PROJECT REPORT
ON
MERGERS AND ACQUISITIONS IN INDIAN BANKING SECTOR
SUBMITED TO: DR. DEEPAK TANDON
SUBMITED BY: SAKSHI AGGARWAL
16PGDMBFS42
BATCH: 2016-2018
ACKNOWLEDGEMENT
In this present world of competition there is a race of existence in which those who are having will to come forward will succeed. Project is a bridge between practical and theoretical working, with this will I have joined the project.
I really wish to express my gratitude towards all those people who have helped me. I really indebted to Dr. DEEPAK TANDON faculty MBA department International Management Institute, New Delhi for this kind hearted approach.
His timely guidance, supervision & encouragement have helped me to get this golden opportunity. My project guide provided me his expert advice, inspiration & moral support in spite of his busy schedule & assignments, has mainly provided my understanding of this project.
I am very grateful to his kind hearted approach & encouragement, which helped me immensely in completion of this project report. Last , but not the least, I say only this much that all are not to be mentioned but none is forgotten and I will like to extend my special thanks and gratitude to my parents who always encourage me in pursuit of excellence.
SAKSHI AGGARWAL
16PGDMBFS42
TABLE OF CONTENTS Page no.
1. Acknowledgement 2
2. Overview 4
3. Background of Mergers and Acquisitions
in Indian Banking sector 4
4. Need for Mergers and Acquisitions 8
5. Impact of Mergers and Acquisitions 9
6. Methodology 10
7. Suggestions and Conclusions 11
8. Bibliography 13
MERGERS AND ACQUISITIONS IN THE INDIAN BANKING SECTOR
OVERVIEW:
The history of Indian banking sector can be divided into 3 main phases:
Phase I (1786- 1969) – Initial phase of banking in India when many small banks were set up.
Phase II (1969- 1991) – Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
Phase III (1991 onwards) – Liberalization and its aftermath
With the reforms of Phase III of the Indian banking sector, as it stands today, is mature in its supply, product range and reach, with banks havingstrong, clean and transparent balance sheets. The major growth drivers, that are increase in retail credit demand, proliferation of ATMs and debit-cards, improved macroeconomic conditions, decreasing NPAs due to securitization, diversification, interest rate spreads, and regulatory and policy changes. Example: Amendments to the Indian Banking Regulation Act.
Certain trends asrising competition, product innovation and branding, all these focus on strengthening risk management systems and emphasis on technology has emerged in the recent past. In addition, the impact of the Basel III norms is going to be somewhat expensive for Indian banks, with the need for additional capital requirement and costly database requirement and maintenance processes. Larger banks would have a relative advantage with such incorporation of the norms.
BACKGROUND OF M&As IN INDIAN BANKING INDUSTRY:
The banking system of India was started in 1770 and the first bank started was the Indian bank knows as the bank of Hindustan. Later on, some more banks like the bank of Bombay in 1840, the bank of Madras in1843 and the bank of Calcutta in1840 were established under the charter of British East India Co. These banks were merged in 1921 and took into form of a new bank known as the Imperial bank of India. For the development of banking facilities, infrastructure and services of the rural areas, the Imperial Bank of India was partially nationalized then on July 1955 and was named as the state bank of India along with its other 8 associate banks(at 7%). Later on, the state bank of Bikaner and the state bank of Jaipur were merged and then formed into the state bank of Bikaner and Jaipur. Improvement of operational and distribution efficiency of commercial banks
has always been an issue for discussion in the Indian policy background and Government of India in consultation with the Reserve Bank of India (RBI) have, over the years, have appointed several
Committees to suggest structural changes towards this objective. Some important committees among these being The Banking commission, 1972 and 1976, and committee for functioning of public sector Banks, 1978. All these committees mainly emphasized on restructuring of the Indian banking system with an aim to improve the scope of credit delivery and also recommended in favor of having 3 to 4 large banks at the all India level and remaining at regional level. However, the thrust on consolidation has been emerged with the Narasimham committee (1991) which emphasis on convergence and consolidation to make the size of Indian commercial banks much comparable with those of globally active banks. Further, the second Narasimham committee (1998) had suggested that few mergers among strong banks/ financial institutions which would make for greater economic and commercial sense and would be a case where the whole of it is greater than the sum of its part and have a “force multiplier effect”.
