You are on page 1of 24

RESEARCH PROPOSAL

An Analysis on
Financial Performance of
CIMB Group Holding Berhad After Merged

PREPARED BY:
HARYANTI HUSSEN (2009476958)
BBA (HONS) FINANCE

PREPARED FOR:
PM MOHD ZAKI B. ZAKARIA

TABLE OF CONTENT

CHAPTER 1: INTRODUCTION
1.0 Background

1.1 Overview of CIMB Bank

1.2 Problem Statement

1.3 Research Objectives

1.4 Scope of the study

1.5 Limitation of the study

1.6 Significance of the study

1.7 Definition of term

CHAPTER 2: LITERATURE REVIEW


2.0 Introduction

2.1 Negative impact

2.2 Positive impact

11

CHAPTER 3: RESEARCH METHODOLOGY


3.0 Introduction

14

3.1 Data Collection Methods

14

3.2 Methodology

14

3.3 Data Analysis and Measurement

15

3.3.1 Common Size Financial Statement Analysis

15

3.3.2 Comparative Financial Statement Analysis

15

3.3.3 Ratio Analysis

15

3.3.3.1 Liquidity Ratio

16

3.3.3.2 Leverage Ratio

17

3.3.3.3 Activity Ratio

18

3.3.3.4 Profitability Ratio

18

REFERENCES

20

CHAPTER 1

INTRODUCTION
1.0 Introduction
Merger and acquisition activity results in overall benefits to shareholders when the
consolidated post-merger firm is more valuable than the simple sum of the two separate premerger firms. The primary cause of this gain in value is supposed to be the performance
improvement following the merger. The research for post-merger performance gains has
focused on improvements in any one of the following areas such as efficiency improvements,
increased market power, or heightened diversification.
The purpose of the paper is to examine the financial performance of CIMB Bank after
merged and effects of merger on the efficiency of the banks. The study has important
implications such as guiding the government policy regarding deregulation mergers.
Decision-makers hence need to be more cautious in promoting mergers in order to enjoying
efficiency gains.
By the end of the 1970s, Bank Negara Malaysia believed that there were too many
banks in the country compared to its real size. The creation of new banks was not allowed
and the existing banks were encouraged to consolidate. However, the call for bank
consolidation throughout the 80s was not received well by the bankers. Only a few
consolidations took place after the economic decline in 1985-86.In order to minimize the
potential impact of systemic risks on the banking sector as a whole, following the deepening
of the financial crisis, the Government took stronger measurers to promote or in other word is
force merging of banking institutions.
After the Asian financial crisis, the government announced a major consolidation in
1999 that would reduce the number of domestic banking institutions to ten banking groups by
2000. The ten banking groups or anchor banks are Malayan Banking Berhad, RHB Bank
Berhad, Public Bank Berhad, Bumiputra-Commerce Bank Berhad, Multi-Purpose Bank
Berhad, Hong Leong Bank Berhad, Perwira Affin Bank Berhad, Arab- Malaysian Bank
Berhad, Southern Bank Berhad and EON Bank Berhad. Each bank had minimum
shareholders funds of RM2 billion and asset base of at least RM25 billion.

1
1.1 Overview of CIMB Bank

For this research, I had choose the CIMB Group which is Malaysia's second largest
financial services provider, and fifth largest in Southeast Asia by total assets. It is owned by
CIMB Group Holdings Berhad, which is listed on Bursa Malaysia with a market capitalization
of RM46.6 billion.

CIMB Group operates as a universal bank offering a full range of financial products
and services, covering corporate and investment banking, consumer banking, treasury,
insurance and asset management. CIMB Group offers products and services on a dual
banking basis, giving customers a choice of both conventional and Islamic solutions.

As a universal bank, it is able to serve everyone from all walks of life in Malaysia as
well as throughout the region, including large regional corporations, domestic listed
companies, entrepreneurial start-ups, high-net worth individuals, pensioners and children.
Today, CIMB serves close to seven million customers in over 600 locations through over
36,000 staff. The overview of CIMB Bank are below:

1999: BBMB and Bank of Commerce merged to form Bumiputra-Commerce Bank.


