Research Journal of Finance and Accounting www.iiste.

org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.4, No.3, 2013

Impact of Merger of Housing Development Finance Corporation

Bank and Centurion Bank of Punjab on Shareholder Value
Management
Piyush Kumar Singh 1, Prof. V. K. Gupta 2*
1
Indian Institute of Management Indore, IIM Indore, Rau –Pithampur Road, 453331, M.P, India
2
Indian Institute of Management Indore, IIM Indore, Rau –Pithampur Road, 453331, M.P, India,
* Email of the corresponding author: vkgupta@iimidr.ac.in , vijkg@yahoo.com

Abstract
This study analyzes the impact of merger on the shareholder’s wealth through Economic Value Added (EVA) and
Market Value Added (MVA) in Indian Banking Industry. The paper explains the major strategic reasons and various
challenges of the high profile mergers of Indian Banking Industry. The paper has attempted to find out the impact of
the merger on the acquirer bank’s profitability ratio, on its different variables like EVA, MVA, etc. This study also
explores the fact that there is very little impact of the sub- prime crisis on the merger outcomes.
Key Words: EVA (Economic Value Added), MVA (Market Value Added), Profitability Ratios, Sub Prime Crisis

1. Introduction
Indian banking sector is the major part of the Indian financial system. Now these days the banking industry of India
itself is passing through transition phase. During this phase a lot of transformation can be seen in this industry like
restructuring of the banks, entry of different private sector banks, diversity in services etc. In India it can be easily
seen that public sector banks are using restructuring techniques for getting competitive advantage and private sector
banks are consolidating themselves through mergers and acquisitions to stay in market and to increase their
efficiency. Previous studies support the fact that mergers and acquisitions help banks to improve in different areas
like economies of scale like improve the collections, service processes, distribution, infrastructure, economies of
scope like to grow products and segments and an opportunity to cross sell, synergy benefits like treasury
performance would be improved as the cost of funds would reduce as it would have a better credit rating. Merger and
acquisitions significantly reduce the bankruptcy risk of the merged entity (Hannan & Pilloff, 2009). Another reason
for Indian banks to go for mergers is to reduce bankruptcy concerns. Researchers have found that bank mergers and
acquisitions are not a new phenomenon for Indian banking industry because it had been started from 1961 and there
have been as many as 77 amalgamations had been accomplished between banks in India, out of which 46 took place
before nationalization of banks while the remaining 31 occurred in post-nationalization period (Leeladhar, 2008).
Initially these mergers and acquisitions were viewed as a regulatory mandate from the Reserve Bank of India (RBI)
wherein the central bank forced a profitable bank to embrace the sick bank to revitalize the latter. It was in 1998
when, for the first time, Narasimham Committee II suggested market-driven mergers (wherein banks merge on the
basis of business considerations and strategic fit so as to gain various kinds of synergies in the post-merger period) as
the only viable route to strengthen the Indian banking sector. From 1999 onwards, banks in the private sector have
initiated the process of market-driven mergers, to strengthen their business operations in terms of size, scale,
geographical reach and market share. It was in this year that first market-driven merger took place between two
private sector banks namely, HDFC Bank and Times Bank. This was followed by the merger of Bank of Madura
with Industrial Credit and Investment Corporation of India Bank (ICICI Bank) in the year 2000 and in the same year
the merger of ICICI Ltd., with ICICI Bank in its quest for creating a universal bank. Further in 2005, Bank of Punjab
merged with Centurion Bank that created a new entity Centurion Bank of Punjab (CBoP) and was followed by the
merger of Lord Krishna Bank with CBoP.
After initiating the first market-driven merger in 1999, HDFC Bank has again taken the lead by announcing the
biggest merger in Indian banking industry between two private sector banks, that is, the merger between India’s best
bank, HDFC Bank, and one of India’s fastest growing medium-sized banks, Centurion Bank of Punjab. It was one of
the largest mergers of Indian banking history and its analysis is important as it was the beginning of the consolidation
wave in the Indian Banking Sector. The HDFC Bank-CBOP merger comes as no surprise. As a result of
liberalization, and due to flexible WTO regulations, there would be greater accessibility for foreign banks to Indian
shores and vice-versa. As a result of that increasing growth, Indian Banks would have to gear up to compete with

