Consolidation is a near universal sentiment when it comes to small players in the banking industry. With profits concentrated in the big ticket banks, scale has become one of the key determinants of the ability to remain competitive in the domestic market.
Regulatory approval was granted by the State Bank of Pakistan to Atlas Bank to be merged into Summit Bank. The merged entity will be a step closer to its eventual shape - pending the formal acquisition of MyBank.
Suroor Investments, a Dubai based group has acquired a majority stake in Atlas Bank. It has previously acquired a 60 percent stake in Arif Habib Bank - now Summit Bank. Interestingly, the group also has a stake in Dubai Islamic Bank.
Critics of amalgamation of small sized banks have long argued that two small problems combined will become a larger problem. Given that large banks don envision any synergies in acquiring their smaller sized competitors, mergers like this one will bring the size closer to the mid-sized banks.
Post merger, Summit Bank will double its branch presence in the country to 80 branches. And once the MyBank transaction follows through, the number will jump to 160.
"One of the quantum issues in the banking industry is the focus on generating low cost deposits. With 160 branches, Summit Bank will be well placed to compete in the retail segments" Nasim Beg told BR Research. He is on the board of directors of the new entity.
Failing to meet capital requirements set by the central bank is another issue that has forced small banks to find partners. SBP has a gradually escalating capital requirement, and about eight banks have fallen short of that target for the past two years.
"The injection of Rs2.5 billion in capital will bring the merged entity in line with the Rs10 billion MCR requirement," confirmed Husain Lawai, President and CEO of Summit Bank.
Going by September 2010 figures, the combined entity will have an asset base of Rs67 billion and deposit base of Rs51 billion. Both Atlas and Summit have higher than average ADRs at 84 and 68 percent respectively. The combined ADR still stands at 74 percent.
But aside from metrics, changes in operational activities will have to be consolidated as well.
Some 250 employees took a golden handshake as a result of the merger and many more may be shown the door once operations at Summit Bank are rationalised to profitable levels.
A strategic business plan to revive the operations of the two ailing banks is expected to be finalised in the next month. Management must look out for toxic assets especially in the retail and SME sectors. Programme based lending in the SME sector at Atlas Bank has seen significant NPLs. (For details read Husain Lawais interview in the upcoming Banking Review)
Even after the merger of MyBank, the asset size of Summit Bank will stand at Rs103 billion. Business leaders in the industry agree that an asset base of less than Rs150-200 billion may not be enough to compete in the market.
Its being heard on the street that consolidation in the Islamic banking segment may see Dubai Islamic Bank scooping up a smaller player. Given that the parent company already has interests in Islamic Banking, one may see it strengthening its portfolio in Pakistan.