Bank Consolidation | Mergers And Acquisitions | Cost Of Capital



Electronic copy available at:


Table of Contents
Abstract..................................................................................................................... 4 Introduction............................................................................................................... 4 The Indian Banking System....................................................................................... 6 Catalysis Initiating the Merger................................................................................... 8 Reforms of 1991.................................................................................................... 8 Increasing Competition and Efficiency .................................................................. 9 Stability............................................................................................................... 10 Regulatory Requirement...................................................................................... 10 Risk..................................................................................................................... 11 Benefits of Consolidation ........................................................................................ 12 Consolidation in Global Banking sector................................................................... 13 Methodology ........................................................................................................... 16 Data ........................................................................................................................ 18 Discussion and Analysis.......................................................................................... 20 Centurion Bank and Bank of Punjab Deal............................................................ 20 Centurion Bank and Lord Krishna Bank .............................................................. 21 ICICI Bank and Bank of Madura Limited ............................................................ 21 ICICI Bank and Sangli Bank ............................................................................... 22

Akhil Bhan

Page 2

Electronic copy available at:


HDFC and Times Bank ....................................................................................... 23 Oriental Bank of Commerce and Global Trust Bank ............................................ 23 Federal Bank and Ganesh Bank of Kurundwad Ltd.............................................. 24 Bank of Baroda and Benares State Bank Ltd........................................................ 24 Conclusion .............................................................................................................. 28 Annexure................................................................................................................. 29

Akhil Bhan

Page 3

Rajesh.De. With the changing environment many different strategies have been adopted by this sector to remain efficient and to surge ahead in the global arena.This paper also uses the empirical methods T-test to study the short term change in the returns of the banks due the merger and EVA (Economic Value added) method to study the efficiencies or benefits achieved due to the merger . Indian. In the recent times this sector has been undergoing a lot of changes in terms of regulations and effects of globalisation . Banking. EVA. Key Words: Merger. In the present scenario Indian Banking sector has close to three quarters of the countries financial assets and the banks have been growing at the rate of around 18 %.2007) Indian banking sector can be divided into two important era the pre –liberalisation era and post liberalisation era since 1991. (Allen. One such strategy is through the process of consolidation via merger and acquisition.These changes have affected this sector both structurally and strategically.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Abstract This paper gives you an insight into the motives and benefits of the mergers in Indian banking sector . Motives. The European money leader used to display their coins for the customer on the benches and from there came the definition of a bank. Bank word has been coined from the Italian word ‘Banca’ which means a bench.Through this paper and the sample taken for analysis it has been concluded that the mergers in the banking sector in the post reform period possessed considerable gains which was justified by the EVA of the banks in the post merger period . giving out loan and investing in securities . Benefits Introduction Bank in general terminology is referred to as an financial institute or a corporation which is authorised by the state or central government to deal with money by accepting deposits.This sector has seen a tremendous amount of change in the post liberalisation era. Akhil Bhan Page 4 .This is done by examining the eight merger deals of the banks in India during the period of reforms from 1999 to 2006 .

This changing market drives the mergers which have been part of the history process of change in the developed economies but in the emerging economies this concept is gaining pace in the recent times. For every change to accelerate some initiator is necessary and for the Indian banking system economic policy liberalization. the catalysts which are initiating these mergers and motives behind these mergers. This merger wave which we see in the Indian banking sector in the present times is the first merger wave and not much has been written about it. consolidation in global banking sector and future of Indian banking sector.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS With the changing times Indian banking system is moving from a system with large number of small banks to a system where in there are small number of large banks. In the subsequent paragraphs of literature review we will focus of Indian Banking System. privatization. 1 Indian express Newspaper Article Akhil Bhan Page 5 . IDBI Bank “The new generation private sector banks are going through a critical phase of financial reformation. Every merger wave has its own reasons and these reasons are closely related to the localised environment. This paper has been written with this purpose in mind to understand these localised factors. managing director. D. remittances and securities trading. The reasons for the consolidation of banking sector in Europe may not be same as that of India or that of Japan .Each has its own localised factors which play a big role in this consolidation. According to Mr. To keep pace with the changing times and to remain competitive in the global arena banks need to change in form and structure.”1 The Indian government and Reserve bank of India has been in favour of these mergers taking place in the Indian Financial sector. the benefits of this consolidation. Mukerjee. main deals which have taken place in the present days.K. The banking industry whose main function was only taking deposits and lending money has moved a long way with banks today offering a large variety services such as Bank-assurance. With the lack of time at hand the preferred route is inorganic growth and hence mergers and acquisitions for consolidation. deregulation and other market reforms have acted as the catalysts.

