Take overs and Mergers

What the bank managers say

Mr. Rienzie Wijetilleka - CEO Hatton National Bank

• What is your opinion about mergers between public quoted banks in Sri Lanka?

A: It is a must. If we want to fall in line with the rest of the world, we should go for mergers.

• Will it increase profitability and will it facilitate technological innovations in the banking arena?

A: Undoubtedly yes. If a small institute joins with a larger institute, then the strength of the strong one will go to the weaker institute.

For example, say we have one branch in Nugegoda and Commercial Bank also has one. Both branches have 25 computers and 25 staff each. If we merge we don't need so much technology, our costs will be much less, we will be saving foreign currency to the country.

Together we can do much more business than we did alone, from one side our overheads will come down and our services will be expanded. It is simple logic.

• Will mergers help some banks to obtain capital to fulfil the capital adequacy requirement?

A: It will help definitely, if a weaker bank and a stronger bank get together. The bigger asset base of the stronger bank will definitely help the weaker bank to maintain the capital adequacy requirement. This is happening everywhere in the world. Today in Colombo Standard Chartered and Grindlays are going to work together by combining their resources and strength, they will definitely be a force to be reckoned with.

• The present Banking Act does not facilitate mergers, Should it be changed?

The question is the restrictions in the Banking Act about maximum shareholding. I am sure that the Central Bank authorities will have a new look at the situation if banks put pressure on them. If they say "We would like to merge," the Central Bank will fall in line. It is a progressive statement, and the country will benefit from the change, I am sure the Central Bank will realise the matter and amend the Act.

• Do you think that the Central Bank should be the sole authority to decide on mergers?

I don't agree with that. The management of the bank planning to acquire the other bank should put a feeler first to the other bank's management and if it fails they should get their directors to think alike. If the bank in question has no way of approaching the other bank, then they should tell the Central Bank to act as an intermediary. The unfortunate thing about some small local banks is that there are some directors who are not shareholders, who oppose such mergers because they fear for their positions.

• Is there a trend in international banking arena towards mergers?

A: There are many mergers taking place, Lloyds bank has merged with TSB, In USA many mergers are taking place. In Sri Lanka people do not see the value of mergers because they haven't seen banks failing and collapsing. The economy of this country does not provide large amount of business, mergers will prevent single banks from facing disastrous situations.

• How will customers and shareholders benefit from a merger?

A: Customers will benefit from the better service. Shareholders will benefit from the reduced cost base and higher return for shareholder funds.

• What will be the effect on employment.?

I cannot see a situation where any professional banker is out of job in this country. There are plenty of employment opportunities in this country for bankers.There is no question about redundancies at this moment.

Anil Amarasuriya - CEO Sampath Bank

• What is your opinion about mergers between public quoted banks in Sri Lanka?

There should be a positive outcome arising out of the merger to the end user. Customers should benefit, shareholders and employees should benefit. If all three parties are going to benefit, then a merger can be pursued. On the surface you cannot say a merger will work. A merger between A&B might work but it might fail between A&C. Without going into each case individually you cannot predict the outcome. If two general players get together it will not benefit the industry. The same with two niche players getting together.

• Will it increase the profitability of the two banks merging?. And will it enhance the technological advances in the two banks?

No. definitely no.You cannot say that merging two different organisations of two different technological levels will be successful. The weaker one might drag the stronger one down. On the face of it, profitability might increase. But in reality, if it is a hostile merger, lots of management time will be spent adjusting things and putting things right. As a result, key business will be lost and competitors will gain market share.

• Will mergers help some banks to obtain more capital to satisfy the capital adequacy requirement?

It will depend on individual cases. Banks have other means of raising capital without resorting to mergers. Example; capital market operations.

• The present Banking Act does not facilitate mergers. Do you think the Banking Act should be changed?

In my opinion the present Banking Act does not want the banking industry which is the life blood of the economy to be controlled by individuals or single parties. That's why there are restrictions regarding maximum shareholding. The Banking Act maintains the competitiveness in the industry and in the end customers will benefit. There is no critical necessity to change the Banking Act.

• Should the Central Bank be the sole authority to decide on mergers between banks?

Mergers should first be discussed among the two parties that are going to merge. All matters pertaining to profitability,staff, should be discussed between the two parties.If the two parties agree then they should go to the regulators and present their case.

• How would shareholders and customers benefit from a merger?

Customers will only benefit if the merged bank can give them better value. It will only happen if the new outfit has better distribution, better rates, and better service. Just because a merger happens it might not result in a improvement in service, in fact the reverse can happen and customers can lose as a result. For shareholders the same will apply. I must state this fact clearly, mergers are not the only solution, there are strategic alliances that can be formed that will give the same or better results. In such an alliance, we combine a strategic sector of the two banks' operations together.This will be more successful than merging two banks completely.

