After the post war economic era, Sri Lankan banking sector performed well and growing. Despite of global financial turmoil, increasing oil prices, key financial soundness indicators were improved and maintained properly.
Credit growth increased significantly reporting a growth of 12.9 per cent in comparison to a negative growth of 0.5 which was reported in September 2009. (Financial Stability Review 2010)
Due to the post war economy many investors are showing greater interest in Sri Lanka. Especially after post Egypt crisis Gulf investors are looking at markets like Sri Lanka as emerging markets. (Sunday Times, Feb.13)
After the post war boom industry consolidation in banking industry has surfaced again. Demand for credit has gowned considerably, which has become a key driver for industry consolidation.
"It is the bank's intention to be involved from a leadership stand point in the future development of this initiative by actively pursuing opportunities for growth through mergers and acquisitions" Theagarajah said in his review in HNB's 2010 Annual Report.
In this post conflict era lot of big infrastructure projects are coming out. Those big infrastructure projects require lot of credit loans which most of the banks can't afford. Because large projects such as harbors, air ports and other infrastructure projects require lot of loans.
In the post war economic, Sri Lanka urgently needs to increase savings, at the same time making borrowing more affordable, if development goals are to be achieved. This is why merges and acquisition is becoming an emerging theme in post war economic era in Sri Lanka.
The Central Bank of Sri Lanka imposed some policy measures during the last three years, in order to maintain financial system stability. The minimum capital requirements of LCB's and LSB's were increased to 5 billion and 3bn respectively effecting 2015.12.31.
Not only is the industry, the Central Bank of Sri Lanka also in an aggressive mode looking positively at possible bank merges with these benefits in mind.
But still some of the leading commercial banks are silent on the above topic, where earlier some of the calls for consolidation were shut down.
Outreach or the branch network has become one of the significant reasons that banks are looking for merges and acquisition, especially in the local context. Industry consolidation was there in the industry or was trying to emerge.
"The ground situation is very ripe for such activity to take place" said Amitha Goonerathne, managing director of Commercial Bank of Ceylon. (Daily FT, 24 March 2011).
So this looks a clear emerging theme which will change the nature of competition entirely in coming 10-15 years. Due to the rapid loan growth local banks even might consider foreign commercial banks for M&A'S to raise capital.
Not only that, proposed banking Act this year will open the door for more consolidation, within the financial services industry. The proposed act comprises supervision of banking groups, provisions to facilitate consolidation through merges and acquisitions of licensed banks.
Rapid loan growth during the Sri Lanka's post war economic resurgence, lead the local banks to consider international markets to as a source of additional capital. And we are already experiencing some of those which are taken by foreign financial institutes. For an example already India's Mahindra Ltd is looking to enter the country's finance industry. For that they are considering to acquire an existing player Industrial Finance Limited (IFL). (Business Times, March 20, 2011) page 08
Merges and acquisitions are something always tried to emerge in the banking industry. Devastating war, a crippling global financial crisis and chaotic world wide banking decade are some reasons why it did not emerged.
Empirical studies show those banks and other financial institutions with low capital to asset ratios, high local market share and banks which operate in urban areas are to be acquired.
How this emerging theme is going to change the nature/structure of competition.
With the liberalization of the Sri Lankan economy and with macro environment theme we can predict 2 or more possible scenarios which will change the nature of the competition. From those, some scenarios will have positive impact on the industry while one or two a negative impact.
Scenario 1
One possible scenario is customers will have one place to deal with as their bank and banks may have more services to offer at an affordable price. A bank after an acquisition could have a wider customer base to deliver. This could be achieved as there is an incentive to serve at low marginal cost.
Investment required for IT infrastructure growing day by day. Banks might look at acquiring or to have a strategic alliance with IT companies. Combination of knowledge of more and people from different backgrounds put extra inputs. In this way banks could have more than what could achieved alone. Banks will achieve significant growth in their operations and will be able to reduce their expenses to a considerable extent. Banks might achieve economies of scale or cost benefits as a result of horizontal merges and acquisitions. The two merged banks might share some of the common required resources in order to reduce operational cost and to have a better reach. Heavy investments in IT systems, branches, ATM distribution, branding marketing, HR and training can be reduced and utilized for customer benefit.
