Financial Performance Pre & Post Merger Of ICICI Bank

Transcription

1 Financial Performance Pre & Post Merger Of ICICI Bank Sadhana Prajapati PDF Scholar, FACULTY OF COMMERCE, Harishchandra Post Graduate College, Varanasi ABSTRACT In the past three decades, India's banking system has earned several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to metropolises or cities in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main aspects of India's banking growth story. The Internationally Banking scenario has been shown major changes in the past decades of the Mergers and Acquisitions. Due to the financial system deregulation, entry of new players and products with advanced technology, globalization of the financial markets, changing customer behaviour, wider services at cheaper rates, shareholder wealth demands etc., have been on rise. This study shows the impact of Mergers and Acquisitions in the Indian Banking sector as sample to examine the as to whether the merger has led to a profitable situation or not. For this purpose, a comparison between pre and post merger performance in terms of Operating Profit Margin, Net Profit Margin, Return on Assets, and Return on Equity, Earning per Share, Debt Equity Ratio and Dividend Payout Ratio has been made in the case of ICICI Bank. ICICI Bank Net Profit and Return on Assets have showed an improvement after the merger but in case of the other parameters there is no significant improvement in the performance. In the initial stage, after merging, there may not be a significant improvement due to teething problems but later they may improve upon. Key words: Mergers. Acquisitions, Financial Performance, Ratio, Profitability. In the past three decades, India's banking system has earned several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to metropolises or cities in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main aspects of India's banking growth story. The Internationally Banking scenario has been shown major changes in the past decades of the Mergers and Acquisitions. Due to the financial system deregulation, entry of new players and products with advanced technology, globalization of the financial markets, changing customer behaviour, wider services at cheaper rates, shareholder wealth demands etc., have been on rise. This study shows the impact of Mergers and Acquisitions in the Indian Banking sector as sample to examine the as to whether the merger has led to a profitable situation or not. For this purpose, a comparison between pre and post merger performance in terms of Operating Profit Margin, Net Profit Margin, Return on Assets, and Return on Equity, Earning per Share, Debt Equity Ratio and Dividend Payout Ratio has been made in the case of ICICI Bank. ICICI Bank Net Profit and Return on Assets have showed an improvement after the merger but in case of the other parameters there is no significant improvement in the performance. In the initial stage, after merging, there may not be a significant improvement due to teething problems but later they may improve upon. In this scenario, Mergers and Acquisitions is one of the widely used strategies by the banks to strengthen and maintain their position in the market. Companies are confronted with the facts that the only big players can survive as there is a cut throat competition in the market and the success of the merger depends on how well the two companies integrate themselves in carrying out day to day operations. Banks will get the benefits of economies of scale through mergers and acquisition. A Merger is a combination of two or more companies into one company or it may be in the form of one or more companies being merged into the existing companies. On the other hand, when one company takes over another company and clearly well-known itself as the new owner, this is called as Acquisition. The banks must follow the legal procedure of mergers and acquisitions which is given by > RJEBS: Volume: 05, Number: 10, August-2016 Page 26

