Table 2 presents descriptive statistics for CEOs in banks. In Panel A, a bank CEO’s total compensation ranges from $0.38 to $23.26 million. In banks, 52.4% of CEO total compensation is paid out in the form of stock and options, with an average equity compensation of $2.12 million, while 31.5% is in the form of cash, with an average cash compensation of $1.27 million. On average, a positive stock return of 1% brings about an increase of $507,000 in the value of CEO stock and stock option portfolio, while a 0.01 increase in the standard deviation of stock returns corresponds to an increase of $126,000 in the value of CEO stock option portfolio. Mergers are infrequent capital events. The change in bank size is due primarily to internal asset growth, with the average dollar amount of non-megamerger internal growth equal to $16.68 billion and the average dollar amount of assets acquired in megamergers over the past three years equal to $1.03 billion. In addition, only 2.5% of bank CEOs are female. About 63.7% of CEOs serve as board chairs. The CEOs on average hold 1.2% of the shares outstanding in their banks. The variation in bank equity value over the prior three years is driven mainly by industry-wide stock return movements rather than by idiosyncratic stock price changes. The sample banks report an average return on assets of 2.5%. More than half of bank shares are held by institutional investors, with an average percentage of institutional stock holdings of 55.7%. The average bank board consists of nearly 13 directors, among whom 74.5% are independent directors. Panel B reports average CEO pay and pay sensitivity across sample years. There was an upward trend in CEO total compensation before 2000, which thereafter declined slightly. The rapid increase in CEO pay generally coincided with bankmerger waves.
In sum, although bank mergers are not per se problematic, lenient bankmerger oversight can expose consumers and the financial system to serious risks. Absent appropriate oversight, bank mergers often hurt consumers and increase systemic risks, without producing societal benefits. The cautionary evidence cited above suggests that regulators should more carefully scrutinize merger proposals—and reject or attach conditions to potentially harmful combinations. Yet the agencies’ recent track record indicates that they generally ignore the downsides of bank consolidation. Under their current laissez faire approach, the agencies deemphasize issues like financial stability, the convenience and needs of the community, and the future prospects of the institutions. Reviving these long-neglected factors is critical to protecting the public from the risks of unrestrained bank consolidation.
Proposals for bank mergers in rural markets often raise particularly serious antitrust issues. Typically, rural markets are more highly concentrated than urban markets and have relatively few competitors. Many rural markets are not attractive for new entry because of their small population and modest eco- nomic prospects. Thus, any adverse competitive effects resulting from a bankmerger are likely to persist. As in urban markets, however, parties to proposed bank mergers frequently argue that com- petition in rural markets is understated because the regulatory agencies and the Department of Justice in their analyses do not take into account the competi- tive influence of out-of-market banks and savings institutions.
Abstract: Commercial bankmerger and acquisition (M&A) transactions are especially informative for analyzing the impact of differing corporate governance structures on the balance of corporate control between managers and shareholders. We exploit these special characteristics to investigate the balance of control between top-tier managers and shareholders using data from bank M&A transactions over the period 1990-2004. Unlike research on non-financial firms, the impacts of independent directors, managerial share ownership, and independent blockholders on bankmerger purchase premiums in this environment are likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. Our model controls for risk characteristics of the target and the acquiring banks, the deal characteristics, and the economic environment. The results are robust. Our results are consistent with those found for non-financial firms, and are consistent with the hypothesis that independent directors could provide an important internal governance mechanism for protecting shareholders’ interests especially in large scale transactions such as mergers and takeovers. We also find results consistent with the conflict of interest argument, where top-tier managers tend to trade potential takeover gains in return for their own personal benefits, such as job security and other employment related perquisites. Our overall findings would support policies that promote independent outside directors on the board of commercial banking firms in order to provide protection for shareholders and investors at large.
The value of the target bank to the acquiring bank should reflect its present discounted value of future net cash flows. Thus, at a minimum, the bid price should be a combination of the stand-alone value of the net assets of the target bank and the net cash flows from higher- valued deposit insurance as a result of the proposed merger. Finance literature also suggests that in large transactions, such as mergers and acquisitions, the value of independent outside directors can be very important as internal governance mechanisms for protecting the interest of shareholders and help to mitigate shareholder/management agency problems. In addition, regulation could also play an important role in determining the number and type of bankmerger transactions. Prior to the Riegle-Neal Act banks were restricted by federal and state laws from expanding across state lines. We examine whether bankmerger prices were higher or lower as a result of these restrictions.
