Merger

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A STUDY ON THE IMPACT OF MERGERS AND ACQUISITIONS ON

EFFICIENCY OF PERFORMANCE OF INDIAN BANKS
*Dr.Deepa Joshi, **Ashutosh Vyas, ***Garima Joshi, **** Dr.Rajeev Shukla
Abstract:
The banking sector of India is considered as a booming sector and the soundness of the
banking system has been vital for the development of the country's economy. A corporation
has diverse options to choose from when it comes to growth strategies. Growth is an important
aspect for any organization
Various challenges and problems faced by the Indian banking sector and the economy have
made mergers and acquisitions activity not an unknown phenomenon in Indian banking
industry. Historically, mergers and acquisitions activity started way back in 1920 when the
Imperial Bank of India was born when three presidency banks (Bank of Bengal, Bank of
Bombay and Bank of Madras) were reorganized to form a single banking entity, which was
subsequently known as State Bank of India.
Globally mergers and acquisitions have become a major way of corporate restructuring
and the financial services industry has also experienced merger waves leading to the
emergence of very large banks and financial institutions. It drives the organization to create
synergy and value creation by way of diversification and improved management.
*Associate Prof., SVIM, Indore, MP, India

**Assistant Prof., SVIM, Indore, MP, India
***Assistant Prof., SVIM, Indore, MP, India
**** Associate Prof., SVIM, Indore, MP, India
Altius Shodh Journal of Management & Commerce

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Keywords:
Merger, Acquisition and Indian Banks.
Introduction
The key driving force for merger activity is severe competition among firms of the same industry
which puts focus on economies of scale, cost efficiency, and profitability. In our country and in
countries like Germany weak banks are forcefully merged to avoid the problem of financial distress
arising out of bad loans. Thus, the banking scenario in India has already gained all the momentum,
with the domestic and international banks gathering pace. The focus of all banks in India has
shifted their approach to 'cost', determined by revenue minus profit. This means that all the resources
should be used efficiently to better the productivity and ensure a win-win situation. The Indian
banks are hopeful of becoming a global brand as they are the major source of financial sector
revenue and profit growth. The financial services penetration in India continues to be healthy, thus
the banking industry is also not far behind. As a result of this, the profit for the Indian banking
industry will surely surge ahead.
Bank mergers and acquisitions are actually quite common, especially during a financial crisis such
as the one recently experienced by the world. When handled properly, this type of action within
the banking industry can be beneficial but because this is such a serious change, numerous factors
must first be considered. Keep in mind that bank mergers and acquisitions are seen with both
national and international institutions with the primary goal being to boost the economy. Again,
when done right, bank mergers and acquisitions can help banks grow while also reduce expenses.
This action comes with a long list of benefits that also includes reducing competition. Obviously,
when one bank takes over another bank, the bank being acquired is eliminated. One aspect of
bank mergers and acquisitions different from other industries that go this route is that a type of
horizontal merger is created. The reason is that the entities being merged are the same type of
business or involved with the same type of business activities.
With the completion of bank mergers and acquisitions, the greatest value typically seen is a greater
number of locations, giving the primary bank a stronger presence. However, this type of marriage
also results in an increased customer base for the primary bank. Today, both private and government
banks are following policies for this type of action, realizing that a number of benefits exist. In fact,
global and multinational banks are now seeing the value that comes from bank mergers and
acquisitions, allowing operations to be extended.
The International and Indian banking scenario has shown major turmoil in the past few years in
terms of mergers and acquisitions. Deregulation has been the main driver, through three major
routes - dismantling of interest rate controls, removal of barriers between banks and other financial
intermediaries, and lowering of entry barriers. It has lead to disintermediation, investors demanding
higher returns, price competition, reduced margins, falling spreads and competition across
geographies forcing banks to look for new ways to boost revenues. Consolidation has been a
significant strategic tool for this and has become a worldwide phenomenon, driven by apparent
advantages of scale-economies, geographical diversification and lower costs through branch and
staff rationalization, cross-border expansion and market share concentration. When bank mergers

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and acquisitions are finalized for global and multinational banks, it is referred to as "cross border
mergers and/or acquisitions". With this, global banks have the opportunity to become positioned
as a dominant force within the banking industry. In addition, these banks can capture a greater
amount of market share and achieve economies of a much greater scale. In most cases, bank
mergers and acquisitions provide the chance for enhanced synergy, efficiency, and profitability.
Forms of Combination
Merger or amalgamation: A merger is a combination of two or more companies into one company. It
may be in the form of one or more companies being merged into an existing company or a new company
may be formed to merge two or more existing companies.
According to the Company's Act, 1956, the term amalgamation includes 'absorption'. Thus a merger or
amalgamation may take any of the two forms:
(i) Merger or amalgamation through absorption: A combination of two or more firms into an existing
company is known as 'absorption'. In a merger through absorption all companies except one go into the
liquidation and lose their separate identities.
(ii) Merger or amalgamation through consolidation: A consolidation is a combination of two or more

companies into a new company. In this form of merger, all existing companies go into liquidation and
form a new company with a different entity. The entity of consolidating corporations is lost and their
assets and liabilities are taken over by a new corporation or a company.
The Narsimhan Committee on Banking Sector Reform was set up in December, 1997. This
Committee's terms of reference include; review of progress in reforms in the banking sector, to make
banking system robust and internationally competitive reforms should be modified according to situations,
framing detailed recommendation regarding banking policy for each dimension like institution, technology
and legislative.
The Committee submitted its report on 23 April, 1998 with the following suggestions (for the purpose
of this study regarding mergers and Acquisitions have been taken)
1) Use of mergers to build the size and strength of operations for each bank.
2) Recommended merger of larger Indian banks to make them strong enough to stand in international
trade.
3) There should be two to three banks with international orientation, eight to ten national banks and a
large pool of local banks so that system can cover remote areas too.
4) Narrow banking will help weak banks to recover large banks should merge only with banks of
equivalent size and not with weaker banks.
5) Enhanced banking risk can be matched with increased capital adequacy.

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6) Review the RBI Act, the Banking Regulation Act, the Nationalization Act and the State Bank of
India Act.
Introduction of Banks Under Study
About HDFC Bank
The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered
office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank
in January 1995.
HDFC is India's premier housing finance company and enjoys an impeccable track record in India
as well as in international markets. Since its inception in 1977, the Corporation has maintained a
consistent and healthy growth in its operations to remain the market leader in mortgages. Its
outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant
expertise in retail mortgage loans to different market segments and also has a large corporate
client base for its housing related credit facilities. With its experience in the financial markets,
strong market reputation, large shareholder base and unique consumer franchise, HDFC was
ideally positioned to promote a bank in the Indian environment.
HDFC Bank's mission is to be a World Class Indian Bank. The objective is to build sound customer
franchises across distinct businesses so as to be the preferred provider of banking services for
target retail and wholesale customer segments, and to achieve healthy growth in profitability,
consistent with the bank's risk appetite. The bank is committed to maintain the highest level of
ethical standards, professional integrity, corporate governance and regulatory compliance. HDFC
Bank's business philosophy is based on four core values: Operational Excellence, Customer Focus,
Product Leadership and People.
About ICICI Bank
ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81
billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year
ended March 31, 2010. The Bank has a network of 2,530 branches and 6,102 ATMs in India,
and has a presence in 19 countries, including India.
ICICI Bank offers a wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialized subsidiaries in the
areas of investment banking, life and non-life insurance, venture capital and asset management.
The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in
United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance
Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh,