2 the Reserve Bank of India, SEBI, Indian Companies Act and Banking Regulation Act Mergers and acquisitions is not a short term process, it takes time to take decisions after examining all the aspects. Literature Review and Gap Under this study, the researcher reviewed research papers for the purpose of providing an insight into the work related to Merger and Acquisitions (M&As). A firm can achieve growth both internally and externally. Internal growth may be achieved by expanding its operation or by establishing new units, and external growth may be in the form of Merger and Acquisitions (M&As), Takeover, Joint venture, Amalgamation etc. Many studies have investigated the various reasons for Merger and Acquisitions (M&As) to take place, just to look into the effects of Merger and Acquisitions on Indian financial services sector. Goyal K.A. & Joshi Vijay (2011) 1 in their paper, gave an overview on Indian banking industry and highlighted the changes occurred in the banking sector after post liberalization and defined the Merger and Acquisitions as per AS-14. The need of Merger and Acquisition in India has been examined under this study. It also gave the idea of changes that occurred after M&As in the banking sector in terms of financial, human resource & legal aspects. It also described the benefits come out through M&As and examined that M&As is a strategic tools for expanding their horizon and companies like the ICICI Bank has used merger as their expansion strategy in rural market to improve customers base and market share. The sample of 17 Merger of post liberalization and discussed about communication in M&As, the study lightened the role of media in M&As. Kuriakose Sony & Gireesh Kumar G. S (2010) in their paper, they assessed the strategic and financial similarities of merged Banks, and relevant financial variables of respective Banks were considered to assess their relatedness. The result of the study found that only private sector banks are in favor of the voluntary merger wave in the Indian Banking Sector and public sector Bank are reluctant toward their type of restructuring. Target Banks are more leverage (dissimilarity) than bidder Banks, so the merger lead to attain optimum capital Structure for the bidders and asset quality of target firms is very poor except the cases of the HDFC Vs the CBOP merger in The factor behind voluntary amalgamation are synergies, efficiency, cost saving, economies of scale. The merging partners strategically similarities and relatedness are very important in the synergy creation because the relatedness of the strategic variable have a significant impact on the Bank performance and the effect of merger on the stock market. Aharon David Y et al., (2010) 2, analyzed the stock market bubble effect on Merger and Acquisitions and followed by the reduction of pre bubble and subsequent, the bursting of bubble seems to have led to further consciousness by the investors and provide evidence which suggests that during the euphoric bubble period investor take more risk. Merger of banks through consolidation is the significant force of change took place in the Indian Banking sector. Kuriakose Sony et al., (2009) 3, focused on the valuation practices and adequacy of swap ratio fixed in voluntary amalgamation in the Indian Banking Sector and used swap ratio for valuation of banks, but in most of the cases the final swap ratio is not justified to their financials. Schiereck Dirk et al., (2009) 4, explained the relationship between bank reputation after Merger and Acquisitions and its effects on shareholder s wealth. This study considered 285 European merger and Acquisition transaction announced between 1997 and 2002 and finds that on average wealth not significantly effect by Merger and Acquisitions. It is found in the study of Bhaskar A Uday et al., (2009) that Banking sector witness of Merger activities in India when banks facing the problem of losing old customer and failed to attract the new customers. It described that the acquiring firms mainly focuses on the economies of scale, efficiency gain and address the need of communication and employee concern, and described the integration process was handled by professional and joint integration committee. Road map is prepared and HR integration is done as per schedule and they took a case of the Bank of Punjab acquired the Lord Krishna Bank and later on the Centurion Bank of Punjab acquired by the HDFC Bank and gave the frame of integration. This study regulate the link between communication, HR integration, management action and consequent contribution of post merger success by conducted interview in a recent bank merger, in depth interviews work conducted in > RJEBS: Volume: 05, Number: 10, August-2016 Page 27

3 a recent mergers of a Indian Bank. It was inferred that proactive communication, changes in organizational structure, and appropriate human resource integration would smoothen the journey towards successful integration. Mantravadi Pramod & Reddy A Vidyadhar (2007) 5 evaluated that the impact of merger on the operating performance of acquiring firms in different industries by using pre and post financial ratio to examine the effect of merger on firms. They selected all mergers involved in public limited and traded companies in India between 1991 and 2003, result suggested that there were little variation in terms of impact as operating performance after mergers. In different industries in India particularly banking and finance industry had a slightly positive impact of profitability on pharmaceutical, textiles and electrical equipments sector and showed the marginal negative impact on operative performance. Some of the industries had a significant decline both in terms of profitability and return on investment and assets after merger. Research Gap As observed from the above studies, most of the works have been done on trends, policies and their framework but researchers was not focussed on mergers and acquisitions in the banking sector. The present paper would go to investigate the details of Mergers and Acquisitions (M&As) with greater focus on the Indian Banking sector in post liberalisation period. The study will also discuss the pre and the post-merger performance of banks. Objectives of the Study The objectives of the paper are: To evaluate the banks performance in terms of Operating and Net Profitability To find out the impact of merger on company s debt equity ratio Methodology Sources of Data: The study is based on secondary data. The financial and accounting data of banks have been collected from the Annual report of the select Banks to examine the impact of Mergers and Acquisitions on the performance of the sample banks. Data are also collected from the Bombay Stock Exchange, National Stock Exchange, Securities and Exchange Board of India and Money Control, rediff business for the study. Sample: ICICI from Private Sector is taken as the sample banks to evaluate the impact of mergers and acquisitions on the performance of the Bank. Period of the Study: To compare the performance of Bank, three years pre merger and three years post merger financial ratios are being computed and compared. The year of merger was considered as a base year. Financial Parameters: The performance of the Banks is made in respect of the financial parameters such as Net Profit Margin, Operating Profit Margin, Return on Assets, Return on Equity, Debt Equity Ratio and Earning per Share. Hypothesis: 1. H 0 (Null Hypothesis) There is no significant difference between the pre and post-merger Operating Profit Margin Operating Profit Margin 2. H 0 (Null Hypothesis) There is no significant difference between the pre and post merger Net Profit Margin > RJEBS: Volume: 05, Number: 10, August-2016 Page 28