In our discussion we segment the Indian banking into an era of pre reforms that is before 1991 and post 1991 reforms which was the reforms era .8% of aggregate deposits of SCBs (Gourlay.Axis Bank .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS The Indian Banking System At the top of the Indian banking system is the Central bank of India known as Reserve Bank of India.This had lead to the growth of the PSB and PSB’s accounted for 90. 2005.A newspaper article of Businessline. after the reforms were brought out on the recommendations of the Narasimham Committees I and II.they did happen but most of these mergers where directed by RBI .During the pre reforms era banks where instructed to maintain a high reserve ratio.This was the time of growth of the private banks like ICICI .Ravishankar. the Indian banking sector started to grow leaps and bounds . The PSB’s are the biggest players in the Indian banking system and they account for 70 % of the assets of SCB’s in India.2006).2 Indian banking was highly regulated before the reforms of 1991 . the interest to be given out by the banks on the deposits and the interest to be charged on loans was also guided by government. It is not that merger did not happen in the pre reforms era .In the post reform era. All these banks fall under Reserve Bank of India (RBI) classification of Scheduled Commercial Banks (SCBs).Jones.2006). Government had created priority sectors and banks had to lend out money to these priority sectors as per the guidelines which was 40 % of the total credit .Jones.These were generally the mergers were in a weak bank which was about to go flat on its tummy was taken over by a strong bank on the directions of RBI .Ravishankar. Private and Foreign Banks are known as Scheduled Commercial Banks as they are included in the Second Schedule of the Reserve Bank of India Act. 1934(Gourlay. The pubic sector was wholly owned by the government of India before the reforms. This was the period of low profitability. private banks and foreign banks. increasing number of Non performing assets and operational inefficiencies .HDFC bank .There where around 55 pre reform era 2 Report on Trends and Progress of Banking in India. The Reserve Bank of India is responsible for the Indian Banking system since 1935.The commercial banks in India are segregated into public sector banks. Akhil Bhan Page 6 . PSBs.

But the underlying motives of the mergers have changed in the present day context. The competitive market dynamics are driving the present day mergers . Akhil Bhan Page 7 .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS mergers .Another important development which is going to take place is when in 2009 government will open the banking sector in India .Author will describe in detail about the motives of mergers in the below given paragraphs.This will bring in large number of foreign player into the sector which will increase the competition. Globalisation is showing its impact on the Indian Banking system .

In the empirical analysis section we will analyse the benefits of these mergers if any.Article published by Indian Knowledge at Wharton 3 Akhil Bhan Page 8 . Some paper also argue that instead of consolidation we need expansion .There is a clear indication that the forces of competition are playing into the Indian banking sector as well . But these all arguments can be countered by following argument . Reforms of 1991 The banking reforms which where taken in 1991 where mainly done to make the banking sector more competitive and fundamentally sound.In the paper present by P.Over the period of time the banks tried to sustain their growth by expanding in various segments but now things have become so competitive that consolidation is the way forward .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Catalysis Initiating the Merger Some working papers argue if the merger wave in the Indian banking sector will continue and are there really any benefits of the merger.To safe guard themselves and to remain in the market the banks have started to capture their emerging competitors .Still in rural India 50 % of the people do not have banks3. there was a big surge in the number of private banks entering into the Indian banking sector and due to this there has been drop in the spread earned by the pubic banks . For any substantial change to occur there has to be the effect of some catalysts which play a big role . Are Bank Mergers in India Entering a New Era?.banked.L Beena in 2004 clearly shows the present trend of mergers in the Indian corporate sector since the reforms of 1991. Adaptability of the system to change is the only way of survival.Same has been the case of the Indian Banking sector. These reforms also required that the Indian banking system should be in line with the international standards. using the data of the mergers happening in Indian banking sector in last 8 years .And this has started the first merger wave in the banking industry in India. Due to the reforms of 1991 .Mergers have been on a increase and they have really benefited the organisations .The argument given in these working paper is that the Indian banking system is under.

Like for example the case of the HDFC and Centurion Bank merger . As you are the market leader so it creates a monopoly for you in the market and you can charge high spread for the products from the customer for the services which you provide. Spagnolo. it leads to gains in these efficiency which in turn results in reduction in the costs of the merged firms and increase in the revenue. The two hypotheses are Structure –conduct – performance paradigm given by Mason (1939) and Bain (1956).But banks do not merge only with the increase in revenue in mind as the law of the land protects the monopoly state to occur and thus restricts the high growth in revenue. This is because as the size increases the efficiency of the system also increases.000 branches and 17. This is the effect of economies of scale. In some cases it can even become the monopoly player and this leads to increase in revenue and becomes one of the important catalysts in the for the merger . (Carletti.000 ATMs4. it the market share of the merged firms is increased and as the market share increases so does the power. India has 88 scheduled commercial banks (SCBs) . and other one is efficient structure hypothesis related to Demsetz (1973) and Peltzman (1977). They have a combined network of over Akhil Bhan Page 9 .28 public sector banks.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Increasing Competition and Efficiency Currently. second. Hartmann. The first effect leads increase in prices. The number of branches can also increase which helps the banks increase their spread . Like if a bank is offering 10 products. after merging with a bank which complements its product range it can offer many more products to the customer. There are two hypotheses regarding the competitiveness effect due to the banking consolidation which lead to the increase in revenue and reduction in cost.Centurion Bank is strong with around 390 branches in North and South of India. And for these services it can charge high value to the customer. And HDFC with 4 http://www. To remain competitive in such a market space the banks needed to go to the basics of profitability which is increase in the revenue and decrease in the cost.2002) A merger has two effects on the industry: First. The second effect tends to reduce prices. 29 private banks and 31 foreign banks.wikipedia.