2000: As part of the government initiated banking consolidation plan, SBB acquired Ban Hin
Lee Bank Berhad and also took over two smaller finance companies; Perdana Finance
Berhad and Cempaka Finance Berhad.
2003: CIMB was listed on the main board of the KLSE. In the same year, CIMB Islamic was
launched providing customers with Syariah compliant solutions.
2004: CIMB acquired 70% of Commerce Trust Berhad (CTB) and Commerce Asset Fund
Managers Berhad (CAFM). This led to the formation of CIMB-Principal, a joint venture with
the Principal Group of USA. Then in 2005, CIMB acquired Singapore based G.K. Goh which
was established in 1979 as an international stock broker. This led to the formation of CIMBGK, CIMB's international investment banking operator.
2

2005: Commerce Asset Holdings Berhad (CAHB) announced its strategic decision to create
a universal bank by combining its commercial and investment banks. Following this
announcement, Bumiputra-Commerce Group was acquired by CIMB. As part of the exercise,
CAHB was renamed Bumiputra-Commerce Holdings.
2006: In January, CIMB completed its restructuring exercise under Bumiputra-Commerce
Holdings Berhad. The new CIMB Group was known as a universal bank. It made a transition
to a full-service banking provider serving corporates to individuals. Then in March, CIMB
Group acquired SBB after extensive negotiations. After the acquisition, in September CIMB
Group was launched by the Prime Minister of Malaysia, YAB Dato' Seri Abdullah bin Haji
Ahmad badawi

1.2 Problem statement

The focus of research is on financial performance of CIMB Group Holding Berhad


after merged. There are several evidence shows that merger could give positive and also
negative impact on the company involves. The evidence shows that acquiring banks were
more technically efficient but less scale efficient than target banks at the time of merger.
However, the acquiring banks did not always maintain their pre-merger efficiency levels.
Inefficiencies grew during the first post-merger year but the results were inconclusive during
the subsequent post-merger years. There is little evidence to support the notion that postmerger efficiency gains are quickly passed on to the public.
Is it the financial performance of CIMB Bank improves after merger or not?

1.3 Research Objectives

Purpose of the study


The focus of research is to examine the financial performance of CIMB Bank after
merged base on the financial statement for the year of 1999 until 2009 by using ratio
analysis, comparative financial analysis and common size financial analysis.
The objective of this study is to comparing the financial performance of bank before
and after merge.
1. The first objective is to comparing the financial performance of CIMB Bank before and
after merge.
2. The second objective of this study is to identify the positive impact after merging
banks.
3. The other objective is to examine the negative impact on CIMB Bank after merged.

1.4 Scope of the study


The scope of this study covers on the CIMB Bank Berhad financial statement
from the period of 1999 to 2009. It can allow information gathering and the relevant
data across time. There will be 5 income statements and 5 balance sheets that will be
cover for this study. The calculation for analyze the financial performance will be
financial ratio analysis, comparative financial analysis and common size financial
analysis.

1.5 Limitation of the study


a) Cost constraint
b) Time constraint
c) Literature Review availability
As the topic of this research is quite popular, the availability of literature review
is not really limited for this study.

d) Data Availability
Overall, this research relies on the secondary data gain from data stream,
CIMB Bank website itself, UiTM Library, Bursa Malaysia Library, Emerald website
and newspapers in order to gather the information and data.

1.6 Significance of the study


This study has provided us some useful significance. These include the ideas
mentioned below.
a) To the company (CIMB Group Holding Berhad)
The bank will able to know their financial performance with more accurate
such as their strong and weaknesses after merge. They can get the
information from this report and some recommendations that will be
recommended by the researcher. So, the bank could take some corrective
action in order to improve their efficiency gains.

b) To the other researcher


From this report, I hope that it will provide other researchers with better
understanding and knowledge especially for them who analyze the financial
performance of a company.

c) To the student
By doing this research, I will gain so much experience and knowledge in
finishing a mini thesis. I will able to use my knowledge from the previous study
about research methodology, financial statement analysis and so on and
apply them in this research.