4 Net Profit Margin 3. H 0 (Null Hypothesis) There is no significant difference between the pre and post merger Return on Equity Return on Equity 4. H 0 (Null Hypothesis) There is no significant difference between the pre and postmerger Earning Per Share Earning Per Share 5. H 0 (Null Hypothesis) There is no significance difference between the pre and post merger Debt Equity Ratio Debt Equity Ratio 6. H 0 (Null Hypothesis) There is no significant difference between the pre and postmerger Dividend Payout Ratio Dividend Payout Ratio Tools for Analysis: Ratios and percentages are used for the analysis of data and for better understanding, Bar Diagrams are used for the presentation of the data. For the pre merger, the combined ratios of both the banks are considered and for the post merger the ratios of acquiring bank were used. Table 1: List of Merger and Acquisitions (M&As) in Indian Banking Industry since Nationalization of Banks Sl. Name of the Transferor Bank Name of the Transferee Date of Merger No. Bank /Amalgamation 1 Bank of Bihar Ltd. State Bank of India November 8, National Bank of Lahore Ltd. State Bank of India February 20, Miraj State Bank Ltd Union Bank of India July 29, Lakshmi Commercial Bank Ltd Canara bank August 24, Bank of Cochin Ltd. State Bank of India August 26, Hindustan Commercial Bank Ltd Punjab National bank December 19, Traders Bank Ltd Bank of Baroda May 13, United Industrial Bank Ltd Allahabad bank October 31, Bank of Tamilnadu Ltd Indian Overseas bank February 20, Bank of Thanjavur Ltd. Indian Bank February 20, Parur Central Bank Ltd Bank of India February 20, Purbanchal Bank Ltd. Central Bank of India August 29, New Bank of India Punjab National Bank September 4, Bank of karad Ltd Bank of India Kashi Nath Seth Bank Ltd. State Bank of India January 1, Bari Doab Bank Ltd Oriental Bank of Commerce April 8, Punjab Co-operative Bank Ltd. Oriental Bank of Commerce April 8, Bareilly Corporation Bank Ltd Bank of Baroda June 3, Sikkim Bank Ltd Union Bank of India December 22, Times Bank Ltd. HDFC Bank Ltd February 26, Bank of Madura Ltd. ICICI Bank Ltd March 10, > RJEBS: Volume: 05, Number: 10, August-2016 Page 29

