POST MERGER PERFORMANCE ANALYSIS OF STANDARD CHARTERED BANK PAKISTAN

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1 POST MERGER PERFORMANCE ANALYSIS OF STANDARD CHARTERED BANK PAKISTAN ASMA ARSHAD Management Studies The University of Faisalabad, 4Km from Sargodha Road, Faisalabad, Punjab. Pakistan. MS Finance ABSTRACT The main intention behind this study is to analyze the post merger performance of the Standard Chartered bank. The Union bank was acquired by Standard chartered bank in December Before merger was the eighth largest bank in Pakistan. After merger Standard chartered bank achieved awards. The main objective was to study and review the existing system of merger and by accessing the gap was to suggest some measures to meet the gap. For this quantitative and cross sectional study ratio analysis was conducted to analyze the performance of Standard Chartered Bank. The total 11 ratios under efficiency ratios, liquidity ratios and capital ratios applied on key financial figures to analyze the performance. Key figures were taken from standard chartered bank s website. Data was taken from before merger and after the merger. MS EXCEL 2007 was used to calculate and analyze the ratios. After applying ratios, averages of all the ratio categories were taken. On account of that it came to know that 64% answer was in favor of Union bank before merger and 36% was in favor of after merger standard chartered bank. The research resulted with unavailability of before merger and after merger financial statements, just focused on merger effect with limited applicability of ratios. No study conducted on this bank ever before. Key words: Merger, Performance, acquired, ratio analysis, financial figures, efficiency ratios, liquidity ratios and capital ratios. 1. INTRODUCTION 1.1 THE HISTORY OF STANDARD CHARTERED BANK (PAKISTAN) The first branch of Standard Chartered had been opened in Karachi in Today there are 176 branches across 41 cities was the beginning year for the transformations of Standard Charterer s operations in Pakistan. During this year the Bank announced its acquisition of that was the eighth largest banks in Pakistan with US$2 billion in assets, and about 400,000 customers. The acquisition was for US$ 487 million in December Bank settled effectively cemented position as the largest and fasted growing international bank in Pakistan. In 2007 the merged bank had 115 branches across 22 cities in Pakistan. A year later in mid of 2008, the bank had 176 branches across 41 cities. After the acquisition of the by Standard Chartered bank, many foreign banks reached to Pakistan and acquired other small and medium sized banks or financial institutions to expand their network and business in Pakistani market. 1.2 THE MERGER In today s large-scale economy, merger and acquisition are more and more used for improving the competitiveness through large market share, lengthening the portfolio and to reduce the risk. It is so done to run the business on new geographical areas at economies of scale. It is actually combining of two or more companies where one company s stockholders offer securities to the acquiring company. Thus merger is the fusion of two or more partners thus creating a totally new business entity or continuing the operation of the partners under the roof of any one of them (Wolff, 2008). In merger companies usually combine to share resources. In merger a new business works. A merger occurs when two (or more) companies agree into merge in a new single company rather than remain separated for creating business synergies (OECD Benchmark Definition of Foreign Direct investment, 2008). COPY RIGHT 2012 Institute of Interdisciplinary Business Research 164

