Although the economic rationale for Sri Lankan domestic consolidation in the Non Bank Financial Institution (NBFI) is beyond question, many believe that the process appears forced and the time lines too severe for a meaningful amalgamation, according to a research report.
“However, in the process there would be opportunities for the equity investor, mostly in target NBFIs with cleaner balance sheets. The larger NBFIs, whose core businesses and valuations we were bullish on, may have their return on equities suffer in the short run in the amalgamation process,” according to a report by Bartleet Religare Securities.
Sri Lanka’s monetary regulator is urgently calling for an amalgamation in the financial sector in the country with the current 58 NBFIs, which account for only 6.6 per cent of the financial system’s gross assets and bring them down to a target 20.
This consolidation process has already been done in East Asian countries like Malaysia, Taiwan and Singapore. While domestic consolidation has occurred in most Asian countries, the restructuring progress has varied across the region. In the more developed countries in the region, domestic consolidation has been a success story for both the regulator and the equity holder.
The report said the category ‘A’ NBFIs will prioritise and move in fast to identify and acquire well run NBFIs in the target group. “However, we are concerned that these companies will be priced at a premium. If the ‘clean balance sheet premium’ does not falter during the negotiations, this may hurt the balance sheet strength and the ROE of the acquirer.”
The report said the regulator may be in a position to call a ‘shotgun wedding’ and assign the less appealing NBFIs to larger NBFIs/banks who did not make the deadline. “Given the woes of the balance sheets (including fleets of commercial vehicles), unprofitability and at times negative Net interest income (in the case of The Finance) this will take off some shine away from the acquirers’ balance sheets, in addition to management impetus.”
The disconnect between the asking multiples (price) and an agreeable price will likely be settled – if needed with regulator intervention, the report said.
The most prominent efforts in domestic consolidation are seen in South Korea and Japan. Both countries are facing reforms as a result of problems that have developed over time for comparable reasons. Taiwan, which had overbanking issues, has reformed and revamped its banking sector. Singapore on the other hand is one of the most proactive countries in the region that has implemented successful banking reforms to gain a leading position in the region.
The Sri Lankan case study is different to what was in the ASEAN countries as this differs from a market-oriented approach, the report said. The key drivers of consolidation remain better transparency, economies of scale, advancement of marketing and product initiatives, improvements in overall credit risk and technology exploitation, it added. The rapid development of the global financial markets has also induced large and financially sound regional banks to consider mergers amongst themselves. “The key deterrent in this case is the imposition by the regulator here that no jobs could be cut.
This from a market perspectiv`e forms the possibility of improvident job duplications in the short to medium term and reduces the possible saving from amalgamation,” the report said.
It added that in the proposed merger between NDB and DFCC, there are clear benefits of scale for the large scale development bank. “The two banks however have comparable current account to savings account ratio bases, branch networks, similar books and the similarities come down to each bank having their own Investment Banking units and Stock brokering arms. Voluntary Retirement Schemes (VRS) may be a possible tool the management has at hand, but we see VRSs being expensive for the firm both in terms of the explicit cost and from unintended key job losses. Hence, even-though the major development bank makes sense from a Treasury perspective it may be hard to make economic sense to equity holders in the medium term.”
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“However, in the process there would be opportunities for the equity investor, mostly in target NBFIs with cleaner balance sheets. The larger NBFIs, whose core businesses and valuations we were bullish on, may have their return on equities suffer in the short run in the amalgamation process,” according to a report by Bartleet Religare Securities.
Sri Lanka’s monetary regulator is urgently calling for an amalgamation in the financial sector in the country with the current 58 NBFIs, which account for only 6.6 per cent of the financial system’s gross assets and bring them down to a target 20.
This consolidation process has already been done in East Asian countries like Malaysia, Taiwan and Singapore. While domestic consolidation has occurred in most Asian countries, the restructuring progress has varied across the region. In the more developed countries in the region, domestic consolidation has been a success story for both the regulator and the equity holder.
The report said the category ‘A’ NBFIs will prioritise and move in fast to identify and acquire well run NBFIs in the target group. “However, we are concerned that these companies will be priced at a premium. If the ‘clean balance sheet premium’ does not falter during the negotiations, this may hurt the balance sheet strength and the ROE of the acquirer.”
The report said the regulator may be in a position to call a ‘shotgun wedding’ and assign the less appealing NBFIs to larger NBFIs/banks who did not make the deadline. “Given the woes of the balance sheets (including fleets of commercial vehicles), unprofitability and at times negative Net interest income (in the case of The Finance) this will take off some shine away from the acquirers’ balance sheets, in addition to management impetus.”
The disconnect between the asking multiples (price) and an agreeable price will likely be settled – if needed with regulator intervention, the report said.
The most prominent efforts in domestic consolidation are seen in South Korea and Japan. Both countries are facing reforms as a result of problems that have developed over time for comparable reasons. Taiwan, which had overbanking issues, has reformed and revamped its banking sector. Singapore on the other hand is one of the most proactive countries in the region that has implemented successful banking reforms to gain a leading position in the region.
The Sri Lankan case study is different to what was in the ASEAN countries as this differs from a market-oriented approach, the report said. The key drivers of consolidation remain better transparency, economies of scale, advancement of marketing and product initiatives, improvements in overall credit risk and technology exploitation, it added. The rapid development of the global financial markets has also induced large and financially sound regional banks to consider mergers amongst themselves. “The key deterrent in this case is the imposition by the regulator here that no jobs could be cut.
This from a market perspectiv`e forms the possibility of improvident job duplications in the short to medium term and reduces the possible saving from amalgamation,” the report said.
It added that in the proposed merger between NDB and DFCC, there are clear benefits of scale for the large scale development bank. “The two banks however have comparable current account to savings account ratio bases, branch networks, similar books and the similarities come down to each bank having their own Investment Banking units and Stock brokering arms. Voluntary Retirement Schemes (VRS) may be a possible tool the management has at hand, but we see VRSs being expensive for the firm both in terms of the explicit cost and from unintended key job losses. Hence, even-though the major development bank makes sense from a Treasury perspective it may be hard to make economic sense to equity holders in the medium term.”
www.sundaytimes.lk
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