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.4, No.3, 2013

their global counterparts in terms of products, technology and people. The merged entity is to be named as HDFC
Bank. The swap ratio has been fixed at 1:29. In terms of balance sheet size the merger will catapult HDFC Bank to
7th position from its present 10th position among all commercial banks in India. Managements of both the banks
have given a big applause to the merger and have quoted that the quest to create a larger entity (in terms of
technology, products, business reach and manpower) that is capable of competing and grabbing opportunities both
globally as well as domestically is the major driver for the said acquisition.
The rationale for the merger, as given by media and the management, are the synergies that are going to accrue to the
merged HDFC Bank (henceforth referred as merged entity). It is interesting to evaluate what these synergies are and
how the stock market has reacted to the announcement of the said merger considering the anticipated synergies. Also,
it is pertinent to discern how these projected synergies would add to the fundamentals and bottom-line (growth,
profitability, efficiency and productivity variables) of the merged entity.

2. Review of Literature
Many studies have been done to find out the rationales behind the Mergers of Indian banking sectors. Basically, two
main techniques have been employed by the researchers to evaluate the value creating potential of bank mergers and
acquisitions: One set of studies support the fact that the impact of a merger on the shareholder’s wealth is ascertained
around the announcement of the merger and acquisition. At the same time the second set of studies investigates
different financial and profitability variables of the merged entity to evaluate whether a bank merger has added value
to the fundamentals of the merged entity or not.
Researchers have found that merging banks were able to enjoy abnormal returns due to the anticipated improvements
in the operations of merged banks (Neely, 1987). It is also examined that effect of cross border mergers on
shareholders’ wealth. They concluded that the shareholders of merging banks experienced positive but insignificant
Average Residuals (ARs) on the announcement of bank merger (Becher, 2000; Campa & Hernando, 2006;
Havrylchyk, 2004; Tourani Rad & Van Beek, 1999).
Previous study examined the impact of merger on the performance of merging banks as compared to the non-
merging control group on the basis of changes in 23 banking ratios selected to reflect asset structure, loan portfolio,
expenses, earnings and profitability (Smith, 1971). He suggested that the main source of value creation in bank
mergers was the increase in revenues of merging banks due to improved liquidity position. But significant increase in
current operating expenses of the merging banks, at the same time, more than offset the higher revenues. Studies
have also contended that the main sources of value creation in mergers was improved profit efficiency due to the
product mix shift from securities to loans, that is, the diversified portfolios of the banks, in the post-merger period
(Akhavein, Berger, & Humphrey, 1997). Study suggested that most of the estimated value gains stemmed from the
opportunity to cut costs by eliminating the overlapping operations and consolidating backroom operations whereas,
the projected revenue enhancements played an insignificant role (Houston, James, & Ryngaert, 2001).
Similarly researchers also found improvements in the fundamentals of the merged banks in the post-merger period
(Altunbaş & Marqués, 2008; Gjirja, 2004; Gugler, Mueller, Yurtoglu, & Zulehner, 2003; Turchynska, 2005).
However, others found performance deterioration for the merged entity (Piloff & Santomero, 1998; Schenk, 2000).
The sources of value destruction suggested by these researchers were either the self-delusion or the quest for private
benefit of control of the acquiring firm’s managers, and also the post-integration problems.
Cybo-Ottone and Murgia’s (2000) event study analysis of 54 mergers and acquisitions deals covering 13 European
banking markets of the European Union and the Swiss market for the period 1988 to 1997. They find positive and
significant increase in the shareholder value of bidder and target banks at the time of the deal’s announcement
(Cybo-Ottone & Murgia, 2000). Also one study examined 102 merger announcements in the European financial
services industry between 1987 and 1999 and finds positive returns for target bank shareholders in different event
windows (Ismail & Davidson, 2005). Sakai, et al. (2009) analyzed mergers of the shinkin bank for 1984 to 2002
study period and concluded that profitability increased due to favourable business environment and increase in
market share. Khan et. al, (2012) reviewed the impact of mergers of the Japanese banks for last 20years and
concluded that Japanese banking sector had not earned as much profit as expected by its shareholders.
Apart from these international studies, some Indian researches worked on mergers of banking and significantly
contributed in existing literature (Kumar & Rajib, 2007; Pandey, 2001). Pandey (2001) has examined the issue of
takeover announcements, open offer and its impact on shareholder value in the Indian corporate sector. Kumar and
Rajib (2007) identify the characteristics of merging firms in India based on their study of 227 acquirer and 215 target
firms during the period 1993-2004. In India, most of the studies conducted on bank mergers are theoretical and