5 22 ICICI Ltd ICICI Bank Ltd May 3, Benares State Bank Ltd Bank of Baroda June 20, Nedungadi Bank Ltd. Punjab National Bank February 1, South Gujarat Local Area Bank Ltd. Bank of Baroda June 25, Global Trust Bank Ltd. Oriental Bank of Commerce August 14, IDBI Bank Ltd. IDBI Ltd April 2, Bank of Punjab Ltd. Centurion Bank Ltd October 1, Ganesh Bank of Kurundwad Ltd Federal Bank Ltd September 2, United Western Bank Ltd. IDBI Ltd. October 3, Bharat Overseas Bank Ltd. Indian Overseas Bank March 31, Sangli Bank Ltd. ICICI Bank Ltd April 19, Lord Krishna Bank Ltd. Centurion Bank of Punjab Ltd. August 29, Centurion Bank of Punjab Ltd HDFC Bank Ltd. May 23, The Bank of Rajasthan ICICI Bank Ltd August 13, State Bank of Indore State bank of India August 26, 2010 Source: Compiled from Report on Trend and Progress, RBI, Various Issues Since Nationalization, various Banks have been either merged or acquired and the same along with the dates of Merger/Amalgamation is provided in the Table 1. Table 2: Sample Banks S.No. Acquirer Bank Merged Bank Date of Merger 1 ICICI Bank Bank of Rajasthan Aug 13, 2010 (Source: Compiled from Table 1) In table 2, the selection of ICICI Bank, case by the researcher for the study is presented. The merger of the ICICI Bank and Bank of Rajasthan on Aug 13, 2010 is selected and analysed. ICICI Bank is from the Private Sector. To analyse the financial performance of the Banks before and after merger, a few ratios like Operating Profit Ratios, Net Profit Margin, Return on Assets, Return on Equity, Debt Equity Ratio, Dividend Payout Ratio and Earning per Share have been calculated and the same are presented in Table 3 for ICICI Bank. Ratios Operating Profit Margin = Operating Profit/Sales 100 Net Profit Margin = Net Profit/Sales 100 Return on Assets =Net Profit/Total Assets 100 Return on Equity (ROE) =Net Profit/Equity Share Holder s Funds 100 Debt Equity Ratio (Pure Ratio) = Total Debt/ Share Holder Equity Dividend Payout Ratio = Dividend / Net Income X 100 Table 3 Financial Performance of ICICI Bank Ratio Pre Merger Post Merger Avg Avg. Operating Profit Ratio Net Profit Ratio Return on Assets Return on Equity Earnings per Share Debt EquityRatio Dividend Payout Ratio > RJEBS: Volume: 05, Number: 10, August-2016 Page 30

6 Source : Dion Global Solutions Limited, (Figure1: Graphical presentation of Table 3) Table 3 shows the analysis of the financial performance of ICICI Bank before and after the merger of Bank of Rajasthan with ICICI. The evaluation is made on the basis of the financial ratios. It is found that there is a difference in the performance after the merger. There is an increase in the average Operating Profit Margin (24.10 % to 29.53%), Net Profit Margin (10.76% vs %), Return on Assets (1.07 % to 1.58%), Return on Equity (8.9 % to 15.47), Earnings per Share (36.43% to 40.39), Debt Equity Ratio (4.53 % to 4.63 %) and Dividend Payout Ratio (35.68 % to 27.63) The Operating Profit Margin, Return on Equity, Earning per Share, Debt Equity Ratio and Dividend Payout Ratio is statistically not significant therefore, the H0 is accepted, which says that there is no significant difference between the pre and post merger in case of the ICICI Bank, though there is a difference in absolute terms. The performance of the ICICI bank in terms of the Net Profit Margin and Return on Assets has improved significantly after the merger - H1 is accepted. IMPACTS OF MERGER & ACQUISITIONS 1. Growth: Companies that desire rapid growth in size or market share or diversification in the range of their products may find that a merger can be used to ful fill the objective instead of going through the time consuming process of internal growth or diversification. The firm may achieve the same objective in a short period of time by merging with an existing firm. 2. Synergy: The merged entity has better ability in terms of both revenue enhancement and cost reduction. Mergers and Acquisition allows firms to obtain efficiency gains through cost reductions(cost synergies) & revenue increases( revenue synergies). 3. Purchase Of Assets At Bargain Prices: M&A S have the opportunity to acquire assets, particularly land mineral rights, plant and equipment, at lower cost than would be incurred if they were purchased or constructed at the current market prices. > RJEBS: Volume: 05, Number: 10, August-2016 Page 31