1.7 Definition of Term


Merger: The merger can be defined as a combination of two or more companies into
one, with only one company retaining its identity. Typically, the larger of the two
companies is the company whose identity is maintained. The merger of two
companies can be accomplished in one of two ways. For this study, I had chosen the
year of merger starting from 1999 because the bank included as one of the bank that
need to do a major consolidation in the year. This is what I mentioned above that the
government wants to reduce the number of domestic banking institutions to ten
banking groups by 2000. So, was that action made the company performance
improved better or not and what other else impacts from the merger.

Financial Performance: The company financial performance will be evaluate by


using financial ratio analysis, common size financial analysis and comparative
financial analysis. This financial analysis will calculated based on the balance sheet
and income statement from annual report of CIMB Bank. For example, the profitability
ratio analysis used to indicate how well a firm is performing in terms of its ability to
generate profit especially after CIMB Bank merge.

Financial Statement Analysis: It is an evaluative method of determining the past,


current and projected performance of a company. Several techniques are commonly
used as part of financial statement analysis including horizontal analysis, which
compares two or more years of financial data in both dollar and percentage form;
vertical analysis, where each category of accounts on the balance sheet is shown as
a percentage of the total account; and ratio analysis, which calculates statistical
relationships between data.

Balance sheet: It is a financial statement that summarizes a companys assets,


liabilities and shareholders equity at a specified period of time. These three balance
sheets segments give investors an idea as to what the company owns and owes, as
well the amount invested by the shareholders.
7

Income statement: According to Investopedia.com the income statement is divided


into two parts which are the operating and non-operating sections. The portion of the
income statement that deals with operating items is interesting to investors and
analysts alike because this section discloses information about revenues and
expenses that are a direct result of the regular business operations. Meanwhile the
non-operating items section discloses revenue and expense information about
activities that are not tied directly to a company's regular operations.

Common size financial statement: A standardized financial statement presenting


all items in percentage terms. Balance sheet items are shown as a percentage of
assets and income statement items as a percentage of sales.

Efficiency gain: According to Financial Times Lexicon.com, efficiency gain normally


measured by looking at the relationship between cost and earnings. If cost goes
down and earnings are flat, or if cost is flat but earnings go up, the company has
made gains in efficiency.

CHAPTER 2
LITERATURE REVIEW
2.0 Introduction
This chapter will describe the previous study and literature reviews about impact on
financial performance after get merged such as their positive and negative impacts.

2.1 Negative impacts


The first application analyzed efficiencies of different branches of a single bank.
Sherman and Gold (1985) studied the overall efficiency of 14 branches of a U.S. savings
bank. DEA results showed that six branches were operating inefficiently compared to the
others. Similar study by Parkan (1987) suggested that eleven branches out of thirty-five were
relatively inefficient.
Rhoades finds that neither income nor non-interest expenses were affected by
merger activity. In Rhoades (1990), a similar study to Rhoades (1993) is conducted with 13
acquisitions involving billion dollar banks. Consistent with his other work, Rhoades finds no
performance effect due to mergers. As pointed by Rhoades (1998, p278), there has been
unanimous agreement among the experts that about half of any efficiency gains should be
apparent after one year and all gains should be realized within three years after the merger
years.
A large portion of the empirical work examining the benefits of mergers focuses on
changes in cost efficiency using available accounting data. Berger and Humphrey (1992),
conclude that the amount of market overlap and the difference between acquirer and target
X-efficiency did not affect post-merger efficiency gains. In addition to testing X-efficiency,
they also analyze return on assets and total costs to assets and reach a similar conclusion:
no average gains and no relation between gains and the relative performance of acquirers
and targets.