In 2014, Kotak Mahindra Band acquired ING Vyasa Bank. On 13th August 2010, the process of M&A’s in the Indian banking sector passes through the Bank of Rajasthan and the ICICI Bank. Moreover, the HDFC Bank acquired the Centurion Bank of Punjab in 2008. The Reserve Bank of India has sanctioned the scheme of mergers of ICICI Bank and the Bank of Rajasthan. After the merger the ICICI Bank have replaced many bank to occupy the second position after the State Bank of India (SBI) in terms of assets in the Indian Banking Sector. In the last ten years, the ICICI Bank, the HDFC bank in private sector, Bank of Baroda (BOB) and Oriental Bank of Commerce (OBC) in the public sector involved themselves as bidder Banks in the Merger and Acquisitions (M&As) in the Indian Banking Sector. Here is a run through of the mergers that have taken place among Indian banks.
TABLE 1
Name of the acquiring bank
Bank targeted Year in which
the merger took place
Kotak Mahindra Bank ING Vyasa Bank 2014
ICICI Bank Bank of Rajasthan Ltd. 2010
HDFC Bank Centurion Bank of Punjab 2008
Indian Overseas Bank Bharat Overseas Bank 2007
Federal Bank Ganesh Bank of Kurandwad 2006
Industrial Development Bank of India United Western Bank 2006
Centurion Bank of Punjab Lord Krishna Bank 2006
ICICI Bank Sangli Bank 2006
Bank of Punjab Centurion Bank 2005
Industrial Development Bank of
India IDBI Bank Ltd. 2004
Bank of Baroda South Gujarat Local Area Bank 2004
Oriental Bank of Commerce Global Trust Bank 2004
Punjab National Bank Nedungadi Bank Ltd. 2003
ICICI Bank ICICI Ltd. 2002
Bank of Baroda Banaras State Bank Ltd. 2002
ICICI Bank Bank of Madura 2001
HDFC Bank Ltd. Times Bank Ltd. 2000
Bank of Baroda Bareilly Co-op Ltd. 1999
Union Bank of India Sikkim Bank Ltd. 1999
Oriental Bank of Commerce Bari Doab Bank Ltd. 1997
Oriental Bank of Commerce Punjab Co-op Ltd. 1996
State Bank of India Kashinath State Bank 1995
Bank of India Bank of Karad Ltd. 1994
Punjab National Bank New Bank of India 1993
SOURCE: Report on trend and progress, RBI
Mergers and acquisitions have completely shaped the Indian Banking sector. Though there seem to be different opinions on this particular matter, yet there is always hope for some improvement in the current scenario after bank mergers take place.
Under the financial services sector in India, banking sector particularly has seen a lot of Mergers and acquisitions right from the early years. Historically, mergers and acquisitions activity started way back in 1920 when the Imperial Bank of India was born, when three of the presidency banks (Bank of Bengal, Bank of Bombay and Bank of Madras) were reorganized and were structured to form a single banking entity, which subsequently was known as the State Bank of India.
In the 1950s and 1960s there were instances of private sector banks, which had to be rescued or were closed down because they had very low capital and were mainly operating with other people’s money. For instance, against total deposits of Rs.2750 crore at the end of December1968, the paid-up capital of private sector banks was only Rs.28.5 crore or just a little over 1% left. In 1960, the failure of few banks such as Palai Central Bank and Laxmi Bank led to loss of confidence in the banking system as a whole. So mergers were then initiated to avoid losses to depositors and build confidence in the system.