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Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and
Germany.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock
Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New
York Stock Exchange (NYSE).
About IDBI Bank
IDBI Bank Ltd. is today one of India's largest commercial Banks. For over 40 years, IDBI Bank
has essayed a key nation-building role, first as the apex Development Financial Institution (DFI)
(July 1, 1964 to September 30, 2004) in the realm of industry and thereafter as a full-service
commercial Bank (October 1, 2004 onwards). As a DFI, the erstwhile IDBI stretched its canvas
beyond mere project financing to cover an array of services that contributed towards balanced
geographical spread of industries, development of identified backward areas, emergence of a new
spirit of enterprise and evolution of a deep and vibrant capital market. On October 1, 2004, the
erstwhile IDBI converted into a Banking company (as Industrial Development Bank of India
Limited) to undertake the entire gamut of Banking activities while continuing to play its secular
DFI role. Post the mergers of the erstwhile IDBI Bank with its parent company (IDBI Ltd.) on
April 2, 2005 (appointed date: October 1, 2004) and the subsequent merger of the erstwhile
United Western Bank Ltd. with IDBI Bank on October 3, 2006, the tech-savvy, new generation
Bank with majority Government shareholding today touches the lives of millions of Indians through
an array of corporate, retail, SME and agri-products and services.
Headquartered in Mumbai, IDBI Bank today rides on the back of a robust business strategy, a
highly competent and dedicated workforce and a state-of-the-art information technology platform,
to structure and deliver personalized and innovative Banking services and customized financial
solutions to its clients across various delivery channels.
Going forward, IDBI Bank is strongly committed to work towards emerging as the 'Bank of
choice' and 'the most valued financial conglomerate', besides generating wealth and value to all its
stakeholders.
HDFC Bank Acquires Centurion Bank of Punjab (May 2008):
 For HDFC Bank, this merger provided an opportunity to add scale, geography (northern and
southern states) and management bandwidth. In addition, there was a potential of business
synergy and cultural fit between the two organizations.
 For CBoP, HDFC bank would exploit its underutilized branch network that had the requisite
expertise in retail liabilities, transaction banking and third party distribution. The combined
entity would improve productivity levels of CBoP branches by leveraging HDFC Bank’s brand
name. CBoP has a major presence in the north and south. It has 170 branches in the north and
140 branches in south a strong hold in the states of Punjab and Kerala,

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 The merger is in a win-win situation for HDFC Bank as it would acquire around 400 branches
and skilled personnel.
 The deal created an entity with an asset size of Rs 1,09,718 crore (7th largest in India), provid-
ing massive scale economies and improved distribution with 1,148 branches and 2,358 ATMs
(the largest in terms of branches in the private sector). CBoP’s strong SME relationships comple-
mented HDFC Bank’s bias towards high-rated corporate entities.
 HDFC Bank has nearly 750 branches and has permission for an additional 200 branches.
CBoP has nearly 400 branches. Post merger, both banks will have around 1,150-1,200 branches.
 There were significant cross-selling opportunities in the short-term. CBoP management had
relevant experience with larger banks (as evident in the Centurion Bank and BoP integration
earlier) managing business of the size commensurate with HDFC Bank.
 The share swap ratio stood at 1:29, that is every shareholder of CBoP will get one share of
HDFC Bank for every 29 shares of CBoP owned.
ICICI and Sangli Bank Merger (April 2007)
 An all-stock amalgamation, the deal was in the ratio of one share of ICICI Bank for 9.25
shares of the privately-owned, non-listed Sangli Bank. The proposed merger will result in
issuance of additional 3.45 million shares of ICICI Bank, equivalent to about 0.4% of its
existing issued equity share capital. Going by the market value of ICICI Bank share (Rs
876.70 per share on Friday), the deal size is pegged over Rs 302 crore.
 The Bhate family of Sangli holds almost 30% of Sangli Bank. Sangli bank had low non-
performing assets but lacked capital.
 ICICI Bank will seek to leverage Sangli Bank’s network of over 190 branches and existing
one lakh customers and 1,850 employees in urban and rural centres for... its rural and small
enterprise banking operations, which are some of the key focus areas for the Bank.
 ICICI Bank expects its rural banking business to constitute 15% of total assets in the next
few years. The amalgamation will also supplement ICICI Bank’s urban distribution net-
work
IDBI and United Western Bank Merger (October 2006)
 IDBI offered to pay Rs 28 per share to the UWB shareholders. The purchase consideration,
at this price, worked out to about Rs 150 crore.
 The amalgamation of UWB with IDBI is likely to add value to the latter over the long term.
The merger is likely to help IDBI expand its retail presence, though its size may not increase

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substantially.
 Of the several benefits the deal brings, the access to the branch network is most significant.
IDBI, with a balance-sheet size of Rs 81,700 crore, had a network of 181 branches 2006.
It scores poorly on this parameter compared to like-size peers. The merger would give
IDBI immediate access to the 230-branch network of UWB covered all the commercially
important places in Maharashtra.
 The Reserve Bank of India’s (RBI) strict licensing norms that restrains opening new branches
over-banked urban centers has placed a scarcity value on branches. The merger would,
therefore, give IDBI access to a ready physical infrastructure, enabling it to mobilize low-
cost funds.
 The merger with UWB is likely to help IDBI diversify its credit profile. Dominant in industrial
financing, IDBI should get exposure to agriculture credit through UWB; nearly half the
number of UWB its branches is in semi-urban and rural areas, and should complement
IDBI’s loan book.
 There were several problems that led to the fall of UWBL that once had reached the ‘A’
class bank category. Irregular transactions with some of its major shareholders, conflicts
between its major shareholders regarding the ownership of the bank, poor governance and
inefficient management of capital were the main reasons for its collapse. On May 30, 1998,
UWBL was penalized for Rs. 1 million by the RBI for irregular transactions with the Makharia
Group of companies (MGC). The Makharia family was given loans for purchasing UWBL’s
shares (in its 1995 rights issue) through its flagship company - Emtex Industries (India)
Limited (Emtex). UWBL provided an overdraft facility of Rs 68.8 million to Emtex. Also,
a letter of credit (LC) was sanctioned to MGC. RBI felt that the LC facility was provided
with the intention of preventing MGC’s loan account with UWBL from becoming non-
performing assets (NPAs). UWBL paid the penalty on June 16, 1998.
Review of Literature:
MERGERS AND ACQUISITION IN BANKING SECTOR: Jagriti Kumara (School of Economics,

University of Madras, (2013). Mergers are those forms of business transactions where there is a
combination of two or more corporate entities, and in the process of combining of two entities one or
more such corporate entities lose their corporate existence because they merge with the surviving
entity. Acquisitions are those forms of business transactions where the shares or control of a company
is taken over by persons who, prior to the change in the shareholding or control, did not possess such
shareholding or control. The Competition Commission of India (CCI) has drawn the Reserve Bank of
India's (RBI's) attention to distortions in banking due to a limited presence of the private sector, high
entry barriers for foreign banks and cartelization of sorts among banks in setting interest rates.

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Government policy can be the one of the major forces in banking consolidation. In 1997, as a result of
the Asian financial crisis, the governments of the region have promoted consolidation of the banking
system on the ground that this would contribute to the stabilization on the banking system of the region
(Berger et al 1999) Motives for mergers and acquisitions in the Indian banking sector - a note on
opportunities and imperatives - Jay Mehta & Ram Kakani: Paper talks about various motivations for
mergers and acquisitions in the Indian Banking sector. The reasons include: Fragmented nature of the
Indian banking sector resulting in poor global competitive presence and position.
Large intermediation costs and consequent probability in increasing its risk profile.
To meet the new stringent international regulatory norms
Check the Risk taken by banks by CAMEL model: The deregulation of the U.S. banking industry has
fostered increased competition in banking markets, which in turn has created incentives for banks to
operate more efficiently and take more risk. They examine the degree to which supervisory CAMEL
ratings reflect the level of risk taken by banks and the risk-taking efficiency of those banks (i.e., whether
increased risk levels generate higher expected returns). Their results suggest that supervisors not only
distinguish between the risk-taking of efficient and inefficient banks, but they also permit efficient banks
more latitude in their investment strategies than inefficient banks.
The economic impact of merger controls- Elena Carletti, Phillip Hartman and Steven Ongena: The
paper throws light upon causes and consequences of banking mergers, identifying efficiency gains in
bank mergers.
Financial ratios are often used to measure the overall financial soundness of a bank and the quality of its
management. Banks' regulators, for example, use financial ratios to help evaluate a bank's performance
as part of the CAMEL system (YUE, 1992).
CAMEL rating system (Keeley): This study uses the capital adequacy component of the CAMEL
rating system to assess whether regulators in the 1980s influenced inadequately capitalized banks to
improve their capital. Using a measure of regulatory pressure that is based on publicly available
information, he found that inadequately capitalized banks responded to regulators' demands for greater
capital. This conclusion is consistent with that reached by Keeley (1988).
Banks performance evaluation by CAMEL model (Hirtle and Lopez)
Despite the continuous use of financial ratios analysis on banks performance evaluation by banks'
regulators, opposition to it skill thrive with opponents coming up with new tools capable of flagging the
over-all performance ( efficiency) of a bank. This research paper was carried out; to find the adequacy
of CAMEL in capturing the overall performance of a bank; to find the relative weights of importance in
all the factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in
evaluating banks' efficiency.

