The urgent need for a fresh round of bank mergers

COMMENT | Given the current tightness in the country’s financial system’s liquidity, the PAS’ central economic, real estate and entrepreneur development committee feels the need to broach the possibility – or even the inevitability – of an industry-wide banks merger, that must be considered immediately at great length.

This comes on the back of the most recent cut in the country’s Overnight Policy Rate (OPR) by 25 basis points to 2.50 percent which is the lowest in ten years and the latest in a series of adjustments within the monetary system, after the cut to Malaysia’s Statutory Reserve Rate to 3.00 percent last month.

While the immediate beneficiary of the lower OPR environment will be the borrower in terms of lower borrowing costs, deposits are set to suffer adversely. 

The banking sector’s Loan Deposit Ratio (LDR) in January 2019 was already at 87.6 percent and the cut will make it even harder for them to attract new deposits and shore up their finances.

Given the increasingly tight liquidity, it only makes sense to consider an industry-wide merger to achieve the necessary economies of scale, stabilise the industry and protect the consumers, while increasing its ability to compete both here and abroad.

It is imperative for the federal government to facilitate the necessary discussions between the banks themselves, both in terms of matching potential parties and providing the appropriate incentives.

And as in any merger and integration, bespoke and active monitoring will be crucial to increase the likelihood of success.

In the longer run, an industry-wide adjustment such as this will also see a rationalisation of costs across the board and a lowering of risks associated with Non-Performing Loans (NPLs) for remaining entities, as a result of its enlarged asset base.

Where possible, it is imperative that any momentum built through these adjustments be expanded where possible across the region as well, as has been ably demonstrated by local giants such as Maybank, CIMB Bank and Public Bank. 

The generally larger regional market base would allow for greater adjustments across a more diverse income stream, and improve cash flow recovery.

While such adjustments across the region only be viable after domestic mergers are completed, any such effort must begin with the larger picture in mind i.e. a complete rethink of the financial industry’s ability to compete, in light of the global pressures.

MAZLI NOOR is Vice Chairman of PAS central economic, real estate and entrepreneur development committee.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.