Pacific Business Review International
Volume 1, Issue 4, Sept 2016
Impact of Mergers & Acquisitions on Operating Performance, Financial
Performance & Shareholders Wealth:
A Case Study of Centurion Bank and Bank of Punjab Merger
Bisma Shah
Abstract
PhD. Scholar,
Department of Business and Financial Studies,
University of Kashmir.
The mergers and acquisitions have acquired a prominent position in
the corporate sector throughout the world. Mergers and acquisitions
(M&A's) is one of the important strategies used by the corporate
entities to attain growth and diversification, to enjoy operational
synergy and to conquer new markets. The global integration has
further forced the business organizations to follow the policy of
mergers and acquisitions to survive and grow. The Indian corporate
sector has also shown keen interest in this new business strategy. There
has been an increase in both the number and size of mergers and
acquisitions in the Indian corporate sector. However, in all the years,
banking sector has emerged as one of the most opportunistic sectors in
the sense that good number of M&A's have taken place in this sector.
The merger of Centurion Bank and Bank of Punjab is regarded as one
of the important merger deals in the Indian corporate sector. Keeping in
view the size and significance of this merger, an effort has been made to
assess the operating, financial performance and shareholders' wealth
of this merger. To test the hypotheses that the merger has a positive
impact on the operating and financial performance as well as on the
shareholders wealth of both the financial institutions, financial ratios
and relevant statistical tools have been used. The study is mainly based
on the secondary data which has been collected from the annual reports
available on various official websites. The study has revealed an
insignificant positive impact on the shareholders wealth as well as on
the operating & financial performance of the merging entity.
Dr. Khursheed Ahmad Butt
Professor,
Department of Business and Financial Studies,
University of Kashmir.
Keywords: Mergers and Acquisitions, Financial Ratios, Shareholders
Wealth
Introduction
A firm can achieve growth either internally or externally. Internal
growth can be achieved if a firm expands its operations or scales up its
capacities by establishing new units or by entering newmarkets. But
internal growth may be faced by several challenges such as limited size
of the existing market or obsolete product category or government
restrictions. Again firm may not have specialized knowledge to enter in
to a new product/ market and above all it takes a longer period to
establish new markets and yield positive returns. In such cases,
external mechanism of growth namely merger and acquisitions
(M&A's), takeovers or joint ventures may be utilized. In the globalized
economy, merger and acquisition acts as an important tool for the
www.pbr.co.in
01
Pacific Business Review International
behind the M&A's is to create synergy, which implies that
one plus one is greater than two and this rationale beguiles
the companies for merger at the tough times. Companies are
confronted with the facts that 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.
One size does not fit for all; therefore many companies find
the best way to go ahead is through merger and acquisitions.
M&A's are generally aimed at achieving economies of scale,
diversification, synergy and financial planning.
Indian economy has undergone a major transformation and
structural change following the economic reforms
introduced by the Government of India in 1991. Since then,
the M&A movement in India has picked up momentum. In
the liberalized economic and business environment,
'magnitude and competence' have become the focal points of
every business enterprise in India, as companies have
realized the need to grow and expand in business that they
understand well as Indian corporate sector has under taken
restructuring exercise to sell off non-core business and to
create stronger presence in their core areas of business
interest. M&A's emerged as one of the most effective
methods of such corporate restructuring and have, therefore
become an integral part of the long term business strategy of
corporates in India.
Three distinct trends can be seen in the M&A activity in
India after the reforms in 1991. Initially, there was intense
investment activity, a wave of consolidation within the
Indian industry, as companies tried to prepare for the
potentially aggressive competition in the domestic and
overseas market, through M&A's. In the second trend,
visible since, 1995, there was an increased activity in
consolidation of subsidiaries by multinational companies
through the acquisition route. With liberalized norms in
place for foreign direct investments (FDI's),Indian
companies focused on capital and business restructuring,
and cleaned up their balance sheets. There was
consolidation in the domestic industries such as steel,
cement and telecom. The third wave of M&A's in India,
evident since 2002, is that of Indian companies venturing
abroad and making acquisition in developed markets for
gaining entry into the international markets. Indian
companies have been actively pursuing overseas
acquisitions in recent years. The opening up of Indian
economy and financial sector, huge cash reserves following
some years of great profits, and enhanced competiveness in
the global markets have given greater confidence for big
Indian companies to venture abroad for market expansion.
Surge in economic growth and fall in interest rates have
made the financing of such deals cheaper. Changes in
regulations made by the finance ministry in India pertaining
to overseas investments by Indian companies have also
made it easier for the companies to acquire abroad. The past
02
seven years have seen Indian corporates in several
international merger and acquisition deals in developed and
emerging markets. The rapid increase in number indicates
that the mergers and acquisitions are being accepted as a
vital means of corporate restructuring to achieve growth by
expanding locally and internationally.
There has been an increase in both the number and size of
mergers and acquisitions in different corporate sectors of
Indian economy. However, in all the years, banking sector
has emerged as one of the most opportunistic sectors in the
sense that good numbers of M&A's have taken place in this
sector. The banking sector is one of the most important
instruments of the national development, thus occupies a
unique place in a nation's economy. Economic development
of the country is evident through the soundness of the
banking system. Economic reforms have witnessed
astounding changes in banking industry leading to
incredible competitiveness and technological
sophistication. Since then, every bank is relentless in their
endeavour to become financially strong and operationally
efficient and effective. Indian banks are the dominant
financial intermediaries in the country. For expanding the
operations and cutting costs, banks are using merger and
acquisitions as a strategy for achieving larger size, increased
market share, faster growth, and synergy for becoming more
competitive.