In India, mergers have been used to bail out weak banks till the Narasimham Committee-II discouraged such a practice. For instance, since the mid-1980s, several private banks had to be rescued through mergers with public sector banks only.
Indian banks have been welcoming towards the technological advances so far and this has substantially given a rise to competitive market and hence, several banking sector mergers have been witnessed in India, over these many years.
Ranking of Indian Banks among World’s Top 1000 Banks (As on March 31, 2006)
Table 1
S. NO. NAME OF BANK OVERALL RANKING ASSETS(US $million)
1. State Bank of India 70 1,86,988
2 ICICI Bank 147 56,258
3 Punjab National Bank 255 32,509
4 Bank of Baroda 259 33,690
5 Canara Bank 281 38,069
6 IDBI 329 20,209
7 HDFC Bank 335 20,945
8 Oriental Bank of Commerce 378 13,190
9 Bank of India 411 25,126
10 Indian Overseas Bank 414 18,868
NEED FOR MERGERS AND AQUISITIONS
The banking industry is consolidating at a very accelerating pace, yet no conclusive results have emerged mainly on the benefits of mergers and acquisitions. In order to investigate the motives and results of each type of deal we have considered separately acquisitions (that is, the purchase of the majority of voting shares) and mergers, using data. Mergers seek to improve income through services, but the increase is offset by relatively higher staff costs; return on equity improves because of a decrease in capital. Acquisitions aim at restructuring the loan portfolio of the acquired bank; improving lending policies and result in higher profits. THE FINANCIAL INDUSTRY isconsolidating at an accelerating pace: the integration of financial markets has blurred distinctions between activities such as investment banking, lending, asset management, and insurance. Firms have reacted to the sharper competition currently by cutting costs and expansion in size, often by merging with competitors or by taking them over. Long isolated by protective regulations, banks have always been among the most active players. Technological innovations and a thorough-going deregulation have always prompted a wave of mergers in the banking industry throughout the world, starting in United States in the eighties and reaching Europe in the nineties. At each and every announcement of a new deal, its benefits in terms of cost reduction and growth opportunities are emphasized by all the parties. Curiously, however, the literature has failed to find some convincing empirical evidence of these advantages and thus it questions the usefulness of mergers and acquisitions (M&As) (for a review of the main results in this field. Here we have deepened the analysis of the efficiency motives for M&A in two directions. First, we distinguish between mergers (that is, deals that involve the full integration of bidder and target banks) and acquisitions (transactions in which one bank can purchases a controlling stake in another bank without joining the assets of the two) because they may well have different motivations and may lead to different results. This separation enables us to gather all the useful insights into each type of deal that would not emerge when the data is pooled. Second, we compare the motivations for mergers and acquisitions as they have appeared in an ex ante analysis of the characteristics of the banks with the ex post consequences for their performances. Previous researches focuses mainly on the ex post effects, controlling for some broad categories of the firms such as size and profitability. Here we identify that the banks are most likely to take part in a merger or acquisition and relate systematically their characteristics to their subsequent performance of the deal: a deeper understanding of the determinants of M&As allows us to recognize the variables that lead to all the changes in the main economic and financial indicators that are usually considered in merger studies. Furthermore, we have separate transitory from permanent effects when we test the hypothesis that any mergers and acquisitions are followed by differential improvements in performance, as a result of cost reductions, revenue increases, or changes in the financial structure of the bank. Acquisitions, by contrast, can be traced back to the strategies based on credit management: both banks that are involved in the deal of having a high share of loans on total assets, but the passive (acquired) bank has also a high ratio of having bad loans to total loans. The
aim of the active (acquiring) bank might be to improve the quality of the overall portfolio of the passive (acquired) bank by reducing bad loans and, in the long run, loans to small firms. To analyze mergers, we can consolidate the balance sheets of the banks involved throughout with the whole period studied, so as to consider them as being a single bank from the beginning. After a merger, we find no evidence of any improvement in profits: the post- merger increase in revenues from a larger market for services and to from the growth of loans relative to total assets is offset for an increase in labor costs. However, we find that mergers are mostly followed by an increase in return on equity, determined by a reduction in capital. After an acquisition, we detect some long-run increase in profitability for the acquired banks, due to some permanent decrease in bad loans accompanied by a long- term reduction in lending, especially to the small firms. Both mergers and acquisitions are mostly followed by a reduction of small-business lending as a fraction of total loans.
