Biggest merger in history of commercial banks between Laxmi Bank and Everest Bank; story behind the scenes

The talks of merger between Laxmi Bank (LBL) and Everest Bank (EBL) has loomed over the market for over two years now. The talks had started back when their paid-up capital stood around Rs 4 arba only. From that time till now, both the banks have met their paid-up capital requirement of Rs 8 billion, have distributed rights and bonus and also have established new branches.

If we look at the foundation and market coverage, both the banks are one of the blue-chip banks of Nepali banking industry and surely not in need of any outside help for survival; but yet why the need for Merger?

So, we are sure now that it is NOT for the increasing the paid-up capital. The primary motive of the merger lies in the larger picture, which will be broken down for you in the article below:

Strengthening the financial foundation

It’s already clear that the primary motive isn’t to boost the paid-up capital, but still it does have its positive externalities on the financial stand. Below are some of the major indicators of both the banks listed side by side for your convenience.

Major Indicators

As presented on 3^rd quarter report of FY 2074/75

*Paid-up capital of Everest bank includes Convertible Preference Shares of Rs 8 crore.

From the above indicators we can see that if LBL and EBL were to merge, their joint equity and reserve will stand at Rs 16 arba approximately. This excludes the individual reserves of LBL and EBL of Rs 2.17 arba and Rs. 5.85 arba respectively. This doesn’t only strengthen their joint capital foundation but also raises up the bar for the entire industry in Nepal.

However, for THIS particular merger huge capital size is just the tip of iceberg. There are factors that aren’t seen in the Balance Sheet but play a significant role in making the banks top of their class. Some such factors that has come to our sight are:

Synergetic Effect

The idea of synergetic effect is that, when individuals are capable of 1 output each their combined forces will result into 1+1=3 and is exactly the thing expected out of this merger. Rather than supplementing, both banks will complement each other and tap the new spaces that hadn’t been touched before. We expect this synergy because the strengths of these banks are different, so rather than being redundant the strengths will back up each other.

Nepal is naturally rich but commercializing that needs huge funds. For example, currently to fund one Hydropower project banks have to form a consortium, but with larger banks such projects can be easily funded with less hassles. Not just hydropower, we will also have prospects for airline companies, petroleum reservoirs, telecom, large irrigation projects, etc.

Optimum utilization of funds

Currently the liquid fund of the market is scattered among 28 banks, which makes it look thinner than it really is. So if there are fewer banks the huge funds from institutions like Citizen Investment Trust (CIT), Employees Provident Fund (EPF), and Nepal Army’s Funds will all come together. So with the combined force, the impact will also be larger.

Access to international market

LBL being a fully Nepali bank, will be able to sell itself in global market through PNB. It will help the bank in getting foreign loans, will help in minimizing forex risk and so on. So once the trend is started, Nepali bank will get acquainted with the international market.

Complementing the Strengths

• Subsidiaries;

Laxmi Laghubitta Bittiya Sanstha is a publicly traded company whose sole promoter is Laxmi Bank. Similarly Laxmi Capital is the 100% subsidiaries of LBL. In addition LBL also has promoter stakes in Prime Life Insurance and Everest Insurance. Whereas EBL has no subsidiaries in each of these sector except its stakes in Forward Laghubitta. So the customers of EBL will have access to huge array of services rendered by these subsidiaries and the subsidiaries in return will have windfall from EBL like they are getting from LBL.

• Management style;

EBL is a joint venture of PNB, which has 20% stake in EBL, so their management style matches with the international standard. Similarly, LBL although fully Nepali Bank has a huge stake from Khetan Group and LBL’s affiliations with multinationals and the background of CEOs they hire show their inclination toward professionalism. It is also seen that most of the leadership positions is filled in by people who have worked at Standard Chartered Bank Nepal. Thus in bird’s eye view both the banks are maintaining international standards plus ethical standards and the staffs at these banks have similar schooling. So their management style can be expected to fit in.

• Market coverage;

Currently EBL and LBL has 80 and 82 branches all over the country respectively. Once the merger is done, 20 branches will overlap in 20 cities. So these branches can be shifted to the nearest city with a branch with same staff and equipment. This will increase the network of the bank and accessibility for the customers.

This also will lower the cost of operations as one employee will be serving two different customers of LBL and EBL

• Land and building:

LBL has three land and buildings of its own in Kathmandu Valley, which has given them a huge brand value. The land at New Road, where the construction is expected to begin soon. Similarly the building at Maharajgunj functions as go-down or archives and the Head office building at Hattisar has the benefit of being located in a prime location. Similarly, EBL has one building if its own. So post-merger these can be essential features to attract more business and more customers for the bank.