Mergers And Acquisitions In The Indian Banking Sector
The Banking system in India started in 1770 with the
establishment of first bank namely Bank of Hindustan. Later
on, some more banks like the Bank of Bombay-1840, the
Bank of Madras-1843 and the Bank of Calcutta-1840 were
established under the charter of British East India Company.
These Banks were merged in 1921 and took the form of a
new bank known as the Imperial Bank of India. For the
development of banking facilities in the rural areas, the
Imperial Bank of India was partially nationalized on 1 July
1955, and named as the State Bank of India along with its 8
associate banks (at present 7). Later on, the State Bank of
Bikaner and the State Bank of Jaipur merged and formed the
State Bank of Bikaner and Jaipur. The history of Indian
banking sector can be divided into two eras, the preliberalization era and the post-liberalization era. In preliberalization era, government of India nationalized 14
banks on 19 July 1969 and later on 6 more commercial banks
were nationalized on 15 April 1980. In the year 1993,
government merged “The New Bank of India” and “The
Punjab National Bank” and this was the only merger
between nationalized banks. In post-liberalization regime,
government had initiated the policy of liberalization and
licenses were issued to the private banks as well, which lead
to the growth of Indian banking sector. The second
Narasimham Committee (1998) had suggested mergers
among strong banks, both in the public and private sectors.
www.pbr.co.in
Volume 1, Issue 4, Sept 2016
During pre-nationalization period from 1961to 1968, 46
mergers have taken place, in the nationalized period from
1969 to 1992, the number of mergers were 13. During the
post reform period i.e. from 1993 to 2006, 21 mergers have
taken place.
Literature Review
Mergers and Acquisitions (M&A's) continue to be a
significant force in the restructuring of the financial services
industry. The Indian commercial banking sector has played a
pivotal role in the country's economic development. With
the onset of economic reforms, the banking sector in India
has embarked upon mergers and acquisitions to capture the
synergistic benefits like economies of scale and scope, in the
face of increasing competition from domestic as well as
foreign players and rapid technological developments.
Several research studies have been conducted to study the
various aspects of mergers and acquisitions. A brief review
of some of the studies of M & A's in the banking sector has
been given in the following para's with the purpose to get
some perspective about the impact of M&A's on financial
and other aspects of banking industry.
Mantravadi and Reddy (2008), found a positive impact of
the mergers on the profitability of firms in the banking and
finance industry in India. They studied a sample of firms in
the period 1991 to 2003. The average pre-merger and postmerger performance of a set of financial ratios such as
operating profit margin, gross profit margin, net profit
margin, return on net worth, return on capital employed and
debt-equity ratio were compared with the help of t-test for
two-samples. However, the statistical test could not find any
significant change in the performance of these financial
ratios.
Mylonidis and Kelnikola (2005), examined the merging
activity in the Greek banking system over the period 19992000. They took a sample of four acquirers and five target
banks that were of relatively the same size and the nonmerging banks that comprised of two large banks and two
small banks were referred to as the control group. One of the
major findings emerged from the study was that the profit,
operating efficiency and labour productivity ratios of the
acquirer and acquired banks did not show any post-merger
improvement, when the comparison was made with the
corresponding ratios of the control group.
Campa and Hernando (2006), while analysing European
M&A's in the financial industry has found that the results
were more aligned with the US results in terms of generating
positive returns only for target banks and with slightly
positive value creation for the bidder firms but economically
not significant.
Antony Akhil (2011), examined the impact of mergers on
profitability of selected banks in India from 1999 to 2011.
Between 1999 and 2011, around 18 mergers took place in the
www.pbr.co.in
Indian banking sector. Six merging banks were selected for
the study, three of them were public sector banks and three
were private sector banks. The findings of the study
indicated that there was a significant improvement in the
profitability ratios like of merging banks inthe post-merger
scenario. The increase in profitability of banks was due to an
increase in employee turnover and subsequent reduction in
operation expenses.
Priya Bhalla (2012), studied the impact of mergers and
acquisition on both the acquiring and the acquired firms
belonging to the financial services sector for the period
1997-98 to 2007-08 .The study has revealed that the
acquiring firms were indeed the one's characterized by
greater size, better capital position, and asset management.
Adel A. Al-Sharkas, M. Kabir Hassan and Shari
Lawrence (2008), studied the cost and profit efficiency
effects of bank mergers in the US banking industry. The
results indicated that mergers had improved the cost and
profit efficiencies of the merged banks. The merging banks
had lower costs than non-merged banks because of technical
efficiency as well as a locative efficiency. Mergers allow the
banking industry to take advantage of the opportunities
created by improved technology and lead to efficiency gains
by changing the input-output mix in a manner that optimized
costs and revenues. It was also found that cost efficiency
improvements for small bank mergers were greater as
compared to large banks. However, mergers improved profit
efficiency equally for both large and small banks.
Rhoades (1998), examined the efficiency effects of nine
bank mergers during the early 1990's and found that four of
the nine mergers were clearly successful in improving cost
efficiency while others were not able to achieve their cost
cutting goals, the reason being difficulty in integrating data
processing systems and operations.