IMPACTS OF MERGER & ACQUISITIONS
1. Growth: Companies that usually desire rapid growth in size or market share or diversification in the range of their products may find that a merger can be used to fulfill the objective of the bank instead of going through the time consuming process of internal growth or diversification again and again. The firm may also achieve the same objective in a short period of time by merging with an existing firm.
2. Synergy: The merged entity has better ability for both in terms of revenue enhancement and cost reduction. Mergers and Acquisition allows all the firms to obtain efficiency gains through cost reductions (cost synergies) & revenue increases (revenue synergies).
3. Purchase Of Assets At Bargained Prices: M&As have the opportunity to acquire the assets, particularly land mineral rights, plants and equipments, at lower cost than would be incurred if they were purchased or are constructed at the current market prices.
4. Enhanced Managerial Skills: Occasionally a firm with good potential may find it unable to develop fully because of deficiencies in certain areas of management or an absence of needed product or production technologies. If the firm is not able to hire the management or the technology it needs, it might combine or merge with a compatible firm that has needed the managerial, personnel or technical expertise.
5. Acquiring New Technology: To stay competitive any market, companies need to stay on top of technological developments and their business applications. By buying out a smaller company with very unique technologies, a large company can maintain or develop that competitive edge.
6. Broader Array of Products: When two firms merge they both have diversified variety of products and after the merger each consumer in both the firms will be then benefited with the
Range of products or services that it may offer to choose from M&A’s helps firms to widen its consumer portfolio but it also leads to a way more diversified range of services.
7. Income Tax Advantages: In some of the cases, income tax consideration may provide the financial synergy by motivating a merger. Tax concessions act as a catalyst for any strong bank to acquire distressed banks that have accumulated losses over a period and unclaimed depreciation benefits in their books.
8. Own Developmental Plans: The purpose of acquisition is usually backed by the acquirer companies’ own developmental plans. A company thinks in terms of acquiring the other company only and only when it has arrived at its own development plan and has determined to expand its operation by having examined its own internal strength. It has to aim at suitable combination where it could have many opportunities to supplement its funds by issuance of all securities; secure additional financial facilities that eliminate competition and strengthen its market position.
9. Strategic Purpose: The Acquirer Company view the mergers as to achieve strategic objectives through alternative type of various combinations which may be vertical, horizontal, product expansion, market extensional or any other specified unrelated objectives depending upon the corporate strategies needed.
10. Corporate Friendliness: Although it has been rare but it is true that the business houses exhibit degrees of cooperative spirit despite much competitiveness in providing rescues to each other from hostile takeovers and then to cultivate situations of collaborations by sharing goodwill of each other to achieve performance heights through some business combinations.
METHADOLOGY:
The main objective of the project is to show the merger and acquisition between two or more companies. Mergers and Acquisitions are there both in public or Private Sector Company or whether it is a bank. The project shows why mergers and acquisitions are necessary in day to day life of a business which is continuously running in a loss, or for a businessman who want to expand his entire business or a particular existing unit. What are the major roles played by the acquiring company? What the major factors behind merger and acquisition?
This research shows the need of merger and acquisition both in banking sector and public/private sector. I added some biggest hikes and slide in the history of merger and acquisition.
Sources of Data:
The secondary data has been collected for the study. The required data for the study were collected and compiled from the various data base and the websites of the banks. The study covers a period from after nationalization of Indian Banks. In addition, the other required data were collected from various journals and magazines.
