A few weeks ago, I’ve shared the importance of mergers and acquisitions in the banking industry; improvement of financial health of banking industry, improvement of customer experience and easy to regulate, and increase efficiency & diversify risks.
One of the principal objective behind mergers in the banking industry is to expand operations and stay competitive.
In our market, we have seen one merger this year so far; Tanzania Postal Bank (TPB) Plc acquired Twiga Bancorp Limited and there is a rumor of another one pending approval from the regulatory.
Mergers result in reduction in the number of banks and increase the size of banks hence I expect the trend will increase among the banks. That is the reason this week, I will discuss the mergers and acquisitions (M&A) as a strategy for banks to grow.
The competitive and regulatory developments in the industry are the main reasons for mergers and acquisitions.
Before I divulge into details, let me define an acquisition and a merger; An acquisition is a strategy through which one buys a controlling stake or 100 percent interest in another with the intent of making the acquired one a subsidiary within its organization.
While a merger is a strategy which one acquires all the assets and all liabilities of another and acquired one ceases to exist while the acquiring one retains its identity.
So why M&A occur? It is very important to know some of the reasons used by different banks in many M&A to move/expand into relatively virgin areas where competition is less, to pool together scarce resource thus having more working capital, to enter into new markets via diversification, and to improve efficiency by pooling together management skills.
Of all the reasons I have mentioned, studies have shown that the most common one is to expand/grow; in today’s business environment, banks may have to grow to survive, and one of the best ways to grow is by merging with another bank or acquiring other bank.
Through M&A, banks can achieve significant growth in their operations and minimize their expenses and encourage healthy competition in the banking sector.
It is worth to note that not all M&As are successful and not each situation is calling for M&A as a growth strategy so I would like to share two situations in which M&A have proven useful as a growth strategy:
Filling gaps created by marketplace changes
When the marketplace changes in response to external events or new laws and regulations, it can create a gap in a bank’s critical offerings. It is a prime opportunity for a strategic merger. For example, when the Government decided to barred the public institutions from depositing their funds in commercial banks and implemented the Treasury Single Account (TSA) which caused the liquidity crisis in the banking industry.
Because of that, some banks lose significant deposits in their balance sheet and could have looked at M&A as a growth strategy to increase their deposits hence maintains the shareholders’ value.
Banks can use M&A to enter into new markets through diversification. We have seen the banking industry’s main competition comes from fintech companies thus the banks that see fintech companies are partners will survive and those don’t will die.
Banks should look into acquiring some fintech companies that fit their cause since the future of banking is digital banking so they are facing with the choice to either adapt to digital revolution or lose market share.
To sum it up, bank mergers are unavoidable in today’s World due to globalization and competition in financial institutions. By promoting M&A, we will have fewer healthier banks which will be a good way to restore the discipline and confidence in the industry.
Banks should see M&A as an opportunity to expand their reach quicker and achieve higher productivity, diversify risk and increase efficiency and reduce cost.