Muhammad Ahmed, Zahid Ahmed (2014), also analysed
the post-merger financial performance of the merging banks
in Pakistan during the period 2006-2010.It has been found
that the financial performance of merging banks
insignificantly improved in the post- merger period. Postmerger profitability improved insignificantly, liquidity
significantly, capital leverage insignificantly while as assets
quality parameter showed a significant deterioration.
Rehana Kouser, Irum Saba (2011), evaluated the effects of
merger on profitability of the banks in Pakistan that faced
M&A during the period 1999 to 2010 by using six financial
ratios (Gross Profit Margin, Operating Profit Margin, Net
Profit Margin, Return on Capital Employed, Return on Net
Worth, Debt Equity Ratio). The study has revealed a decline
in the operating and financial performance post-merger
across all ratios.
Bert, Robert Wit (2004), measured short term wealth
effects of European and US bank merger and acquisition
03
Pacific Business Review International
deals to both target and bidding bank shareholders during
the period 1990-2000. The results revealed that target
shareholders' earned positive returns in Europe whereas
bidding firms earned slightly positive returns. In contrast,
US target firms earned high returns whereas the bidding
firms earned negative abnormal returns from mergers.
Target shareholders' return in US was more as compared to
returns to shareholders' in Europe.
Muhammad Usman Kemal(2011), analysed the financial
performance of Royal bank of Scotland taking a case study
of the merger of ABN AMRO Bank with Royal Bank of
Scotland (RBS). It has been found that the merger deal failed
to improve the financial performance of RBS across 20 vital
ratios studied. The financial performance of the merging
bank was measured in the areas of liquidity ratios,
profitability ratios, return on investment ratios, solvency
ratios and market stock ratios.
Hicham Meghouar and Hicham Sbai (2003), analysed the
post-merger profitability of the combined entity taking a
case study of the merger between the Commercial Bank and
Wafa bank who took place in Morocco in 2003. The results
revealed an improvement in profitability (ROA, ROE,
ROCE)and productivity parameters(loan to assets, sales per
employee, asset per employee, income per employee) of the
merged entity.
Deo and Shah (2011), studied the financial implications on
the acquirer and target shareholders wealth in the Indian
Information Technology Industry (IT) that have taken place
from January 2000 to June 2010 taking a sample of 28
acquisition announcements. The study has revealed that
acquisition announcements in the IT sector have no
significant impact on the bidder portfolio, while as it has
been found that acquisition has generated significant
positive abnormal returns for target shareholders only.
Dutta and Dawn (2012), analysed the performance of
merging banks in terms of growth in total assets, profits,
revenues, deposits, and number of employees taking four
years of prior-merger period and four years of post-merger
period. The study has revealed that the mergers have
resulted into significant increases in total assets, profits,
revenues, deposits, and in the number of employees.
The brief review of the above related studies have revealed
that since the liberalisation of the Indian economy in 1991
and more importantly easing out of regulatory norms, the
activity of mergers and acquisitions have picked up in the
Indian corporate sector including Indian banking industry.
The other fact that becomes evident is that though the
numbers of merger and acquisitions have grown up in the
Indian banking industry but the number of studies conducted
to be taken into the different aspects of M&A's are still
limited. Added to it, just a few case studies have been made
on individual M&A's in the Indian financial sector. Guided
04
by these and other limitations of the existing literature on
M&A's, an attempt has been made to make a case study of
the merger of Bank of Punjab and Centurion Bank into
Centurion Bank of Punjab limited.
Brief Profile Of Bank Of Punjab And Centurion Bank
Bank of Punjab (BoP) which was founded in 1995 with its
first branch in Chandigarhhad expanded and grown in size
over a period of time. It offered wide range of products and
services across all segments of customers, however, with
more focus on agricultural sector. In the FY05, lending to
direct agriculture doubled and it's lending to SSI's and
traders increased to46% and 19% respectively. Also lending
to medium and large scale industries and the retail segment
increased to21% each. As on march 2005,the bank had a net
worth of Rs. 181 crores. On June 2005, BoP and Centurion
Bank merged at a swap ratio of 4:9. This means that for every
four shares of Bank of Punjab, its shareholders received nine
shares of Centurion Bank and formed new bank by the name
Centurion Bank of Punjab(CBoP).
Centurion bank (CB), a joint venture between 20thCentury
Finance Corporation and Keppel Group of Singapore, was
established on June 30, 1994. Centurion Bank was one of the
leading private sector banks in India providing retail and
corporate banking products and services. Initially, it started
with a network of 10 branches. In 1995, Centurion bank
amalgamated 20th Century Finance Corporation. It had an
extensive network of branches spread across the country.
The shares of Centurion Bank were listed on the major stock
exchanges in India. These were also listed on the
Luxembourg Stock Exchange. Centurion Bank had a
network of 99 banking offices across India. The bank, with
staff strength of 1,374, reported a net profit of Rs 25.11 crore
in the financial year ended March 31, 2005 as against a loss
of Rs 105.14 crore in the previous year. Centurion bank
offered a wide array of products and services to its customers
across the nation.
Financials Of The Merging Entity- Centurion Bank Of
Punjab
The cost of deposit of BoP were lower than Centurion
bank, while Centurion had a net interest margin of
around 5.8% .The net interest margin of the merged
entity was around at 4.8%.
The combined entity had net non-performing assets
(NPAs) of about 3.6 per cent as per performa balance
sheet of March 2005. Centurion bank's net NPAs as on
31 March 2005 stood at 2.49 per cent while for Bank of
Punjab, the figure stood at 4.6 per cent.
