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MERGERS IN BANKING SECTOR IN INDIA: AN ANALYSIS OF PRE & POST MERGERPERFORMANCE OF SBI WITH ITS ASSOCIATES Ms. Priyanka Jaiswal
Asst. Professor, Acropolis Faculty of Management & Research, Indore Dr. N. K. Totla
Assoc. Professor, IMS. DAVV., Indore
Abstract- The merging of the 6 associate banks (State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore and Bharatiya Mahila Bank) with SBI started in 2016, although the merger was given approval by the Union Cabinet on 15 June 2016. The main objective of the paper is to analyze the financial position of SBI pre and post-merger with the help of various financial parameters. The hypothesis that there is no significant improvement after mergers is accepted in majority of cases- though there are few exceptions. The study of SBI reveals that some ratios like Operating Profit Margin, Debt to Equity Ratio, Current Ratio, and Quick Ratio have shown significant difference between pre and post-merger performance while others like Net Profit Margin, Return on Equity, Return on Asset and Asset Turnover Ratio showed no significant difference between pre and post-merger performance.
Keywords: Pre and Post Merger, Financial Position and Ratio Analysis.
1 INTRODUCTION
Mergers and Acquisitions have become a strategic issue in today's business world. Mergers are favoured for many reasons including economies of scale, acquisition of technologies, access to varied markets, competitive advantage, building synergies, profit maximization etc. A „Merger‟ is a combination of two or more entities into one; where the desired effect is not only accumulation of assets and liabilities of invariably distinct entities, but organization of such entity into one. Normally, in a merger, the merging entities would cease to exist and merges into a single surviving entity. In the history of Banking mergers have played a transformational role since World War II. Not only are they a source of inorganic growth but also a panacea to long term sustainability and facing competition in dynamic environment.
1.1 Merger of SBI
State Bank of India (SBI) is an Indian multinational as well as nationalized public sector bank providing financial services in India .It is largest Indian Bank having 23% market share in terms of assets. Earlier State Bank of Indian was know as Imperial Bank of India until 30th June 1955. On 1st July 1955 Reserve Bank of India acquired the control over Imperial Bank of India under the provisions of special act i.e. State Bank of India Act 1955 and Imperial Bank of Indian become State Bank of India.
Earlier before the merger of associates of SBI, its having 7 subsidiary. In this process the node was given by Government of India on July 2010 and on 26th August 2010, State Bank of Indore which was it largest subsidiary merged into State Bank of India and become SB India. After the merger of one more subsidiary 5 associates remaining were State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore and Bhartiya Mahila Bank. During the merger of State Bank of Indore with SBI the swap ration was offered sharp i.e. 34:100, means for every 100 share of State Bank of Indore 34 shares of State Bank of India. In the year 2017 rest of the 5 associates of SBI has been merged in it and State Bank of India become the part of top 50 banks of the world.
History is created by the largest merger in Banking Industry. Government is of the opinion that this merger was an important step for the purpose of strengthening the banking sector by consolidation of public sector banks as the combined entity which will have a network of nearly 23,000 branches. The reasons for merger are not only Bad Debt Recovery, Increase Profitability, recovery of bad loans and reduction of NPA, also
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reconstruction of its asset base and increasing its network but also increase in productivity and efficiencyPost-merger State Bank of India's asset base became 5 times larger than the assets of ICICI Bank, which was the second largest Indian bank. The aim of the paper is to understand the benefits after merger and to study its impact on SBI an pre and post merger analysis is done.
2 LITERATURE REVIEW
The idea behind the merger is to convert a non profitable company into profitable company for that purpose a company which is not performing well in terms of profit is merged with its superior organization. This type of merger were done with certain motive such as value creation, competition etc. with the help of merger a new entity is in much better condition to face offshore competition from the multinational corporate not only with in the home land but also in foreign market by extended arms. Because with the help of merger the entities were having access to superior staff, synergy and cost efficient process. Sanfilippo Azofra, Garcia Olalla and Torre Olmo (2008) in mergers and acquisition size plays an important role but no evidence of economies of scale. Hassan Yusuf and Lukman Raimi (2019) has opinion that Asset turnover ratio has no positive relation with merger and acquisition. Asset turnover ratio is either deteriorated or not improved significantly.