Diversity in clientele

Currently more than 60% - 65% of LBL is coming from Wholesale clients or the top 100 customers whereas the strength of EBL lies in retail. More than 70% of EBL’s business comes from retail customers. So combining them will diversify each other’s area of expertise and create a bigger opportunity for the merged institution.

Efficiency in Decision Making

Although publicly listed, both the banks have strict chain of command and the decision making power lies in the hands of a few. From the side of EBL, the major promoter stakeholders are PNB and B. K.  Shrestha. Similarly, for LBL the major promoter shareholder is Mr. Rajendra Khetan. Since there are only 3 big parties, the entire negotiation is bound to be smooth. With higher number of people involved, higher number of ideas will emerge and with that the probability of disagreements will also go up.

No dispute for position

Rajendra Khetan, the prime personality of Laxmi Bank has already enjoyed his chairmanship and now functions as an advisor. Similarly, B.K. Shrestha, prime personality of Everest Bank has business of his own and is settle in Delhi. So this implies that there will be no conflict or internal manipulation for taking the positions. However the top management posts, CEO D-CEO and secretary positions will be up for grabs.

Benefit to the shareholders

If the merger is completed, the shareholders’ of LBL will have access to higher reserves of EBL and shareholders’ of EBL can enjoy the cushion of higher paid-up capital of LBL.

Shock absorbing power

Banking and financial sector is very vulnerable sector and that is prime reason why it is heavily regulated by Nepal Rastra Bank (NRB). The directives to maintain CCD ratio, Capital Adequacy Ratio, Statutory Liquidity Reserve are all directed towards creating a cushion for the banks that will protect them during hard times. So after the merger, the shock absorbing power of the bank will go up. They will have access to each other’s resources and this directly increases the capacity of the bank to digest more risky projects.

Economies of scale

Economies of scale is usually used in manufacturing sectors, but seems fitting in this scenario. With higher resources, the redundant costs can be eliminated which can be diverted towards other productive sectors. For example, a small locality that had both EBL and LBL branches will now be served by only one branch. It will decrease the cost of operations, number of employees required to serve, efficient use of office equipment and a lot more.

To set a benchmark

There has always been a voice inside and outside the NRB that we too need to follow The Malaysian Model. In Malaysia too after the number of banks had significantly gone up like in Nepal, a forced merger was implemented and the number was made nominal. Irrespective of the popular belief that such harsh action will affect the banking industry and the level of employment, it turned out successful. The existing 7 banks are powerful and providing quality services to its customers.

So the paid-up capital increment was sort of a way how the Nepali industry would react. However, rather going for merger and acquisition most chose to issue bonus and right shares to meet the capital requirement.

Despite the fact that the talks of merger had started two years back, both the banks met their capital requirement on their own. By doing so they have proved that they are capable on their own and by going for this merger they are showing support for the Malaysian model and consolidation of financial market.

Things in question.

Stake of Punjab National Bank (PNB) in EBL

PNB has 20% stake in EBL and post-merger the ownership is sure to get diluted. In past there was a floor of 20% stake ownership for foreign joint venture but now that’s gone. So PNB can choose to (1) let go and dilute its ownership (2) inject more equity to maintain its 20% ownership. However given the current situation, it can be fairly predicted that PNB will settle for a diluted stake.

Swap Ratio

A lot of hue and cry in the market were being heard the credibility of the claims are equally questionable. The swap ratio for the merger totally depends on how the Due Diligence Audit (DDA) will turn out. Currently two entities – one Nepali recognized audit firm and other is the Ernst & Young, which is a internationally recognized accounting firm – are looking into individual DDA of two banks separately. However, there is already a prescribed formula for determining the swap ratio of BFIS merger given by NRB from which almost 70% accuracy can be expected. So the banks can only negotiate for the remaining 30% value depending on their DDA report.

As per the privy source the swap ratio is likely to fall between the ranges of 50% to 65%.

Finalization of Merger

Merger is often used synonymously with “Corporate Marriage” and for a healthy marriage understanding and anticipating each other’s need is very important. The most recent example we can infer from is the merger of Mega Bank and Tourism Development Bank. After the announcement of merger the trading of shares were halted for more than 400 days. “Learning from that mistake, the merger will be announced only when all others conditions are agreed upon”, stated one of the concerned official.

However the longest we’ll have to wait is till Ashad end as that is the time when the DDA report will come. So after that, the final news of either the merger will happen or won’t happen will come out from authorized sources. If the merger does happen, the trading will be halted only for around 2 months as everything else is completed.