The combined entity had adequate capital adequacy of
16.1 per cent to provide for its growth plans. Centurion
bank's capital adequacy on a standalone basis stood at
23.1 per cent while for Bank of Punjab, the figure stood
www.pbr.co.in
Volume 1, Issue 4, Sept 2016
at 9.21per cent.
The performa net worth of combined entity as on March
2005 stood at Rs 696 crore with Centurion's net worth at
Rs 511 crore and Bank of Punjab's net worth at Rs 181
crore, and the combined entity (Centurion Bank of
Punjab) had total asset worth Rs 9,395 crore, deposit
worth Rs 7837crore and operating profit of Rs 43 crore.
The merged entity had paid up share capital of Rs 130
crore and a net worth of Rs 696 cr.
The merged entity had 235 branches & extension
counters, 382 ATM's and 2.2 million customers.
Why Merger
The capital adequacy ratio of the combined entity would
be 16.1 per cent, thus an extremely well capitalized
bank.
The merging bank (Centurion Bank of Punjab) would
provide all the banking and financial needs of its
customers through multiple delivery channels, using
latest technology. The bank would offer a full suite of
NRI banking products to overseas Indians. The bank
would provide services for individual consumers, small
and medium businesses and large corporations with a
full range of financial products and services for
investing, lending and advice on financial planning
through its strong network of the branches.
The merged entity would be a pioneer in foreign
The merger of the two banks was guided by the fact that both
the banks had synergies which complement each other very
well. Bank of Punjab had a strong presence in North India
and Centurion Bank in the West and the South. The merger
would have ensured that the combined banking entity will
have good footprint across the country. In the words of Rana
Talwar, Chairman, Centurion Bank, “The merger is a winwin situation for the shareholders, customers and staff of the
two banks. The reason for the merger is the fantastic fit in
terms of achieving scale and geographical presence. There
would be a crossover of products and services”. The similar
views were expressed by Mr. Tejbir Singh, Executive
Director, Bank of Punjab, by saying that the combined bank
would produce "electrifying results" and represented a
perfect fit.
Operating performance
Key benefits expected from the Merger
Financial performance
Combined entity, Centurion Bank of Punjab would be
Shareholders wealth.
the among the top 10 private sector banks in the country.
Merging entity would benefit from the fact that
Centurion Bank had recently written of its bad loans
against equity.
Branch network of the two banks will complement each
other. The combined entity would have a nationwide
reach.
Centurion Bank was strong in South India, Maharashtra
and Goa whereas Bank of Punjab was strong in Punjab,
Haryana and Delhi. While Centurion Bank has 82 per
cent of its business coming from retail, Bank of Punjab
was strong in the small and medium enterprises (SMEs)
segment and agricultural sector.
The book value of the bank would also go up to around
Rs 300 crore. The higher book value should help the
combined entity to mobilize funds at lower rate.
The combined bank would be full-service commercial
bank with a strong presence in the retail, SME and
agricultural segments.
www.pbr.co.in
exchange services, personal loans, mortgages,
education loans and agricultural loans, and credit cards.
Research Objectives
This paper is aimed to achieve the following specific
objectives:
To review the related literature on mergers and
acquisitions in the financial sector to get a perspective of
the subject matter.
To analyze the impact of merger of Punjab Bank and
Centurion Bank into Centurion Bank of Punjab on the
following parameters:
To conclude and to make valuable suggestions.
Hypotheses
In line with the above stated objectives, the following
hypotheses have been set for the study.
·There has been a significant impact of the merger of the two
banks on the operating performance, of the merging bank
across all variables.
·There has been a significant impact of the merger on the
financial performance of the merging company and the
wealth of the shareholders.
Materials And Methods
The study is based on the secondary data which has been
collected from the official websites of the banks under study
and other websites like moneycontrol.com, sify-finance etc.
To test the hypotheses, five years data, three years prior to
the merger i.e. 2003, 2004 % 2005 and two years postmerger i.e2006 & 2007 has been used. The post-merger data
has been compared with pre-merger data to draw
meaningful inferences about the impact of the merger under
05
Pacific Business Review International
study on operating & financial performance and
shareholders' wealth.
research question, which has been analysed and the results
of which has been presented in the following para's.
The data so collected has been analysed using the following
ratios:
Operating Performance
Non- interest income to total income ratio
The operations of a bank include mobilising deposits,
deploying funds in a portfolio of assets that yields maximum
return at a minimum risk. Modern banks also focus on the
generation of more and more non interest incomes.
Therefore, to assess the impact of the merger under study on
the operating performance of merging bank, namely
Centurion Bank of Punjab, measures like deposits to total
asset ratio, total advances to total deposits ratio, spread,
operating profit to total assets ratio, operating profit margin
ratio, and ratio of interest and non-interest income to total
income have been used. Each of these ratios has been briefly
explained as under:
Interest income to total income ratio
Deposits to total assets ratio
The financial performance has been measured using the
following ratios;
A deposit-to-asset ratio of 0.8:1 is considered satisfactory.
Bank highly capable of mobilizing funds; maintain high
deposit to assets ratio. As a stable source of funding, a higher
percentage of deposits are usually related to lower risk
levels. However, banks with higher fluctuation of the
deposit levels may get exposed to higher risk, so a lower
deposit to assets ratio is preferred.