60.000cr more capital. An obvious way to meet this requirement would be by industry consolidation.This lead to decrease in cost which may be passed to the customer so as to increase the customer base.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS around 1100 5branches mainly in north and western India will give the new entity a much wider spread. These standard results in industrial organisation apply of course to banking markets as well. As per the Basel II norms banks have to meet the requirements of the capital Are Bank Mergers in India Entering a New Era?. Also efficiency comes in the system due to wider choice of better suitable human resource for the purpose of doing the job. The Hindu Business Line. 24th October 2005) Akhil Bhan Page 10 .Article published by Indian Knowledge at Wharton 5 6 Banks may need Rs.50 billion including the Bank of Baroda. Even India’s largest bank does not have the any standing among the top banks in the world . Even though it may be good to have a fragmented banking state for the customers because of low cost due to lack of any one bank having the monopoly . Stability Indian banking system is highly fragmented. Basel II which is going to be implemented in all the banks operating in India aims at determining the capital requirement based on risk weighted average of the capital of the bank.But for the financial stability of the country it is not good that its banking system is not stable This is another catalyst for the merger of the banks in India Regulatory Requirement Indian economy is growing at the rate of 8 – 10 % to maintain such amount of growth Indian banking system needs Rs.Only four banks have been able to cross the market capitalisation of Rs. and HDFC. State of India. ICICI. In fact efficiency at all the 3 levels of people. process and product can be achieved through merger . 590 billion6. This is another reason for the merger of the banks. Moreover the trend has also shown that the top 5 banks have been eroding in wealth and it is getting spread among other banks which are an indication that the stability of the top banks is in question.

Also the trade barriers are getting removed under WTO and Indian Banking System is going to open up for the global competitors by 2009 . Thus. this need to keep the additional capital to meet Basel II norms and to maintain the needs of the growing economy.2006 the merger also helps the banks to reduce the bankruptcy risk if the merger is carried over in a controlled manner . to keep pace with the fast running financial sector in India these banks will try and grow through inorganic means of merger and acquisition in Indian arena . Risk As per the study by Hannan and Pilloff. consolidation of the banks for larger credit pool is also one of the catalysts.As a result of this lot of foreign banks will enter into Indian markets .As a result many Indian banks which are weak are going to be soft target of these foreign banks. Craig and Santos also in their research paper have validated that risk gets reduced due to the diversification in the merger of the banks .As a result of these regulatory requirements the banks will have to increase their capital base to support their assets and as per the estimates the additional requirements of capital will be 2-3% of the risk based assets of banks (Unnikrishnan.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS for the operational risk as well . When these banks will enter India.This has been validated by the z score test done on default probability and by stock return volatility Akhil Bhan Page 11 . Also big banks in India will have a stiff competition from these foreign banks and to be prepared for such competition the bigger banks in India will fasten the pace of merger and acquisition in Indian banking sector. 2007). The report of Tarapore Committee on Fuller Capital Account Convertibility has drawn a pathway for the bringing the Indian financial sector at par with the global levels and norms.

Mester and Moon(1999) Akhil Bhan Page 12 .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Benefits of Consolidation In Business the benefit achieved from the thing is the most important than any thing else. the benefits achieved by the banks after merger are perceived to be as 1. As the single line of business after the merger can be expanded and thus the cost effectiveness is achieved 2. Also due to the increase in the scale of the deposits the banks can get higher amount of credit at a lower value .The banks credit worth ness also is increased due to the large deposit size 5. The details for this are given in the empirical methods section below . Due to the merger the banks get an access to large amount of capital base which in effect leads to the greater avenues for the bank to invest money and earn higher rate of return and this increases the bottom line of the banks 4. Lang. Brand plays a big role in increasing the revenue of the bank 3. This is very well explained in their papers by Boyd ad Runkle (1993) and Hughes. we will check empirically if the benefits of the merger in Indian banking sector are really achieved and are they realised over a short period of time. Any bank goes in for the merger or acquisition due the benefits which are associated with it . Also cross selling of the products to the existing customer base can also help increase the revenue 7.We have already talked about the motives of the banks to merger and on the lines of these motives.Many papers talk about the benefits achieved. This also helps in the diversifications of the products which help to reduce the risk as well. The large amount of fixed cost which is required for collecting the data of the customers is rationalised by the increase number of the products sold to the customer base by the merged entity .Thus the per product fixed cost gets reduced 6. After the merger the bank will have large number of branches and its visibility will be at more places which will help it to build the brand image.

This drove the banks to consolidation and which rationalised their purchase of the costly technology . In Japan the reasons of consolidation were driven by technology . this gave the banks an avenue to scale up their branches and reap the benefits of the economies of scale and geographical diversification.(The Economist .Consolidation is a key word in the banking sector in all economies with some what varying reasons or motives of consolidation . The reasons for the consolidation in US banking sector were mainly the regulatory changes which allowed interstate ownership of the banks. In the global banking scenario the Merger and Acquisition has been used for cutting costs and increasing the revenue This trend took pace from 1998 onwards when more than fourth of the merger deals involved banks . this resulted in increased competition and this was also a prime reason of mergers and acquisition in the US banking sector.1999). In the European markets the banking sector is highly concentrated and as the result the European banks are doing a lot of cross border Mergers.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Consolidation in Global Banking sector In the global arena the deregulation of the banking sector had a wide impact on the banking sector . They started to look at the avenues to increase their returns and one of the ways was consolidation.Also this was kind of the safe wall creation to safe guard themselves from the competition which the foreign banks would create when they enter into the Japanese markets. From the period from 1st January 1996 to 31 Dec 2005 European banks spend around €682bn for M & A activities around the world.The banks wanted to scale up their technology and it did not make sense to buy a very costly technology for only a single small operation bank.As a result of this profit of the banks suffered heavy brunt. As the legislature allowed the banks to have other investment services as well.This process started in from 1980s in United States . 7 Banking Consolidation Report . Even thought this trend started in US but now it has spread to other economics of the world.PWC Akhil Bhan Page 13 .7 The European banks are growing in trend of acquiring the banks in Western Europe .The deregulation resulted in price competition in the banking sector and also dis-intermediation .

