shows that mergers alone do not guarantee success. The formation of the Bangladesh Development Bank Ltd (BDBL) after merging the Bangladesh Shilpa Bank and the Bangladesh Shilpa Rin Sangstha is a reminder. Despite consolidation, BDBL still struggles with default loans.

Neighbouring India offers more examples. In 2021, ten public sector banks were consolidated into four, with the objective of strengthening the economy, improving profitability, cutting non-performing assets (NPAs), improving efficiency and widening the branch network. In Sri Lanka, plans were made to merge small and mid-sized banks in pursuit of similar synergies.

To navigate the complexities of mergers, regulatory oversight, and stakeholder engagement is essential. Regulators must enforce strict guidelines, safeguard depositors and investors, and ensure healthy competition. Transparency and effective communication are also vital to managing expectations.

Beyond regulation, success depends on careful planning, robust risk management and effective post-merger integration. While the central bank, the ministry of law and even higher courts may play important roles, day-to-day operations must be entrusted to experienced commercial bankers who can bring everything together.

The writer is a banker and an economic analyst