For measuring the operating performance, the following
ratios have been used;
Deposits to total assets ratio
Total advances to total deposits ratio
Spread or NIM to total assets ratio
Operating profit to total assets ratio
Operating profit margin ratio
Debt -Equity ratio
Liquid asset to total deposit ratio
Net profit margin ratio
Return on assets(ROA)
Impact of merger on shareholder's wealth has been
analyzed using the following ratios:
Earnings per share
Return on Equity (ROE)
Book value per share
Dividend Yield
Results And Discussions
Mergers and acquisitions are generally aimed at adding
more value to shareholder's wealth. However, M&A's are
successful in creating more wealth only when merging
entities synergistically complement each other. The merger
of Bank of Punjab and Centurion Bank was assumed as a
perfect fit. Bank of Punjab had a strong presence in North
and Centurion Bank in the West and the South, thus merger
was aimed at having good footprints across the country.
Rana Talwar, chairman, Centurion Bank had held that the
reason for the merger is that the two entities were fantastic fit
in terms of achieving scale and geographical presence.
Given the above stated synergies, the merger of the two
banks was expected to have produced positive impact on
operating and financial parameters of the merging entity i.e.
Centurion Bank of Punjab which in turn would have created
more wealth for shareowners of the new entity. Whether in
actual the merger of the two banks had a positive impact on
operating and financial performance of the new entity is the
06
Total advances to total deposits ratio
This ratio measures the efficiency and effectiveness of the
management in converting the available deposits with the
bank into advances. This ratio should be higher because the
core business of the banks is to convert deposits into
advances and investments. Thus, earning capacity of a bank
depends to a great extent on its ability to convert its deposits
into viable advances. As such, a higher ratio would reveal
greater efficiency of the management in terms of efficient
lending.
Spread or net interest margin (NIM ) to total assets
ratio
NIM is the difference between the interest income and the
interest expended. This ratio shows the ability of a bank to
keep the interest on deposits low and interest on advances
high. It is an important measure of a bank's core income
(income from lending operations). A higher spread indicates
the better earnings, given the total assets.
Operating profit to total assets ratio
This ratio reflects how much a bank can earn profit from its
operations for every rupee invested in its total assets. Higher
ratio would mean better profitability of an investment made
in the assets of a bank.
Operating profit margin ratio
Operating profit margin is used to measure a bank's
operating efficiency. A high operating profit margin is better
www.pbr.co.in
Volume 1, Issue 4, Sept 2016
as it indicates that a bank is able to control its expenses.
diversify their operating risks focus on the generation of
non- interest income as well. A gradual and a constant
increase in non-interest income is considered a healthy sign
for modern banks operating in a highly competitive
environment.
Interest income to total income ratio
Interest income is considered as prime source of revenue for
banks. The interest income to total income reflects the
capability of the bank in generating income from its lending
business. Therefore, well managed banks generally have
higher interest income to total income ratio.
In order to conclude whether there was any statistical change
in the operating performance, financial performance and
shareholders' wealth, the average post- merger variables
have been compared with the pre- merger variables, using
ratio analysis and paired sample t-test at significance level of
5%, the details of which have been presented in the below
tables.
Non- interest income to total income ratio
It reflects any income that banks earn from activities other
than their core operations. Modern banks in order to
Pre and Post-Merger Operating Ratios of BoP, CB & CBoP for the period 2003-2007
BANK OF PUNJAB
TABLE I
CENTURION BANK OF
CENTURION BANK
PUNJAB
tSTATISTIC
p-VALUE
(SIG-2
TAILED)
RATIOS
Mar 03
Mar 04
Mar 05
Mean
Mar 03 Mar 04
Mar 05 Mean
AVG.
Mar 06
Mar 07
MEAN
MEAN
.
Deposits to
total assets(%)
81
83
82
80
81
2.00
0.295
53.23
53.76
69.5
75.4
72.45
-5.36
0.117
3.85
3.50
3.03
3.51
3.08
3.29
-0.38
0.765
-1.09
.98
.18
0.14
1
1.39
1 .19
-6.56
0.096
4.75
-9.3
10.75
2.06
0.49
10.69
15.45
13.07
-15.53
0.041*
25.40
17.70
15.87
17.26
16.94
21.17
27.94
25.78
26.86
-1.80
0.322
72.26
82.29
84.12
82.73
83.04
77.65
72.06
74.21
73.13
1.04
0.486
83
85
87
85
83
85
76
50
56.8
56.1
54.3
46.3
51.3
62.1
2.3
2.64
2.75
2.56
3.01
3.66
1.15
1.28
-2.09
.11
0.65
10.11
13.35
-26.7
-1.08
27.68
28.03
20.51
72.32
71.97
72.49
Total advances to
total deposits (%)
Spread or NIM to
total assets (%)
Operating profit
to total assets (%)
Operating profit
margin (%)
Non-interest
income to total
income (%)
Interest- income to
total income (%)
Source: money control, sify finance
*Statistically Significant
Perusal of the data detailed out in the table I reveals a
positive impact of the merger on the operating performance
across all operating measures except deposits to total assets
ratio, net interest income to total assets ratio and interest
income to total income ratio. It can be seen that before
merger, the operating profit margin ratio and operating
profit to total assets ratio of BoP and CB was suffering from
greater degree of instability. However, after merger, these
www.pbr.co.in
two ratios have not only witnessed stability but have also
shown sufficient improvement. The mean operating profit
margin ratio of BoP and CB has increased from 0.49% to
13.07% post-merger. The operating profit margin ratio of the
combined entity (CBOP) which was 10.69% in 2006 has
increased to 15.45% thereby having registered an increase
of around 5%. The mean operating profit to total assets ratio
of BoP & CB had also recorded an improvement after
07
Pacific Business Review International
merger, witnessing an increase from 0.14% (pre-merger) to
1.19% (post-merger).Similar improvements were found in
case of mean total advances to total deposits and noninterest income to total income ratio. The mean total
advances to total deposits ratio of BoP and CB recorded an
increase from 53.76% to 69.5% in 2006 which further
increased to 75.4% in 2007.This reflected the increased
ability of the new entity (CBOP) to deploy more and more
funds. In case of non-interest income to total income, an
increase from 21.17% to 26.86% was recorded. It also
becomes clear from the above referred table that the pre and
post net interest margin to total assets almost remained at the
same level. The mean net interest margin to total assets ratio
of BoP and CB was around 3.03% over a three year period.