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Vol.4, No.3, 2013

presented various arguments with regard to the question, whether there should be consolidation of banks in India or
not (Bagchi & Banerjee, 2005; Lakshminarayanan, 2005; Mohan, 2005). Till date, only one study (Anand &
Jagandeep, 2008) empirically evaluated the impact of bank mergers on the wealth creation of both acquirer and
target bank’s shareholders. They analyzed five mergers and found that except for one (that of Global Trust Bank and
Oriental Bank of Commerce), all others created positive wealth for the shareholders of both acquiring and target
banks around the announcement period.
In this paper a methodical analysis of the merger of HDFC bank and CBoP has been done. Here an attempt has been
made to analyse the impact of merger of the Indian banks on the shareholder’s wealth as well as impact of the merger
on the performance of the bidder (HDFC) bank. Keeping in view the above background the present study has been
conducted with the following objectives:
x To analyze the immediate impact of the merger on the different fundamental variables like EVA, market
capitalization, relative profitability, return on net worth, MVA etc. of the bidder bank
x To find the amount of profit generated and wealth created for the shareholders due to the merger.
x Finally, to analyze the various strategic reasons and major challenges for the merger.

3. Research Methodology
Secondary data set has been used for the analysis. Since the merger has been accomplished in the May 2008, so here
5 years data (2006, 2007, 2008, 2009 & 2010) has been taken to capture the major fluctuations in the fundamental
variables. For attaining the cited objectives in the above paragraph, the analysis has been conducted in three parts.
Firstly, merger impact on shareholders’ wealth and on the different fundamental variables like EVA, market
capitalization, relative profitability, return on net worth, MVA of acquiring bank has been ascertained by employing
the statistical analysis of the dataset. Secondly, to know whether the different strategies are fulfilling or not, which
had been considered by the Bidder bank before the merger. Finally different challenges for the current merger and
impact of the market fluctuation on the different variables have been also analyzed.

3.1. Major Indicators

3.1.1. Economic Value Added-
Economic Value Added or EVA is an estimate of a firm's economic profit . It represents the value created in excess
of the required return of the company's shareholders . EVA is the profit earned by the firm less the cost of financing
the firm's capital. The idea is that shareholders gain when the return from the capital employed is greater than the
cost of that capital (Savarese, 2000).
EVA=NOPLAT-(WACC*CAPITAL EMPLOYED) (1)
Where, NOPLAT== Net Operating Profit after Taxes, WACC='Weighted Average Cost of Capital
3.1.2. Market Value Added
Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed
by investors. If MVA is positive, the firm has added value (Joseph, 2000). If it is negative, the firm has destroyed
value.
MVA = Market value of equity +Market value of debt (2)

3.2. Major Strategic reasons for the Merger

The major strategies of this merger were the key path to achieve the growth and sustainability over the year. Some of
them are described as follows-
x To get the expansion in branch network,
x To achieve the economic as well as managerial synergy,
x To access the complementary income stream and a wide range of product portfolio
x To achieve the International expansion etc

4. Data Analysis and Discussion

For calculation EVA and MVA different constituent of these approaches are calculated. Weighted Average Cost of
Capital (Table 1) can be calculated by calculating cost of debt (Table 1.1, 1.2) and cost of equity (Table1.3, 1.4),
their weighted ratios (Table 1.5) and tax percentage (Table 1.6). After calculating WACC, EVA (Table 1.7) has been
calculated (Table 2). Similarly MVA (Table 3) has been calculated by calculating its’ constitutes i.e., Market Value
of Equity (Table 3.1), Interest & Debt (Table 3.2) and Market Value of Debt (Table3.3). Bnakex details (Table 4)