SUGGESTIONS AND CONCLUSION:
The banking industry is one of the most rapidly growing industries in India. The growth rate of this sector has been remarkable and it has become one the most preferred banking destinations for International Investors. After economic reforms of 1991, there has been a paradigm shift in Indian banking sectors. A relatively new dimension in the Indian banking industry has accelerated through Mergers and Acquisitions of banks. It is observed in the studies that, the finance and banking industry contributes the highest number of M&As deals during the study period 2008 to 2014, the trends of consolidation in Indian Banking Industry is so far restricted to the merger of small and weak banks with large and public sector banks. To this backdrop, the present study has examined the ‘Impact of Mergers on Performance of selected commercial banks in India’. The impact of mergers on performance of the various banks has been evaluated from three prospective:
i) Physical Performance of the merged banks,
ii) Financial Performance of the Merged Banks and
iii) Share price performances.
Analysis of physical performance of the merged banks emphasizes that, there has been a significant improvements in Advances, Deposits, Businesses and Number of Employees of all the selected banks. Therefore, this result indicates that the Mergers can help commercial banks to achieve the physical performance. While the analysis of the financial performance of merged banks yields with mixed results, the results indicates that, any significant improvement in Assets Quality, Earnings quality, Management Efficiency and liquidity of the selected banks and Capital Adequacy of Public sector banks did not indicate any improvements, this may be the policy matters of the public sectors banks but on an average the overall financial performances of merged banks has increased after the merger. So Merger could be considered as a much useful strategy in order to achieve any financial performance of commercial banks by achieving economies of scale, competitiveness, and increased efficiency and overall Market share. Further the analysis of share price performances of merged banks have shown that, there is no consistent pattern of any Abnormal Returns of selected merged banks, Market positively have reacted only in case ICICI Bank and Federal Bank. The rest of the cases that market negatively reacted for merger
Announcement. Therefore from the following result it can be said that, Merger is not a much preferred tool to achieve shareholders wealth of banks in short term. It is also suggested to the Government of India and RBI to liberalize their policies in connection with the Mergers and Acquisitions to increase the number of deals between the banks. Other suggestions may be:
1. Banks can work towards a synergy based merger plan that provides minimization of technology-related expenditure.
2. There is also much need that merger or large size is just a facilitator, but no guarantee for any improved profitability.
3. The thrust should be only on improving risk management capabilities, strategic business planning and corporate governance.
4. In the short run, attempt options like strategic alliances, outsourcing, etc. can be considered. Banks need to take all the advantage of this fast changing environment, where product life cycles are relatively short, time to market is very critical in deciding who wins in future.
5. The Government should not go for the M&As as a means of bailing out of weak banks. The strong banks should not be merged with weak banks, as it may have adverse affect upon the asset quality of the stronger banks.
6. The strong banks should be merged with only strong banks to compete with foreign banks and also to enter in the global financial market.
To conclude, Merger is a very useful strategy, through which Banks can expand their operations on a huge scale, may serve larger customer base, increases the profitability, liquidity and efficiency in all ways but the overall growth and financial illness of the bank can’t be solved from only mergers.
Bibliography:
1. http://economictimes.indiatimes.com/topic/bank-mergers
2. http://www.thehindu.com/business/Industry/public-sector-bank-consolidation-a-painful-journey-ahead/article8402485.ece
3. http://1000projects.org/mergers-and-acquisitions-in-indian-banking-sector-mba-project.html
4. http://www.ibpsexamadda.org.in/banking-awareness-49-mergers-and-acquisitions-of-banks-7469/
5. http://www.yourarticlelibrary.com/banking/indian-banking-system-3-phases-of-indian-banking-system/23493/
6. http://www.slideshare.net/CheekuMaan/merger-and-acquisition-in-banking-sector
7. http://www.slideshare.net/sanjaySDessai/research-project-methodology-for-undergraduate-students