After the merger, the interest margin ratio of the new entity
had increased to 3.51% in 2006 which then declined to
3.08% in 2007 thereby reflecting a marginal increase only.
Out of all the improved operating variables, the mean
differences of operating profit to total assets ratio, total
advances to total deposits ratio, non-interest income to total
income ratio and interest margin ratio were found to be
statistically insignificant (p>0.05) while as operating profit
margin ratio improved at a significant level (p<0.05). There
has been an improvement in the total advances to total
deposits ratio (TA/TD) as well after the merger. Compared
to the above ratios, the merger was found to have little or no
impact on the deposits of the new entity. It becomes clear
from the above table that before the merger, the average
deposits to total assets ratio of BoP and CB was around 83%
which had declined to 82% and 80% in 2006 and 2007
respectively after the merger. However, the decline was not
statistically significant (p>0.05). Similar picture emerged
about the interest income to total income ratio. The mean
ratio of interest income to total income of BoP and CB was
found to be 77.65% which declined to 72.06% in 2006 and
then increased to 74.21%, averaging to 73.13% post-merger.
It reflected the inability of the bank in generating income
from its primary business. The mean of the deteriorating
deposits to total assets and interest income to total income
ratio were both statistically insignificant (p>0.05). From the
above discussion, it was seen that total assets to total
deposits ratio improved (insignificantly),net interest margin
ratio improved (insignificantly),operating profit to total
assets ratio improved (insignificantly), operating profit
margin ratio improved (significantly),interest and non-
interest income to total income deteriorated
(insignificantly). Except operating profit margin ratio, all
the other variables had p-values greater than 5%. As such, it
could be safely concluded that there was no significant
difference in the ratios before and after the merger.
Therefore the hypothesis is rejected.
Financial Performance
Financial health of a business entity including financial
companies is reflected in the financial position, quality of
assets, rate of return earned on the assets given and the risk to
which the owners and creditors have been exposed. The
financial position and riskiness of a bank is indicated by the
debt-equity ratio, liquid assets to total deposits ratio and
capital adequacy ratio. The profitability of the assets is
measured in terms of the net profit margin ratio and rate of
return on total assets, and profit per employee. Besides, the
quality of assets of a bank is determined by the nonperforming asset ratio like gross NPA and net NPA ratios.
Net profit margin ratio
Net profit margin is the percentage of revenue remaining
after all operating expenses, interest and taxes. The higher
the net profit margin, the better it is. When a bank has a low
net profit margin, it means that it spends a large portion of its
revenue to maintain its operations or its spread is thin.
Debt -Equity ratio
This ratio represents the degree of financial leverage of a
bank. It shows how much proportion of the bank business is
financed through equity and how much through debt.
Higher ratio is an indication of less protection to the
depositors and creditors and vice-versa.
Return on Assets (ROA)
This ratio reflects the efficiency in the utilization of assets in
terms of rate of return earned on capital employed. Higher
ratio reflects better profitability of assets and vice-versa.
Liquid asset to total deposits ratio
This ratio reveals the liquidity available to the depositors of
a bank. More precisely it measures the ability of a bank to
honour its obligations efficiently, effectively and
economically. There should be neither more nor less
liquidity, but always sufficient liquidity.
Pre and Post-Merger Operating Ratios of BoP, CB & CBoP for the period 2003-2007
TABLE II
BANK OF PUNJAB
CENTURION BANK
CENTURION BANK
t-
OF PUNJAB
STATISTIC
AVG.
