Merging Banks and Risks Associated

In a couple of years, it’s likely that the majority of banks in Asia and Europe would look forward to merging or acquiring other smaller banks. Every bank in a growing economy is looking to either purchase another bank or be bought by a bigger bank. Many of such banks see acquisition or merger as a chance to scale up their operations which can reach and cater to a broader market.

Picture Credits: The Hindu

However, it has drawbacks as well – particularly for the staff and business units that work independently and have their style of working. There are multifaceted administration hassle, employees, ongoing deals, and logistics which are part of an active merger or acquisition. It’s easy to forget the risks that bank mergers pose to all involved.

Efficiency of systems

Acquiring a bank not just scales efficiencies, but also operational effectiveness. Every bank has an infrastructure in place for AML, Compliance, Risk Management, Accounting, Infrastructure, Operations, and IT Security and as the two banks merge, they can efficiently consolidate and manage those operational infrastructures. Financially, a larger bank will have a lower accumulated risk profile as a more significant number of similar loans will decrease overall institutional risk.

Compliance and Risk 

Another factor which is considered crucial during a merger is a risk and compliance culture of banks involved. Every financial institution handles banking compliance and banking regulations differently, but it’s essential that the merging banks agree on their approach moving forward. Imagine if two mismatched risk cultures clash during the merger, it may negatively affect the profitability of the business which can change the bottom line if both cultures don’t agree to a standard working solution.

Execution risk is another significant danger in bank mergers. In some cases, bank officials don’t commit time and resources into bringing the two banking platforms together, which results in impacting customers who lose faith in the newly merged bank too. The newly formed bank should dedicate enough experienced resources towards integration to build a new entity.

Keeping and Promoting the in-house talent

The biggest fear for people in the merger is the uncertainty of jobs, while this does not affect the balance sheet, but retaining and disposal of talent becomes a challenge even for leadership. Bank mergers can be viewed at multiple levels, and most of them fail to look over at people or culture into account. Failure to assess cultural fit is one reason why many bank mergers ultimately fall through. Throughout the merger, the bank needs to communicate and interact with employees and addressing the issues. Human Resources plays a very crucial role, and this human element should never be disregarded or downplayed.

Scaling up and lending

A newly formed bank merger would help it to scale up business quickly, expand and acquire new customers instantly. The acquisition gives the consolidated bank an incremental capital to work with when it comes to lending to its new and old customers or to invest. It also provides a comprehensive geographical reach in which they are operating and new geographies or products they want to launch, which enables the combined bank to achieve their growth goals faster.

Understanding Technological Gaps

Bank mergers and acquisitions empower your business to fill product or technology gaps. Acquiring another bank may offer an exceptional business model or financial solution which is at times more comfortable than building that business from scratch. From a technology perspective being taken over by a larger financial institution might allow both organizations to accept best practices and upgrade its technology platform significantly and cater to its customer business needs.

Customer Impact and Perception

While undergoing the merger, it’s critical that you pay attention to the impact it has on customers. Notably smaller or semi-government banks where customers respond to their needs differently and can look at acquisition differently especially if their bank is getting acquired. It is essential that employee manage customer expectations with regular meaningful and vigilant communication. Once the merger is underway, customers should be handheld to ensure that changing technology platforms of financial products should not impact customers business as it can spread negativity if one does not pay attention.

Bank mergers and acquisitions are complex procedures with the possibility of extraordinary payoff – or extraordinary peril – so it’s essential that you organizations pay detailed attention on each aspect or acquiring or getting merged.

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Disclaimer : This content is meant for information only and should not be considered as an advice or opinion, or otherwise. CAC – Corporate Analyst and Consultant Pvt.Ltd.does not intend to advertise its services through this.

Posted by:

CA Harmeet Singh Vohra

CAC – Corporate Analyst and Consultant Pvt.Ltd.

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