Local banks in fear as recapitalisation deadline approaches

• Posted on April 17, 2018
• by Nana Kwesi Coomson
• Comment

Two experts in banking have taken issue with the posture of local banks towards consolidation, explaining that their “phobia for mergers” is to blame for the high numbers of indigenous banks in the country.

Should local banks be open to mergers and acquisitions, the current 16 indigenous banks could have been consolidated into a maximum of five strong banks capable of serving the economy better, Mr Emmanuel Asiedu-Mante, a banking consultant and retired deputy Governor of the Bank of Ghana (BoG) and Mr Alhassan Mahama Iddrisu, an investment banker and an accountant, told the GRAPHIC BUSINESS in separate interviews.

This would have spared shareholders of the various banks the trouble of recapitalising their respective banks to the current minimum capital requirement of GH¢400 million per bank by December this year, they said.

They, therefore, predicted that recent moves by the BoG and the Ministry of Finance to consolidate the numbers in the banking sector would fail, similar to the fate suffered by earlier ones.

“If the banks will agree to a merger, it will solve a lot of problems but I can see a lot of resistance and hesitation when it comes to that,” Mr Asiedu-Mante, who currently chairs the board of Stanbic Bank Ghana, said.

Why we can’t merge

The two were sharing their thoughts on recent demands by a group of locally-owned banks – the Association of Indigenous Universal Banks –for an extension in the recapitalisation deadline in spite of attempts to consolidate them through the recapitalisation.

The association said their respective financial situation made it impossible for them to recapitalise to GH¢400 million by December this year as required by the BoG.

While conceding that mergers and acquisition was “a method of achieving the new capital, the association said “given the levels of capital of the indigenous banks, two or three indigenous banks will have to merge to attain the new minimum capital of GH¢400 million.”

In a petition sent to President Nana Addo Dankwa Akufo-Addo, the association said: “Even if a merger is a possible solution, it is unlikely that a successful merger of two or three banks can be achieved within a relatively short period of one year, considering the due diligence activities that have to be undertaken before mergers are consummated.

“Furthermore, the merger option could have very serious negative consequences on the economy,” the banks said, citing possible job losses and challenges with integration.

“Since the banks to be merged are engaged in similar activities, have similar organisational structures with proximity of branch locations, the merged entity would have to reorganise its operations to eliminate duplication of roles and functions.

“This rationalisation will lead to a close down of some branches and staff lay-offs,” they said.

In their estimation, each merger could lead to “a loss of employment of between 500 and 1,000 persons.”

“Such lay-offs could undermine the government’s efforts to create employment. The social costs could, therefore, outweigh the potential benefits of the merger,” they added.

They further argue that a merger an “involuntary merger of the kind we envisage” could kill local entrepreneurial initiative.

Given that each bank has different structures, they said a merger as a financial tool does not always produce the desired results due to incompatibility of partners which could occur after the merger.

As a result, they pleaded with President Nana Addo Dankwa Akufo-Addo to prevail upon the central bank to extend the date to December 2022 to allow them to recapitalise in stages, starting with GH¢170 million by December this year.

Merger is horror

Over the years, Messrs Asiedu-Mante and Iddrisu have been deeply involved in various types of discussions on mergers and acquisitions, majority of which failed to pull through due to shareholder disagreements over ownership and control. They, therefore, using those experiences, said they had come to the conclusion that bank owners feared losing ownership and power, hence their decision to always hold on to their respective banks.

“Somehow, the local banks have a phobia for mergers, something that happens easily and probably frequently in the western world,” Mr Asiedu-Mante, who retired as deputy Governor of BoG in 2006, told the GRAPHIC BUSINESS on April 10.

“Here, when you ask banks to merge, they shy away from it as if they do not want to lose ownership or power,” he said, adding that the canker permeated the entire Ghanaian business space, including rural banks.

Mr Iddrisu, a former Managing Director of Ecobank Development Corporation (EDC), said the anxiety to mergers among local banks was so strong that merger itself was like “horror movie” to most bank owners.

“For me, phobia is an understatement; merger is horror for them,” he said.

He added that instead of always engaging consultants to advise on issues of consolidation, most shareholders of banks had decided to rely on emotions, resulting in their disaffection.

Request for extension

On the request for extension, Mr Asiedu-Mante observed that it made “a lot of sense.”

He, however, said any extension should be done for all the banks not only local banks as is being demanded.

Given that the directive means that almost all the banks will throng the capital market in search of fresh capital, he said it was obvious that the liquidity in the market will not be able to support it.

“If all of the local banks, including even some of the foreign banks were to go to the stock market, it will not be an overnight activity to prepare prospectus, get people to subscribe and then they can be listed. With this, you are talking of anything between six months to one year when the date for compliance is end of this year.

“Also, one does not know how liquid the market is. So in a situation like this, asking for extension makes a lot of sense to me,” he said.

Since 2001, the BoG has raised the minimum capital five times, ostensibly to strengthen the capital base of banks for a growing economy and compensate for foreign currency depreciation as well as increasing write-offs resulting from high non-performing loans (NPLs).

Apart from 2008, when the minimum capital was raised from GH¢7 million to GH¢60 – representing an increment of 757 percent, the current increase in bank capitals from GH¢120 million to GH¢400 million is the highest.

In previous instances, recapitalisation timelines ranged from no fixed dates to four years and 10 months.