7 4. Enhanced Managerial Skills: Occasionally a firm with good potential finds it unable to develop fully because of deficiencies in certain areas of management or an absence of needed product or production technology. If the firm cannot hire the management or the technology it needs, it might combine with a compatible firm that has needed managerial, personnel or technical expertise. 5. Acquiring New Technology: To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. 6. Broader Array Of Products: When two firms merge they have diversified variety of products and after the merger each consumer in both the firms will be benefited with the range of products or services to choose from &A s helps firms to widen its consumer portfolio but it also leads to a more diversified range of services. 7. Income Tax Advantages: In some cases, income tax consideration may provide the financial synergy motivating a merger. Tax concessions act as a catalyst for a strong bank to acquire distressed banks that have accumulated losses and unclaimed depreciation benefits in their books. 8. Own Developmental Plans: The purpose of acquisition is backed by the acquirer companies own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities; secure additional financial facilities eliminate competition and strengthen its market position. 9. Strategic Purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. 10. Corporate Friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. SUGGESTIONS 1. Banks can work towards a synergy based merger plan with minimisation of technology-related expenditure. 2. There is also a need that merger or large size is just a facilitator, but no guarantee for improved profitability. 3. The thrust should be on improving risk management capabilities, corporate governance and strategic business planning. 4. In the short run, attempt options like outsourcing, strategic alliances, etc. can be considered. Banks need to take advantage of this fast changing environment, where product life cycles are short, time to market is critical in deciding who wins in future. 5. The Government should not go for M&As as a means of bailing out of weak banks. The strong banks should not be merged with weak banks, as it will have adverse effect upon the asset quality of the stronger banks. 6. The strong banks should be merged with strong banks to compete with foreign banks and to enter in the global financial market. Conclusion The banking industry has been undergoing major Mergers and Acquisitions in the recent years, with a number of global players emerging through successive.mergers and Acquisitions in all sectors including banking. The present study indicates that the pre and post- Mergers and Acquisitions of selected banks in India have no greater changes in profitability ratio; a few banks are satisfactory during the study period. The study highlights that even after ten years of merger; the firms couldn t improve their performance. Similar decline in performance is observed matching firms. Thus, the decline in the performance of merging firms cannot be attributed to merger alone. But in future, there > RJEBS: Volume: 05, Number: 10, August-2016 Page 32

8 are strong prospects of improvements in profitability. But overall, results indicate that mergers led to higher level of cost efficiencies for the merging banks. Merger between distressed and strong banks did not yield any significant efficiency gains to participating banks. However, the forced merger among these banks succeeded in protecting the interest of depositors of weak banks but stakeholders of these banks have not exhibited any gains from mergers. A comparison between pre and post merger performance in terms of Operating Profit Margin, Net Profit Margin, Return on Assets, Return on Equity, Earning per Share, Debt Equity Ratio and Dividend Payout Ratio has been made in case of ICICI Bank, Net Profit and Return on Assets have showed an improvement after the merger but in case of the other parameters there is no significant improvement in the performance. In the initial stage, after merging, there may not be a significant improvement due to teething problems but later they may improve upon. References 1. Kuriakose Sony & Gireesh Kumar G. S (2010), Assessing the Strategic and Financial Similarities of Merged Banks: Evidence from Voluntary Amalgamations in Indian Banking Sector, Sci. & Soc, 8(1) 49-62, Retrieved From 2. Mantravadi Pramod & Reddy A Vidyadhar. (2007), Relative Size In Mergers And Operating Performance: Indian Experience, Economic and Political Weekly, September 29, Retrieved From 3. Dr. K B Das & CA (Dr) Sanjeev Singhal, Impact of Reforms on Efficiency of the Commercial Banks in India, Indian Journal of Accounting, Vol. XLV (1) Dec 2013, Pg no Dr. T. Anitha Devi and S. Sridevi Impact of Human Resources on Mergers and Acquisitions, Osmania Journal of International Business Studies, Vol. II No. 1 Jan June 2007, Pg no M. Selva Kumar, K. jegatheesan and G. Aruna A Performance Evaluation of Regional Rural Banks in India The Indian Journal of Commerce, Vol. 66, Jan arch Dr. SM Tariq Zafar, A Study on Universal Banking and its impact on Indian Finacial Market, Journal of Business Management & Social Sciences Research, Vol. 1, No. 2 Nov 2012, Pg. No Dr. KA Goyal and vijay Joshi, Mergers and Acquisition in Banking Industry: A Case Study of ICICI Bank Ltd., International Journal of Research in Management, Vol. 2, March 2012, Pg. No Nidhi Natwaya and Rahul Vyas, Post Merger Financial Performance Analysis of ICICI Bank and Erstwhile bank of Rajastan Ltd., Pacific Business Review International, Vol. 5 Issue 6, Dec 2012, Pg. No > RJEBS: Volume: 05, Number: 10, August-2016 Page 33