2 Merger is different form acquisition. In merger a new business creates where there is not any concept of acquirer. There is the combine management system in new business. Moreover, both companies are of parallel size. In merger both participants decide to establish and arrange the management. A merger exists when Neither company is portrayed as the acquirer or the acquired. Both parties participate in establishing the management structure of the combined business. Both companies are sufficiently similar in size that one does not dominate other when combined. All or most of the consideration involves a share swap rather than a cash payment, etc. (Glenlake & Fitzroy, 2000) 1.3 IMPORTANCE OF STUDY Merger enhances the value of business. On account of which owners good will increases with the increment in profit through economies of scale and cost reduction etc. Motives behind merger are to increase revenue by enhancing market share, cost reduction, economies of scale and economies of scope. As the size of bank increases, efficiency also improves. In addition to economies of scale and diversification benefits, there are two other economic motives of M&A; Horizontal integration and vertical integration (Gaughan, 2011). To employees, merger provides a different and new culture to work. There employees can work in an advanced culture with some desired change. The success of mergers and acquisition depends on a change in state of mind of the people (Sathe and Davidson, 2000; Champy, 1995). Calomiris and Karceski (2000) and point out that efficiency gains can flow to bank customers (Nikolaos & Ioanna, 2005). 1.4 OBJECTIVE OF THE STUDY Main causes of merger in Pakistan according to banking system review are; Increase in Minimum Capital Requirements, Restructuring of public sector and private entities, Appetite for Commercial Banking License, Expansion & Growth (Malik, 2006). Main intention in doing this research is to; Study the existing system of Merger. Review idea system of Merger. Access the gap between existing system and idea system of Merger in Standard Chartered Bank. To suggest measures to reduce the gap in banks. Evaluate the affect of the merger on post-profitability of standard chartered bank. 1.5 HYPOTHESIS = Merger improves the performance of Standard Chartered Bank Pakistan. = Merger does not improve performance of Standard Chartered Bank Pakistan. 2. REVIEW OF LITERATURE Merger is the global business term used achieving the business growth and survival. Merger is different from acquisition. Merger is the combination of two businesses that leads toward a new business, but acquisition is the takeover or purchase of one business by other business. Merger is also helpful for businesses in terms of solvency. Because when a business liabilities exceed to assets then mostly businesses adopt this process to abstain from insolvency. There were limitations of resources. So following are the reviews according to access to different articles. The process of mergers & consolidation in the banking system also extended hand to strengthen the solvency of the banking system (Malik, 2006). From banking system review it was also seen that merger of banks is adapted to increases the return on capital, that further lead towards increment in equity. The recent trend of mergers and acquisitions of local banks by the foreign banks is also intended to extend their outreach to maximize return on their capital (Malik, 2006). Mergers and consolidation of the banking system further supported this increasing equity base (Malik, 2006). The chances of uncertainty in operations increase due to new technologies, e- banking and more over mainly from merger. No doubt that new technology and e- banking are the basic factors of operational risks, but banking mergers are causing operational risk in a situation when there was no more idea about new banking workings and operations while diversification is there. The contributory factors to enhanced operational risk exposure generally originate COPY RIGHT 2012 Institute of Interdisciplinary Business Research 165

