FINANCIAL PERFORMANCE OF ICICI BANK Ltd. A CRITICAL ANALYSIS OF ON PRE AND POST MERGER Dr. Sadhana Prajapati, PDF Scholar HCPG College, Varanasi ABSTRACT Mergers and Acquisition is an important tool for the banking growth and expansion. The Indian Banking Sector is no exception. It is helpful for the survival of the weaker banks by merging into the larger bank. This study has trying to find out the impact of Mergers as sample to examine the as to whether the merger has led to a profitable situation or not. For this purpose, a comparison has been making between pre and post merger performance in terms of Operating Profit Margin, Net Profit Margin, Earning per Share, Debt Equity Ratio, and Dividend Payout Ratio. The price has been made in case of ICICI Bank. There is no significant improvement in the performance after the merger as the merger was mainly in the interest of the public. 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 The International 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, lower costs through branch and staff rationalization, cross-border expansion and market share concentration. The new Basel II norms have also led banks to consider M&As. 1 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 the Reserve Bank of India, SEBI, Indian Companies Act and Banking Regulation Act 1949. Mergers and acquisitions is not a short term process, it takes time to take decisions after examining all the aspects. Indian Corporate Sector had stringent control before liberalization but, the Government has initiated the Reform after 1991which resulted in the adaptation of the different growth and expansion strategies by the Companies. Landmarks in Indian Banking Sector The Banking System of India was started in 1770 and the first Bank was the Indian Bank Known as the Bank of Hindustan. 1840: Bank of Bombay 1843: The Bank of Madras 1840: Bank of Calcutta 1921: All the above banks were merged and formed a new bank known as Imperial Bank of India. 1955: Imperial Bank was partially nationalized and was named as State Bank of India www.theinternationaljournal.org > RJCBS: Volume: 05, Number: 05, March 2016 Page 1
1969: 14 banks were nationalized 1980: 6 more banks were nationalized 1993: the New Bank of India was merged with The Punjab National Bank Indian Banking can be divided into three main phases: Phase I (1786 1969): Initial phase of Banking in India where many small banks were set up Phase II (1969 1991): Nationalization, Regularization and Growth marked this period Phase III (1991 onwards): Liberalization and its aftermath In post liberalization regime, Government had initiated the policy of liberalization and licenses were issued to the private banks which led to the growth of the Indian Banking Sector. In the recent times, Indian Banking Industry showed a tremendous growth because of an increase in the retail credit demand, proliferation of ATMs and debit cards, decreasing NPAs, improved macro economic conditions, diversification, interest rate spreads and regulatory and policy changes. 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 2007. The factor behind voluntary amalgamation is synergies, efficiency, and 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. Research Gap As observation 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. In this paper would go to investigate the details of Mergers and Acquisitions (M&As) with greater focus on www.theinternationaljournal.org > RJCBS: Volume: 05, Number: 05, March 2016 Page 2
the Indian Banking sector in post liberalisation period. The study will also discuss the pre and the post merger performance of ICICI banks Ltd. Objectives of the Study The objectives of the paper are: To study the Mergers and Acquisitions of Banks from 1969 to till date 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 is 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 for the study. Sample: Private Sector, are 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 Banks, 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 which is financial year 2012-13, 2013-14 and 2014-15. Financial Parameters: The performance of the Banks is made in respect of the financial parameters such as Net Profit Margin, Operating Profit Margin, Debt Equity Ratio, and Earning per Share. Hypothesis: 1. H0 (Null Hypothesis) There is no significant difference between the pre and post merger Operating Profit Margin H1 (Alternative Hypothesis) - There is a significant difference between the pre and post merger Operating Profit Margin 2. H0 (Null Hypothesis) There is no significant difference between the pre and post merger Net Profit Margin H1 (Alternative Hypothesis) - There is a significant difference between the pre and post merger Net Profit Margin 3. H0 (Null Hypothesis) There is no significant difference between the pre and post merger Earning Per Share H1 (Alternative Hypothesis) - There is a significant difference between the pre and post merger Earning Per Share 4. H0 (Null Hypothesis) There