Impact of Mergers &
Financial Performance & Shareholders Wealth:
A Case Study of
Centurion Bank and Bank of Punjab Merger
Scholar, Department of Business and Financial Studies,
of Kashmir. (email—firstname.lastname@example.org)
Khursheed Ahmad Butt
Department of Business and Financial Studies,
of Kashmir. (email—email@example.com)
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 aninsignificant positiveimpact on the shareholders
wealth as well as on the operating & financial performance of the merging
Key Words: Mergers and Acquisitions, Financial Ratios,
A firm can achieve growth either internally or externally. Internal
growth can be achieved if afirm 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
existingmarket or obsolete product category or government restrictions. Again
firm may not havespecialized knowledge to enter in to a new product/ market and
above all it takes a longer period toestablish new markets and yield positive
returns. In such cases, external mechanism of growth namelymerger 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 growth and expansion of the economy. The main motive
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 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
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 pre- liberalization era and the post-liberalization
era. In pre-liberalization 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. 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.
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 post-merger 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 1999-2000. They took a
sample of four acquirers and five target banks that were of relatively the same
size and the non-merging 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 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
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.
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. Post-merger
profitability improved insignificantly, liquidity significantly, capital
leverage insignificantly while as assets quality parameter showed a significant
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 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.
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 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
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
FINANCIALS OF THE MERGING ENTITY- CENTURION
BANK OF PUNJAB
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%.
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.
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 at 9.21per cent.
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
merged entity had paid up share capital of Rs 130 crore and a net worth of Rs
merged entity had 235 branches & extension counters, 382 ATM’s and 2.2
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 win-win 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.
benefits expected from the Merger
· Combined entity, Centurion Bank of
Punjab would be 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
· 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 exchange services, personal loans, mortgages, education loans and
agricultural loans, and credit cards.
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:
v Operating performance
v Financial performance
v Shareholders wealth.
To conclude and to make
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.
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 post-merger 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 study on operating &
financial performance and shareholders’ wealth.
The data so collected has been analysed using the following ratios:
measuring the operating performance, the following ratios have been used;
Deposits to total assets ratio
advances to total deposits ratio
or NIM to total assets ratio
profit to total assets ratio
profit margin ratio
Non- interest income to total income ratio
Interest income to total income ratio
financial performance has been measured using the following ratios;
asset to total deposit ratio
profit margin ratio
of merger on shareholder’s wealth has been analyzed using the following ratios:
on Equity (ROE)
value per share
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 research question, which has been analysed and the results of which has
been presented in the following para’s.
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:
to total assets ratio
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.
advances to total deposits ratio
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
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
profit to total assets ratio
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.
profit margin ratio
profit margin is used to measure a bank’s operating efficiency. A high
operating profit margin is better as it indicates that a bank is able to
control its expenses.
Interest income to total income ratio
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.
Non- interest income to total income ratio
reflects any income that banks earn from activities other than their core
operations. Modern banks in order to 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.
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.
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 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 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 non-interest 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
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 non- performing asset ratio
like gross NPA and net NPA ratios.
profit margin ratio
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
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.
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.
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.
[Insert Table II]
II presents the data about the parameters of financial performance discussed above.
It becomes clear from the data detailed out in the table II that 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%
pre-merger. 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).
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.
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.
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
on Equity is similar to EPS,the only difference is that it measures the
profitability of owners’ equity in percentage terms.
yield reveals payoff in terms of cash dividend to shareowners in percentage
terms.More dividend yield,therefore, the shareholders have received more
earnings in cash.
Value of a Share
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 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 post-merger.
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.
value per share(BV)
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.
The details of the above ratios
have been presented in table III.These
ratios have been calculated for the
and merging bank for a five year period,the details of which have been
presented in the
above table (table3).The
post-merger ratios have been compared with the pre-merger ratios to assess
has been positive or negative impact of the merger on the wealth of the
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 termsreveals 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 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.
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