3 from new automated technologies, more complex products, e-banking and acquisitions/ mergers in the banking system (Malik, 2006). Little banks have to face problem of less capital. For running business they see for a partner so that that person will be able in running business activities properly. So, to solve capital problem banks decide to go for merger. So that business will not only be able to produce required capital but also will be in a position to introduce new innovative facilities. Some of the banks that have less capital than the required level and/or are facing difficulties in raising capital through equity injection or reinvestment of profits are opting for mergers to bring their capital to the requisite level. (M. & MUSLEH-UD, 2006). Cost efficiency is obtained from merger. It may be raised due to the fact that merged banks get entrance into cost reduction technologies or increase their fixed cost over a bigger base, thus dropping average cost. The cost efficiency effects of merger and acquisition may depend on the type of merger and acquisition, the motivation behind it and the manner in which the management implemented its plans (Pardeep & Gian, 2010). When in-market mergers take place then competition is reduced. In this case market power for survival of the business is increased. On this basis business can earn more profit and offers high loan rates and lowering deposit rates. That helps business in enhancing its good will. A related effect of in-market mergers is at the market share of the surviving organization in these markets is raised (Pilloff & Santomero, 1996). Mostly banks do mergers to get more return on assets, equity and for increment in profit. But different bodies of research examined the performance effects of bank mergers and found no evidence of merger-related performance improvements as measured by ROA, ROE or operating income profitability (Jens & Kevin, 2009). When mergers take place some changes occur in the working and response of employees. If the resulted response is positive then this leads towards efficiency of business and ultimately customers feel change. The cultural change after the Merger and Acquisition is highly regarded as an important attribute for success (Rizwan, Majed, Muhammad, & NUML, 2011). Mostly merging activities were performed by banks. And banks adopted merger in that case when they require change means diversification, to enhance profitability or to decrease competition etc. In financial systems mostly merger purposes were proved successful in achieving efficiency. Mergers and acquisitions in the financial system could impact positively on the efficiency of most banks (Joshua, 2011). Similarly potential efficiency gain after merger also meant that merging businesses were obtaining both operating and managerial efficiency. It s because when businesses merged they come with new objectives and with some extra goals. To achieve their newly settled objectives management worked hardly and efficiently. The potential efficiency benefits from mergers and acquisitions include both operating and managerial efficiency (Appah & Sophia, 2011). With this some organizations proved more efficient, because they had eliminated personnel and removed some facilities after merger. This is actually the downsizing and reduction in cost which ultimately had provided resultant requirement. Larger institutions may be more efficient if redundant facilities and personnel are eliminated within the post-merger organization (Elumilade & David, 2010). Banks attained the performance improvement after merger on the basis of decrease in cost of production and increase in production level. Scope of economies or changes in product mix are another potential way in which mergers might help improve bank performance (Berger & Humphrey, 1994). Another source of cost efficiency behind merger was that efficient banks acquires the inefficient banks and run their managing rules over the inefficient. In this case all talents of superior management are spread over there with the help of different resources. Thus efficient business gets required results. Cost efficiency could be considerably improved by a merger in which a relatively efficient bank acquires a relatively inefficient bank and spread its superior management talent over more resources (Akhavein, Berger, & Humphrey, 1996). Mergers cause the gains by proper allocation of resources rather than by reducing the tax payments to capture the market. M&A as value creation, efficiency improvements as explanations for synergies and produced evidence that suggests mergers generate gains by improving resource allocation rather than by reducing tax payments of increasing the market power of the combined firm (Dr. & Vijay). It was also seen that if the acquiring bank is more efficient than target then there would not b any improvement in efficiency gain. If the acquiring bank is more efficient than its target, there are not efficiency gains from in market mergers (Benjamin & David, 2001). In another place it was seen that bank mergers improve accounting profitability ratios whereas, some researchers found no improvement in these ratios (Milbourn, Boot, & Thakor, 1996). Merger and acquisition is adopted to attain the operating and financial efficiencies. According to the efficiency theory, the main motive of mergers and acquisition is to gain operating and financial synergy (Sufian, Fadzlan, Abdul, Muhamed, Haron, & Razali, 2007). Most of the places it was seen that merger is mostly used to COPY RIGHT 2012 Institute of Interdisciplinary Business Research 166

4 reduce the cost and proper management which will ultimately lead to wards efficiency. Mergers between entities are often motivated with arguments on cost reduction, input savings, better management and therefore efficiency enhancement (Gjirja, 2003). On another side it was seen that horizontal mergers mostly cause the efficiency. The mergers selected were generally large horizontal mergers that are thought to be the kind of merger most likely to yield efficiency gains (Rhoades, 1997). 3. RESEARCH DESIGN This quantitative and cross sectional study was conducted for hypothesis testing of merger improves the profitability of standard chartered bank. In this longitudinal study data was collected with minimal interference. 3.1 DATA COLLECTION Data for the study was collected from Standard Chartered bank s web site. For the financial analysis of standard chartered bank, key financial data were taken from website of standard chartered bank (Pakistan) from 2006 to Key financial data were taken because of the absence of financial statements of bank before merger. Owing to which a specific number of ratios are applied for analysis. 3.2 DATA ANALYSIS Merger in banking side is becoming more important. In banks, merger is adopted to gain the market share and to get the economies of scale with cost efficiency. Mergers and acquisitions not only improve the bank profit but also improve the economy and society situation. To analyze the profit situation of standard chartered bank before and after merger ratio analysis was conducted as per guidance of Statistics and DWH department of State Bank of Pakistan that is available on State Bank s website named as Financial Statement Analysis of Financial Sector Total ten ratios were applied and for computation of ratios MS Excel 2007 was used FINANCIAL RATIOS Financial ratios are the analytical tool used to analyze the financial performance and situation of the business at specified time. Ratios are actually used to determine the trends within the industry that ultimately helps a business in improving its activities. This analytical tool helps the financial analyst in taking the decisions regarding profitability/efficiency, liquidity, leverage and financial structure etc. In this study following financial ratios are used to analyze the performance of standard chartered bank: Liquidity Ratios: It is used to determine the ability of a business to pay its short term debts. Higher the answer of the ratio larger will be the safety. It describes that is the business has going concern ability. It includes the Investment to total assets, Advances and total assets and liabilities to total assets. Efficiency/Profitability Ratios: It is used to measure management s ability to manage expenses and to earn revenue from business activities. Higher value of this ratio indicates that company is going well. It includes non-interest income to total assets ratio, Return on assets, return on equity and return on sales ratios. Capital/Leverage Ratios: It is used to determine the company s ability to meet its long term debt. Higher the ratio more solvent and risky the company is, that shows company has more debt than equity. It includes capital ratio, deposit to equity ratio and debt to equity ratio. 3.3 LIMITATIONS In this study: Only mergers affect was seen on standard charted bank. There is not any consideration on diversification affects of merger. This study does not include any other cooperate sector of the economy. Limited ratios are applied. Unavailability of financial statements before merger of bank. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 167