Growth and expansion through Merger and acquisition and developing business models to tap the untapped markets 8.2006).This will be the evolution phase and the sector will emerge as an important driver of economy and wealth by 2010.Second scenario which the paper talks about which may evolve is that it will be pro –market but it will also be a little cautious in working for reforms .According to the report by Mckinsey there are 3 potential scenarios which will emerge in the Indian banking sector .During the period of 5 years from 2000 to 2005 the assets of the banking sector grew by $255 billion and the profits grew to $ 5 billion . In this market driven scenario the success of the management of the banks will depend on the upgrading capabilities of the bank which match the market dynamics . be it the 1997 Asian Crisis or be the resent Sub Prime Crisis where the exposure of the Indian banks as of now seems to be negligible.which are :First a high performance scenario where in the regulatory bodies will not intervene in the working of the banks and leave them independent .After the opening up of Indian banking sector in 2009 the foreign backs will catch pace with the fast growing markets in India and will lead the merger wave .It is estimated through the news paper reports that the total profits will be between $ 10 to $12 billion by 2010 (Sinha.By watchful eye of the regulators the author of this paper means that the managed consolidation and not letting it in the hands of market 8 Indian Banking 2010 by Mckinsey Akhil Bhan Page 14 . Indian banking is entering into a new orbit and it is going to change a lot in the next 3 years .The third scenario which may occur is the stage of stagnation where in policy maker will employ lot of restrictive conditions on the banks and the consolidation activity instead of being driven by market condition will be restrictive . After 2009 when the Indian banking system opens for the markets player from across the globe things are moving and will starting moving even faster in the Indian banking sector .The regulatory body will intervene only when it has to safeguard the interests of the customers and maintain the stability of the system .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Future Growth of Indian banking Sector Till now Indian banking sector has remained safeguarded at number of occasions from the crisis in the financial markets. The best scenario to occur is the market driven banking sector growth under the watchful eyes of the regulators .This will impede the growth of the banks .

consolidation and convergence9. It is universally acknowledged that the key drivers of the banking sector in the future will be competition.As the Indian economy still needs to develop .the banks should lead the way in the development .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS players completely . Akhil Bhan Page 15 . 9 Budget Speech of Mr. P.C.The Pubic sector banks should to some extend support the development and growth of the rural sector in Indian and to bring them on level playing ground with the private banks or foreign banks some initiatives should be brought about to maintain their profitability . Chidambaram.

The expected return is calculated as follows: Expected return = α + β * RM α + β: these are aspects which are related to a individual stock. The expected rate of the return is calculated using the using the capital asset pricing model. Also another test which has been applied to check the financial performance of the Akhil Bhan Page 16 . In all the deals which have been selected between the banks a caution has been taken so that only those deal are selected for which only 2 banks are involved in the merger. α & β are calculated by running a linear regression and then we calculate the Abnormal returns Abnormal Return = Actual stock – Expected Return on Stock After we run a T-TEST at confidence level of 95% to verify if there is any significant change in the CAR calculated.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Methodology After doing the literature review and understanding the motives of the merger of banks in India and benefits achieved there by. Cumulative abnormal return Returns of the stock have been calculated by comparing the closing stock price on the t day (Day zero) to the closing stock price of the stock on t-1 day. β is a beta which implies the systematic risk of a stock.For this author has chosen the time period from 1999 to 2006 .The data for 8 significant deals which have happened during this period has been collected as the time series data.It is this which will indicate the effect of the merger. RM return of market α alpha is an intercept of minimum rate of return. Expected Rate of return for the stock 3. After collection of data various empirical methods have been applied on the data to validate or refute the arguments stated in the literature review section and then giving the conclusion on the basis of the observed results .The data required for the analysis is: 1. Returns of the stock of the banks 2. The author of this paper validates with help of the data if the benefits of the merger are there in the Indian banking sector .

The concept it is build upon is that till the time the business does not give out profits which are more that the cost of the capital till that time business is not profitably and it is making losses. • Akhil Bhan Page 17 .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS banks is the EVA method . How do we calculate the EVA? EVA is a methodology which links the finance to the competitive strategy rate) Cost of the capital has been calculated as WACC which is weighted average cost of capital. Positive EVA number means that the company is going to create value for its shareholders and negative EVA number means that it is destroying the value of the shareholder . Total Capital Employed has been calculated as the total debt and total equity. We first calculate the NOPAT which has been calculated as • • NOPAT = EBIT * (1. It is also an indicator of the value which is created in the stocks of the company.EVA method is the invention of the Stern Steward and Co which was launched in 1989.Economic Value Added is a measure of the financial performance of the banks . EVA = Net operating profit of the company (NOPAT) – (Cost of the capital * Total capital employed) This formula will give us a positive or a negative EVA number. This is the weighted sum of the cost of debt and cost of equity.