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Vol.4, No.3, 2013

have been also given for weight calculation. Market impact analysis (Table 5) has been also evaluated to see the
impact on share price. From Table 5, it is clear that there is very less impact of the market on the stock price of the
HDFC banks after the merger. For this analysis Bankex data has been taken and by dividing it with the stock price, a
ratio is obtained for each time frame. It is again multiplied with bankex to get the expected price (free from the
market behavior) of the share at a given time frame. Here we are removing the impact of market trend; it means that
the increase in the expected share price is only due to acquisition and not due to any recession impact. There is drop
in the ratios, just after acquisition because of the merger but it increase after some time.
HDFC bank has expanded its’ distribution network from 761 branches in 327 cities to 1,412 branches in 528 Indian
cities as well as ATMs had been increased from 1,977 to 3,295 due to this amalgamation. The branch network is not
overlapping rather it is complimentary. HDFC Bank has a strong presence in western India whereas; CBoP is strong
in northern and southern India with pockets of concentration in Punjab and Kerala. The branch network in Kerala
would give it access to a large NRI client base originating from the state. HDFC Bank also got access to more rural
branches that in turn could be leveraged to give boost to its rural initiatives. The merger would further help HDFC
Bank in broad basing its spread in non-metro and rural areas from where it is presently fetching 40% of its deposits
(Adhikari, 2008a). Thus, the enhanced branch network would enable HDFC Bank to strongly position itself across
the various geographies in India.
Growth was the basic rationale behind this amalgamation. Actually HDFC bank wanted a robust growth momentum
that it has sustained over the years. To ramp up its scale, HDFC had selected CBoP because of its’ well developed
network and its’ latent potential. After this Merger we can see the significant growth in different fundamental
variables like EVA, market capitalization, relative profitability, and return on net worth, MVA of the bidder bank
(Table 2, Table 3.4, and Table 6). The merger actually took place on the 23 May 2008. EVA has been increased just
after the merger but after that it has been slightly decreased due to increase in capital employed. If we analyse the
MVA trend (Table 3.4) then we find that the MVA value has been decreased just after the merger. This was
happened due to decrease in market value of the equity. It is clear that subprime crisis was happened in the same year
and it was occurred just after the merger. These phenomena also lead to decrease the share prices of the HDFC and
other banks. On the other hand it is obvious that share price of the acquire firm is decreased after the merger. This
may be happened due to the information Asymmetry. So, it is clear from the tables that EVA, MVA have been
increased after the merger and the opposite trend was due to some unexpected events.
Growth momentum of HDFC can also be explained on the basis of different key ratios (Table 6) and different heads
of the financial statements. From table 6 it is clear that there is a significant growth in the different heads like
deposits, fixed assets, reported net profits and advances, which are showing the trend of growth after the mergers.
We can also observe the growth picture in figure 1, figure2, and figure 3. Apart from this, some useful ratios also
have been showing the growth in coming years after the merger. Basically after merger there was a significant
increase in deposits due to clubbing the deposits accounts of both banks. This deposits impels so many heads further
like due to increase in deposits advances has been increased and it enhanced the interest earning. On the other hand
deposit also pushed the interest expenses up as the form of interest payments on the deposit accounts. This trend
leads the growth prospects of the HDFC bank in coming years.
Merger brings a lot of opportunities in terms of economic as well as managerial growth. With this merger HDFC
banks has increased volume of its’ sales, thus realizing economic of scale. Due to the extension in the branch
network it can also access the variety of customers for their variety of products. This will decrease the operational
cost and increase the efficiency of operation. The merged entity can also increase their economies of scale due to
cross selling of their products. After merger HDFC pushed its various value added product credit cards, mutual
funds, general insurance, bancassurance, foreign exchange services etc., to its retail customers. Likewise various
retail products like car loans, two wheeler loans, CV/CE loans etc., has been pushed to its corporate customers. This
is a twofold effect on the profitability of the merged entity. In this way HDFC has brought its cost to income ratio
down by providing value added services to retail customer.
It was quite interesting to know that before merger HDFC Bank and CBoP were competent in different geographical
regions with various reach and scope. Like HDFC Bank’s strategy is to have margin-led growth, which means unlike
other private sector banks, it does not sacrifice margins in its race for market share. But in the present day scenario of
hardening interest rates, it is difficult for a bank to sustain higher Net Interest Margin (NIM). While the other hand
CBoP was operating with various value-added services like e-broking products in partnership with Infrastructure
Leasing & Financial Services Limited (IL&FS) and also Miracle Card in collaboration with The Art of Living
Foundation. Thus merged entities are maintaining their profitability amidst hardening interest rate scenario by