5 4. RESULTS AND DISSCUSSIONS With the help of key financial data available on the web site of Standard Chartered Bank Pakistan six years accounting ratios have been calculated as per formulae before merger and after merger Standard Chartered Bank. These accounting ratios include profitability/efficiency ratios, liquidity ratios and capital/leverage ratios. In the following table the averages of the ratios were taken before and after the merger. So that there will be more ease in describing financial health of these two banks. 4.1 EFFICIENCY/PROFITABILITY RATIOS The table 4.1 shows the average values of the efficiency/ profitability ratios of Standard Chartered Bank before and after merger to determine the position of bank. This table includes the 5 ratios which are; Non-interest income to total assets ratios, ROA, ROE, Return on sales and Du Pont return on assets ratios. 4.2 LIQUIDITY RATIOS After efficiency/profitability ratios comparison Liquidity ratios are also important for financial analysis. Table 4.2 is the averages of liquidity ratios of standard chartered bank before and after merger. This table is consisted on 3 ratios that are; Investment to total assets, Advances to total assets and Total liabilities to total assets ratios. 4.3 CAPITAL/LEVERAGE RATIOS The table 4.3 describes the averages of Capital/Leverage ratios of standard chartered bank before and after merger. That comprises Capital ratios, Deposit to equity ratios and Debt to equity ratios. 4.4 ALL RATIOS COMPARISON Now the comparison is done among the above three categories of ratios to see that how many ratios are in favor of before merger union bank and after merger standard chartered bank which is represented in table 4.4. So that there will be the more possibility to determine the performance of bank after merger on overall basis. Thus hypothesis is rejected. From the ratio analysis it has been proved that Standard Chartered Bank s merger proves to be failure. 4.5 DISCUSSIONS In a study it is also shown that Royal Bank of Scotland (RBS) proves to be failure in banking history. In this RBS study author also has adopted the same way of finding results by applying 20 financial ratios, to analyze the profitability or Royal Bank of Scotland. And concluded that merger does not improve the profitability (Kemal, 2011). In another study the empirical results also shows that there is not statistically significant gain in value or performance from merger activity (Pilloff & Santomero, 1996). Furthermore, in another study it is also seen that target merged banks are smaller, less profitable, less cost efficient and riskier than non-merging banks in case of Germany (Andreas Behr, 2002). In another study it is found that Merger between unhappy and strong banks did not give up any significant efficiency gains to participated banks (Pardeep & Gian, 2010). 5. CONCLUSION Merger is becoming more important in financial sectors. It is adopted when one company gets unable in meeting its expenses and to reduce cost. It is mostly adopted to earn more profit by economies of scale, to capture market effectively and efficiently than competitors through competitive edge. The merger and acquisition is opted to change the structure of business to secure from risks and to be a sound business in market. In financial sectors investment has the most importance and to analyze the position of a business ratio analysis is used. Which is analytical tool used to present a clear picture of a business in all areas of business. In this study post merger performance analysis of standard Chartered Bank Pakistan was discussed. In this study it was seen that before merger union bank was the eighth largest bank in Pakistan, has improved its performance after merger being a standard chartered bank Pakistan. For this purpose a hypothesis was developed which is Merger improves the profitability of bank. In this regard key financial data was taken from the website of standard chartered bank because financial statements before merger were unavailable. Key financial data was taken from Data was analyzed by applying the accounting ratios with the usage of MS EXCEL The ratios are the analytical tool used to check the financial performance of businesses. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 168