that is post merger years.If the value given by the t-test is less than . Then this expected return was subtracted from the actual return to arrive at the abnormal return .To check how many mergers have been profitable to the banks in India the paper has short listed 8 deals which have happened in the Indian banking sector from the period 1999 to 2006.05 then the hypothesis which is Akhil Bhan Page 18 . We found the intercept and the slope of these stocks and by applying the CAPM formula we found the expected return on the stocks. The deals which have happened in 2007 have not been included because it would not be possible to study the effect of merger due to the less number of time periods available after 2006 .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Data This paper till now talks about the merger and its benefits in Indian context . To study the short term impact we applied the t-test and for long term impact we applied EVA (Economic value added method).Over the period of 30 days pre and post merger the abnormal returns where found and t-test was applied on these abnormal returns . Also only deals where only two banks have been involved have been selected. Target Name BANK OF PUNJAB LIMITED BANK OF MADURA LIMITED LORD KRISHNA BANK LTD SANGLI BANK LTD TIMES BANK LTD GANESH BANK OF KURUNDWAD LTD GLOBAL TRUST BANK BENARES STATE BANK LTD Acquirer Name CENTURION BANK OF PUNJAB LTD ICICI BANK LTD CENTURION BANK OF PUNJAB LTD ICICI BANK LTD HDFC BANK LIMITED FEDERAL BANK LTD ORIENTAL BANK OF COMMERCE BANK OF BORODA Payment Type Stock Stock Stock Stock Stock Undisclosed Undisclosed Undisclosed Date 20-06-2005 11-12-2000 04-09-2006 09-12-2006 26-11-1999 25-01-2006 26-07-2004 24-01-2002 After selecting the deals we applied two empirical methods on it. T-Test To study the T-Test on the data we selected a time series data of the closing prices of the stock from 1999 to 2007 and then found the return of these stocks.

For projects it is best to calculate the NPV or IRR to check for the feasibility of the projects .Firstly how fast the funds are moved and how much of these funds create further value which is more than the cost factor of generating these funds which clearly given by the EVA of the banks Another important thing to be understood in terms of the mergers of the banks is difference between the projects and strategies.These all ratios are prone to window dressing by the mischievous management . There are two sensitive drives of the value creation in the banks .Many Indian banks also use EVA to calculate their profits by EVA method like ICICI Bank.Book Value do not give a clear understanding of the major variables which are the value drives .When ever the benefits of the decisions taken by the banks are more than the cost involved in its structure. Limitation of ratios Many accounting fundaments such as Price Earnings . Barclays etc . To study the long term effect of merger another indicator is the EVA. For the operations of the banks the EVA is used as a common measure by many banks like Citi Bank.Return of Net . HDFC etc which in itself justifies the reason of using EVA for our methodology for calculating the profits of the banks .Return of Equity . EVA gives us a clear understanding of the values which the banks create over a period of time .EVA also very beautifully raises the point of how the shareholders of the bank expect a certain rate of return for taking the risk of investing in the bank Akhil Bhan Page 19 .It connects the theories of Finance with the strategy of competitive markets given by Michael Porter. We calculated the EVA pre merger. All the data has been analysed from the acquiring banks perspective.Also these measures use the historical data to arrive at the conclusions . it creates the value for the Bank. Most of the strategies of the banks create value for the bank over a period of some time which may be in distant future and thus when ever profitability of the bank’s merger is to be calculated it should be done through EVA method.For strategies one should check the EVA and the decision of the merger should be based on the EVA calculated from estimation of the strategies of the merger. in the year of merger and post merger which gives us the idea of the efficiency of the merger.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS that the data sets are similar over the period of study is rejected and we conclude that the significant effect of merger is prevalent.

t .This deal was perceived by the market as the good deal because of the cost factor and the synergies of merger in terms of geographical expansion .2005 the year of the merger and 2006( the post merger year ) .This is an indication that merger was successful.This shows that over a short period of time merger did not effect the returns .49.1 percent when the news of merger broke out .This was done through the method of EVA . 2005.To measure the benefits of this deal we ran the t –test on this deal with the time period of t+30 .The value of t-test for this deal for t+30 .Then we studied effect of merger over a long period of time that is one year . Cumulative abnormal returns have also not changed over a period of time interval t + 30 and t-30. This was a tremendous increase in the Economic value of the bank which had an intermingled effect of merger news with Lord Krishna Bank which the bank was going to go through.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Discussion and Analysis Centurion Bank and Bank of Punjab Deal Bank of Punjab in order to meet the credit requirements sold 15 % of its shares and this led to a sharp decrease in the stock price of Bank of Punjab . .96 which is quite high and accepts our hypothesis that the merger has not had a significant effect on the abnormal returns of the bank pre merger and post merger .31.t-30 .This was to check the effect of the merger before and after using the CAPM and t-test and to establish that has merger shown any effect over a short period of time .In this case finally the Centurion bank which wanted to expands its arms in northern part of India and more so in the agricultural belts of Punjab acquired the Bank of Punjab in June.The deal took place in 2005 so we calculate the economic value added by the merger in the year 2004 ( the year before the merger ) . As the basic concept of the merger when ever the company’s stock prices drop down drastically then it becomes the target for a acquisition .The combined entity was known as Centurion bank of Punjab and it had 235 outlets with a customer base of 2.As per t-test which was done on a sample from time period 1999 – 2007 . The positive effects of this merger was validated even by the stock market with increase in its stock price by 2.61 which is a clear indication that the even the news of the merger of the two banks did create an upsurge it its profitability.In the year of the merger its value increase to 154.2005 . Akhil Bhan Page 20 .t-30 is coming out be .This happened in Feb.As per the data observed in Table -1 for the Centurion bank which is acquirer bank had an EVA value of negative 50.2 million . To see the long term effect of the merger we observed that the 1 year post merger the value of EVA was 421.

