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Effect of bank mergers on customer relationships

By Mustafa Sethi

This research was done to find out the different reasons for doing the Bank Mergers
that happen all around the world and what implications do bank mergers have, what
effect does bank mergers have on customer relationships. It was found out that the
different variables that affect the customer relationships in banks are bank borrowing,
small term financing, loan contracts, customer centric view and the lack of
information provided by the management to the customers after the bank mergers.
The sample size of the research would be around 150, depending on convenience. The
sample targeted would be bank customers, most of who will belong to merged banks
in Lahore.

Chapter one Introduction

Banking sector is one of the pillars of any thriving economy. One of its major roles is
to channelize the credit of the people towards the countries industries and to
encourage the domestic savings of the people by providing a variety of deposits. This
is the main thing required for the economy to grow and sustain. For this to happen it is
very important that the banks are regulated and efficient, this is necessary to ensure
that the economic process is not hampered by any improper functioning of the
banking sector. Since the beginning of Pakistan, its economy has not been a stable
one. Banking sector is one of the reasons for this financial instability. A banking
sectors role is very important for financial stability and it is important to understand
how a bank operates. The primary source of funds for the banking sector is deposits.
There are basically two functions attached to deposits: first and foremost, it allows
savers to earn income on what they opt to save, in terms of interest. And secondly, the
deposits can then in turn be used as funds for the bank to lend out when the need
arises or when the market demands so. And once again, the bank foresees two benefits
to this. The bank earns the spread, which they receive from having loaned out the fund
and the difference from the cost they owe for having acquired those funds. And then
on another hand, it allows entrepreneurs to improve the fortunes of the nation by
providing them with a start up capital for their business.
Therefore we can see that the banking sector is predominantly running the financial
aspect of the public as well as the industrial aspect of the country, thus, smooth and
efficient running is necessary for the bank to generate revenue, without which it does
not have reason to exist. The last 15 years have witnessed unprecedented numbers of
mergers and acquisitions (M&As) in most countries, in mature and innovative sectors
alike, from retailing to telecom- communications to banks.. In the last few years there
have been lots of takeovers of banks in Pakistan. One the main examples being
Summit Bank acquired by HBL and RBS being acquired by Faysal bank.
The reasons for these bank mergers include

High Competition between banks

Low efficiency of banks
Poor service of banks

Small banks, like Summit bank having low expenditures and a few branches, are
acquired by bigger banks, like HBL, which have high capital, efficiency and
Another reason for recent bank mergers is due to the banks not meeting minimum
capital requirement set by the state bank. A bank short of the minimum capital
requirement merges with a bigger bank so the bank survives in the economy. The state
bank helps in doing that so that the bank does not default because if it does, the people
will loose trust on banks and the state bank cant allow that to happen. According to
traditional economic theory, a merger in any industry can lower costs through
economies of scale and raise prices by creating market power.

Chapter 2 Literature Review

The banking industry has seen loads of mergers in recent years but there have been no
substantial evidence on whether these mergers have been beneficial or not.
The financial industry has been growing at extreme pace, with the joining together of
financial markets reducing differences between banking activities such as lending,
investment banking, insurance and asset management. Firms are trying to respond to
these by reducing their costs and expanding their size by merging with their main
competitors or completely acquiring them. Banks are very active especially when it
comes to mergers, not missing any chance for expanding or taking over their
competitors. De-regulation and technological advances have led to a large number of
mergers, which started in the eighties in USA and a decade after that this phenomenon
reached Europe in the nineties. Whenever there is a takeover, the parties involved try
to emphasize the cost cutting and the various growth opportunities although it does
not discuss to what extent the mergers have been successful.
Jonathon Scott also discusses about how some of the newly merged banks CEOs are
trying to make sure the customers are being appreciated by the banks after mergers
describing it as a good thing too as they tried to make sure there was as low
inconvenience to the customers as possible due to the mergers being taken place and
there is a seamless transition for the customers. He explained how the customers
never asked for a merger and he tells banks should try to make sure the transition is

transparent for all parties involved. He tells the biggest problem for the customers in
mergers is the uncertainty that follows as he tells the customers dont fear the change
that is occurring but they actually fear the uncertainty that follows the change, as the
customers are very sensitive. He also tells the information about mergers which a few
years ago was appreciated by the customers is now being demanded by the customers
and it is very important for the staff to map out the customers clearly. He explains that
the key to keeping customers happy is better communication with on going research
going side by side as well. (Scott, Dunkelberg 2003)
One of the variables that affect customer relationships is bank borrowing. Carow and
Kane in their article discussed how the bank borrowers have fared after the mergers.
In his article he stated that as banks merge and become more powerful in their
bargaining power, it adversely affects the bank borrowers of the acquired bank. It
discusses how the on going increasing amount of mergers, have unfavorably affected
the credit limits that are allowed to the customers and smaller firms. It discusses
bargaining takes place in three main areas during one of the mergers and one of the
main bargaining takes place between banks and its customers. It also discusses the
changes that occur in the bargaining power and banks become more powerful as
mergers happen. Mergers eliminate competitors for the banks and reduce the power of
bank borrowers also losing an average of 0.2% of their equity value. He states that as
the banks become more powerful, it leads to higher prices with the cost of borrowing
also increasing. Banks calculate the returns of a customer or firm and the parties,
which are highly profitable to them, are treated fairly as compared to those, which are
less profitable. He argues that banks in this era grow through mergers and
consolidations and when doing so they reduce the supply of loan to smaller businesses
and lesser profitable customers. From this article we found out bank mergers have an
adverse effect on bank borrowing for smaller less profitable firms and customers
whereas more profitable customers and firms gain from mergers as the costs of
borrowing is reduced for them along with increased supply of money for them.