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In addition, the best ratios in each of the factors in CAMEL were identified. For example, the best ratio
for Capital Adequacy was found to be the ratio of total shareholders' fund to total risk weighted assets.
The paper concluded that no one factor in CAMEL suffices to depict the overall performance of a
bank. Among other recommendations, banks' regulators are called upon to revert to the best identified
ratios in CAMEL when evaluating banks performance.
CAMELs and Banks Performance Evaluation (Muhammad Tanko)
Despite the continuous use of financial ratios analysis on banks performance evaluation by banks'
regulators, opposition to it skill thrive with opponents coming up with new tools capable of flagging the
over-all performance ( efficiency) of a bank. This research paper was carried out; to find the adequacy
of CAMEL in capturing the overall performance of a bank; to find the relative weights of importance in
all the factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in
evaluating banks' efficiency. The data for the research work is secondary and was collected from the
annual reports of eleven commercial banks in Nigeria over a period of nine years (1997 - 2005. The
paper concluded that no one factor in CAMEL suffices to depict the overall performance of a bank.
Among other recommendations, banks' regulators are called upon to revert to the best identified ratios
in CAMEL when evaluating banks performance.
Challenges the Indian banks faced - This article is about the various challenges faced by Indian banking
sector. It discussed the position of banks after merger and acquisition. It discusses the challenges such
as: interest rates risk, credit risk by private banks. The first mega merger in the Indian banking sector
that of the HDFC Bank with Times Bank, has created an entity which is the largest private sector bank
in the country.
Mergers & Acquisition- The Indian banking scenario: This article studies M&A activities in the Indian
banking sector and says that even though the objective of present bank mergers is to place the weak
banks in safe hands, the future mergers will focus more on strategic issues like increasing geographical
reach and improving product mix.
Rationale of the study:
The research aims to understand the various "Mergers and Acquisitions in Indian Banking Sector" A
large number of international and domestic banks all over the world are engaged in merger and acqui-
sition activities. One of the principal objectives behind the mergers and acquisitions in the banking
sector is to reap the benefits of economies of scale.
In recent times, there have been numerous reports in the media on the Indian Banking Industry Reports
have been on a variety of topics. The rationale behind this research is to study the Indian banking
industry as today; the banking industry is counted among the rapidly growing industries in India. It has
transformed itself from a sluggish business entity to a dynamic industry. The growth rate in this sector is

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remarkable and therefore, it has become the most preferred banking destinations for international investors.
In the last two decade, there have been paradigm shift in Indian banking industries. The Indian banking
sector is growing at an astonishing pace. A relatively new dimension in the Indian banking industry is
accelerated through mergers and acquisitions. It will enable banks to achieve world class status and
throw greater value to the stakeholders.
Objectives of the study:
 To compare and analyze the pre merger and post merger financial statements of the acquirer
banks for different years to check whether the synergistic gains are visible in acquirer
bank’s financial statements or not.
 To find out what are the strengths acquired by the acquirer bank and the deficiencies
noticed in the financial statements. That is has the performance of the bank in terms of
capital adequacy, asset quality, earning efficiency improved with the lapse of time after
merger.
For the purpose of this study a sample will be the four banks namely HDFC bank, ICICI bank,
IDBI bank and The Federal Bank ltd. Sample used in this study will be these four banks and their
acquisition as given below:
 HDFC Bank and Centurion Bank of Punjab Merger on 23 rd May 2008.
 ICICI Bank and Sangli Bank Merger on 19 th April 2007.
 IDBI Bank and United Western Bank Merger on 03 rd October 2006.
Data Analysis

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PARAMETER SUBPARAMETER
CAPITAL ADEQUACY CAPITAL ADEQUACY RATIO
DEBT EQUITY RATIO
ASSET QUALITY GROSS NPA
NET NPA
MANAGEMENT EFFICIENCY TOTAL ADVANCES/TOTAL DEPOSITS
BUSINESS PER EMPLOYEE
PROFIT PER EMPLOYEE
EARNING EFFICIENCY RETURN ON INVESTMENT
RETURN ON EARNINGS
NET PROFIT /AVG. ASSETS
NET INTEREST MARGIN RATIO
COST TO TOTAL INCOME RATIO
LIQUIDITY RATIOS LIQUID ASSETS TO TOTAL ASSETS
GOV. SECURITIES INVSTS./TOTAL ASSETS
LIQUID ASSETS/DEMAND DEPOSITS
EQUITY MULTIPLIER RATIO
Camel rating system:
The CAMEL rating system is based upon an evaluation of five critical elements of a credit
union's operations: Capital Adequacy, Asset Quality, Management, Earnings and Asset/
Liability Management. This rating system is designed to take into account and reflect all
significant financial and operational factors examiners assess in their evaluation of a credit
union's performance. Credit unions are rated using a combination of financial ratios and
examiner judgment.
In other words, during an on-site bank exam, supervisors gather private information, such
as details on problem loans, with which to evaluate a bank's financial condition and to monitor
its compliance with laws and regulatory policies. A key product of such an exam is a
supervisory rating of the bank's overall condition, commonly referred to as a CAMELS
rating. The acronym "CAMEL" refers to the five components of a bank's condition that are
assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. CAMEL is
basically a ratio-based model for evaluating the performance of banks. Various parameters
forming this model are explained below:
Limitations of the study:

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1. The study was limited to three banks only.

2. Time and resource constraints.
3. CAMEL ratings are not publicly available. So it is difficult to verify the research variations from
final outcomes of the bank supervisors.
Interpretation:
Capital adequacy ratio refers to the risk weight assigned to an asset raised by the banks in the process
of conducting business and to the proportion of capital to be maintained on such aggregate risk weighted
assets. The RBI stipulates a capital adequacy of 9 % for all banks.
Banks’ capital is vital as it is the life blood that keeps the bank alive. It also gives the bank the ability to
absorb the shocks. The ratio ensures that the bank do not expand their business without having adequate
capital.
Capital Adequacy is a measurement of a bank to determine if solvency can be maintained due to risks
that have been incurred as a course of business. Capital allows a financial institution to grow, establish
and maintain both public and regulatory confidence, and provide a cushion (reserves) to be able to
absorb potential loan losses above and beyond identified problems.
In case of HDFC bank the capital adequacy ratio has enhanced post merger which implies that the firm
has a sound capital base that strengthens confidence of depositors. A slight decline is noticed in the
2010-2011 which is because RWA increased at a slightly higher rate than the capital.