The market had very well accepted the merger with Lord Krishna bank and this increased the credit worthiness of the merged entity .This deal made ICICI bank 33 percent bigger than HDFC .31 which is a very high value .But in this case we see a very high value of EVA .To understand the effect of the synergy derived over a long period of time we applied the EVA test on this merger as well .As the t-test has been done on 95 % confidence level this accepts the hypothesis that the merger did not show any significant effect on the banks returns.At that time ICICI bank did not have very strong holdings in southern part of India .In this case as well we studies the effect of the merger on returns by t-test for time period t.For the significant returns to be shown and to reject the null hypothesis of t-test we should get the value of . ICICI bank paid $70 mn min in share swap to buy Bank of Madura limited .branches and gave it additional 2.305 .This shows that the within a short period of 30 days the merger did not show any signs . t+ 30 and t-30 days where in t stand for the date of the merger.This is contributed due to dual effect .This compound effect really pulled the EVA value high for Centurion bank . The value which we get from the t-test is .61 for the year of the merger it is 421. Also the cumulative abnormal returns 30 days prior to and post merger did not show any change .This deal provided ICICI bank with the synergies that enhanced its brand image .But the main factor for such an increase in the EVA was the post merger gain with the Bank of Punjab which had started to show the effect .Also the news of the merger did not create any significant ripples in the market .6 million customer and 263 branches Akhil Bhan Page 21 .05 or below for the t-test.This deal was done to increase the presence of ICICI in southern India.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Centurion Bank and Lord Krishna Bank The merger between the lord Krishna bank and Centurion bank was more of a RBI driven merger to safe guard the interests of the depositors .its rival .The EVA for the year before the merger that is 2005 is 154. As has been talked about in this paper above that many mergers in Indian banking scenario also happen due to the managed M & A activity by legislature or more clearly RBI .This deal took place finally on 04-09-2006.The Centurion Bank become the 4 th largest bank after the deals and in the post merger year 2007 its EVA continued to be good and upwards which is an indication that the merger was successful ICICI Bank and Bank of Madura Limited This deal too place in the month of December 2000 .Even though the banks spend the money for the merger and the economic value should have ideally either remained same or marginally increased .

00 for the merger year and 5293.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS in southern India. Details of which can be seen in table -3 To study the effort over the long period of time through the calculation of the EVA for the given deal pre merger .Sangli Bank was a non listed bank .27 which is low and some variation is abnormal returns can be seen but it is not significant enough in term of merger point of view.By the market value the deal size was 302 crores .Synergies from this deal have realised over a period of 1 year . This merger of the Indian bank was also a success and the benefits talked about in the beginning sections of this paper have been achieved which have resulted in adding the economic value for the bank.27 which again accepts our hypothesis that the merger did not show gains over a short period of 30 days pre and post merger and that the abnormal returns where almost similar .25 shares of Sangli Bank .post merger and which is shown in table -1 which is 3191.Sangli bank was held 30 % by Bhate family of Sangli .This was due the inroads which the ICICI could get into the interior of Maharastra state in India through the branches of Sangli bank where had a major customer base in these places. Akhil Bhan Page 22 . on the year of the merger . Also the cumulative returns given in the table -3 below shows that the values have not changed much which is an indication that within short period of 30 days there was no abnormality of returns pre and post merger.31. But the gains from the merger were high over the long period of time.772 which accepts our hypothesis that the merger has did not created any change in the returns over a short period of 30 days .2688.During the year of merger the EVA had gone down due the extra shares which the company had to release and money spend over the deal which had effected the bottom-line of the bank and over the period of the one year the economics of scale benefits where realised and the EVA jumped up to 5293.This EVA gives us a clear understanding how the value has been created for the ICICI by this merger over a long period of time . The author of this paper checks the short term gains and to gauge the market reaction using the t-test over short period .31 for the post merger year .The t –test give us a value of . ICICI Bank and Sangli Bank The deal between ICICI Bank and Sangli Bank took place in Dec 2006 which is exactly 6 years after the deal of ICICI bank with Bank of Madura Limited .The cumulative returns over a short period of 30 days turned negative from positive value which was pre merger.The deal structure was in the ratio of 1 share of ICICI for 9. On the analysis of the returns of 8 years and applying t –test we get a value of .919 for the pre merger year .Even though the value of the t-test is coming out to be .

MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS HDFC and Times Bank This was the first deal which took place in the Indian banking sector which was market led .On doing a t-test the merger did not show any gains in the short period run .We studied the stock returns from a period 1999-2000 and applied the t-test on the data to check the abnormal return pre merger and post merger and the value of the t-test came out to be .e.Total market value of the deal was 5775.Before this the Global trust bank‘s operations where suspended by the Central bank of India . So at that time OBC took this opportunity and decided to acquire GTB and turn it around in one and a half year .30 days pre merger.14462 and t+ 30 days the value of the cumulative abnormal return is 0.On analysis of the data we check that the deal has created value and shown the effect of the merger even within the short period of 30 days .This deal was driven by the Central bank .75 Million Rs and it was a total stock deal .7 billion rupees of deposits .To understand the gain over a long period and to see if the Oriental Bank was able to turn around the bank in the stated period of time and enjoy the benefits of the Akhil Bhan Page 23 .As this deal was a friendly deal and was market led so the market perceived it to be a very good deal which would benefit HDFC in a big way .As stated by the bank authorities that the bank deal will have a impact on the bottom-line of the bank and they will turn around the bank in the one and a half years time .15102 post merger 30 days .159725 .GTB had 103 branches in southern part of India and has a strong retail products in the market which proved to be a value adds for the synergy of the deal .At that time OBC was looking for merger options with other banks and RBI decided to merger GTB with OBC to safeguard the interests of the depositors.Also t-30 days cumulative abnormal return is -0.The GTB‘s bad loans accounted for about fifty of its 32.055 which is indication that the hypothesis is rejected that the pre merger and post merger the abnormal returns have been the same and thus merger has created a significant change in abnormal return . t 30 and t + 30 .The markets reaction immediately to the deal was not good and they thought that it will effect the bottom-line of Oriental Bank of Commerce . Oriental Bank of Commerce and Global Trust Bank This take over of the Global Trust Bank by Oriental Bank of Commerce took place in last week of July .The abnormal returns turn out to be from negative to positive. to -0.This was checked by the author of this paper by using the t-test over a period of 30 days i.451292 which is clear indication of the value added due to the merger over a short period of time .The cumulative abnormal returns turned from 0.

277 which is indication that the Akhil Bhan Page 24 .in the year of merger and 1 year after merger and the values as given in table 1 are 654.This is also a clear indication that banks do benefit over a long period of time from merger.259. Merger is beneficial if it is sustained and in this case it was sustained as well . 618.42.35 billion rupees .This suggests that the hypothesis is accepted that the bank has not benefited over a short period of time .27 and 850.18 .52.Even though Ganesh Bank of Kurundwad had only 32 branches but this was a strategic decision for Federal bank as it gave federal bank in roads into the agricultural belt of Maharashtra.30 and 406.The data shows clearly the benefit of the merger and the value added.The Federal bank could capitalise on the inroads which it got from the Ganesh Bank of Kurundwad in the agricultural sector of Maharastra and its Economic value one year prior to merger . Bank of Baroda and Benares State Bank Ltd This deal between the banks took place in 2002. Benares State Bank helped Bank of Baroda in this aspect.But the bank was successful to turn around its acquired bank GTB with in a short period of time and started to reap the benefits of the profit made from the merger due to which its EVA increased to 850.The EVA of the Oriental bank of commerce is a clear indication that due to the merger its EVA had suffered due to the losses of the GTB .To see the effect of the merger over a long period of time we could see that the merger was really very effective .So at that time Federal Bank which was a private bank asked the RBI to permit them to merge Ganesh Bank of Kurundwad with it .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS merger author calculated the EVA 1 year before merger .The Ganesh Bank of Kurundwad was a bank of Maharashtra which was under moratorium to safeguard the investors money.27.As at that point of time most banks in India where trying to expand their customer base and there by increase the consumer banking business.735 . On Analysis of the deal to understand the benefits of merger of these banks author of this paper carried out the t-test which gave a value of .In the short run the Federal Bank did not have any change or gain from the merger as could be seen by the t-test done over t-30 and t + 30 days who’s value is coming out to . Federal Bank and Ganesh Bank of Kurundwad Ltd This was a small merger in the Indian banking context .27 .in the year of the merger and post merger was 185. Benares State Bank Ltd was a bank in Uttar Pradesh in India with the 105 branches and 2.

09 0.32 0.23 226161.17 1918.008 5293. TABLE -1 Year 2005 2006 2007 ICICI BANK NOPAT WACC 8.919 2688.86 41006.277 850.048523591 4766.4272 618.12 25170.04 70910.046639685 0.96 20692.055662242 0.03 0.24 0.9275 1181.468.45 EVA 654.83 respectively which is the indication that even though some benefits where achieved due to the merger process but they could not be sustained as the benefit of the merger seen through EVA value has dropped down .038583191 OBC WACC 0.4956 154.219 1063.47 Total Capital 63322.07 76424.316 Year 2005 2006 2007 Total Capital 16820.046259922 Federal Bank NOPAT WACC 778.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS hypothesis has been accepted and the merger has not shown any benefits over a short period of time .036811513 12.2757 Year 2004 2005 2006 2007 Year 2001 2002 2003 Centurion Bank NOPAT WACC 98.407160788 193.831 Akhil Bhan Page 25 .1181.69 0.03558413 Total Capital 146263.3109 706.050333699 4622.2567 EVA 906.041782221 19.72 0.97 0.6127 421.1063.03878938 1377.81 2774.88 2530.64 EVA 185.68 0.during the year of merger and after the year of merger which can be seen from the table below as 906.33 0.137.038069236 BOB NOPAT WACC 4094.On doing a long term analysis of the merger of the bank by calculating the EVA of the banks before the year of merger .041479367 492.5264 Year 2003 2004 2005 NOPAT 2546.58 EVA -50.16 0.84 0.48 EVA 3191.21.048454812 Total Capital 366.52 0.035296559 1061.92.118 259.94 0.036978665 820.56 54069.07 06429.576.3055 406.11 2996.29 Total Capital 33998.38 933.