Kumara, Dr. Manoj (2018) is of the opinion that merger has not impact on financial performance. The study included a period of two years before and after merger and data was examined using paired sample test. In order to achieve desired synergies , long term analysis will be helpful in selecting the competent partner. Kuriakose, Sony and Paul Justine (2016) the dissimilarity in the banking may have adverse effect in the post merger performance. Khan, Azeem and Sarfaraz, Javed. (2017) concluded that merger has some positive side such as increase in operating efficiency, value of enterprise and business performance, strong financial position but it is not having any effect on profitability.
Alvarez-González, P. and Otero-Neira, C. (2020) concluded that merger and acquisition has positively affected the product and services offered post merger. Gupta, Honey (2016) in his research revealed that post merger there no significant improvement in the finaical performance of State Bank of India. significant improvement in the financial performance post-merger. While some parameters showed significant improvement post-merger most of them had not shown significant improvement. Okoye, Lawrence Uchenna, Modebe, Nwanneka J.et.al (2016) in their research on effect of mergers and acquisition on Banking sector reveal that there was not very singnificant effect on capital adequacy and return on asset but significant positive effect on Bank ratio. Muhammad Rizwan Ullah, Ahsan Ali et.al (2016) has opinion that mergers and acquisition has some benefits in terms of synergy to banking sector. SalujaRajni, Sharma Sheetal, Dr. Lal Roshan (2012) has conclude in his research by application of camel rating that parameters such as capital adequacy , asset quality, management capability earning and liquidity is improved after merger. Singh, G.
and Gupta, S. (2015) concluded that post merger the productivity and profitability is improved of the bank.
2.1 Objectives of the Study:
To analyze the financial strength of SBI on the basis of key financial ratios.
3 RESEARCH METHODOLOGY
Research Design: For the purpose of the study exploratory research design has been adopted.
Data Collection: In the present study secondary data has been used. This data has been collected from various sources like Annual reports, official website of moneycontrol.com and various research papers, articles, etc.
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Period of Study: The study covers six years annual data to compare the pre and post- merger performance of the bank. Thus, pre-merger period of three years from 2014 to 2016 andpost-merger period of three years from 2018-2020 are taken into consideration. The year of merger is considered as base year and has been ignored.Tools of Analysis: For the purpose of analysis 7 hypothesis has been formulated and tested with the help of t test, mean and standard deviation.
3.1 Data Analysis and Interpretation
Table 1 Variable wise hypothesis
S. No Variable Null Hypothesis Alternate Hypothesis 1. Net Profit Margin NPMBM= NPMAM NPMBM ≠ NPMAM
2. Operating Profit Margin OPMBM=OPMAM OPMBM ≠ OPMAM
3. Return on Equity ROEBM = ROEAM ROEBM ≠ ROEAM
4. Return on Assets ROABM = ROAAM ROABM ≠ ROAAM
5 Current Ratio CRBM = CRAM CRBM ≠ CRAM
6. Quick Ratio QRBM = QRAM QRBM ≠ QRAM
7. Debt to Equity D/EBM = D/EAM D/EBM ≠ D/EAM
8. Asset Turnover Ratio ATRBM = ATRAM ATRBM ≠ ATRAM
Table 2 Pre- and Post-merger Financial Performance of SBI
Group Period N Mean Std Deviation P
Value
Profitability Ratios
Net Profit Margin Pre-merger 3 7.54 1.32
0.22 Post-merger 3 2.04 4.34
Operating Profit Margin Pre-merger 3 -7.58 2.90
0.02 Post-merger 3 -
31.49 3.65 Return on Equity Pre-merger 3 8.76 1.70
0.26 Post-merger 3 2.49 5.60
Return on Assets Pre-merger 3 0.58 0.14
0.22 Post-merger 3 0.13 0.30
Liquidity Ratios
Current Ratio Pre-merger 3 2.35 0.41
0.01 Post-merger 3 0.08 1.82
Quick Ratio Pre-merger 3 2.35 0.41
0.00 Post-merger 3 8.60 0.52
Debt Coverage Ratios
Debt to Equity Pre-merger 3 1.78 0.40
0.00 Post-merger 3 15.63 0.51
Efficiency Ratios
Asset Turnover Ratio Pre-merger 3 0.08 0.01
0.18 Post-merger 3 0.07 0.00
Source: Compiled for the Financial Statements retrieved from Banks and http://www.moneycontrol.com/stocksmarketsindia
H11: There is no significant difference in Net Profit Margin for pre-merger and post- merger.