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Vol.4, No.3, 2013

complementing HDFC Bank’s interest income with that of growing fee-based income of CBoP. Apart from this there
is a huge complimentarily between HDFC Bank and CBoP’s product portfolio. HDFC Bank is deriving majority of
its business from its corporate clients, followed by retail customers and SME customers, whereas CBoP fetches
majority of its business from retail customers followed by SME and corporate customers. In this way they are very
complementary with each other’s in terms of their business.

5. Findings
On the basis of above results and discussion, we can draw following findings:
x HDFC bank has fulfilled its network expansion strategy successfully, due to this merger.
x EVA and MVA are increased after the merger of both banks.
x Merger has provided various strategic benefits like wide network of branches across various geographies,
broad range of products and experienced management team to HDFC Bank’s existing operations.
x The merger has blended the physical and human resources of these two banks, which helped HDFC BANK
in expanding its scale and business, reach both domestically and internationally by realizing various
economies of scale and scope.
x This merger also enabled the merged entity to create better wealth for its shareholders in future.
x Merger helps in achieving diversity services and better product portfolio, which helped HDFC Bank in
revenue generation and in achieving economies of scopes in their business.
Apart from the positive findings, some negative aspects also come with mergers:
x It is always associated with high cost
x It is always difficult to get the synergy between merged entities
x In this case the asset and loan quality of CBoP were very bad. CBoP had very risky profile of loan entities.
x There are always dilution issues just after the merger in the stock price of the acquire firm. Like in this case
we can see the immediate drop in the share price of the HDFC after the merger.

6. Conclusions
From the above discussion, it can be concluded that the merger has highly impacted the merged entities. Basically
the merger enabled the merged entity to enhance its deposits, size and the scale of its operations by providing a
diverse range of products; and expand business reach through extensive branch network. In this study we have also
seen that there is significant increment in EVA, MVA, Net profit and Share price after the merger (figure 1, figure 2
figure3). This fact supports the statement that the merger increases the shareholders’ wealth. Furthermore, it has
strengthened the management bandwidth. With the merging of branch network and extensive product range on one
hand and expertise of management on the other, if HDFC Bank is able to realize the projected cost savings and also
increase its profitability by increasing the volume of value-added services as well as banking services it would be
able to derive better value for its shareholders in future. Thus, CBoP provides a perfect fit in terms of culture,
strategy and approach to HDFC Bank. This paper has provided an analysis from the view point of the stakeholders of
a banking firm. Currently the forced mergers may be protecting the interests of depositors but shareholders of both
bidder and target banks are not, necessarily perceived as beneficiaries of the merger. So this study may help them to
analyse the trend. Also the ongoing consolidation trends in Indian banking will create a platform, where this study
will be highly applicable.
Further study can be done to analyse the impact of the merger announcement on the shareholders’ wealth. Valuation
part can be also a broad area for the future research. One can apply different valuation technique to confirm the deal
that whether this merger was done by considering undervaluation or overvaluation. Relative impact analysis, among
the different variables like EVA, MVA, and relative profitability can also be done.

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Bagchi, A. K., & Banerjee, S. (2005). How Strong Are the Arguments for Bank Mergers? Economic and Political
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Piyush Kumar Singh- He is a doctoral student of Indian Institute of Management Indore in Finance and Accounting
Area. His area of interest is banking performance and risk management in financial institutions. He is also holding a
M. Tech. Degree from Indian Institute of Technology Kharagpur.
Prof. V. K. Gupta- Dr. V. K. Gupta is Professor Finance and Accounting Area at Indian Institute of Management,
Indore. He has received 2nd Asia B-Schools Award – “Best Professor in Financial Management” from the Asia
CMO Council in Singapore. He received 16th Business School Affair & Dewang Mehta Business School-Best
Teacher in Financial Management Award across all Indian Business Schools. His research interests include
International Accounting, Strategic Cost Management, Management Control Systems, Corporate Performance
Management and Third Generation Balanced Scorecard etc. He has developed different modules on International