Chapter 3 Theoretical Framework

Bank Borrowing

Customer Centric


The above theoretical framework describes the two variables which effect the
customer relationships and what relationships they have.

Chapter 4 Results
To ensure the effectiveness of this research, these variables are tested on AMOS and
SPSS. When we calculate the model fit, all the values of the factor loading below 0,4
are deleted and the values above 0.4 are then used as they are considered fit to be used
for the model structure. After the initial model, we cut off the factor loadings, which
had value below 0.4 as they were insignificant and wrote all the significant values.
After seeing the factor loadings, we checked further reliability of our model by
checking at the values of AVE and the construct reliability. The cut off point for AVE
is 0.5 and for the construct reliability is 0.7. The value of customer centric view is
0.498, which we can say is equal to 0.5 and the values of Consumer Response and
Bank Borrowing are both above 0.5. Hence we can conclude that AVE for both the
variables hold true. The cut off value for construct reliability is 0.7. Bank borrowing
construct reliability is 0.696, which we can round off to 0.7 and the construct
reliability of both, customer response and customer centric view is above 0.7 hence all
the three variables are considered reliable in this.

Next we check the discriminant validity, which is used to check the extent to which
there is a correlation between un-related variables and how much different these
variables are from each other. AVE value of each variable is compared to the squared
value of each construct. These constructs are found by detecting the values of the
arrows between each variable. The value of AVE should be greater from the values of
all the constructs. For my research the discriminant validity test completely holds true
as the AVE value is greater than all squares of the construct thus the discriminant
validity test also holds true.

Model Fit













The CMIN/DF value from the model fit diagram is 3.377 which is lesser than 5 so the
value we got is good. In the baseline comparison model the default model values
should be greater than 0.7 and the values of AGFI, GFI and CFI are greater than 0.7
and therefore lie between the range of cutoff, as they are above 0.7. TLI and NFI
values are below 0.7 hence they are not in the cutoff range.

Cronbachs Alphas
Table 4.2 Reliability Statistics

Dependent variable

Independent variable

Cronbachs alpha

Bank Borrowing
Customer Centric View
Customer Response


Individual Chronbachs Alphas



Bank Borrowing


Customer Centric View


Customer Relationships


This is a common measure, which is used for to check internal consistency and
reliability. This is basically used when you have likert scale questions that are in a
scale. The interpretation benchmark is greater than 0.7. Validity as a whole is said to
be true as the value is 0.910. Individually the alphas also hold true as all the values are
0.7 or above 0.7.

Analysis of Regression Equation

Equation: Customer Relationships = 2.032 + 0.591 Customer centric view + 0.100
Bank Borrowing.
For every unit increase in customer centric view will result in 0.591-unit change in the
customer relationships.
For every unit increase in Bank Borrowing will result in 0.10 unit change in effect of
customer relationships

The purpose of this study was to find the effects of Bank mergers on customer
relationships. All over the world, when a bigger bank merges with a smaller bank, the
way a bank deals with customers changes. When going through this research, which I
did on the customers who were there at the bank before and after the merger, I found
out that the customers who had stayed on were due to the favorable conditions the
banks gave to them. The previous articles done on this research also stated that bank
mergers have both a positive and a negative effect on the customer relationships.
Customer service is sometimes lost in between the mergers; customers who were
happy with the previous regime and the new regime changed the structure, the
unhappy customers left due to the fact that they thought they werent being treated
properly. The customers who had stayed on with the bank had stayed due to the
reason that they liked the new regime, they were being given the proper attention, the
bank had used a customer centric view towards them and the bank borrowing had also
been good for them.
From the research, I found out about how having a customer centric view helps banks
retain its customers, and the customers they dont want, the smaller customers, after
the policy change leave the bank and the bank is left with the customers who they
think they should cater and the customers who are happy with the current setup of

Similarly after mergers, the bank borrowing setup also changes. The banks lend the
money more to bigger customers of theirs, who have stayed with them. The customers
who arent happy with the current borrowing setup leave.
To conclude, this paper goes with the previous researches, pointing out that the
customers who were there before and after the merger, are happy with the services
being offered to them and stay on with the bank as the customers were a profitable
proposition for the banks, hence banks charging them favorably and the unhappy
customers, the less profitable ones leave and go out to other banks.

This research was done on customers who had stayed before and after the mergers. It
didnt take into account the customers who had left the bank after mergers separately.
One recommendation for future researches would be to take into account those
customers and separately see the reasons behind those customers leaving and what
could be done for them.
Another recommendation for the banks would be to be more fairer and having a more
customer centric view of the all the existing customers of the merged banks. The
customers are their assets and they should try and hold as much of the customers as
possible, as the customers are their assets and at least 30% leave after the merger. The
banks should bring down that number and do more research on them. During the
merger process, banks in that time lose focus and there becomes disarray during the
process. From future the banks should while completing the merger process, also try
to make sure they are seeing their customers properly and try to minimize the number
of dissatisfied customers.