is no significance difference between the pre and post merger Debt Equity Ratio H1 (Alternative Hypothesis) - There is a significant difference between the pre and post merger Debt Equity Ratio 5. H0 (Null Hypothesis) There is no significant difference between the pre and post merger Dividend Payout Ratio H1 (Alternative Hypothesis) - There is a significant difference between the pre and post merger 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. To test the hypothesis, `t test is employed. The performance of the banks before and after the mergers and acquisitions has been compared. For the pre merger, the combined ratio of bank is considered and for the post merger the ratios of acquiring bank were used. www.theinternationaljournal.org > RJCBS: Volume: 05, Number: 05, March 2016 Page 3
Acquirer Bank Merged Bank Date of Merger ICICI Bank Bank of Rajasthan Aug 13, 2010 (Source: Compiled from Table) The merger of the ICICI Bank and Bank of Rajasthan on Aug 13, 2010, ICICI Bank is from the Private Sector. To analyse the financial performance of the Bank before and after merger, a few ratios like Operating Profit Ratios, Net Profit Margin, Debt Equity Ratio, Dividend Payout Ratio, and Earning per Share. Calculated and the same are presented in Table for ICICI Bank. Ratios Operating Profit Margin = Operating Profit/Sales 100 Net Profit Margin = Net Profit/Sales 100 Debt Equity Ratio (Pure Ratio) = Total Debt/ Share Holder Equity Dividend Payout Ratio = Dividend / Net Income X 100 Financial Performance of ICICI Bank Pre Merger Post Merger 2007-2008- 2009- Avg. 2012-2013- 2014- Avg. t- Sig. 08 09 10 13 14 15 value Operating Profit Ratio 20.1 23.06 29.15 24.1 46.32 58.39 14.15 39.62 3.01 0.095 Net Profit Ratio 10.5 9.71 12.06 10.76 17.19 17.96 18.24 17.79 56.69 0.000 Earnings per Share 39.39 33.76 36.14 36.43 72.17 84.95 19.28 58.8 2.92 0.100 Debt Equity Ratio 5.27 4.42 3.91 4.53 7.1 7.2 7 7.1 122.97 0.000 Dividend Payout Ratio 33.12 36.6 37.31 35.68 27.71 27.07 25.93 26.9 51682 0.000 (Source: Compiled from the Financial Statements of Bank) Figure1: Graphical presentation of Table Figure2: Graphical presentation of Table www.theinternationaljournal.org > RJCBS: Volume: 05, Number: 05, March 2016 Page 4
Figure 3: Graphical presentation of Table Table 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 39.62%), Net Profit Margin (10.76% vs. 17.79%), Earnings per Share were (36.43% to 58.8%) in the post merger period. It is only in the case of Debt Equity Ratio (4.53% to 7.1%) and Dividend Payout Ratios (35.68 % to 26.9%), there is a decline in the post merger period, reflecting upon a favourable impact of Merger. The result of the `t test states that the difference in the Operating Profit Margin,, Debt Equity Ratio, 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 has improved significantly after the merger - H1 is accepted. www.theinternationaljournal.org > RJCBS: Volume: 05, Number: 05, March 2016 Page 5
Conclusion Mergers and Acquisition is an important decision for the growth and expansion in any banking Industry and the Indian Banking Sector is no exception. It is assist to the weak banks by merging into the larger bank. In this research paper I want to shows the impact of Mergers and Acquisitions in the Indian Banking sector and study as sample to examine the as to whether the merger has led to a profitable situation or not. For this aim, a comparison between pre and post merger performance in terms of Operating Profit Margin, Net Profit Margin, Earning per Share, Debt Equity Ratio, Dividend Payout Ratio has been made in case of ICICI Bank after the merger but in case of the other parameters there is no significant improvement in the performance. References 1. M&As in the Indian banking sector - strategic and financial implications, Srinivasan R., Associate Professor & Gourav Chattopadhyay, Arvind Sharma. 2. Aharon David Y, Gavious Ilanit & Yosefa Rami (2010), Stock Market Bubble Effects on Mergers and Acquisitions, The Quarterly Review Of Economics and Finance, 50, 456 470. Retrieved From http://web2.ono.ac.il/shauserpublish/files/1.pdf. 3. Goyal Dr. K.A. & Joshi Vijay (2011), Mergers in Banking Industry of India: Some Emerging Issues, Asian Journal of Business and Management Sciences, Issn: 2047-2528, Vol. 1 No. 2, [157-165], Retrieved From Www.Ajbms.Org/Articlepdf/Ajbms,1231.Pdf. 4. 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- Http://Ieg.Ignou.Ac.In/Wiki/Images/B/B4/Science_And_Society.Pdf. 5. Mantravadi Pramod & Reddy A Vidyadhar. (2007), Relative Size In Mergers And Operating Performance: Indian Experience, Economic and Political Weekly, September 29, Retrieved From Http://Papers.Ssrn.Com/Sol3/Papers.Cfm?Abstract_Id=1082787. 6. 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. 32-44. 7. 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. 261-265. 8. 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 march 2013. ***** www.theinternationaljournal.org > RJCBS: Volume: 05, Number: 05, March 2016 Page 6