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Debt Equity ratio :
Interpretation: This ratio indicates the degree of leverage of a bank. It indicates how much of the bank
business is financed through debt and how much through equity. The ratio indicates the proportionate
claims of owners and the outsiders against firms assets .The purpose is to get an idea of the cushion
available to the outsiders on liquidation of the firm.
In the case of HDFC there is a substantial reduction in the debt as the no. of times of the equity if we
compare the year 2007 (two years prior to the merger)& 2011two years post merger. Further a
consistent decline can be noticed which indicates a favorable scenario for the long term creditors as
it will enhance the margin of safety for them.
Asset Quality:
1) Gross NPA to Total Advances:

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Interpretation :
In case of HDFC the Gross NPA and Net NPA ratio has substantially declined which implies that
the bank is not adding a fresh stock of bad loans .It also implies that the bank is exercising enough
caution when offering loans or is stringent in terms of following up with borrowers on timely
repayments. . A low level of NPAs suggests low probability of a large number of credit defaults
that affect the profitability and net-worth of banks and also wear down the value of the asset.
Management Efficiency
1) Total Advances / Total Deposit Ratio
Interpretation: The ratio is indicative of the percentage of funds lent by the bank out of the total amount
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raised through deposits. Higher ratio reflects ability of the bank to make optimal use of the available
resources. The ratio has increased for HDFC post merger which implies ability of the banks management
in converting the deposits available with the banks (excluding other funds like equity capital, etc.) into
high earning advances.
2) Business and Profit per Employee:
Interpretation: The business, profit in case of HDFC have enhanced post merger which implies high

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productivity of bank’s employees. It indicates the bank is utilizing its employees very efficiently. Rising
revenue per employee is a positive sign that suggests the bank is finding ways to squeeze more sales/
revenues out of each of its employee.
Earning Efficiency: 1) Return On Investment:
Interpretation: This ratio is used to measure the overall efficiency of the firm. In case of HDFC there is
slight decline in this ratio which implies that the net profits have not increased at a lower rate as compared
to the invested in the firm. This ratio would imply efficient utilization of funds by the firm .This ratio
implies successful achievement of the prime objective that is to maximize the earnings. This ratio can
have favorable and far fetching impacts on the present and the prospective shareholders of the funds.
The ratio if improved further would lead to increase in attractiveness of the investments for the investors.
2).Return on Equity:

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Interpretation: Equity shareholders are the real owners of the company. They assume the highest risk in
the company. Thus they are more interested in the profitability of the company. For HDFC the ratio has
increased post merger which implies a higher payment of dividend and a larger share in the residual
profits thus increasing the attractiveness of investments for the present and the prospective sharehold-
ers.
3) Net Profits to Average Assets:
Interpretation: The net profits to average assets ratio has showed a consistent increase and has also
enhanced substantially post merger for the HDFC bank but a further improvement ion this ratio is
always appreciable as a low ratio would indicate inefficient utilization of the funds and assets em-
ployed and thus a low operating efficiency of the bank .

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4) Net Interest Margin (Spread) Ratio:
Interpretation: This is net interest income expressed as a percentage of average earning assets .
The ratio has declined post merger that is for the years 2009-10and year 2010-11 shows a slight
revival for HDFC .The ratio should be improved as a low ratio indicates inefficient management of
assets employed for earning. The bank may come under pressure from offering preferential rates
to customer base. The lower the net interest margin, approximately 3.0% or lower, generally it is
reflective of a bank with a large volume of non-earning or low-yielding assets.
5) Cost to Total Income:

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Interpretation: The ratio for the bank has increased post merger but the increase is less than the year
2007-2008(in this year the cost was maximum) which implies there is a need to control operating
expenses as controlling overheads are critical for enhancing the bank's return on equity. Branch
rationalization and technology up gradation account for a major part of operating expenses for new
generation banks. Even though, these expenses result in higher cost to income ratio, in long term they
help the bank in improving its return on equity.
Liquidity:
1) Liquid Assets to Total Assets:
Interpretation: Liquid assets here include cash and balances with reserve bank of India & balances
with banks and money at call and short notice. For the HDFC bank the ratio has increased post
merger by a small percentage in the year 2009-10 but again declined in the year 2010-11by a
meager percentage, which implies an inconsistent behavior. This says the obligation honoring capacity
of a bank has increased by a meager percentage but maintaining an ideal liquidity ratio is like a
tight rope walk as Liquidity is a prime concern in a banking environment and a shortage of liquidity
has often been a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the
income from that asset (cash, for example, is the most liquid asset of all but pays no interest) so
banks will try to reduce liquid assets as far as possible. However, a bank without sufficient liquidity
to meet the demands of their depositors risks experiencing a bank run. The result is that most
banks now try to forecast their liquidity requirements and maintain emergency standby credit lines
at other banks.

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2) Government Securities to Total Assets:
Interpretation: Government Securities investments are the most liquid and safe investments. This ratio
measures the government securities as a proportion of total assets. Banks invest in government securities
primarily to meet their SLR requirements. The ratio of HDFC has shown a slight detoriating pattern
post merger. However an improvement on this ratio would indicate low risk investments and an enhanced
ability to meet financial obligations as and when they are demanded.
3) Liquid Assets to Demand deposits:
Interpretation: For the HDFC bank there is a substantial change in the liquid assets to total demand
deposits ratio post merger. We can see that the liquidity has enhanced and thus it gives a better standing
to the bank in honoring the demand deposits and other financial obligations as and when they become
due.

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4) Equity Multiplier Ratio:
Interpretation:
The equity multiplier ratio is used to measure a company’s total assets against stockholder’s equity,
providing a way for investors to examine the level to which a company uses debt to finance its assets.
EQUITY MULTIPLIER (EM) shows the amount of assets owned by the firm for each equivalent
monetary unit owner claims held by stockholders, i.e., the equity multiplier measures how many of
assets an institution supports with each rupee of capital . If a firm is totally financed by equity, the equity
multiplier will equal 1.00, while the larger the number the more highly leveraged is the firm. EM compares
assets with equity: large values indicate a large amount of debt financing relative to equity.
In the case under study the equity multiplier has reduced a little post merger but the firm is still highly
leveraged which means there is an increased risk with every rupee of debt. In times of irregular income
it can affect the credit rating of firm adversely.
Analysis of ICICI Bank

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Capital Adequacy:
1. Capital Adequacy Ratio:
Interpretation:
In case of ICICI bank the capital adequacy ratio has enhanced post merger which implies that the
firm has a sound capital base that strengthens confidence of depositors. This ratio is used to protect
depositors and promote the stability and efficiency of financial systems around the world
2. Debt- Equity Ratio:
Interpretation:

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This ratio indicates the degree of leverage of a bank. It indicates how much of the bank business is
financed through debt and how much through equity. The ratio indicates the proportionate claims of
owners and the outsiders against firm's assets. The purpose is to get an idea of the cushion available to
the outsiders on liquidation of the firm.
In the case of ICICI there is a substantial and consistent reduction from 11.42 times in the year prior to
the merger to 5.73 times in 08-09, 5.74 times in 09-10, 6.01 in 10-11 in the debt as the no. of times of
the equity. A further reduction on this ratio would indicate a favorable scenario for the long term credi-
tors as it will enhance the margin of safety for them.
Asset quality:
1. Gross NPA Ratio: Gross NPA / Total Advances
2. Net NPA Ratio: Net NPA / Total Advances
Interpretation:
In the case of ICICI the gross NPA and the net NPA has increased post merger as a % of total deposits
which implies that the bank has added a fresh stock of bad loans. It also implies that the bank is not is
exercising enough caution when offering loans or is too lax in terms of following up with borrowers on
timely repayments. In the current year an appreciation worthy reduction can be seen in the gross NPA
from 5.23% to 4.64% and net NPA from 2.12% to 1.11%. This suggests a low probability of a large
number of credit defaults that affect the profitability and net-worth of banks and also wear down the
value of the asset.
Management efficiency:

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1. Total Advances to Total Deposits Ratio:
Interpretation:
The ratio is indicative of the percentage of funds lent by the bank out of the total amount raised through
deposits. Higher ratio reflects ability of the bank to make optimal use of the available resources.
The ratio has increased for ICICI post merger in year 2008-09 which implies ability of the banks
management in converting the deposits available with the banks (excluding other funds like equity
capital, etc.) into high earning advances. A substantial detoriation can be seen in the year 2009-10 to
89.69 %. Again a revival phase is noticeable in the current year. A consistent behavior is desirable on
part of the firm.
3. Business and Profit per employee:

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Interpretation:
The profit and business per employee in case of ICICI have enhanced post merger which implies high
productivity of bank's employees. It indicates the bank is utilizing its employees very efficiently. Rising
revenue per employee is a positive sign that suggests the bank is finding ways to squeeze more sales/
revenues out of each of its employee. A phase of deterioration is visible for the years 09-10, 10-11
which is a cause of concern for the bank.
Earning efficiency:
2. Return on Investment:
Interpretation: A constant phase of deterioration is noticeable from the year of merger and a slight
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Interpretation:
A constant phase of deterioration is noticeable from the year of merger and a slight increase can be seen
in the current year. One of the probable reasons for this can be the increased costs in the year of the
merger. An improvement in this ratio would imply efficient utilization of funds by the firm. This ratio
implies successful achievement of the prime objective that is to maximize the earnings. This ratio can
have favorable and far fetching impacts on the present and the prospective shareholders of the funds.
The ratio if improved further would lead to increase in attractiveness of the investments for the inves-
tors.
2. Return on Equity:
Interpretation:
Equity shareholders are the real owners of the company. They assume the highest risk in the company.
Thus they are more interested in the profitability of the company. For ICICI the ratio has increased post
merger. A higher ratio implies a higher payment of dividend and a larger share in the residual profits thus
increasing the attractiveness of investments for the present and the prospective shareholders where as
a lower ratio will deteriorate the attractiveness of investments.
3. Net interest margin (spread) ratio:

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Interpretation:
This is net interest income expressed as a percentage of average earning assets . The ratio has shown
slight improvement for ICICI year after year and should be improved further as a low ratio indicates
inefficient management of assets employed for earning. It may come under pressure from offering
preferential rates to customer base, a low level of growth in savings. The lower the net interest
margin, approximately 3.0% or lower, generally it is reflective of a bank with a large volume of non-
earning or low-yielding assets.
4. Cost to Total Income Ratio:
Interpretation:
The ratio for the bank has declined considerably post merger which means there is a control over the

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operating expenses as controlling overheads are critical for enhancing the bank’s return on equity. An
increase is seen in the current year. Branch rationalization and technology up gradation account for a
major part of operating expenses for new generation banks. Even though, these expenses result in
higher cost to income ratio, in long term they help the bank in improving its return on equity.
5. Net Profit to Average Assets
Interpretation:
The net profits to average assets ratio has showed a consistent increase and has also enhanced sub-
stantially post merger for the ICICI bank but a further improvement in this ratio is always appreciable
as a low ratio would indicate inefficient utilization of the funds and assets employed and thus a low
operating efficiency of the bank .
Liquidity ratio:
1. Liquid Assets to Total Assets:
Interpretation:
For ICICI bank the ratio has not shown a consistent behavior post merger. It needs to be enhanced
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further. Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been
a trigger for bank failures. Thus a high liquidity ratio is always an added advantage but it comes at a cost
of sacrificing interest income earned on investing it profitably. However, a bank without sufficient liquidity
to meet the demands of their depositors risks experiencing a bank run. The result is that most banks
now try to forecast their liquidity requirements and maintain emergency standby credit lines
2. Government securities investments to Total Assets:
Interpretation:
Government Securities investments are the most liquid and safe investments. This ratio measures the
government securities as a proportion of total assets. Banks invest in government securities primarily to
meet their SLR requirements. The ratio of ICICI has slightly deteriorated post merger but enhanced
after that in year 2009-10. A decrease is visible in the current year. However an improvement on this
ratio would indicate low risk investments and an enhanced ability to meet financial obligations as and
when they are demanded. A more consistent behavior on this ratio is the need of the hour.
4. Liquid Assets to Demand Deposits Ratio:

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Interpretation:
For ICICI bank, there is a substantial change in the liquid assets to total demand ratio post merger. We
can see that the liquidity has deteriorated post merger and thus it gives a poor standing to the bank in
honoring the demand deposits and other financial obligations as and when they become due.
4. Equity Multiplier Ratio:
Interpretation:
The equity multiplier ratio is used to measure a company's total assets against stockholder's equity,

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assets an institution supports with each rupee of capital . If a firm is totally financed by equity, the equity
In the case under study the equity multiplier has reduced post merger and so the firm is still highly
leveraged which means there is an increased risk with every rupee of debt .In times of irregular income
Analysis of IDBI Bank
Capital adequacy:
1. Capital Adequacy Ratio:
Interpretation:
In the case of IDBI the ratio has declined consistently which indicates that the firm should strengthen its
capital base to protect depositors and promote the stability and efficiency of financial systems around
the world.
2. Debt -Equity Ratio:

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Interpretation:
owners and the outsiders against firms assets. The purpose is to get an idea of the cushion available to
the outsiders on liquidation of the firm.
In the case of IDBI the ratio has grown substantially and thus indicates an adverse scenario for the long
term creditors as the margin of safety for them would further detoriated.
Asset Quality:
1. Net NPA to Total Advances:
Interpretation:

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In case of IDBI net NPA ratio has remained unchanged post merger which implies that the bank is not
adding a fresh stock of bad loans .It also implies that the bank is exercising enough caution when
offering loans or is stringent in terms of following up with borrowers on timely repayments. . A low
level of NPAs suggests low probability of a large number of credit defaults that affect the profitability
and net-worth of banks and also wear down the value of the asset.
In the above case IDBI has shown incredible efficiency to maintain NPA ratio between 2.4-1% since
last 6 years. A huge decrease is noticed from the year 2002-03 in the following years where NPA stood
at 14.2% of the total advances.
Management Efficiency:
1. Total Advances to Total Deposit:
Interpretation:
deposits. Higher ratio reflects ability of the bank to make optimal use of the available resources. The
ratio has declined for IDBI post merger which implies inability of the banks management in converting
the deposits available with the banks (excluding other funds like equity capital, etc.) into high earning
advances.
2. Business per Employee and Profit per Employee:

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Interpretation:
For IDBI there is a substantial increase recorded in business per employee and a decrease in profit
per employee. The rising ratios imply high productivity of bank's employees. It indicates the bank is
utilizing its employees very efficiently. A decline in profit per employee indicates inability of the bank
to squeeze more sales/revenues out of each of its employee.
Earning Efficiency:

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Interpretation:
This ratio is used to measure the overall efficiency of the firm. For IDBI the ratio has marked a small
increment post merger. A further improvement is certainly desired which would imply efficient utilization
of funds by the firm .This ratio implies successful achievement of the prime objective that is to maximize
the earnings. This ratio can have favorable and far fetching impacts on the present and the prospective
shareholders of the funds. The ratio if improved further would lead to increase in attractiveness of the
investments for the investors.
2. Return on Equity:
Interpretation:

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Equity shareholders are the real owners of the company. They assume the highest risk in the company.
Thus they are more interested in the profitability of the company. For IDBI bank the ratio has increased
post merger which implies a higher payment of dividend and a larger share in the residual profits thus
increasing the attractiveness of investments for the present and the prospective shareholders.
3. Net Profit to Average Assets:
Interpretation:
The net profit to average assets ratio has recorded a slight decline post merger. It is very low also; the
improvement in both the ratios is the need of the hour as a low ratio would indicate inefficient utilization
of the funds and assets employed and thus a low operating efficiency of the bank.
4. Net interest Margin (Spread) ratio:
Interpretation:

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This is net interest income expressed as a percentage of average earning assets. For IDBI
the ratio has slightly enhanced post merger but still the ratio is very low and should be
improved as a low ratio indicates inefficient management of assets employed for earning. It
may come under pressure from offering preferential rates to customer base, a low level of
growth in savings. The lower the net interest margin, approximately 3.0% or lower, gener-
ally it is reflective of a bank with a large volume of non-earning or low-yielding assets.
The increment has been remarkable from the post merger years where the spread ratio was
negative.
5. Cost to Total Income Ratio:
Interpretation: The ratio for the bank has declined considerably post merger as compared to its in
the pre merger years where it stood at 13.83% which means there is a control over the
operating expenses as controlling overheads are critical for enhancing the bank's return on
equity. Branch rationalization and technology up gradation account for a major part of operating
expenses for new generation banks. Even though, these expenses result in higher cost to income
ratio, in long term they help the bank in improving its return on equity.
Liquidity ratio:
1. Liquid Assets to Total Assets Ratio:

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Interpretation:
For IDBI bank the ratio has remained unchanged. It needs to be enhanced. Liquidity is a prime concern
in a banking environment and a shortage of liquidity has often been a trigger for bank failures. Thus a
high liquidity ratio is always an added advantage but it comes at a cost of sacrificing interest income
earned on investing it profitably. However, a bank without sufficient liquidity to meet the demands of
their depositors risks experiencing a bank run. The result is that most banks now try to forecast their
liquidity requirements and maintain emergency standby credit lines.
2. Government securities Investments to Total Assets Ratio:
Interpretation:
Government Securities investments are the most liquid and safe investments. This ratio measures the
government securities as a proportion of total assets. Banks invest in government securities primarily to
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meet their SLR requirements. The ratio of IDBI in government securities investments has marked an
increase .However an improvement on this ratio would indicate low risk investments and an enhanced
3. Liquid Assets to Demand Deposits Ratio:
Interpretation:
For IDBI bank there is a slight change (decrease) in the liquid assets to total demand ratio post merger.
Liquidity should be enhanced as it gives a better standing to the bank in honoring the demand deposits
and other financial obligations as and when they become d
Interpretation:

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assets an institution supports with each rupee of capital. If a firm is totally financed by equity, the equity
In the case under study the equity multiplier has enhanced post merger which indicates firm is highly
leveraged which means there is an increased risk with every rupee of debt. In times of irregular income
An Inter Firm Comparison For The Year 2010
Capital Adequacy
1. Capital Adequacy Ratio
HDFC ICICI IDBI
16.45% 19.14% 11.31%
Interpretation:
All firms have successfully maintained CAR above 9% which shows an excellent ability of the bank to
absorb shocks. The CAR ensures that the banks do not expand their business without having adequate
capital.
2. Debt- Equity Ratio
HDFC ICICI IDBI
8.38:1 5.7:1 21.19:1
Interpretation:
owners and the outsiders against firms assets .The purpose is to get an idea of the cushion available to
the outsiders on liquidation of the firm. All the firms have extremely high debt equity ratios with ICICI
having the lowest. It implies there is no cushion
For the credit holders: A decrease on this ratio would indicate a favorable scenario for the long term
creditors as it will enhance the margin of safety for them.
Asset Quality:
1. Gross Npa / Total Advances

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HDFC ICICI IDBI
1.443% 5.23% 1.54%
2. Net Npa / Total Advances:
HDFC ICICI IDBI
.31% 2.12% 1.02%
Interpretation:
ICICI have very high gross & net NPA which implies the bank is not is exercising enough caution
when offering loans or is too lax in terms following up with borrowers on timely repayments.
Management Efficiency:
1. Total Advances / Total Deposits
HDFC ICICI IDBI
75.16% 89.6% 82.42%
Interpretation:
deposits. Higher ratio reflects ability of the bank to make optimal use of the available resources.
All the firms have high ratio with ICICI with the highest ratio which implies ability of the banks management
in converting the deposits available with the banks (excluding other funds like equity capital, etc.) into
high earning advances
2. Business Per Employee:
(In rupees thousands)

HDFC ICICI IDBI
56513.07 102900.5 250445.3
Interpretation:
All the firms have high amounts with IDBI with the highest amount followed by ICICI implies high
productivity of the employees.

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4. Profit Per Employee:
(In rupees thousands)

HDFC ICICI IDBI
568.28 1080.76 844.29
Interpretation:
All the firms have high amounts with ICICI with the highest amount followed by IDBI indicates the
bank is utilizing its employees very efficiently. It indicates ability of the bank to squeeze more sales/
revenues out of each of its employee.
Earning Efficiency:
HDFC ICICI IDBI

13.70% 7.79% 10.14%
Interpretation:
The firms have less ROI with HDFC with the highest ROI followed by IDBI. An enhancement would
imply efficient utilization of funds by the firm. The ratio can have unfavorable and far fetching impacts on
the present and the prospective shareholders of the funds. The ratio if improved further would lead to
increase in attractiveness of the investments for the investors.
2. Return on Equity Shareholders Funds
HDFC ICICI IDBI

6.44:1 3.62:1 1.42:1
Interpretation:
The firms have good returns with HDFC earning highest return followed by ICICI which implies a
higher payment of dividend and a larger share in the residual profits thus increasing the attractiveness of
investments for the present and the prospective shareholder
3. Net Profits / Average Assets
HDFC ICICI IDBI

1.45% 1.08% 0.51%
Interpretation:
The firms have fewer returns on the total assets which imply the profits have not increased in the
same proportion as the amount of assets employed. An increase on this ratio is needed to satisfy and
give good returns to the shareholder as a high ratio indicates efficient utilization of the funds.

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4. Cost /Total Income
HDFC ICICI IDBI

28.85% 17.65% 10.42%
Interpretation:
The firms have a high cost ratio with HDFC having highest operating expenses which means there is a
lack of control over the operating expenses as controlling overheads is critical for enhancing the bank’s
return on equity. Branch rationalization and technology up gradation account for a major part of oper-
ating expenses for new generation banks. Even though, these expenses result in higher cost to income
ratio, in long term they help the bank in improving its return on equity.
5. Net Interest Margin Ratio

HDFC ICICI IDBI
4.13% 2.18% 1.12%
Interpretation:
All the firms under study have a low ratio with IDBI firm lowest which implies that the assets have
increased by a greater amount & the net interest income has not marked an equal increased the. The
ratio should be improved as a low ratio indicates inefficient management of assets employed for earn-
ing. It may come under pressure from offering preferential rates to customer base, a low level of growth
in savings. The lower the net interest margin, approximately 3.0% or lower, generally it is reflective of a
bank with a large volume of non-earning or low-yielding assets
Liquidity ratios:
1. Liquid Assets To Total Asset Ratio
HDFC ICICI IDBI

13.45% 10.69% 6.24%
Interpretation:
HDFC has the highest ratio followed by ICICI which implies sufficient liquidity is a must to
meet the demands of their depositor's risks. Liquidity is a prime concern in a banking
environment and a shortage of liquidity has often been a trigger for bank failures. Thus a high
liquidity ratio is always an added advantage but it comes at a cost of sacrificing interest
income earned on investing it profitably.
2. Government Securities Investments / Total Assets
HDFC ICICI IDBI

22.94% 18.82% 26.03%
Interpretation:
IDBI and HDFC have highest investment in government securities & followed by ICICI has

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highest investment in approved securities which indicate low risk investments and an enhanced
3. Liquid Assets / Demand Deposits:
HDFC ICICI IDBI

80.43% 125.00% 93.00%
Interpretation:
All the firms under study have good ratio with ICICI at the top which indicates a better standing to the
bank in honoring the demand deposits and other financial obligations as and when they become due.
HDFC ICICI IDBI

10.33:1 7.04:1 22.90:1
Interpretation:
The equity multiplier ratio is used to measure a company's total assets against stockholder's equity,
IDBI has the highest ratio followed by HDFC which shows that the company is using more of debt to
fund its assets and it is not desirable .The greater the debt used to finance assets, the greater the risk;
this isn't the same as saying that a business carrying a greater amount of debt will fail, only that it's more
likely to than company's carrying less debt.
Ratio Wise Weightage:

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RATIO WEIGHTAGE
CAPITAL ADEQUACY 20%
CAPITAL ADEQUACY RATIO 10%
DEBT EQUITY RATIO 10%
ASSET QUALITY 20%
GROSS NPA 10%
NET NPA 10%
MANAGEMENT EFFICIENCY 20%
TOTAL ADVANCES/TOTAL DEPOSITS 6.60%
BUSINESS PER EMPLOYEE 6.70%
PROFIT PER EMPLOYEE 6.70%
EARNING EFFICIENCY 20%
RETURN ON INVESTMENT 4%
RETURN ON EARNINGS 4%
NET PROFIT /AVG. ASSETS 4%
NET INTERESRT MARGIN 4%
COST TO TOTAL INCOME RATIO 4%
LIQUIDITY RATIOS 20%
LIQUID ASSETS TO TOTAL ASSETS 5%
GOV. SECURITIES INVSTS./TOTAL ASSETS 5%
LIQUID ASSETS/DEMAND DEPOSITS 5%
EQUITY MULTIPLIER RATIO 5%
TOTAL 100%
After allocating the weights, I have made frequency classes according to the results found from the
ratios for each ratio of each parameter. Here frequency classes for each ratio are as follows:
Capital Adequacy
RATIOS MARKS
1 2 3 4 5
CAPITAL 10.5%- 12.5%- 14.5%- 16.5%- 18.5%-
ADEQUACY RATIO 12.5% 14.5% 16.5% 18.5% 20.55
DEBT EQUITY
RATIO 19-22 15-18 Nov-14 06-Oct BELOW6
Asset Quality
RATIOS MARKS
1 2 3 4 5
5.55%- 4.55%- 3.5%- 2.35%-
GROSS NPA 6.55% 5.5% 4.5% 3.55% BELOW2.5%
NET NPA 4%-5% 3%-4% 2%-3% 1%-2% BELOW 1%

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RATIOS MARKS
1 2 3 4 5
TOTAL ADVANCES
70.5%- 74.5%- 79.5%- 83.5%- 87.5%-
TO TOTAL
74.5% 79.5% 83.5% 87.5% 91.5%
DEPOSITS
BUSINESS PER Below 70500- 100500- 130500- 160500
EMPLOYEE 70500 100500 130500 160500 &above
PROFIT PER 875 &
Below 275 275-475 475-675 675-875
EMPLOYEE above
Earning Efficiency
RATIOS MARKS
1 2 3 4 5
RETURN ON Below 8.5%- 10.5%- 12.5%- 14.5%-
INVESTMENT 8.5% 10.5% 12.5% 14.5% 16.5%
RETURN ON Below 2-4 4-6 6-8 8-10
EARNINGS 2 times times times times times
NET PROFIT /AVG. Below .60%- 1.5%- 2.4%- 3.3%-
ASSETS .60% 1.5% 2.4% 3.3% 4.2%
NET INTERESRT Below 1.5%- 3%- 4.5%- 6%-
MARGIN 1.5% 3% 4.5% 6% 7.5%
COST TO TOTAL Below 10.5%- 15.5%- 20.5%- 25.5%-
INCOME RATIO 10.5% 15.5% 20.5% 25.5% 30.5%
Liquidity Ratios
RATIOS MARKS
1 2 3 5 4
LIQUID ASSETS TO Below 6.5%- 9.5%- 12.5%-
15.5%-
TOTAL ASSETS 6.5% 9.5% 12.5% 15.5%
18.5%
GOVT. SECURITIES 18.5%- 20.5%- 22.5%- 24.5%-
26.5%-
INVSTS. / TOTAL ASSETS 20.5% 22.5% 24.5% 26.5%
28.5%
LIQUID ASSETS / Below 106and
DEMAND DEPOSITS 85% 85%-92% 92%-99% 99-106% above
EQUITY MULTIPLIER Below 9 9-14 14-19 19-24 24-29
RATIO times times times times times
The table given below shows the marks out of 5 given to the ratios:
CAPITAL ADEQUACY BANKS

RATIOS HDFC ICICI IDBI
CAPITAL ADEQUACY RATIO 3 5 1
DEBT EQUITY RATIO 4 5 1
ASSET QUALITY BANKS

GROSS NPA 5 2 5
NET NPA 5 3 4

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MANAGEMENT EFFICIENCY BANKS

TOTAL ADVANCES / TOTAL DEPOSITS 2 5 3
BUSINESS PER EMPLOYEE 1 3 5
PROFIT PER EMPLOYEE 3 5 4
EARNING EFFICIENCY BANKS

RETURN ON INVESTMENT 4 1 2
RETURN ON EARNINGS 4 2 1
NET PROFIT /AVG. ASSETS 2 2 1
NET INTERESRT MARGIN 3 2 1
COST TO TOTAL INCOME RATIO 1 3 5
LIQUIDITY RATIOS BANKS

LIQUID ASSETS TO TOTAL ASSETS 4 3 1
GOV. SECURITIES INVSTS./TOTAL ASSETS3 1 4
LIQUID ASSETS/DEMAND DEPOSITS 1 5 3
EQUITY MULTIPLIER RATIO 4 5 1
Multiplying the marks allotted to their respective weights:
Capital Adequacy
RATIOS BANKS
HDFC ICICI IDBI
CAPITAL ADEQUACY RATIO .3 .5 .1
DEBT EQUITY RATIO .4 5. .1
TOTAL (A) .7 1 .2
Asset Quality
RATIOS BANKS
HDFC ICICI IDBI
GROSS NPA .5 .2 .5
NET NPA .5 .3 .4
TOTAL (B) 1 .5 .9

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RATIOS BANKS
HDFC ICICI IDBI
TOTAL ADVANCES/TOTAL DEPOSITS 0.132 0.330 0.198
BUSINESS PER EMPLOYEE 0.067 0.201 0.335
PROFIT PER EMPLOYEE 0.201 0.335 0.268
TOTAL ( C ) 0.400 0.866 0.801
Earning Efficiency
RATIOS BANKS
HDFC ICICI IDBI
RETURN ON INVESTMENT 0.160 0.040 0.080
RETURN ON EARNINGS 16.000 0.080 0.040
NET PROFIT /AVG. ASSETS 0.080 0.080 0.040
NET INTERESRT MARGIN 0.120 0.080 0.040
COST TO TOTAL INCOME RATIO 0.04 0.12 0.2
TOTAL (D) 0.56 0.4 0.4
Liquidity Ratios
RATIOS BANKS
HDFC ICICI IDBI
LIQUID ASSETS TO TOTAL ASSETS 0.200 0.150 0.050
GOV. SECURITIES INVSTS./TOTAL ASSETS
0.150 0.050 0.200
LIQUID ASSETS/DEMAND DEPOSITS 0.050 0.250 0.150
EQUITY MULTIPLIER RATIO 0.200 0.250 0.050
TOTAL (E) 0.6 0.7 0.45
TOTAL (A+B+C+D+E) 3.26 3.446 2.751
Conclusion
The study of various factors has helped to explore various aspects of mergers and acquisition of these
banks. As the analysis explains ICICI Bank scored the highest score and can be ranked 1st. Accord-
ingly HDFC may be ranked 2nd and IDBI ranked 3rd.
Findings and recommendations
Findings and recommendations on the basis of ranking banks & inter firm analysis:
 A point to be appreciated is that the firms under the study maintain capital adequacy ratio which
is higher than 9%.
2 A point to be noted here is that there lies a very minor difference between ranks scored by