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.4, No.3, 2013

Financial Reporting Standards, US GAAP, Human Resources Accounting, Environmental Accounting, Social
Accounting, Intellectual Capital Accounting, Value Added Accounting, Financial Dimensions for Human Resource
Decisions, Activity Based Management, Performance Based Management, Value Based Management, Priority Based
Management, Result Based Management and Focused Based Management etc.

Appendix
Table. 1 WACC calculation

Cost of Debt Calculation-

Table.1.1
Government Security Quotes
Instrument Price Yield
7.17% 2015 96.84 8.02
7.99% 2017 99.27 8.14
Table.1.2

Corp Bond Spreads(bps)

Tenor AAA AA+ AA
1 194 209 234
3 121 143 173
5 70 97 127
10 79 107 137

From the above two table-

kd= Rf+ Spread= 7.17+0.7= 7.87
Assumption- Here I am taking 5 years debt instrument only and from the data it is clear that HDFC's Credit rating is
AAA and it will be same for the 2005-2015 (because here I am taking 5 years debt instrument and credit rating of
HDFC bank is consistent over the last five years)
Cost of Equity Calculation-
ke= Rf + (beta) (Rm-Rf)

Table. 1.3 Beta details

years Beta details
2006 0.881
2007 0.9917
2008 1.0089
2009 0.7978
2010 0.8836
Where, Rf= Risk free rate and Rm= market return rate

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Table 1.4 Ke calculations

Years Rf Rm-Rf Beta( Rm-Rf) ke= Rf +(beta) (Rm-Rf)

2006 7.17 6.83 6.01723 13.18723
2007 7.17 6.83 6.773311 13.943311
2008 7.17 6.83 6.890787 14.060787
2009 7.17 6.83 5.448974 12.618974
2010 7.17 6.83 6.034988 13.204988

Table 1.5 E/D+E and D/D+E calculations (in Crore)

E/D+E and D/D+E 2006 2007 2008 2009 2010

Equity= total reserve+ capital=E 5299.53 6433.15 11497.24 14646.33 21519.58
Debt=deposits+ borrowing+ other
liabilities =D 68,287.34 84886.14 121753.77 168305.93 201034.4
equity+ debt=D+E 73,586.87 91,319.29 133,251.01 182,952.26 222,553.98
equity/(equity+ debt)=E/D+E 0.072017 0.070447 0.086282573 0.08005547 0.09669
debt/(equity+ debt)=D/D+E 0.927983 0.929553 0.913717427 0.91994453 0.90330

Table 1.6 Tax % calculations (in Crore)

Tax % Calculation
2010 2009 2008 2007 2006
PBT 4289.14 3299.25 2280.65 1638.75 1253.51
PAT 2948.7 2244.94 1590.2 1141.45 870.78
Taxed amount 1340.44 1054.31 690.45 497.3 382.73
tax % 0.312519526 0.319561 0.302743 0.303463005 0.305327
1-tax% 0.687480474 0.680439 0.697257 0.696536995 0.694673

Table 1.7 WACC calculations

WACC Calculation

Years ke E/D+E ke*(E/D+E) Kd 1-tax kd(1-tax) D/E+D kd(1-tax)*(D/E+D) WACC

2006 13.187 0.0720 0.9497 7.87 0.6947 5.4671 0.9280 5.0734 6.0231
2007 13.943 0.0704 0.9823 7.87 0.6965 5.4817 0.9296 5.0956 6.0778
2008 14.061 0.0863 1.2132 7.87 0.6973 5.4874 0.9137 5.0139 6.2271
2009 12.619 0.0801 1.0102 7.87 0.6804 5.3551 0.9199 4.9264 5.9366
2010 13.205 0.0967 1.2768 7.87 0.6875 5.4105 0.9033 4.8873 6.1642

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Research Journal of Finance and Accounting www.iiste.org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.4, No.3, 2013

Table.2 Economic value added calculations (in Crore)