6 Total 11 ratios are applied which are liquidity ratios, efficiency/profitability ratios and capital/leverage ratios. This analysis was taken as per guidance of Financial Statement Analysis of Financial companies issued by state bank of Pakistan. After concluding the results it was find out from average of efficiency/ profitability ratios that out of 5, 4 ratios were in favor of union bank before merger and only 1 was in favor of standard chartered bank of Pakistan after merger. Then from the average of liquidity ratios it was seen that out of 3 there were 2 ratios in favor of Union bank before merger and only 1 ratio was in favor of standard chartered bank. After that from the average of capital/leverage ratios it was seen that out of 3 ratios, 2 ratios were in favor Standard chartered bank and 1 was in favor of the before merger. Then all ratios comparison were analyzed and found that out of 11, 7ratios were in favor of Union bank and only 4 were in favor of standard chartered bank after merger. Which shows that Union bank before merger was 64% and after merger it reached up to 36%. With this analysis it was proved that merger does not improve the performance after merger. Thus hypothesis was rejected. So according to study findings Union bank before merger was in better position than after merger. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 169

7 Annexure TABLE 4.1 EFFICIENCY/PROFITABILITY RATIO COMPARISON Efficiency/Profitability Ratios Before Merger Averages After Merger Standard Chartered Bank Averages Standard Chartered Bank Non-Interest Income to Total Assets Ratio 1.96% 2.36% Better Return on Assets (ROA) 2.86% 0.51% Better Return on Equity (ROE) 32.60% 3.10% Better Return on sales 47.15% 6.01% Better Du Pont return on assets 32.60% 3.10% Better Above table reveals that union bank before merger was in better position as the 4 out of 5 ratios are in favor of Union bank and there is 1 ratio in favor of standard chartered bank after merger. It means that Union bank before merger was in better position to manage the expense for the purpose of earning profit and to reduce the cost. TABLE 4.2 LIQUIDITY RATIOS Liquidity Ratios Before Merger Averages After Merger Standard Chartered Bank Averages Standard Charterd Bank Investment and Total Assets 16.89% 17.96% Better Advances and Total Assets 50.59% 44.67% Better Total Liabilities to Total Assets 89.57% 83.91% Better From the table it is clear that before merger union bank was better than after merger Standard chartered bank. It is said because out of 3 ratios, 2 ratios are in favor of union bank before merger. It means that Union bank was in better position to pay its short term debts than after merger standard chartered bank. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 170

8 TABLE 4.3 CAPITAL/LEVERAGE RATIOS Before Merger Averages After Merger Standard Chartered Bank Averages Standard Chartered Bank Capital/Leverage Ratios Capital Ratio 10.43% 16.09% Better Deposit to Equity Ratio (Times) Better Debt to Equity Ratio (Times) Better Above table depicts that Standard Chartered Bank after merger is better in status as 2 ratios out of 3 ratios are in favor of Standard Chartered Bank and there is only 1 ratio in favor of Union bank before merger. This shows that Standard Chartered Bank Pakistan has more ability to pay its long term debts. Standard Chartered Bank Pakistan has also achieved the Best Debt House award in 2011 which depicts that bank has more ability not only to meet its on debt but also in providing debts to others. GROUP OF RATIOS TABLE 4.4 TOTAL RATIOS COMPARISON Total No. of ratios Calculated No. Of favorable Ratios Before Merger No. Of favorable Ratios After Merger Efficiency/Profitability Ratios Liquidity Ratios Capital/Leverage Ratios TOAL This table depicts that out of 11 ratios it is clear that 7 ratios (64%) are in favor of before merger Union bank and 4 ratios (36%) are in favor of after merger Standard Chartered bank. This shows that merger has not improved the performance of Standard Chartered Bank. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 171

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