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Price guidance to prevent possible bubbles

During the first seven months of the year, Central Bank’s monetary board has principally approved as much as 19 consolidation proposals,  and those companies are now proceeding with the merger/acquisition processes, according to a financial sector consolidation update issued by the Central Bank.
Meanwhile, another 19 non-bank financial institutions (NBFIs) have completed their due diligence processes and soon will submit their proposals seeking Central Bank approval.

Since the announcement of merger guidelines for the financial sector at the beginning of this year, 57 NBFIs and 12 banks have submitted plans for consolidation as well as for further capital infusion.

There are 58 NBFIs and 25 commercial banks under the Central Bank.  Troubled Central Investments & Finance PLC, which was initially not included in the consolidation programme was included into the process last week.
Some of those proposals included capital infusion by the existing shareholders as well as by new investors.

The Central Bank said they had evaluated such proposals and held meetings with the top management teams of those entities to discuss about the timelines of completion of the mergers and also on the way forward in the post-integration period.

“A panel of audit firms completed information memoranda, due diligence reports and valuation reports of 38 NBFIs,” the statement said.
Notably, the Central Bank has also provided price guidance for the proposed mergers on the basis of valuations carried out by the audit firms.

“This was done in order to facilitate the conclusion of transactions at reasonable values, and thereby prevent the creation of possible price bubbles, which could be unhealthy for financial system stability in the future,” the Central Bank said. Meanwhile, three micro finance institutions have so far been given in-principle approval to undertake micro-finance business with improved capital, widened asset bases and satisfactory governance structures and practices, but the names were not disclosed.  In relation to the proposed merger between the two development financiers – NDB Bank PLC and DFCC Bank PLC, CB said amendments to the respective legislation and approvals necessary for successful completion of the transactions were being attended while the services of expert firms were availed of to ensure smooth transition.

Consolidation may hinder effective competition: IMF The ongoing banking sector consolidation may result in increased concentration in the industry and hinder effective competition, if larger and state-owned banks continue to grow and dominate the banking sector, the International Monetary Fund (IMF) cautioned. While post-consolidation will see fewer but stronger banks, it is likely that those few will lose the desire to compete against each other as the state banking giants, Bank of Ceylon and People’s Bank together account for 43 percent of the market share based on the total asset base. Bank of Ceylon recently said it had just under 30 percent market share (24 percent) in the commercial banking business in the country and want to woo more private customers, particularly the young segment lost to smaller, efficient private banks. The concentration will be more on the industry if any one of the two or both decide to merge with a private sector competitor/s although none has thus far indicated such intensions. At present, there are 25 commercial banks operating in the country including the recently opened Cargills Bank. The Central Bank wants to shrink the banking sector to five larger banks, post-merger.  Hence, if the authorities do not see a marked progress in the consolidation process, they may even push state banks to buy smaller banks, a banking sector analyst said on the grounds of anonymity.  Last November, the budget 2014 proposed to consolidate the banking and finance sector and later Central Bank issued merger guidelines for the banks. Some say the effort is to push the banks to borrow from overseas capital markets using their balance sheet strength. In 2013, alone the Sri Lankan banks raised US $ 1.35 billion in international markets.  In this context, IMF urged authorities to loosen restrictions placed upon the restructuring process, to expedite the process and also the importance was placed on corporate governance practices as a key determinant of the success of the entire process.  The multi-lateral lender further urged authorities to conduct close supervision both during and after the consolidation process as it would help them to avoid certain pitfalls encountered by other countries in financial sector restructuring episodes such as excessive credit growth. NDB Bank PLC and DFCC Bank PLC in July announced they appointed BCG India (Pvt) Limited to advise during the amalgamation process while Cargills Bank said they were already in merger talks with an undisclosed party.