• What is the effect on employment by merger?

Without analysing each case, you cannot say how employees will be affected. If the two banks merging decide to rationalise their operation then redundancies can occur. In the international arena, there are many redundancies from mergers where rationalisations took place.

Rohini Nanayakkara - CEO Seylan Bank

• What is your opinion about mergers between public quoted banks in Sri Lanka?

There will come a time when such mergers are necessary, Especially with the Central Bank hoping to introduce international banking standards to local banks, some small banks might find it difficult to measure up to capital adequacy requirements. Mergers might be the answer.

Will it increase the profitability of the two banks merging?

Yes. This is happening the world over, especially in an economic downturn there is a tendency to go for mergers. This has happened in Japan. Globalisation has also played a major role in mergers, if you are hoping to expand from a domestic market to a regional player, then mergers will be necessary. Banks strong in Asia might find that they are not strong in Europe and they might merge with an European bank. Recently this happened when HSBC merged with Midlands Bank Plc. A merger will bring down operating costs by cutting duplicating areas such as advertising, duplicating accounts etc. Lloyds Bank chief reported that they were able to cut costs by 40% by merging with T.S.B.

• Will it help some banks to obtain Capital adequacy ratios?.

Yes. There are some banks which have a large capital base, but weak business. If this bank merged with a bank which has good business but a weak capital base, it will be beneficial to both banks.

• Should the present Banking Act be changed, to facilitate mergers?

The modern Banking Act should be changed to suit the modern banking environment, particularly in the light of changes in the IT sector that affects the banking industry (i.e. internet banking). I also do not understand the rationale behind the restrictions on mergers. Competitiveness has become the name of the game and these restrictions do not hold any ground.

• Do you think Central Bank should be the sole authority to decide on mergers?

The Central Bank in any country is the regulatory body. They are in the best position to decide on mergers.

• How will the customers and shareholders benefit from a merger?

Shareholder value will go up, they will benefit from increased profits. Customers will benefit from increased branch network, more ATM facilities etc. Also benefits from economies of scale will be passed down to customers.

• How will the employees be affected by mergers?

The words redundancies , bankruptcy are new words for Sri Lanka. Staff lay-offs are unacceptable to our culture. In a merger, there is a possibility of a staff rationalisation, sometimes this staff can be absorbed into new areas of business, if not voluntary retirement schemes will have to be brought in.

Mr. Nihal Fonseka - CEO/DFCC

• What is your opinion about mergers between public quoted banks?

A: There is nothing fundamentally wrong about it. Everywhere in the world consolidations are happening.

• Will mergers increase profitability of the two banks merging?

A: That will depend upon the two banks and how you do the merger.

Basically in any merger your profitability will increase in two ways, from the cost saving side by bringing down the transaction cost and from the additional revenue created by higher market share, cross selling complementary products etc. But for it to really work especially in our environment both banks need to work with one objective in mind ; all the management and staff from the two banks needs to work for one goal .

• Will mergers accelerate technological advancements in the banking industry?

A: It will . Technology in this country is still pretty expensive, even though in an international context technology is getting cheaper. Still in the local context technology is comparatively very expensive compared to our other costs.Instead of two banks spending twice over, it will be one bank spending.

• The present Banking Act does not allow mergers. Do you think that the Banking Act should be changed?

A: This tends to be a policy decision of the government. From a purely business point view you might say mergers are good but the government might decide the time is still not right. When the banking act was created in 1988 the idea was to keep banks apart and not allow mergers. If on a national policy making level it is decided that mergers are good, then the Banking Act should be changed to facilitate mergers.

• Do you see a trend in the international arena towards mergers?

A: Yes it has become the done thing. Going back a few years there has being several mergers between banks.

• Will shareholders benefit from a merger between two banks. If so how?

A: Shareholders will mainly benefit from the reduced cost base and increased profits. But you should bear in mind that for every merger that works there are five or six which fail. The merger process itself should be treated with great care and skill, otherwise you might not gain any success out of the merger.

• Will there be any direct benefits to customers?

A: That is difficult to say, because if you reduce the number of banks it can lead to monopolies cartels etc. which can be detrimental to customers' interest. If you look at Sri Lanka, even though we have about 28 banks of various sizes and natures, 80% of the business is between eight or ten banks. So it is questionable whether if this is further reduced, it will be in the interest of shareholders. In my opinion there will be more benefit if a small bank merged with a big bank.

Benefit of big banks merging is, for a example, if a development bank like DFCC merged with a commercial bank, our customers will get the benefit of current account facilities, ATMS etc. and the other banks customers will gain access to longer credit. Generally bigger banks will benefit because the bigger you are the more risks you can take. Also economies of scale will bring down your operating costs, normally these benefits will be passed on to customers.

Q: How will the employees benefit from a merger?