055042036 0.01892 0.02468 T+30 0.07 -0.01087 TABLE -3 SUMMARY SHEET T-Test Score HDFC FEDERAL BANK OBC CBOP + LORD KRISHNA CBOP + BANK OF PUNJAB ICICI ICICI BOB 0.728710799 0.06511 -0.19773643 0.014852 -0.12293412 0.297282 -0.73585137 0.159725 0.06 0.01 0.098617 0.961347473 0.05 -0.270677601 0.076485 -0.15102 -0.14462 -0.02085 -0.204561 T 0.736749455 0.00276 -0.06 0.2734273 0.607327665 0.720474714 0.01545 0.01082 0.16 0.325859037 0.305223594 0.772110838 0.277245138 TABLE-4 SUMMARY SHEET 90 Day HDFC FEDERAL BANK OBC CBOP + LORD KRISHNA CBOP + BANK OF PUNJAB ICICI + Sangli Bank ICICI + Madura Bank BOB T-Test Score 0.373697396 Akhil Bhan Page 26 .451292 -0.00 0.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS TABLE -2 SUMMARY SHEET HDFC FEDERAL BANK OBC CBOP + LORD KRISHNA CBOP + BANK OF PUNJAB ICICI ICICI BOB FOR ABNORMAL RETURNS T-30 -0.


This paper also validates if the mergers have created any value for its shareholders by checking the value of EVA pre merger and post merger . As the value of the merger lies in its synergies and these synergies are not released over a very short period of time but over a considerable period of time .During the year of the merger it was observed that the EVA value was reduced and then in the year following the merger it was high again. In the Indian banking context the effect of mergers in not seen over a short period of time .Around the time of the merger the market stock price returns pre merger and post merger do not shown much of the difference so as to conclude a significant effect of the merger 2. Also with the given sample it was observed that all the banks did do well after the merger and the value was added . Economic value added method is a good method to study the long term effect of the efficiencies of the merger.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Conclusion This paper has examined the merger deals which have happened in the Indian banking sector over the period from 1999 to 2006 in the post reforms period . Some conclusions which have been arrived under the given sample are: 1.Through this paper we have looked at the various motives and benefits of the merger . Overall with the given sample of mergers in the Indian banking sector . it is clearly indicated that post reform mergers have been efficient for the merging banks . This is clear from the fact the money which is spend on the merger effects its bottom-line and so the EVA is reduced but in the following years when the merger benefits where achieved the EVA increases by a considerable value.They have create a value for the acquiring banks.Through the empirical methods by applying t-test and EVA value calculations the potential of the mergers has been evaluated. Akhil Bhan Page 28 .So EVA gives us a clearer picture of the value which has been added by the merger in the context of Indian banking sector 3.

value and other information about the deals which happened in the Indian banking sector from the year 1999 to 2006 Akhil Bhan Page 29 .MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS Annexure The following annexure have been taken from the Bloomberg. They give us the information about the deal date.








S P Talwar 7. Salleo 2. F.2006 17 9.imf. Consolidation in Financial Sector http://www.Dr.htm (Summary Report) through 4. Jamshedpur) and Ram Kumar Kakani (S P Jain Center of Management. Competition. Panetta and C. Adrian Gourlay. Geetha Ravishankar. Why Do Banks Merge? By D. Department of Economics 11. Singapore Campus) 5. Banking Sector Developments in India. India Banking 2010 -Towards a High-performing Sector.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS References 1. Focarelli. Ruhr-University of Bochum. Tom Weyman-Jones WP. Motives for Mergers and Acquisitions in the Indian Banking Sector – A Note on Opportunities & Imperatives by Jay Mehta (XLRI School of Business.Mckinsey Report 6. Reserve Bank of India Akhil Bhan Page 37 . Consolidation in Banking and Financial Stability in Europe by Ulrich Heimeshoff Meera Sharma 8.Tilburg University) 3. consolidation and systemic stability in the Indian banking industry by . Non-Parametric Analysis of Efficiency Gains from Bank Mergers in India a. The Economic Impact of Merger Control Legislation by Elena Carletti (Wharton Financial Institutions Center) . Philipp Hartmann (European Central Bank) and Steven Ongena(CentER . Bank Mergers – Possibilities and Preparation . and Achamma Samuel 12. Ramasastri A.S.

Washington.MERGERS IN INDIAN BANKING SECTOR – MOTIVES AND BENEFITS 13. Article on Major changes await Indian banks by Janmejaya K Sinha 17.C. Acquistion Targets and Motives in the Banking Industry Federal Reserve Board. Ramana.V. 2006 19. Economic value addition by Indian Banks: A study by Dr. 2003 Akhil Bhan Page 38 . Consolidation in Indian Banking Mr. D. K Unnikrishnan (Senior Vice President Indian Banks' Association 16. Fraker. Using Economic Value Added (EVA) to Measure and Improve Bank Performance by Gregory T. Sankar De(Indian School of Business) 15.P Verma 18. Rajesh Chakrabarti(Indian School of Business). 14.B. D. India's Financial System – by Franklin Allen (The Wharton School). Market Value Added and Economic Value Added: Some Empirical Evidences Dr.

Sign up to vote on this title
UsefulNot useful