Weak-bank mergers may fail to deliver: MTB chief

Merging weak banks with one another may fail to deliver the expected benefits of consolidation, as the newly formed entities often remain burdened by non-performing loans, capital shortages, and governance failures, warned a leading banker.
Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB) and current managing director and CEO of Mutual Trust Bank (MTB), noted that bank mergers are typically designed to create synergy by pairing a strong bank with a weaker or specialised institution. 
He questioned whether any true benefits could be achieved by merging two troubled banks instead.
Mahbubur spoke as the chief guest at a discussion on the financial health of the banking sector, organised by the Capital Market Journalists Forum (CMJF) on Saturday.
CMJF President Monir Hossain chaired the event, while General Secretary Ahsan Habib Russell moderated.
Asked about the ongoing process to merge five local banks, Mahbubur declined to comment directly on whether the current plan was properly structured.
However, he said the primary objectives of a bank merger should be to increase efficiency and capacity while reducing operational inefficiencies.
When two banks are merged, there is normally scope to rationalise branches, staffing and other operating costs, he said. Maintaining two separate structures for similar functions is unnecessary, and consolidation should create opportunities to improve efficiency.
What matters, however, is the extent to which structural consolidation actually takes place after the merger, he said.
“If the branch and employee structures of the merged banks remain unchanged, it will be difficult to achieve the desired efficiency through the merger,” Mahbubur said.
He said changing only the name or ownership structure of a bank would not be enough.
“It is necessary to examine what kind of actual integration is taking place, how costs are being reduced and how the capacity of the bank is being strengthened,” he said.
Mahbubur said that in a merger between a strong and a weak bank, the stronger institution’s capacity could be used to address the weaknesses of the other bank.
But if both banks are already weak, their problems may persist even after the merger.
“Whether the desired outcome can be achieved by merging a bad bank with another bad bank is a major question,” he said.
The newly merged institution could continue to face the same problems, including legacy non-performing loans, capital shortages, governance weaknesses and management deficiencies, he added.

Banking sector remains fragile
Mahbubur also described the country’s overall banking sector as fragile, saying the lending capacity of many banks had declined while the industry faced pressure from capital shortages, liquidity constraints and rising non-performing loans.
The non-performing loan ratio is currently above 32%, and the actual situation could be worse, he said.
In 2008, non-performing loans amounted to around Tk28,000 crore, compared with more than Tk6 lakh crore now.
Mahbubur said the huge burden of non-performing loans was putting pressure on banks’ earnings and capital.
The implementation of IFRS 9, the new international financial reporting standard, could require banks to maintain higher provisions, putting additional pressure on their financial positions, he said.
Mahbubur said the core business of a bank is to lend money and earn interest income. However, loans and advances are declining at many banks while investment in government securities is increasing.
Income from government securities is supporting banks’ profitability, but it cannot replace banks’ core lending business, he said.
Going forward, raising low-cost deposits, particularly current account and savings account (CASA) deposits, will become increasingly important for banks’ profitability, he added.

Efficiency needed to cut costs
On reducing operating costs, Mahbubur said there was limited scope to cut all types of expenses.
A large portion of banks’ expenditure, including office rent, salaries and allowances, insurance and other operating costs, is unavoidable, he said.
Instead of relying on indiscriminate staff cuts to reduce expenses, banks should make greater use of technology and improve operational efficiency, he said.
Mahbubur said consolidation alone would not be enough to overcome the current crisis in the banking sector.
Reforms must simultaneously address non-performing loans, capital shortages, provisioning requirements, governance problems and management weaknesses, he added.