Consider savings banks first. We find that profitability is highest for merg- ers exhibiting above benchmark CE changes but below benchmark CE levels, i.e. group IV mergers. At the same time both net interest margins and concentration are highest for this group, too. Consequently, high profitability may be due to market power. We consider such a merger not a success and conclude that market power concerns are appropriate for savings banks that exhibit above benchmark CE changes. Our taxonomy of success on the basis of CE seems to avoid identifi- cation of such mergers as desirable. With respect to potential motives of merging we find little support that either scope or scale economies are realised in savings bank mergers. The share of fee to interest income and unit costs are not the most favourable ones for our success group I. However, our productivity proxy indicate that successful mergers are those with high labour productivity. Conse- quently, savings bank mergers in Germany might indeed be a vehicle to reduce the work force under comparably rigid labour laws. This result is akin to findings of Lang and Welzel (1999) who report that only those mergers yield above average efficiency growth which are accompanied by closure of branches.
Problem Statements: Economic liberalization and privatization policy adopted by the government has open up the opportunity and threat to the banking sectors. As a result, we see a rapid growth in the numbers of commercial banks in the country and of course, the rapid increment in numbers of commercial banks in small country like Nepal has created tough competition among bankers. While operating after merger there may be different kind of changes in the position of organization. Change may take place as regard net worth, deposit collection, investment, income generation, expenditure etc. In this research work it would be relevant to analyze the direction as well as magnitude of such change that has taken place during the study period. This research work attempts to know whether the change pattern or direction of changes as regards various trends of the concerned banks is beneficial to the shareholders and to the economy or not. This study will try to seek the answers relating to the merger of banks and the consequences to the shareholders return and to the economy as a whole. Do merger really enhance the shareholders’ value?
Our detailed dataset allows us to address two important lacunae of the existing literature. First, the empirical literature on deposit rate dynamics around bank mergers has so far ignored the rigidity of deposit rates. As documented in earlier studies (Hannan and Berger, 1991; and Neumark and Sharpe, 1992) deposit rates adjust sluggishly to changes in market interest rates. Deposit rate rigidity is relevant for the analysis of the changes of deposit rates around bank mergers because no immediate change in deposit rates is observed for a significant number of observations. In addition to a possibly slow adjustment to the change in market structure, which must be modelled with a dynamic model, the data present the additional problem of rigidity: that is, for the vast majority of observations, the price is the same as for the period before. In econometric terms this censoring presents large potential problems. It has long been known that in the presence of censoring, OLS regression results can be inconsistent and biased (see a standard text such as Wooldridge, 2002). We incorporate the rigidity of deposit rates in the empirical analysis by explicitly integrating the censoring process into the empirical estimation. Our focus is on modelling bank pricing behaviour by accounting for both the probability of a deposit rate change and the de facto change of the deposit rates in a joint framework. The design is structured to estimate bank merger’s impact on the deposit rate setting mechanism.
Few mergers have taken there after mainly in the public sector primarily to protect the interest of depositors of weak private banks like early 1990’s Karur Central Bank in Kerala was merged with Bank of India, Hindustan commercial Bank faced the moratorium in 1988 and was merged with PNB, Bank of Tharur in Tamil Nadu in the late 1980s was later merged with Indian Bank, Nedungadi Bank in 2002, which was later merged with Punjab National Bank. However the Times Bankmerger with HDFC Bank a few years back and bank of Madura with ICICI Bank portend a new wave of consolidation in the banking industry for mutual benefit. The merger in these cases sought to attain critical size. Another example of merger is merger of Global trust Bank. In a moratorium, government imposes a freeze on the bank’s liabilities so that bank is not able to grant any loan or advances, incur ay liability, make any investment or disburse any amount. The purpose of the paper is to examine the mergers and acquisitions in Indian Banking sector and know the rationale behind mergers. The paper is based on secondary data which is drawn from various journals and magazines, newspaper articles, websites, annual reports of banks and books.
In many countries, proposals for mergers and acquisition are reviewed to check its impacts on the industry. The mergers and acquisition may be restricted if the same is threatening to the competition in local market as some times M&A results in falling the degree of competition below to a certain specified level by the country. Certain rules are defined to deal with M&A and bodies are assigned the task to review and approve M&A e.g. Fed. Along with some other organization, in U.S approves the mergers and acquisition. Furthermore, a review on competitive aspects of all proposed bankmerger is provided by the antitrust division of the department of justice and is authorized to sue merger proposal that will have significant adverse effect on competition. The US department of justice has defined three threshold levels for HHI to find out the market structure in an industry. These are: (i) A HHI index below 0.1 (or 1,000) show an unconcentrated index. (ii) A HHI index between 0.1 to 0.18 (or 1,000 to 1,800) indicates moderate concentration. (iii) A HHI index above 0.18 (above 1,800) indicates high concentration.