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ICICI and HDFC bank.
ICICI Bank
1. For ICICI bank we can say that group is sound in every respect.
2. Any weaknesses are minor and can be handled in a routine manner by the board of directors
and management.
3. These financial institutions are the most capable of withstanding the vagaries of business conditions
and are resistant to outside influences such as economic instability in their trade area.
4. These financial institutions are in substantial compliance with laws and regulations.
5. As a result, these financial institutions exhibit the strongest performance and risk management
practices relative to the institution’s size, complexity, and risk profile, and give no cause for
supervisory concern.
6. These financial institutions are stable and are capable of withstanding business fluctuations
7. There are no material supervisory concerns and, as a result, the supervisory response is informal
and limited.
Recommendations and Suggestions
1. First, to enhance ability to honor financial obligations on time and so as to have safe investment
policy the investment in government securities should be increased.
2. Secondly, ICICI has a low return on assets and spread ratio. It should be enhanced as a low
ratio implies inefficient utilization and allocation of funds.
3. Thirdly, the return on investment and return on equity shareholders funds should be enhanced
firm as it is the prime test of the efficiency of the enterprise. An improvement in this ratio would
imply efficient utilization of funds by the firm .This ratio implies successful achievement of the
prime objective that is to maximize the earnings. These have an immense impact on the present
and the prospective shareholders of the company. A high ratio also increases attractiveness of
investments.
4. Fourthly, the firm has high NPA’s as compared to the other two firms which should be curbed
as it is detrimental for the organization.
Following are Positive aspects of ICICI:
1. The firm has a less debt –equity ratio as compared to the other firms under study which indicates
more margin of safety for creditors.
2. Management Efficiency of the firm is good when compared to the other two firms under study
on all the three parameters.
3. The company has the lowest equity multiplier ratio which indicates the company is using less of

ISSN 2348 - 8891
debt to fund its assets and it is desirable.
4. ICICI is at the top amongst the firms under study in maintaining liquid deposits which indicates
a better standing to the bank in honoring the demand deposits and other financial obligations as
and when they become due
HDFC Bank:
For HDFC bank we can say that
1. Some degree of supervisory concern in one or more of the component areas.
2. These financial institutions exhibit a combination of weaknesses that may range from moderate
to severe.
3. Management may lack the ability or willingness to effectively address weaknesses within ap-
propriate time frames.
4. Recommendations and Suggestions
5. HDFC has highest operating expenses amongst the firms under study which means there is a
lack of control over the operating expenses as controlling overheads is critical for enhancing the
bank’s return on equity.
6. The company has low total advances to total assets ratio which should be enhanced as banks
aggressiveness in lending which ultimately results in better profitability.
7. Company has a higher debt–equity ratio as compared to other firms under the study which
indicates no cushion available to the outsiders on liquidation of the firm.
8. In case of HDFC an improvement in productivity of the employees is desired so as to enhance

business per employee, profit per employee.
9. The equity multiplier ratio of the firm must be reduced which shows that the company is using
more of debt to fund its assets and it is not desirable .The greater the debt used to finance
assets, the greater the risk; this isn’t the same as saying that a business carrying a greater
amount of debt will fail, only that it’s more likely to than company’s carrying less debt.
10. Following are the Positive aspects of HDFC
11. Return on equity shareholders funds and low amount of NPA’s are really commendable which
indicates banks is exercising enough caution in advancing loans.
12. All the firms under study have a low ratio with HDFC firm having the highest the. The ratio
should be improved as a low ratio indicates inefficient management of assets employed for
earning. . It implies that the assets have increased by a greater amount & the net interest income
has not marked an equal increased.
13. HDFC is at the top amongst the firms under study in maintaining liquid deposits which
indicates a better standing to the bank in honoring the demand deposits and other financial
obligations as and when they become due.

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IDBI Bank:
1. IDBI Bank’s low composite score of 2.751 exhibit unsafe and unsound conditions. There are
serious financial or managerial deficiencies that result in unsatisfactory performance.
2. The weaknesses and problems are not being satisfactorily addressed or resolved by the board
of directors and management.
3. The firm has a low capability of withstanding business fluctuations.
4. There may be significant noncompliance with laws and regulations. Risk management practices
are generally unacceptable relative to the institution’s size, complexity, and risk profile. This is
evident from the lowest capital adequacy ratio amongst the firms under study.
5. Close supervisory attention is required, which means, in most cases, formal enforcement action
is necessary to address the problems.
6. Recommendations and suggestions
7. First, the company has a very high debt equity ratio which indicates an unfavorable scenario for
the long term creditors as it wills deteriorate the margin of safety for them.
8. The company has the highest equity multiplier ratio which indicates that the company is using
more of debt to fund its assets and it is not desirable .The greater the debt used to finance
assets, the greater the risk; this isn’t the same as saying that a business carrying a greater
amount of debt will fail, only that it’s more likely to than company’s carrying less debt.
9. The firm has a low return on assets and a low return on shareholders funds which indicates
inefficient utilization of the resources employed in the business.
10. All the firms under study have a low spread ratio with IDBI firm lowest which implies that the
assets have increased by a greater amount & the net interest income has not marked an equal
increased the. The ratio should be improved as a low ratio indicates inefficient management of
assets employed for earning.
11. Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been
a trigger for bank failures. Thus a high liquidity ratio is always an added advantage but it comes
at a cost of sacrificing interest income earned on investing it profitably .IDBI has the lowest
liquid assets to total assets ratio among the firms under study.
Following are the positives aspects of IDBI:
1. Management Efficiency of the firm is good when compared to the other two firms under study
on all the three parameters. The firm has the highest business per employee indicates the bank
is utilizing its employees very efficiently. The firm has profit per employee which indicates ability
of the bank to squeeze more sales/revenues out of each of its employee.
2. The company also has a safe investment and low risk taking policy which is evident from high
investments in government securities.
References:

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ISSN 2348 - 8891

A STUDY ON THE IMPACT OF MERGERS AND ACQUISITIONS ON

aspect for any organization

subsequently known as State Bank of India.

synergy and value creation by way of diversification and improved management.

*Associate Prof., SVIM, Indore, MP, India

Altius Shodh Journal of Management & Commerce

Altius Shodh Journal of Management & Commerce

(ii) Merger or amalgamation through consolidation: A consolidation is a combination of two or more

5) Enhanced banking risk can be matched with increased capital adequacy.

Altius Shodh Journal of Management & Commerce

Introduction of Banks Under Study

About HDFC Bank

About ICICI Bank

Altius Shodh Journal of Management & Commerce

About IDBI Bank

HDFC Bank Acquires Centurion Bank of Punjab (May 2008):

Altius Shodh Journal of Management & Commerce

IDBI and United Western Bank Merger (October 2006)

Altius Shodh Journal of Management & Commerce

MERGERS AND ACQUISITION IN BANKING SECTOR: Jagriti Kumara (School of Economics,

Altius Shodh Journal of Management & Commerce

To meet the new stringent international regulatory norms

Banks performance evaluation by CAMEL model (Hirtle and Lopez)

Altius Shodh Journal of Management & Commerce

CAMELs and Banks Performance Evaluation (Muhammad Tanko)

Rationale of the study:

Altius Shodh Journal of Management & Commerce

Objectives of the study:

 HDFC Bank and Centurion Bank of Punjab Merger on 23 rd May 2008.

 ICICI Bank and Sangli Bank Merger on 19 th April 2007.

 IDBI Bank and United Western Bank Merger on 03 rd October 2006.

Altius Shodh Journal of Management & Commerce

Camel rating system:

Limitations of the study:

Altius Shodh Journal of Management & Commerce

1. The study was limited to three banks only.

Altius Shodh Journal of Management & Commerce

Debt Equity ratio :

Altius Shodh Journal of Management & Commerce

Altius Shodh Journal of Management & Commerce

revenues out of each of its employee.

Earning Efficiency: 1) Return On Investment:

Altius Shodh Journal of Management & Commerce

3) Net Profits to Average Assets:

Altius Shodh Journal of Management & Commerce

4) Net Interest Margin (Spread) Ratio:

5) Cost to Total Income:

Altius Shodh Journal of Management & Commerce

Altius Shodh Journal of Management & Commerce

2) Government Securities to Total Assets:

3) Liquid Assets to Demand deposits:

Altius Shodh Journal of Management & Commerce

4) Equity Multiplier Ratio:

Analysis of ICICI Bank

Altius Shodh Journal of Management & Commerce

Altius Shodh Journal of Management & Commerce

2. Net NPA Ratio: Net NPA / Total Advances

Altius Shodh Journal of Management & Commerce

1. Total Advances to Total Deposits Ratio:

Altius Shodh Journal of Management & Commerce

3. Net interest margin (spread) ratio:

Altius Shodh Journal of Management & Commerce