No better time and rationale for bank consolidation

Thursday, 27 July 2023 00:00 - - {{hitsCtrl.values.hits}}

“Consolidation of financial institutions in both the banking and non-banking financial sectors will be carried out/facilitated to improve capital with the benefit of economies of scale, synergy, and efficiency, while enhancing the financial strength, resilience and overall stability of those entities and their ability to cater to the growing demands of the business community in the period ahead.” Source: Monetary and Financial Sector Policies for 2023 and Beyond issued by the communication Department of the Central Bank

Recent articles that appeared in the Daily FT demonstrate the interest shown by the public on bank consolidation.

This press release shows that the Central Bank is also very much in sync with what has been expressed in those articles. It is widely believed that a majority of shareholders and customers would benefit from bank consolidation. Bank consolidation will be resisted by major shareholders who would prefer to remain big fish in small ponds. Therefore the Central Bank will need to take a more active role in this matter in the interest of the economy as a whole.

In a situation where recapitalisation requires raising funds from the market, bigger and more stable banks with larger market shares have a much better ability to carry out a successful recapitalisation. This was the experience in Greece where Piraeus, Alpha, and Eurobank saw a total of € 5.9 billion being heavily subscribed after a bank consolidation program that saw 18 commercial banks in Greece being consolidated to form four large banks.

It is a known fact that the Central Bank had to exclude the banking sector from the Domestic Debt Optimisation (DDO) exercise in order to preserve the stability of the financial sector. Over 25% of the assets of Licensed Commercial Banks consist of Treasury Bills and Treasury Bonds. Should the banking system have consisted of large banks with the ability to confidently raise equity capital to overcome any loss of capital resulting from a DDO, it would have been possible to deliver a more equitable DDO solution.

The ‘vision document for economic partnership’ referred to by Indian Prime Minister Narendra Modi during the visit of President Ranil Wickremesinghe on Friday incorporates the intention to build on the decision to designate INR as a currency for trade settlements between Sri Lanka and India.

Larger and more stable banks created through a timely consolidation exercise will position the Sri Lankan banking sector to benefit from this initiative. An ability to better compete with the larger Indian banks and the possibility of raising capital through the Indian investor community through listings on the Indian stock exchanges are just two such benefits.

The general public and the bank shareholders and customers in particular are waiting for the Governor to take this bold step to announce and implement a bank consolidation plan. Shareholders and customers expect the Central Bank to deliver on its policy statements.

G De S