Akhavein, Berger, and Humphrey (1997) analyze changes in profitability


experienced in the same set of large mergers as examined by Berger and Humphrey. They
find that banking organizations significantly improved their profit efficiency ranking after
mergers. However, rankings based on more traditional ROA and ROE measures that
exclude loan loss provisions and taxes from net income did not change significantly following
consolidation.
The work of Linder and Crane (1992) is also noteworthy. They analyze the operating
performance of 47 bank-level intrastate mergers that took place in New England between
1982 and 1987. Of the 47 mergers in the sample, 25 were consolidations of bank
subsidiaries owned by the same holding company. The authors aggregate acquirer and
target data one year before the merger and compare it to performance one and two years
after consolidation. The results indicate that mergers did not result in improved operating
income, as measured by net interest income plus net non-interest income to assets.
Chamberlain (1992) demonstrates the importance that sample selection can have in
influencing the results of a merger study. Her sample consists of 180 bank subsidiaries that
were acquired by bank holding companies between 1981 and 1987. The unit of analysis is
the individual target bank that experienced a change in ownership, but was not consolidated
into another bank. For eac h merger, matched pair analysis is conducted. Pre-merger and
post-merger performance of the acquired bank are compared to those of a non-acquired
bank from the same area and of similar size and
leverage. While Chamberlain finds evidence of overall gains when Texas mergers are
omitted from the sample, the full sample yields no evidence of gains.
Hannan and Wolken (1989) conduct a study of the value-weighted abnormal returns
experienced in 43 deals announced between 1982 and 1987. The authors find that, on
average, total shareholder value was not significantly affected by the announcem ent of the
deal. The authors do, however, find that one determinant, target capitalization, crosssectionally influenced expected synergistic gains . Target capital was negatively related to
the change in total value.

10

A note of caution however, encouraging or forcing banks to merge in times of severe


banking crisis as a measure to reduce bank failure risk, would not only possibly create a
weaker bank, but could also worsen the banking sector crisis. As shown by Shih (2003),
merging a weaker bank into a healthier bank in many cases would result in a bank even
more likely to fail than both the predecessors bank. On the other hand, he found that
mergers between relatively healthy banks would create banks that are less likely to fail.

Positive impacts
The findings of Zhang (1995) on U.S. data contradict those of most abnormal return
studies . Among a sample of 107 mergers taki ng place between 1980 and 1990, the author
finds that mergers led to a significant increase in over all value. Although both merger
partners experienced an increase in share price around the merger announcement, target
shareholders benefitted much more on a percentage basis than the acquiring shareholders.
Cross-sectional results suggest that increases in value were smallest when improved
efficiency and increased market power were expected to have their greatest potential impact.
.
Recently, several papers incorporate both approaches in the literature. The first of
these studies is conducted by Cornett and Tehranian (1992) and examines 30 large holding
company mergers occurring between 1982 and 1987. The authors find that profitability, as
measured by cash flo w returns on the market value of assets, improved significantly after
the merger. This finding, however, must be viewed closely for several reasons.
Pilloff (1996), like Cornett and Tehranian, combines both approaches found in the
literature to analyze a sample of 48 mergers of publicly traded banking organizations that
merged between 1982 and 1991. His study improves upon Cornett and Tehranian by
addressing many of the problems in that paper. First, results are based on traditional
measures of performance that are appropriate for a study of banking organizations. Second,
the performance of merging banks is compared to a more accurate benchmark that controls
for geographic location. Third, and perhaps most importantly, the merger sample is larger
with substantially fewer observations that are poorly suited for analysis. Pilloff obtains results
that are consistent with the bulk of the merger literature.
11

In general, mergers were not associated with any significant change in performance,
suggesting that managers were unable to generate benefits from deals on average.
Moreover, the mean overall change in shareholder value was also quite small.

Revenue enhancements may result from cross-selling of bank services and the
improved ability to raise fee revenues and lower interest rates on deposits (Houston, James
and Ryngaert, 2001). Mergers can also increase efficiency when larger merged entities
reaches required critical mass to gain access to cost saving technologies or spread fixed
costs over a larger production base. The studies of US banking generally show very little cost
X efficiency improvement on average from bank mergers in the 1980s.
Bank mergers and acquisitions may enable banking firms to benefit from new
business opportunities that have been created by changes in the regulatory and
technological environment. Berger et al. (1999,p 136) pointed the consequences of mergers
and acquisitions, which may lead to changes in efficiency, market power, economies of scale
and scope, availability of services to small customers and payments systems efficiency.