From the above table it is evident that the mean of net profit margin during pre-merger is 7.54 and 2.04 during post-merger is and the P value is 0.22 which indicates that we fail to reject the null hypothesis at 5% significance level which implies that the means of net profit margin during pre and post-merger are equal.
H12: The is no significant difference in Operating Profit Margin equal for pre-merger and post-merger.
From the above table it is evident that the mean of Operating Profit Margin for during pre- merger is-7.58 and the mean during post-merger is -31.49 and the P value is 0.02 which indicates that we fail to accept the null hypothesis at 5% significance level which implies that the means of Operating Profit Margin during pre and post-merger are not equal.
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H13: There is no significant difference in Return on Equity of pre-merger and post- merger.From the above table it is evident that the mean of Return on Equity during pre-merger is 8.76 and the mean during post-merger is 2.49 and the P value is 0.26 which indicates that we fail to reject the null hypothesis at 5% significance level which implies that the means of Return on Equity during pre and post-merger are equal.
H14: There is no significant difference in Return on Asset of pre-merger and post- merger.
From the above table it is evident that the mean of Return on Asset during pre-merger is 0.58and the mean during post-merger is 0.13and the P value is 0.22 which indicates that we fail to reject the null hypothesis at 5% significance level which implies that the means of Return on Asset during pre and post-merger are equal.
H15: There is no significant difference in Current Ratio of pre-merger and post-merger From the above table it is evident that the mean for current ratio during pre-merger is 2.35 and the mean during post-merger is 0.08 and the P value is 0.01 which indicates that that we fail to accept the null hypothesis at 5% significance level which implies that the means of current ratio during pre and post-merger are not equal.
H16: There is no significant difference in Quick ratio of pre-merger and post-merger.
From the above table it is evident that the mean for quick ratio during pre-merger is 2.35 and the mean during post-merger is 8.60 and the P value is 0.00 which indicates that we fail to accept the null hypothesis at 5% significance level which implies that the means of quick ratio during pre and post-merger are not equal.
H17: There is no significant difference in Debt to Equity Ratio of pre-merger and post- merger.
From the above table it is evident that the mean for Debt to equity ratio during pre-merger is 1.78 and the mean during post-merger is 15.63 and the P value is 0.00 which indicates that we fail to accept the null hypothesis at 5% significance level which implies that the means of Debt to equity ratio during pre and post-merger are not equal.
H18: There is no significant difference in Asset Turnover Ratio is not equal for pre- merger and post-merger.
From the above table it is evident that the mean for Asset Turnover Ratio during pre-merger is 0.08 and the mean during post-merger is 0.07 and the P value is 0.18 which indicates that we fail to reject the null hypothesis at 5% significance level which implies that the means of Asset Turnover Ratio during pre and post-merger are equal.
4 FINDINGS OF THE STUDY:
Net Profit Margin during the pre and post-merger period i.e. the mean remains same indicating no improvement after consolidation of the bank.
Operating Profit Margin during the pre and post-merger period the mean is not same indicating some improvement after consolidation of the bank.
Return on Asset during pre and post-merger the mean remains same indicating no improvement after consolidation of the bank.
Return on Equity during pre and post-merger the mean remains same indicating no improvement after consolidation of the bank.
Current Ratio during the pre and post-merger period the mean is not same indicating some improvement after consolidation of the bank.
Quick Ratio during the pre and post-merger period the mean is not same indicating some improvement after consolidation of the bank.
Debt to Equity Ratio during the pre and post-merger period the mean is not same indicating some improvement after consolidation of the bank.
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Asset Turnover Ratio during the pre and post-merger period i.e. the mean remains same indicating no improvement after consolidation of the bank.
5 CONCLUSION
The study is about the Impact of Mergers and Acquisitions in the Indian Banking Sector for which the sample of State Bank of India has been analyzed to examine whether the merger of SBI with its Associates has led to a profitable situation or not. A comparison between pre and post-merger performance is done, with respect to Net Profit Margin, Return on Equity, Return on Asset and Asset Turnover Ratio, no significant improvement in the performance after the merger has been witnessed. While some ratios like Operating Profit Margin, Debt Equity Ratio, Current Ratio, and Quick Ratio reflects significant difference between pre and post-merger performance. Though are several economic and strategic advantage to the merged entity but, the new entity is also not free from challenges. It must gear up to face new challenges of future .
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Webliography
1. http://www.moneycontrol.com/stocksmarketsindia 2. www.sbi.co.in
3. www.rbi.org.in
4. www.moneycontrol.com