RATIOS
Mar 03
Mar 04
Mar05
Mean
Net profit
6.50
7.94
-15.94
-.05
Mar 03
-5.47
Mar 04
-25.07
Mar05
Mean
MEAN
Mar 06
Mar 07
MEAN
5.96
-8.19
-4.12
8.28
7.25
7.76
p-VALUE
(SIG-2
TAILED)
-3.34
0.185
Margin (%)
08
www.pbr.co.in
Volume 1, Issue 4, Sept 2016
Debt-Equity
16.73
16.97
17.86
17.18
15.9
16.4
16.05
16.11
16.64
10.14
11.3
10.72
5.31
0.118
(%)
Return on
Assets (%)
15.04
14.7
-25.3
1.48
-1.04
-2.2
0.54
-0.09
0.69
0.77
0.06
0.41
0.651
0.633
Liquid Assets
to Total
14.75
12.07
13.47
13.43
16.87
16.58
12.95
15.46
14.44
11.06
9.42
10.24
2.29
0.262
Deposits (%)
Source: money control, sify finance
Table II presents the data about the parameters of financial
performance discussed above. It becomes clear from the
data detailed out in the table IIthat the debt-equity ratio has
declined after the merger.Before the merger, the average
debt- equity ratio of BoP and CB was around 16.64% over a
three year period (2003-2005) which had declined to
10.14%in 2006, which, however increased to 11.3% in
2007.The decline in the debt-equity ratio after the merger
reflects an increase in the protection to the depositors and
other creditors of the new entity.It can also be seen from the
above referred table that the ratio of liquid assets to total
deposits has also declined after the merger.This ratio in case
of BoP had remained in the range between 12% to 14% and
in case of CB between 12% to 16%.The mean liquid assets to
total deposits of BoP and CB was found to be 14.44% premerger. But after the merger, it had remained 11.06% in
2006 which further declined to 9.42% in 2007.The ratio of
9.42% compares with the industry average;thereby a decline
reflected the improvement in the efficiency of the new entity
in utilising its funds profitability. However, the
improvement in performance of both these ratios was not
statistically significant (p>0.05).
The analysis of the impact of the merger under study has
revealed a positive though not significant impact on the
majority of operating performance, which is expected to get
reflected in the profitability of the new entity. As can be seen
from the data presented in table II,the merger of BoP and CB
had a positive impact on the net profit margin ratio of the
new entity i.e CBoP.The mean net profit margin ratio of
BoP& CBwas found to be -4.12% before the merger.But
after the merger, the net profit margin ratio of the new entity
improved to 8.28% &7.25% in 2006 and 2007 respectively,
but not with statistically significant values (p>0.05).
However,similar picture does not emerge with regard to the
return on assets.The mean return on total assets of BoP and
CB was0.69% which after the merger further declinedto
0.41%, however the decline was not statistically
significant(p>0.05).What becomes clear from the above
discussion is that except ROA, which had a marginal
insignificant negative impact post-merger, all the other
ratios showed positive impact though not with statistical
significant values. Hence the hypothesis is rejected.
www.pbr.co.in
Shareholders' Wealth
The ultimate goal of modern corporate entities is the
creation of more wealth for its shareowners.Towards this
goal, numbers of financial and non-financial strategies are
employed by corporate entities.One such financial strategy
is the merger of two or more entities to produce synergic
benefits.The merger of Punjab Bank ltd. and Centurion
Bank ltd. were presumed to have synergies which
complement each other.As such, the merger was expected to
produce better results on all fronts thereby creating more
wealth for the shareowners of the two banks.The wealth of
the shareholders is represented by market value of the
shareholding and any dividend received or to be
received.The market price and dividend yield are the
determinants of net earnings for shareholders.Therefore to
assess the impact of the merger under study on shareholders
wealth, measures like EPS, ROE, P/E ratio, dividend yield,
market value of a share and book value of a share have been
used.
Earnings per share(EPS)
EPS shows how much has been earned per share.In other
words, it shows the earning power of a business entity.More
the EPS, better is the performance and prospect of a
firm.More EPS would also mean higher the return to
shareholders',thereby more wealth.
Return on Equity(ROE)
Return on Equity is similar to EPS,the only difference is that
it measures the profitability of owners' equity in percentage
terms.
Dividend Yield
Dividend yield reveals payoff in terms of cash dividend to
shareowners in percentage terms.More dividend yield,b
therefore, the shareholders have received more earnings in
cash.
Market Value of a Share
Market price is the value of a company's share that it
commands at a particular date in the market.Therefore, if the
merger causes an increase in the market value of share,it
09
Pacific Business Review International
means that the wealth of the shareholders has improved.But
to draw a conclusion in this regard, one would be required to
take the average price of a certain period of time postmerger.
Price- Earnings Ratio
The price-earnings ratioreveals how the market is revealing
the present and future performance of a company.If a
company is expected to perform better in future, its share
will most likely enjoy a better price relative to its earnings.
Book value per share(BV)
Book value per share is also an interesting financial
parameter for managers or owners of a company.Itreveals an
amount per share that a shareholder would receive presently
if a firm is dissolved. Higher the book value per share, higher
would be the amount that a holder of a common share would
get if a company were to liquidate.
Pre & Post -Merger Shareowner Net Return Ratio of BoP, CB & CBoP for the year 2003-2007
TABLE III
BANK OF PUNJAB
CENTURION BANK
CENTURION BANK
AVG.
Mar 03
Mar 04
Mar05
Mean
Mar 03
Mar 04
Mar05
Mean
t-
OF PUNJAB
p-VALUE
STATISTIC
MEAN
Mar 06
Mar 07
MEAN
-0.42
0.62
0.77
0.69
6.61
8.91
(SIG-2
TAILED)
RATIOS
-1.09
3.03
3.52
-5.83
0.24
-1.66
-1.85
0.24
20.44
23.21
22.97
22.20
11.53
3.4
5.54
6.82
14.51
Equity (%)
15.04
14.7
-25.3
-11.6
-34.5
4.06
-14.01
-6.26
Dividend
.22
.18
EPS
-1.51
0.372
BookValue Per
Share
7.76
0.77
0.581
-1.09
0.470
Return on
0
1.48
.13
0
0
0
0
0.06
2.54
0
8.61
5.57
0
0
1.00
0.500
Payout
*Source: money control, sify finance
The details of the above ratios have been presented in table
III.These ratios have been calculated for the merged entities
and merging bank for a five year period,the details of which
have been presented in the above table (table3).The postmerger ratios have been compared with the pre-merger
ratios to assess whether there has been positive or negative
impact of the merger on the wealth of the shareholders.