Besides improvement in cost and profit efficiency, mergers and acquisitions could
also lead banks to earn higher profits through the banks market in leveraging loans and
deposit interest rates. Prager and Hannan (1998) found that banks mergers and
acquisitions has resulted in higher banks concentration, which in turn leads to significantly
lower rates on deposits. Some evidence also suggested that U.S. banks that involved in
M&As improved the quality of their outputs in the 1990s in ways that increased costs, but still
improved profit productivity by increasing revenues than costs (Berger and Mester (2003, p
88)).

Bank mergers can increase value by reducing costs or increasing revenues. Cost
reduction may be greater when merging banks have geographic overlap because banks
often claim that overlap elimination can result in cost savings amounting to around 30% of
the targets non-interest expenses 2277 (Houston, James and Ryngaert, 2001). Revenue
enhancements may result from cross-selling of bank services and the improved ability to
raise fee revenues and lower interest rates on deposits (Houston, James and Ryngaert,
2001).
12

Bank mergers and acquisitions may enable banking firms to benefit from new
business opportunities that have been created by changes in the regulatory and
technological environment. Berger et al. (1999, p 136) pointed the consequences of
mergers and acquisitions, which may lead to changes in efficiency, market power,
economies of scale and scope, availability of services to small customers and payments
systems efficiency. Prager and Hannan (1998) found that banks mergers and acquisitions
have resulted in higher banks concentration, which in turn leads to significantly lower rates
on deposits.

13

CHAPTER 3
RESEARCH METHODOLOGY

3.0 Introduction
This chapter describes the research methodology that used in this research paper. It
is a fundamental that specifies type of information collected, sources of data, data
collection method.

3.1 Data Collection Methods


The data can be obtained from primary or secondary sources. For this research
paper, I used secondary data in order to analyze the CIMB Bank performance after
merge. According to Uma Sekaran (Research Methods for Business, pg 219) secondary
data refer to information gather from sources already existing. So, for this project paper, I
will use company records such as annual report and its website, the internet,
newspapers, the Emerald website and research books. Besides that, I also used the past
thesis done by the senior for better understanding.

3.2 Data Analysis and Measurement


In conducting this research, the methodology of analysis used in analyze the bank
performance is financial statement analysis. I will analyze the income statement and
balance sheet of the company by using ratio analysis, common size financial analysis
and comparative financial analysis. The annual reports are from year 1999 until year
2009.

14

3.3 Methodology
There are three tools used to analyze the financial performance of CIMB Bank such
as comparative financial statement, common size financial statement and ratio analysis.

3.3.1

Comparative Financial Statement Analysis


This is an analysis that reviewed consecutive balance sheets, income
statements or statement of cash flow from period to period. This study will
analyze from the period of 1999 until 2009 of CIMB Bank annual report.

3.3.2

Common Size Financial Statement Analysis


Meanwhile common size financial statement analysis use to understand the
internal made up of comparing such as distribution of financing across
liabilities and utilization of assets. It also uses to understand the distribution of
expenses and profit over sales. There are two types of common size analysis
which are common size income statement and common size balance sheet.

3.3.3

Ratio Analysis
According to Dr. Nik Maheran Nik Muhammad (Fundamental of Financial
Statement Analysis) the ratio analysis is a useful way of gaining a snapshot
picture of a company. These ratios can be analyzed to identify the companys
strengths and weaknesses. Besides that, through the process, we can gain
the useful insights. There are four most commonly used groups of ratios such
as liquidity, debt or leverage, activity or turnover and profitability.

15

3.3.3.1

Liquidity Ratio
It used to determine a companys ability to pay off its short terms debts
obligation. Usually, the higher the values of the ratio, the larger ability
for the company cover its short term debts. These ratios contain four
of common ratio such as current ratio, quick ratio, net working capital
and operating cash flow ratio. For this research, I will use three of
them.
a) Current Ratio
It is a ratio that measures a companys abilities to pay a short term
liabilities. The higher the current ratio, the better.
Current ratio = Current asset
Current liabilities

b) Quick Ratio
This ratio used to indicate the capability of a company whether it
has enough short term assets to cover its immediate liabilities
without selling inventory or not. The companies with a ratio less
than 1 will unable to pay their current liabilities immediately.
Quick ratio = Current asset Inventories
Current liabilities

c) Net Working Capital


It is a measure the companys efficiency and short term financial
health. The company is able to pay off its short term liabilities if it
has positive working capital.
NWC = Current asset Current liabilities

