Do bank mergers within the same market work?

BANKING mergers and acquisitions generate a lot of excitement with the usual announcements extolling the virtues of the proposed combination. The three-way merger in Malaysia between CIMB, RHB and MBSB, which collapsed recently, is no exception. Combining two banks is difficult enough. This involved three parties, one of which was a non-bank.

The stock market reaction to the collapse was quite telling. In the face of declining markets, the stock price of the banks rose, demonstrating the market's relief that the deal was not going through. There is much speculation about the cause of the collapse and it's unlikely if we will ever know which straw broke the camel's back. The more fundamental question is whether mergers within a market, ie, in-market mergers, where there is significant overlap of operations, make sense and can deliver value.

Many reasons are put forward in support of these transactions. Size is often touted as a desired outcome. However, unless one of the banks is very small and subscale, size by itself renders little benefit. The ability to underwrite big deals, for example, on the back of a larger balance sheet comes with added risks. Undoubtedly market shares will increase when you add two businesses.