Another significant change we might be able to see is behind this kind of a strategic direction competition is reduced because merges and acquisitions eliminate competitors from the industry. Merges and acquisitions in the banking industry have more to do with horizontal integration because merging entities are also from the same industry offering same kind of financial services.
In this scenario we might be able to see only few players in the industry. There will be only less than 10 banks and those banks would be big in size. They will have the capacity of catering for big infrastructure projects that are ongoing in Sri Lanka. At the same time competition between the rests of the players would be much higher. The branch network & the reach would be much stronger than the previous situation. Cross selling is another factor which would emerge in this scenario Portfolios are not the same, so the opportunity for cross selling becomes greater. For an example some banks have factoring service, insurance (both vehicle and life insurance) which are not common with every bank. So banks can promote each other's products it they are to succeed with merges and acquisitions. So in future we might see two rival banks promoting each others products and services after a successful merge or an acquisition.
We might be able to see a synergy coming out from this. Increasing the market power of the merged entity is a one way to achieve synergy. It gives potential for cost savings. Cost savings can be done via exploitation of scale of economies, and adoption of more efficient production or organizational technology. Removing inefficient management at the target institution is a way of removing cost. In future we might see two rival banks working under one management team after an acquisition or a merge.
I near future CBSL will make legislative changes that would facilitate merger procedures. In the industry due to reduced no of banks the completion will be reduced. Rather than competing on prices (lending interest & barrowing interest rates) banks will try to introduce a flat rate and will try differentiating by giving a personalize service. If the industry players go for a price war profits margins will be shrinking. On the other hand Sri Lankan economy urgently needs to increase savings at the same time making barrowing more affordable if the development projects are to be successful. If interest margins are cut without reducing these expenses, profit or the bottom lines will necessarily plunge making the task of attracting new capital much more difficult. Expense would be high when banks lack of scale.
In this scenario another possible outcome is small banks would get together a form one or two big banks. This will reduce the no of banks and even increase the completion amongst rest of the players as well. This is also a positive move and what government expected to be happened when they increase the minimum capital requirement for 3bn in recent past. But what happened was these small banks were able to find that capital did not look for merges & acquisitions.
Scenario 2
Another possible scenario is that multinational banks would try to cross over geographical boundaries by entering to the Sri Lankan market. The demand for credit would increase significantly with the prevailing low interest rate environment. This would enable mega investment projects in the north & east coupled with expansion of economic activity. This will drive the loan expansion up to circa plus 20% p.a. over the coming 5 years. In addition to that government rules and regulations also would make an impact on the nature of the competition. Increase of statutory reserve ratio (SRR) by 100 bps to 8% from the reserve week commencing from 29th April is another important factor. Due to this LCB's will have to increase their amount of capital which is kept in or maintained at CBSL. LCB's have to look into alternative ways of funding. So this might be another reason why they need to look at international capital. This will lead the entire industry looking for foreign capital.
So there factors within the industry as well as from outside the industry which would drive merges and acquisitions to be happened in with foreign banks. We might be able to see one or two regional banks coming into Sri Lanka for merges and acquisitions. They will use this opportunity to enter Sri Lanka. This would give immense pressure for local banks who are not involved with M&A are with foreign. Newly form entities will be strong with capital and will have the global knowledge. More importantly they will have the scale advantage.
Another limiting factor would be how government regulates these foreign mergers & acquisitions. At the moment government is facilitating local merges & acquisitions but the attitude will be different for foreign banks.
Strategic marketing response
There are two strategic responses that organizations can follow with relevant to this emerging theme.
To act positive on this and open gates for consolidations.
To react negatively on this and make strategic investments to strengthen the group without going M&A's.
Both options have its' own merits and drawbacks. It is organizations duty to analyze both of these options. Implications are different to each other.
The strategic option that I would recommend is to act positively on this & open gates for consolidation. Organizations need to prepare themselves for this emerging theme which would revolutionize the industry. To be prepared banks need to make strategic changes within the organization which involves lot of activities. Both parties need to strategically fit each other for M&A to be successful. This can be explained by using some of the elements which are explain by McKenzie's 7S model.