EVA CALCULATION
201003 200903 200803 200703 200603
Equity Paid Up 457.74 425.38 354.43 319.39 313.14
Net worth 21522.49 15052.74 11497.24 6433.15 5299.53
Capital Employed 222556.89 183358.67 133251.01 91319.29 73586.87
Gross Block 4707.98 3956.63 2386.97 1917.56 1589.47
Sales 16172.9 16332.26 10115 6647.93 4475.34
PBIDT 12469.83 12570.26 7439.47 5037.8 3361.6
PBDT 4683.53 3659.16 2552.36 1858.35 1432.1
PBIT 12075.44 12210.35 7167.76 4818.2 3183.01
PBT 4289.14 3299.25 2280.65 1638.75 1253.51
PAT 2948.7 2244.94 1590.2 1141.45 870.78
NOPLAT= PBIT-(PBT-PAT) 10735 11156.04 6477.31 4320.9 2800.28
total liabilities 222556.89 183358.67 133251.01 91319.29 73586.87
deposits 167,404.44 142,811.58 100,768.59 68,297.94 55,796.82
Capital Employed 55,152.45 40,547.09 32,482.42 23,021.35 17,790.05
WACC 0.0616 0.0593 0.0622 0.06077 0.06023
EVA= NOPLAT-(WACC*CAPITAL EMPLOYED) 7337.60 8751.59 4456.90 2921.89 1728.78

Table .3 Market value added calculation

Table 3.1 Market value of equity (in Rs)

Time No of share Share Value Market Value of Equity

31/3/2006 313142408 773.5 242215652588.00
31/3/2007 319389608 949.4 303228493835.20
31/3/2008 354432920 1,319.95 467833732754.00
31/3/2009 425384109 967.85 411708009895.65
30/03/2010 457743272 1,932.50 884588873140.00
Table 3.2 Interest & debt calculations (in Crore)

Particulars 2010 2009 2008 2007 2006

PBIT 12075.44 12210.35 7167.76 4818.2 3183.01
PBT 4289.14 3299.25 2280.65 1638.75 1253.51
Interest 7786.3 8911.1 4887.11 3179.45 1929.5
debt 201034.4 168305.9 121753.77 84886.14 68,287.34

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Research Journal of Finance and Accounting www.iiste.org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.4, No.3, 2013

So, from the above tables –one can find out the Interest amount, kd, and book value of debt. After this market value
of debt for the five years can be calculated by the following formula-
Market value of debt = interest amount* ((1-1/ (1+Kd) 5))/kd) + debt/ (1+Kd) 5
Table 3.3 Market value of debt calculations (in Crores)
Years Market Value of Debt
2006 246.4107908
2007 405.5348629
2008 623.1858634
2009 1135.331903
2010 993.0081

Table.3.4 Market value added (in Crores)

Years Market Value of Debt Market Value of Equity Capital Employed MVA
2006 246.4107908 24221.57 17790.05 6677.93
2007 405.5348629 30322.85 23,021.35 7707.03
2008 623.1858634 46783.37 32,482.42 14924.14
2009 1135.331903 41170.80 40,547.09 1759.04
2010 993.0081 88458.89 55,152.45 34299.45

Table.4 Bankex details

Free-
Float
Adj. Free-Float Weight in
Scrip Code Company Close Price Full Mkt. Cap. Factor Mkt. Cap Index
(Rs. crore) (Rs. crore) (%)
532174 ICICI BANK LTD 1,078.05 123,765.30 1 123,765.30 29.57
500180 HDFC BANK LTD 2,161.45 100,115.24 0.8 80,092.19 19.13
500112 STATE BANK OF INDIA 2,696.05 171,198.67 0.45 77,039.40 18.41
532215 AXIS BANK 1,296.25 53,105.99 0.65 34,518.89 8.25
532461 PUNJAB NATIONAL BANK 1,204.35 37,973.46 0.45 17,088.06 4.08
500247 KOTAK BANK 451 33,088.69 0.5 16,544.34 3.95
532134 BANK OF BARODA 882.85 32,159.27 0.5 16,079.63 3.84
532149 BANK OF INDIA 436.1 22,902.89 0.4 9,161.16 2.19
532187 INDUS IND BK 255.65 11,879.25 0.75 8,909.44 2.13
532483 CANARA BANK 642.3 26,334.30 0.3 7,900.29 1.89
532648 YES BANK 299.7 10,366.16 0.75 7,774.62 1.86
532477 UNION BANK 326.05 16,469.37 0.45 7,411.22 1.77
500469 FEDERAL BANK 405.2 6,926.70 1 6,926.70 1.65
500116 IDBI BANK L 155.55 15,312.52 0.35 5,359.38 1.28
TOTAL 661,597.81 418,570.62

