Merger of five Islami banks could drag Dhaka bourse down by 59 points

The benchmark equity index of the Dhaka Stock Exchange (DSE) is likely to fall by about 59 points, according to EBL Securities, as the merger of five ailing Islami banks may lead to their de-listing.

These banks - First Security Islami Bank, Social Islami Bank, Union Bank, Global Islami Bank, and Exim Bank - are expected to be de-listed as the Bangladesh Bank plans to take them over and consolidate them into the largest state-owned Shariah-compliant lender.

The combined market capitalisation of the banks is Tk 20 billion, while the market value of their free-float shares is more than Tk 16 billion.

"The formal procedure has begun and the majority of the work will be completed within one and a half months," said Kabir Ahmed, head of the six-member working committee overseeing the merger process, at a meeting on Sunday.

There is no clear provision in the Bank Resolution Act-2025 regarding the status of the new entity-whether it will be listed on the stock exchanges or not, said Salim Afzal Shawon, head of research at BRAC EPL Stock Brokerage.

Expected impact of de-listing

Currently, the general public, institutions, and foreign investors together hold between 45.51 per cent and 94.1 per cent stakes in these banks. As a result, around 59 points from the prime index are likely to disappear with the elimination of free-float shares.

Exim Bank has free float worth Tk 4.40 billion, carrying an index weight of 0.29 per cent on the Dhaka Stock Exchange. Similarly, Social Islami Bank's free-float market cap is Tk 5.54 billion, with an index weight of 0.30 per cent.

"If [the banks are] delisted, there will be a huge negative impact on the overall stock market as majority shares of these banks are free float," said Md Sajedul Islam, managing director of Shyamol Equity Management.

He, however, acknowledged that there is no other way to salvage the banks. "Since the government is determined to keep these banks alive, there is still hope for investors."

Mr Islam also expressed concern that the delisting of banks would create a negative impression among foreign investors, as four out of the five banks have foreign stakes.

Currently, the Dhaka bourse's equity market cap is Tk 3,661 billion, while the banking sector's market cap stands at Tk 726 billion, according to Tuesday's data.

The banking sector's market cap may shrink by Tk 20 billion, or 2.75 per cent, after the merger. Despite that, it will still retain its leading position in terms of market cap, followed by the telecommunication and pharmaceuticals sectors.

What happens otherwise

Some stakeholders believe the new entity will remain listed in the equity market.

Akramul Alam, head of research at Royal Capital, said the consolidated bank will almost certainly remain a listed entity.

"International best practice is that the surviving or newly-formed entity remains listed, provided it meets listing requirements. So, investors' ability to trade in shares is preserved," said Mr Alam.

Existing shareholders are usually given shares of the new entity in exchange for their holdings of the dissolved institutions, in proportions determined by market valuation. The new bank is then quoted in the stock market under a new name/ticker.

To corroborate his statement, Mr Alam noted that during the merger of listed banks such as JPMorgan-Chase and Bank of America-Merrill, the consolidated entities remained listed. "Ticker may change but quotation continues without interruption."

The newly-formed entity is considered a continuation of the dissolved companies, provided free float and governance matters are maintained. "So, the yet-to-emerge bank is very likely to list unless the regulator decides to delist the [ailing] banks," added Mr Alam.

If the new entity ends up as a non-listed enterprise, shareholders of the five banks will require clarity about their investment status after the merger.

Arif Hossain Khan, executive director and spokesperson of the Bangladesh Bank, recently told The FE that everything will be carried out with utmost caution and transparency.

He assured that the interests of general depositors and small investors-particularly general shareholders-will be fully protected. "At this point, it's difficult to say exactly how the process will unfold," he added.

Meanwhile, Sunday's meeting estimated that Tk 352 billion will be required for the bank merger. Of this, the government will provide Tk 202 billion, while Tk 150 billion will be mobilised from institutions and through the conversion of institutional deposits.

Abul Kalam, spokesperson of the Bangladesh Securities and Exchange Commission (BSEC), said the merger process is being carried out under the Bank Resolution Act-2025 to revive the financial health of the struggling banks and stabilise the banking sector.

"We will remain informed throughout the merger process and try to safeguard the general investors' interest," said Mr Kalam, without elaborating.

Among the five banks, four had been under the control of the controversial S Alam Group until August 5 last year, while Exim Bank was managed by Nazrul Islam Mazumder, founder of Nassa Group.

Mr S Alam and Mr Mazumder had strong ties to the previous regime and were influential figures in the banking sector.

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