Strategy
To implement this strategic response both parties need to consider each others strategy. The strategic direction should be aligning well so that it will bring synergy. Banks should evaluate their own strategy and should make adjustments to fit with the other bank.
Why they should evaluate their own strategies and make adjustments.(justification)
As an individual bank, it may have a unique growth strategy as well as a positioning strategy. In this context positioning strategy needs to be fit each other. For example a bank that practices the scale advantage may not be able merge and form one entity if the other bank is a nishe player. Especially it may not bring any synergy amongst two banks. It might be difficult to work under one brand name.
Looking at the growth strategies it necessarily does not have to match as it was like positioning strategy. A bank which is coming out with new financial products (product development strategy) can merge or acquire a bank which is in the market penetration strategy to enhance the availability.
Structure
Structural and cultural barriers would be the biggest barrier for M&A's. it is identified as one of the biggest barriers that caused some of the M&A's to fail. For my recommended strategic response, one of the key activities is to adjusting the structure so that it would fit with the target bank. It might take 2-3 years to change & we marketers' needs to pioneer that change. If the bank wants to have a merger or acquisition the structure of both parties need to be examined closely and make changes to form one entity or to have a synergy. For example if a target bank has flat and open structure and wants have M&A with a bank whose structure is rigid, chances that it might fail is high. Structure should be changed gradually.
Shared values
Shred values are also should be discussed and come to an agreement to have a one set of shared values. If not customers of both banks will be confused.
If banks opt to go on the other way, which is the second option to resist this change they might have to face consequences of it. On the other hand central bank of Sri Lanka has already raised the minimum capital requirement of LCB's & LSB's to 5billion and 3 billion effecting from 2015.12.31. So this is a clear indication what CBSL is trying to do. CBSL wants industry players, especially small banks who are unable to find the minimum capital requirement to consolidate with the help of M&A. Even if these small banks are able to find that minimum capital requirement still they will have liquidity problems because the money which is to be reserve at central bank does not bring any interest. And also with the heavy investments required for IT and for other functions these small/medium banks will definitely find them selves difficult to compete with others.
The banks that resist this opportunity will not be able to enjoy the benefits that others will have. Scale advantage, economies of scope, cross selling opportunities, ability to cross over geographical
.
The skills and the competencies that a marketer needs to change
The industry is changing and the way we, the marketing professionals thinking also need to be change. The leadership has a huge challenge; it has to mentally prepare everyone for the M & A's. First of as marketing professionals if we are pioneering the project we need to able to sell that idea to the entire staff especially if you are the target entity, employee might get demoralized. These employees should be mentally prepared for the relevant merger or acquisition.
Other than that markets will need to have good analytical skills and have good market intelligence if they are to do an acquisition. You need to be able to analyze pre and post merger performance using accounting ratios and efficiency indicators, for stock price reactions is also another indicator which marketer needs to closely look at.
For this marketing professionals need to study about this subject. They should have a good knowledge of pre- post merger situations if they are to pioneer this project. Because most of the M 7 A's are not successful. And if a merger or acquisitions is not working they should also take measures to stop information spillovers. These mergers and acquisitions will predominantly change the strategic direction of a company, so marketing professionals need to be strategic planners. They should be in the board room and be a part of strategic planning.
And also they need to be able to communicate this situation for customers as well. Strong personal communication is very important to convince the customers that the company took this step in order to serve them much better than previous. At the same time objectives of this should be well communicated for staff as well. Marketing professionals should be expert in information gathering. Marketing professionals need to be financial literate to so that they understand finance people say.
They need to be innovative in their communication. If you are the target entity, the customers might think the company has become unprofitable and that is the reason for the merger or acquisition.
Marketing professionals in Sri Lanka will have to learn about global examples & scenarios, especially about mergers & acquisitions. They should be able to learn those case studies, because nearly half of the mergers & acquisitions that happened during the last decade failed or was unsuccessful. So marketing professionals need to learn these lessons from those rather than be a victim of a similar situation. And marketers need to be financial savvy to some extent. To evaluate the post merger and pre merger performances marketrs will need to know finance. Little bit of finance is far more great than not knowing anything.
