PAPUA New Guinea’s consumer watchdog, the Independent Consumer and Competition Commission (ICCC) has declined authorization for the proposed acquisition of 89.91 shares in Westpac Bank-PNG-Limited (Westpac PNG) by Kina Securities Limited (KSL).
On 17th March, 2021, KSL applied for authorization pursuant to section 82 of the ICCC Act regarding the proposed acquisition. The ICCC registered the application on 22nd March, 2021; and the authorization process was initiated thereafter. Public consultation commenced on 24th March, 2021 and ended on 09th April, 2021.
The ICCC Commissioner and Chief Executive Officer, Paulus Ain said that in its consideration of the likely effects on competition, if the proposed Acquisition proceeds, the ICCC has, in summary, formed the following conclusions:
- Although KSL proposed to operate the acquired business of Westpac PNG as a separate bank independent of Kina Bank, as East West Commercial Bank, the ICCC is not satisfied that they are separate banks, because of common ownership. Therefore, the ICCC did not consider them as separate banks.
- Currently, the markets are highly concentrated; and will remain so, as long as there are only few players in the markets. The number of commercial banks would be reduced to two with the acquisition, with small fringe non-bank financial institutions (NBFI) operating in some location, with limited scale, scope and network economics.
- The barriers to entry and expansion are very high and the proposed acquisition would further heighted the barriers to enter as number of banks are reduced and giving more market power to the two existing incumbents. The ICCC recognizes, however, that KSL as a merged entity would gain scale, scope and network economies necessary to complete more effectively with the dominant firm; but this may not be possible with KSL and proposed East West Commercial Bank operating independently and separately.
- In a duopolistic financial industry where one is already classified as the dominant bank, the incentive to “coat-tail” and the ability to do so is in a highly concentrated market would be very strong and likely to overcome the incentive to compete.
- There is no countervailing power in the markets of greatest concern-retail banking-type service markets consisting of the provision of the transaction, savings, deposits, home loans and personal loans services to individual and small-to medium size enterprise (SME) customers.
The only available power that such retail banking customers have is to choose which financial services provider they bank with; and that depends on the level of competitions that prevails. The proposed acquisition would reduce such choice significantly.
- The ICCC is concerned that the proposed acquisition is likely to result in prices and profit margins increasing.
- In terms of substitutes, some of the services or products in the relevant markets are also provided by other banks and some of them by non-bank financial institutions (NBFIs), but most of the letter are dependent on a bank to facilitate certain transactions, and their geographic or customer spread is limited, thereby raising costs to risks which limit their competitive ability.
- The proposed acquisition of Westpac PNG would likely affect growth in the commercial banking markets given the number of commercial banks has decreased over the years.
- Although Westpac has decided to divest PNG business, it appears that this will not happen immediately without the proposed acquisition proceedings; hence the ICCC considers that Westpac PNG will be a significant source of competition for at least several years.
“The ICCC is not satisfied that this proposed acquisition would not have, and would not be likely to have, the effect of substantially lessening competition in the relevant markets for the reasons outlined in its determination,” Mr. Ain added.
He reiterated that in terms of public benefit and determent assessment, ICCC concludes that the proposed acquisition would not be likely to result in public benefits that outweigh detriments to the public, including those resulting from the lessening of competition because:
- If the proposed acquisition proceeds, it is likely to substantially lessen competition in the retail banking markets. This in itself is very significant public detriment.
- The proposed acquisition would increase barriers to entry, in the way of costs in setting-up an adequate physical presence in PNG to complete effectively with the two remaining banks; and to the expansion of the NBFIs to compete more effectively with the existing banks.
- The market power of the two remaining banks would allow them to extract higher rents by charging loan interest rates to business/individuals and by paying a lower rate of return to depositors. Lower supply demand for loans would be associated with higher lending rates and would impede capital accumulation and limit national economic progress.
- With the innovation in technology and product design, there may be some gain in efficiency in service delivery and product /service differentiation but with the likely absence of true competitive pressure that is likely to result in higher lending rates and lower interest rates on deposits, less attention to customer’s queries/service quality.
“ Based on the above assessment and reasoning, the ICCC has decided to Decline Authorization for the proposed acquisition of 89.91% of the shares in Westpac Bank-PNG-Limited by Kina Securities Limited,” the Commissioner said.