How merger issues deal a blow to bank stocks

Infographics: TBS

With the signing of a memorandum of understanding (MoU) for the merger with Padma Bank, a fourth-generation lender struggling for survival, Exim Bank shares plummeted below their face value.

Exim Bank, an A-rated stock at the Dhaka Stock Exchange (DSE), saw its shares drop to Tk9.70, marking a 3% decline from the face value of Tk10 on Monday, coinciding with the lender's entry into the amalgamation deal.

In the country's first voluntary merger move, Padma Bank is set to merge with Exim Bank after failing to regain stability despite the government's Tk1,700 crore bailout package.

The Bangladesh Bank previously announced plans to merge weaker banks with stronger ones.

On 4 March, the Bangladesh Bank held a meeting with the Bangladesh Association of Banks (BAB), where Governor Abdur Rouf Talukder told bank owners about the incentives to encourage mergers.

Bank owners were also pleased to hear about such regulatory relaxation and agreed with the Bangladesh Bank to consider mergers, said a top executive of the central bank who was involved in preparing the compulsory merger scheme.

After Bangladesh Bank's announcement, there was a significant decline in the banks' shares in the stock market. Market insiders believe that investors are selling bank shares out of fear that the asset quality of stronger banks may deteriorate if weaker banks merge with them.

Shahidul Islam, chief executive officer of VIPB Asset Management, told The Business Standard, "Whether it will be good or bad for investors depends on how many shares are allocated to shareholders of the weaker bank."

"Additionally, we have to see what types of incentives the authorities extend to the transferee bank to decide whether the merger will be beneficial for investors. If the merger, in any way, becomes forceful, it will not be beneficial for the investors," he warned.

On 27 February, NRB Bank made its debut on the DSE, with shares soaring over 33% to Tk13.30 within three days. However, the shares sharply declined to Tk10 amid merger progress.

Among the 36 banks currently listed on the stock market, several, including Rupali Bank, AB Bank, SBAC Bank, IFIC Bank, Global Islami Bank, First Security Islami Bank, and Social Islami Bank, have witnessed significant declines in their share prices over the past month.

Most of them are in a risky position, according to a recent Bangladesh Bank report. These banks saw their share prices drop by 20% to 33% during this period.

Currently, shares in 11 banks are trading below their face value.

Owing to the downfall, the bank sector lost the market capitalisation of around Tk3,126 crore to settle at Tk67,177 crore.

Banks will be categorised for mergers 

The Bangladesh Bank, as part of regular monitoring, will categorise the banks into three broad groups, sound, stable, and distressed, based on a set of selection criteria scores.

If the aggregate calculated score is equal to 80% or above, the bank will be categorised as a sound bank. This type of bank will be eligible to participate as a bidder/transferee bank in the compulsory merger process and will therefore be asked to submit an Expression of Interest (EOI).

If the aggregate calculated score is equal to or greater than 60% but less than 80%, the bank will be categorised as a stable bank. The Bangladesh Bank may also consider a  stable bank as a bidder/transferee bank, and therefore may also be asked for an EOI.

If the aggregate calculated score of a bank is less than 60%, it will be categorised as a distressed bank. This type of bank will not be considered a bidder/transferee bank.

As per the merger guideline, the Bangladesh Bank in December last year introduced the Prompt Corrective Action (PCA) framework under which banks will be categorised based on their non-performing loans (NPLs) and Capital to Risk (Weighted) Assets Ratio (CRAR).

Banks will be categorised based on their 2024 audited financial reports, and the framework will take effect in May 2025.

In the meeting with bankers, the Bangladesh Bank asked them to take necessary measures to improve their financial health as per PCA in the stipulated period to avoid a merger.

Bangladesh Bank governor Abdur Rouf Talukder informed bank owners that at least 10 banks will be merged.

Eight banks fall in the "red zone"

Meanwhile, the Bangladesh Bank has identified eight local banks falling within the "red zone" in the health index, which was formulated through using six distinct ratios derived from the CAMELS rating system: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.

The eight banks are – Padma, BASIC, National, Janata, Agrani, Rupali, and AB Bank.

This report has been prepared based on data from 54 banks for the past six semi-annual periods, spanning the period December 2020 to June 2023.

The yellow zone contained three commercial banks (Bangladesh Development Bank, Sonali Bank, and First Security Islami Bank) that were close to falling into the red zone.

Banks that fall in the yellow zone include three state-owned commercial banks, 19 conventional private commercial banks, and eight Shariah-based Islami banks.

The central bank report mentioned that these banks need supervisory attention due to the relative deterioration of their health in comparison with the industry average. 

Condition of banks

The country's banking sector experienced a steep rise in default loans by Tk25,000 crore in 2023. At the end of December last year, the total default loan in the banking sector stood at Tk1.45 lakh crore, accounting for 9% of the total loans that stood at Tk16.17 lakh crore.

Only 11 banks accounted for 93% of the staggering Tk24,419 crore in loans defaulted as of June last year. Bangladesh Bank data shows that the capital shortfall for 14 banks reached Tk37,506 crore at the end of September last year.

One of those, Padma Bank, is now on the verge of collapse. NRB Global, another such bank, transformed into Islamic bank, renamed as Global Islami Bank. Rest of new generation banks have also been struggling to get trade finance even after a decade due to their branding of licensing under political consideration.