16

3.3.3.2 Leverage Ratio


A company's leverage relates to how much debt it has on its balance
sheet, and it is another measure of financial health.
a) Debt ratio
This ratio indicates the proportion of a companys debt has
relative to its assets.
Debt ratio = Total debt
Total assets

b) Debt to equity ratio


The debt to equity (debt or financial leverage) ratio indicates
the extent to which the business relies on debt financing. A
high financial leverage or debt to equity ratio indicates possible
difficulty in paying interest and principal while obtaining more
funding.
Debt to equity ratio = Total liabilities
Shareholders equity

d) Times interest earned


This ratio indicates the extent of which earnings are available to
meet interest payments. A lower TIE ratio means less earnings
are available to meet interest payments and that the business
is more vulnerable to increases in interest rates.
TIE = EBIT
Interest expenses

17

3.3.3.2

Activity Ratio
These ratios measure a companys ability to convert different account
within their balance sheets into cash or sales.
a) Total asset turnover
The total asset turnover ratio measures the ability of a
company to use its assets to generate sales.
TATO = Net sales
Total asset

b) Fixed asset turnover


The fixed asset turnover ratio measures the company's
effectiveness in generating sales from its investments in plant,
property, and equipment. The higher the measure, the more
efficiently these investments are performing.
FATO = Net sales
Total Fixed asset

3.3.3.3

Profitability Ratio
This ratio indicates how well a firm is performing in terms of its ability
to generate profit.
a) Net Profit Margin
Net profit margin indicates how well the company converts
sales into profits after all expenses is subtracted out.
Company's that generate greater profit per dollar of sales are
more efficient.
Net profit Margin = Net income x 100%
Net sales

18

b) Return on asset
ROA tells you what earnings were generated from invested
capital (assets).

When using ROA as a comparative

measure, it is best to compare it against a company's previous


ROA numbers or the ROA of a similar company.
ROA = Net Income x 100%
Total sales

c) Return on equity
Return

on

equity measures

company's

profitability by

revealing how much profit a company generates with the


money shareholders have invested.
ROE = Net Income x 100%
Shareholders equity

19

REFERENCES
Books
Uma Sekaran (2003). Research Methods for Business: A Skill Building Approach (4 th ed).
John Wiley & Sons, Inc, 219.
Zainudin Hj Awang (2009). Research Methodology for Business and Social Science, 59-78.
Nik Maheran Nik Muhammad (2009). Manual book:Financial Statement Analysis

Journals
Allen D & V. Boobal. The Role Of Post-Crisis Bank Mergers In Enhancing Efficiency Gains
And Benefits To The Public In The Context Of A Developing Economy: Evidence From
Malaysia, p2278

Fadzlan Sufian. (2004). The Efficiency Effects Of Bank Mergers And Acquisitions In A
Developing Economy: Evidence From Malaysia. International Journal of Applied
Econometrics and Quantitative Studies. 1-4. p57-59.

Mahadzir Ismail. (2009). Impact of Merger On Efficiency And Productivity In Malaysian


Commercial Banks. International journal of economic and finance. 1 (2), p 225
Steven J. Pilloff & Anthony M. Santomero. (1996). The Value Effects of Bank Mergers and
Acquisitions. The Wharton Financial Institution,p12

Geneva. (2001). The Employment impact of mergers and acquisitions in the banking and
financial services sector. Report from International Labour Organization.
Ruby Ahmad, Mohamed Ariff 7 Michael Skully. (2007). Factors Determining Mergers Of Bank
In Malaysias Banking sector Reform. Multinational Finance Journal. 11

20

Tina Weber. The Impact of Mergers and Acquisition in the Banking and Insurance Sectors.
ECOTEC

Elena Carletti, Philipp Hartmann & Steven Ongena. (2007). The Economic Impact of Merger
Control: What is special about banking?

21