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Research Journal of Finance and Accounting www.iiste.org
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Vol.4, No.3, 2013

Table 5. Market’s impact analysis

Without Merger Expected
Date Closing Share Price Banking Index Ratio Share Price
10/12/2010 2,220.40 13002.87 0.1708 2002.44
30/09/2010 2480.8 14025.04 0.1769 2159.86
30/06/2010 1914.65 10765.03 0.1779 1657.81
31/03/2010 1932.5 10652.35 0.1814 1640.46
31/12/2009 1700.4 10030.8 0.1695 1544.74
30/09/2009 1642.25 9855.6 0.1666 1517.76
30/06/2009 1491.75 8211.48 0.1817 1264.57
31/03/2009 967.85 4490.97 0.2155 691.61
31/12/2008 997.6 5454.54 0.1829 840.00
30/09/2008 1229 6478.85 0.1897 997.74
30/06/2008 1002.3 5915.98 0.1694
31/03/2008 1319.95 7717.61 0.1710
31/12/2007 1727.8 11418 0.1513 Average= .154
28/09/2007 1439.05 9469.26 0.1520
29/06/2007 1144.1 8009.94 0.1428
30/03/2007 949.4 6542.01 0.1451
29/12/2006 1069.75 7085.73 0.1510

Table.6. Some useful key ratios

Particulars Mar 10 Mar 09 Mar 08 Mar 07 Mar 06

Deposits 167404.44 142811.58 100768.59 68297.94 55796.82
Borrowings 12915.69 9163.64 4594.92 2815.39 2858.48
Cash & Balances with RBI 15483.29 13527.21 12553.18 5075.25 3306.61
Advances 125830.59 98883.05 63426.9 46944.78 35061.26
Fixed Assets 2122.81 1706.73 1175.09 966.67 855.08
Other Assets 6053.47 6444.72 4477.15 3796.39 2357.57
Interest Expended / Total Funds (%) 3.84 5.63 4.35 3.86 3.08
Net Interest Income / Total Funds
(%) 4.13 4.69 4.66 4.21 4.07
Operating Expenses / Total Income
(%) 28.86 28.85 30.21 30.29 31.3
Interest Earned 16,172.90 16,332.26 10,115.00 6,647.93 4,475.34
Interest expended 7,786.30 8,911.10 4,887.11 3,179.45 1,929.50
Reported Net Profit 2,948.70 2,244.94 1,590.20 1,141.45 870.78

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Research Journal of Finance and Accounting www.iiste.org
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Vol.4, No.3, 2013

10,000.00
9,000.00
8,000.00
7,000.00
6,000.00
SHARE
5,000.00
VALUE (Rs)
4,000.00
3,000.00 EVA (Crore)
2,000.00
1,000.00
0.00
2005 2006 2007 2008 2009 2010 2011

Figure 1. Trend of Share value and EVA of Parent Bank

40,000.00
35,000.00
30,000.00
25,000.00
20,000.00 SHARE
VALUE
15,000.00 (Rs)
MVA
10,000.00
(Crore)
5,000.00
0.00
2005 2006 2007 2008 2009 2010 2011

Figure 2. Trend of Share value and MVA of Parent Bank

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Research Journal of Finance and Accounting www.iiste.org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.4, No.3, 2013

3,500.00

3,000.00

2,500.00

2,000.00
SHARE VALUE
1,500.00
(Rs)
1,000.00
NET PROFIT
500.00 (Crore)

0.00
2005 2006 2007 2008 2009 2010 2011

Figure 3. Trend of Share value and Net Profit of Parent Bank

44
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