Perusal of the data presented in the referred table reveals
positive impact on the wealth of the shareholders of the
entities under study across all measures,however with
varying degrees.It can be seen from the table that the EPS of
BoP had declined from Rs 3.03 in 2003 to Rs -5.83 in 2005
with a mean value of Rs 0.24 over a three year period.In case
of Centurion Bank, the EPS which was Rs -1.66 in 2003 had
increased to Rs 0.24 in 2005 with a mean EPS of Rs -1.09
over a three period time. After the merger,the EPS of the new
entity was Rs 0.62 and Rs 0.77 in 2006 and 2007
respectively with a mean value of Rs 0.69 which is better
than the mean pre-merger EPS of BoP and CB(Rs-0.42).The
ROE which reveals earnings for shareholders in percentage
terms reveals similar picture. It can be seen from the data
presented in the table III that the mean ROE of BoP and CB
over a three year period time (2003-05)was 6.26%,which
10
after the merger had increased to 2.54% in 2006 and further
to 8.61% in 2007, with a mean ROE of 5.57% over a two
year period. However, the mean difference in case of both
the ratios(EPS &ROE) was not statistically significant
(p>0.05).Book value per share gives a snap shot of firm's
present situation and reveals an amount per share that a
shareholder would receive presently if a firm is dissolved.It
also reflects the past earnings of a firm.The data detailed out
in table III about book value per share confirms the findings
about the impact of the merger on EPS and ROE. As can be
seen from the table that the weighted average book value per
share of new entity which was Rs 5.54 at the time of merger
in 2005, has increased to Rs 6.61 and Rs 8.91 post merger in
2006 and 2007 respectively.This in turn reveals that the
merger had a positive impact on book value per share as well
but the positive impact was not found to be statistically
significant (p>0.05).
Overall it was seen that the merger had an insignificant
positive impact across majority of the parameters studied.
As such, it was concluded that there has been no significant
impact of the merger of the two banks on the operating
performance, financial performance and shareholders'
wealth of the merging entity i.e Centurion Bank of Punjab.
www.pbr.co.in
Volume 1, Issue 4, Sept 2016
References
Sharkas, A. A., M., Hassan,K., Lawrence,S. (2008). The
Impact of Mergers and Acquisitions on the
Efficiency of the US Banking Industry: Further
Evidence. Journal of Business Finance &
Accounting. Vol. 35(1) & (2), pp.50–70.
Akhil,A. (2011). Post-Merger Profitability of Selected
Banks in India.International Journal of Research in
Commerce, Economics and Management. Vol. 1,
(8), pp. 133-135.
ScholtensB., Wit,R. D. (2004). Announcement Effects of
Bank Mergers in Europe and the US. Research in
International Business and Finance, Vol. 18,
pp.217–228.
Campa J. M., Hernando, I. (2006). M&A's Performance in
the European Financial Industry. Journal of
Banking & Finance.Vol. 30, pp.3367-3392.
Meghouar,H., Sbai,H. (2013). The Performance of Bank
Mergers and Acquisitions: The Case of the
Commercial Bank of Morocco and Wafabank.
International Journal of Innovation and Applied
Studies. ISSN 2028-9324, Vol. 3,(4), pp. 908-918.
Dutta,M. M., Dawn,S. K. (2012). Merger and Acquisitions
in Indian Banks after Liberalization: An Analysis.
Indian Journal of Commerce and Management
Studies. Vol. 3,(1),pp. 108-114.
Deo,M., Shah,M. A. (2011). Shareholder Wealth Effects to
Merger Announcements in Indian IT industry.
International Journal of Research in Commerce,
Economics and Management. Vol. 1, (7), pp. 61-66.
www.pbr.co.in
Mantravadi, P., Reddy, A. V. (2008). Post-Merger
Performance of Acquiring Firms from Different
Industries in India. International Research Journal
of Finance and Economics. Issue 22, pp.192-204.
AhmedM., AhmedZ. (2014). Mergers and Acquisitions:
Effect on Financial Performance of Banking
Institutions of Pakistan.J. Basic. Appl. Sci. Res.
Vol. 4, (4), pp.249-259.
Kemal,M. U. (2011). Post-Merger Profitability: A Case of
Royal Bank of Scotland (RBS). International
Journal of Business and Social Science. Vol. 2, (5),
pp.157-162.
Mylonidis, N. Kelnikola, I. (2005). Merging Activity in the
Greek Banking System: A financial Accounting
Perspective. South-Eastern Europe Journal of
Economics.Vol.1, pp.121-144.
Bhalla,P. (2012). Determinants of Mergers and Acquisitions
of Firms in the Indian Financial Sector: An
empirical analysis. The IUP Journal of Business
Strategy. Vol.8, (3), pp. 7-23.
Kouser,R., Saba, I. (2011). Effects of Business Combination
on Financial Performance: Evidence from
Pakistan's Banking Sector. Australian Journal of
Business and Management Research. Vol.1,(8),
pp54-64.
Rhoades,S. A.(1998). The Efficiency Effects of Bank
Mergers: An Overview of Case Studies of Nine
Mergers. Journal of Banking & Finance. Vol.22, pp.
273-291.
11