Cenbank retreating from bank merger push. Here’s why

Major reasons
•    Stronger banks unwilling to voluntarily participate in merger
•    Resistance from influential bank directors
•    Weaker banks facing liquidity crisis as deposit withdrawal rises
•    Procedural challenges

In a surprising turn of events, the Bangladesh Bank has decided to backtrack on its plan for forced mergers of 10 weak banks with 10 strong ones. The decision comes in response to a rush of deposit withdrawals from the banks involved, signalling nervousness among customers and pressure from influential quarters, especially bank directors, according to Insiders in the banking industry.

Md Mezbaul Haque, executive director and spokesperson of the central bank, on Monday said there will be no further approvals for bank mergers for the next three years with the exception of the five mergers already announced.

This move has raised questions about the reasons behind the BB's sudden reversal. Investigations by The Business Standard reveal that some banks are experiencing significant withdrawals of deposits.

For instance, BASIC Bank, which is set to merge with City Bank, has seen large depositors expressing their intent to withdraw funds, as reported by the bank's acting managing director Abu Md Mofazzal.

"A decision was made at our board meeting on Wednesday that the issue of the bank's overall deposit losses due to the merger decision that created a liquidity crisis for us as customers have started withdrawing their deposits will be raised to our superior authorities," Mofazzal said.

Likewise, the state-owned Bangladesh Development Bank Limited (BDBL), slated for merging with Sonali Bank, another state-run institution, and Rajshahi Krishi Unnayan Bank (Rakub), set to merge with Krishi Bank, is also facing pressure of deposit withdrawals.

"If the trend of abrupt withdrawal of deposits continues, the crisis will worsen," said a senior official of Rakub.

The fourth bank, National Bank Limited (NBL), which was slated for merger with another private lender, United Commercial Bank, has encountered a setback. Despite the recent restructuring of its board of directors by the BB just two months ago, NBL has failed to obtain approval from its board for the proposed merger.

A senior official of privately-owned National Bank told TBS that over the past two months, the bank has undergone a restructuring, including the replacement of its chairman and several directors. "But the merger move has had a negative impact."

He said many of the bank's indicators are showing positive trends after the board restructuring. It could take another year or so to improve the indicators further.

"But the central bank's merger decision has already had a negative impact. Many customers are coming to our bank to withdraw their deposits," said the official.

BB forces banks for merger without consulting banks concerned

On 9 April, senior executives of United Commercial Bank (UCB), another private bank, were suddenly summoned by the Bangladesh Bank. The bank's executive committee chairman, Aniszzaman Chowdhury and managing director, Arif Qadri, met with central bank officials where they were informed that National Bank would be merged with UCB. 

"The UCB leadership had no opportunity to express their difference of opinion on the matter," said a senior official of the bank.

An official, who was present at a recent BDBL board meeting, told TBS that they had not made any merger proposal to the central bank.

The board members said as per the government's decision, the bank will be merged with another state-owned bank. "The board members say they have no room for objection if the government wishes. However, BDBL was in a good position."

A number of RAKUB officials also told TBS that the central bank has imposed the merger decision on them even without any proposal, he said.

"The bank's board members or senior executives did not even know that their bank was going to be merged although the policy states that the board of directors of the concerned bank will take the merger decision," said the official.

A top executive of the NBL also said the central bank had summoned its senior management and informed the top executives of the merger decision. "However, the bank's board of directors did not endorse this decision. Consequently, it is still unclear whether or not the bank will merge."

BB move termed as 'forced marriage'

Dr Birupaksha Paul, former chief economist of the BB and currently a professor at the State University of New York at Cortland, US, expressed his concerns while talking with TBS regarding the bank mergers. He compared the process to a "forced marriage," highlighting its potential drawbacks.

"It will only help banks to conceal their toxic assets," he said. "The approach taken by the central bank could be described as a perverse method of forced consolidation." 

The economist also emphasised the importance of conducting thorough audits of all banks' financial health and making them public before proceeding with any mergers. He suggested that banks should then be given the option to choose their merger partners based on the available information.

"It takes time, and we must exercise patience in this process. The NPL crisis didn't emerge overnight, so resolving it will also require time and concerted effort," he said.

Has the central bank violated its merger policy?

Bangladesh Bank Governor Abdur Rouf Talukder shared the plan for bank mergers with leaders of Bangladesh Association of Banks (BAB) at a meeting held on 4 March at Bangladesh Bank headquarters. Directors of seven commercial banks from state-owned and private banks attended the meeting.

Later a merger policy was announced by the Bangladesh Bank, saying if any bank wishes to merge voluntarily, it will make decisions independently in its respective board of directors by December this year.

It has been stated in the "Compulsory Mergers-Related Policy" that the Bangladesh Bank will be able to compulsorily merge weak banks from the year 2025 onwards. Before any bank is merged, it must be evaluated by a listed inspection agency of the central bank.

The Bangladesh Bank will bear the expenses of the evaluation. 

Upon the decision to merge, a notice of liability and asset acquisition of the respective bank will have to be published in the newspaper, ensuring that all information about the bank is available. The central bank can merge the bank with any other bank.

Impacts on the stock markets

Some banks made record profits in 2023 and announced good dividends for their shareholders but there was no impact on their share prices.

For instance, City Bank's share price fell after the merger news became public. According to the Dhaka Stock Exchange, the bank's share price fell down by 1.75% within three working days despite the bank making record Tk638 crore net profits and recommending a 15% cash dividend and a 10% stock dividend to its shareholder.

On the other hand, amid news of a merger between United Commercial Bank and National Bank Limited, UCB shares surged while NBL plunged. In the first trading session of 15 April following the publication of the merger news, UCB shares rose by 0.88% to Tk11.50, while NBL stocks fell by around 6% to close at Tk6.50 each on the DSE.

Similarly, BRAC Bank achieved a remarkable 35% growth in profit, reaching over Tk827 crore in 2023, marking its highest-ever profit in history, according to the bank's annual financial statement. The bank also recommended 10% cash and 10% stock dividends to its shareholders for the last year marking the highest payout in the last six years. Yet the bank's share price dropped.

The news of the merger between Exim Bank and Padma Bank was published on 14 March. On that day, the share price of Exim Bank was Tk10. After the news was published, its share price decreased. On Wednesday, its share price dropped to Tk9.3, registering a 7% fall within a month.

What central bank officials say

Asked if any bank outside these five banks will merge, central bank adviser Abu Farah Md Nasir told TBS, "If any bank wants to merge with another bank on its own, we will definitely be flexible to them. If we get any official decision from them, then we'll make further decisions."

On the process of bank mergers, he said the Bangladesh Bank has so far appointed auditors to conduct asset and liability valuation of Exim and Padma Bank giving them preliminary approval for their merging. 

No such preliminary approval has been given for the remaining four mergers yet, he said. "As a result, nothing definitive can be said about the mergers of those four weak banks at this time."

Abu Farah, also a former central bank deputy governor, said, after receiving the audit report, both parties will go to court with the approval of the central bank. Once the court grants approval, the two banks will merge, he said.

Md Mezbaul Haque said, "Bank mergers entail numerous procedures, including auditor appointments, asset and liability setting, determining share prices, allocation, and legal processes. This will require time.

"By implementing these five proposals, we at the Bangladesh Bank will gain experience."

However, a senior BB official, wishing not to be named, told TBS that the merger process might come to a halt due to pressure from some influential quarters. 

"The owners of banks identified as weak in the country are mostly influential individuals. These influential owners could hinder the process of mergers," he said.