When two institutions get together it will create a stronger force. This will enhance the career development prospects. But on the other hand, there can be some redunduncies from some areas of operations. Staff can be reabsorbed into expanding areas of operations, if not voluntary staff retirement schemes have to be offered to excess staff.

It should be kept in mind that mergers should be allowed only if it doesn't kill the competition. If mergers happen just for the fashion of it, it will harm the industry.

AMITA GOONARATNE - CEO Commercial Bank.

• What is your opinion about mergers between public quoted banks?

I feel there will be a time that these mergers will have to take place because the volume of business specially in Sri Lanka does not justify the number of players involved and we feel consolidation is necessary because the volume of the business is not that large.

• Will it increase profitability of the operations and facilitate technology developments ?

The increase in the technology will depend between the two banks that will merge. If one bank is strong in the particular area of operations due to superior technology then there will be a benefit to the other bank. Mergers will also have a dual benefit, in terms of additional income generations and operational overheads. Many operations would be trimmed down and streamlined. Many duplicating branches will be removed and the staff will be redeployed elsewhere. Overall there will be an increase in profitability.

• Will mergers help some banks to obtain more capital to maintain the capital adequacy requirements?

It will only help if the both banks are well capitalised, if we take a lop sided merger where one bank is under capitalised and other bank also not well capitalised it will only make the situation worse. Therefore you must select your partners cautiously

• The existing Banking Act in Sri Lanka does not facilitate mergers between banks. Should the Banking Act be changed to facilitate the mergers?

Banking Act was done a long time ago without any consideration for mergers between banks. Yes, I think there is a need to revise the banking act to facilitate the mergers that might arise in the future.

• Should the Central Bank be the sole authority in deciding the mergers and acquisitions of banks?

Yes, the Central Bank should have the final decision in allowing a merger to go ahead. The Central Bank is in the best position to decide whether the merger will have a favourable effect in the industry.

Most importantly, it should bear in mind that Central Bank looks after interest of depositors which is of paramount importance. Also the Central Bank has the discretion to call upon a bank to take over another bank which is on the verge of callapse.

• Is there a trend towards mergers in the international banking arena?

Yes there are mergers taking place .

• How will the customers benefit from mergers between banks?

We will first take the shareholders. Shareholders will benefit from the additional revenue created. Also when one bank is strong in one area of operations that aspect would reflect on profits and shareholders will receive a better return.

As for customers, what I feel is if the merger takes place between two banks that can blend with each other in terms of both corporate culture and operations, then the customers will benefit from improved efficiency and better customer care.

But if the two institutes are unable to blend together then the merger will not be successful. A lot of mergers that happen in the international arena were unsuccessful because the two banks were unable to blend together. Therefore the mergers should be meticulously planned in order to be successful.

• How will the employment be affected by mergers? Will it create less job opportunities?

It will depend upon the two banks which are merging. If one bank has a large staff, then redeployment will not be sufficient to absorb the staff layoff from duplicating areas. Voluntary retirement schemes will have to be adapted for the extra staff.

• How will the mergers affect the competition in the banking industry especially in a Sri Lankan context?

Sri Lanka has about eight main commercial Banks. By consolidating and merging if this comes down to about three then it will be very unhealthy for competition. It is the competition that keeps the banks on their toes enhancing the customer orientation. If a lot of consolidations take place and it became fashionable then it will have a harmful effect on the industry. It can be concluded that mergers should happen only if it doesn't kill the competition.

• Will shareholders benefit from a merger between two banks. If so how?

Shareholders will mainly benefit from the reduced cost base and increased profits. But you should bear in mind that for every merger that works there are five or six which fail. The merger process itself should be treated with great care and skill, otherwise you might not gain any success out of the merger.

Will there be any direct benefits to customers?

That is difficult to say, because if you reduce the number of banks it can lead to monopolies, cartels etc. which can be detrimental to customers' interest. If you look at Sri Lanka, even though we have about 28 banks of various sizes and natures, 80% of the business is between eight or ten banks. So it is questionable whether if this is further reduced, it will be in the interest of shareholders. In my opinion there will be more benefit if a small bank merged with a big bank.

Benefit of big banks merging is, for example, if a development bank like DFCC merged with a commercial bank, our customers will get the benefit of current account facilities, ATMS etc. and the other banks customers will gain access to longer credit. Generally bigger banks will benefit because the bigger you are the more risks you can take. Also economies of scale will bring down your operating costs, normally these benefits will be passed on to customers.

Q: How will the employees benefit from a merger?

When two institutions get together it will create a stronger force. This will enhance the career development prospects. But on the other hand, there can be some redunduncies from some areas of operations. Staff can be reabsorbed into expanding areas of operations, if not voluntary staff retirement schemes have to be offered to excess staff.

It should be kept in mind that mergers should be allowed only if it doesn't kill the competition. If mergers happen just for the fashion of it, it will harm the industry.

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