The empirical survey of various empirical studies on mergers and acquisitions in the banking industry will be presented and discussed in this section. The wave of M&A has expanded scope for growth, particularly for the Indian banking sector. Walleghem and Willis (1998) measured the cost efficiency of a merger of 19 community banks in the United States. They found that cost efficiency increased in all cases. Garden and Ralston (1999) studied 16 Australian bankmerger cases and observed that most of the mergers did not boost efficiency. Only 3 banks reported gains in efficiency. Avkiran (2000) attempted to measure efficiency gains after a merger by applying DEA analysis. He used a small sample of four public sector merger cases. The study found that the efficiency of the acquirer banks more or less remained the same after merger. Liu and Tripe (2002) studied 6 New Zealand bankmerger cases and observed that 5 banks showed post-merger efficiency gains. Kim (2004) investigated pre- and post-merger branch efficiency of Canadian banks. They found that almost all merger cases led to efficiency gains. There are many studies which measure merger gains in Asian countries, such as Sufian (2004) which gauged post-merger efficiency in Malaysian commercial banks and found gains in efficiency and performance of banks. Randhawa and Lim (2005) measured the post-merger efficiency in 7 Hong-Kong and Singaporean banks. They reported that large banks benefited more from the merger in efficiency than small banks. Gourlay and Ravishankar (2006) measured merger gains in the Indian banking system. They reported a significant impact of merging on the efficiency of the merged banks. Joshua (2011) measured the postmerger efficiency gains in three Nigerian banks and observed that merger brought efficiency gains in all cases. Rasiah et al. (2014) measured the pre- and post-merger efficiency of Malaysian domestic banks from 2005 to 2009 and found that efficiency grew during the first year after the merger.
While considering the case of Nadungadi Bank and Punjab National Bankmerger, regarding Credit - Deposit Ratio, Investment- Deposit Ratio, Priority sector advance as % to total advance, Interest income as a % of total income, Operating profit as % to average working funds, Capita Adequacy Ratio , Establishment expenses as a % of total expenses, Other operating expenses as a % of total expenses, Spread as a % to Assets , null hypotheses are rejected which lead us to conclude that there are significant differences between pre and post merger above mentioned financial indicators.
For the input and output variables, several variables are chosen. First, total deposit is the sum of demand deposits, savings, time deposits, certificates of deposits, and deposits from other banks. Second, personnel and administration expenses include salaries and wages. It also consists of administrative expense include rent and promotions. Third, interest expense and commissions consist of all the expenses paid in the form of bank interest expense in Rupiah and foreign currencies. It includes the provision of paid commissions and bank in the form of commissions or provision of loans. Fourth, total credit represents loans provided by banks to borrowers. It is either related parties or parties that are not associated with the bank in Rupiah or foreign currency. Fifth, interest income and commissions are the total income of the bank in the form of all the interest in Rupiah and foreign currencies in its operations. It also includes the commission and provision income received on the loan.
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.
restrictions would promote competition and reduce market power stemming from barriers to entry (e.g. Flannery 1984, Evanoff and Fortier 1988). Consolidated banks also can operate more efficiently through their ability to achieve scale economies associated with better portfolio diversification, scale related economies of scope in product delivery, and lower costs (e.g. Calomiris 2000, Calomiris and Karceski 2000). For the banking system as a whole, an increase in interstate mergers and acquisitions improves average bank performance through better “bank manager discipline” and “survival of the fitness” effects (Jayaratne and Strahan 1996, Hubbard and Palia 1995).
From the above analysis it is clear that after the merger we can see that in various financial parameter of the bank performance have improved in both cases and the success of merger is dependent upon synergy gains created after the merger and overall performance of bank, the financial performance of both the Banks i.e., Bank of Baroda and ICICI banks have been improved after the merger and was affected positively, the reaction comes out in terms of Gross Profit, Net Profit Margin , Return on Equity and Return on Capital Employed. Finally the Indian Banking Sector has used Merger and Acquisitions as a tool to expand and global recognition. Sick bank survived after merger, enhanced branch network, rural reach, increase market share and improve infrastructure all achieved through Merger and Acquisitions.
Given these policy trade-offs, there is no straightforward way to organise the merger review process. If for example one requires that merger operations are cleared by both the antitrust authority and the prudential regulator, none of the simple merger types will pass the review process. But this implies that potentially large gains, for example in growth due to reduced interest rates, are foregone. If on the other hand one allows that mergers take place if clearance is obtained by either the antitrust authority or the prudential regulator, intraregional mergers will present their case for the prudential regulatory and obtain approval, while interregional merger will appeal to the antitrust regulator, and also obtain approval. But this implies that potentially large costs are inflicted upon the economy. Hence, the optimal solution to organise merger review in the banking industry is unlikely to be either a Sah-Stiglitz hierarchy, or polyarchy. Instead, a one stop shop principle, where one authority reviews the merger and decides, then is more appropriate.
Prior to 1999, the amalgamations of banks were primarily triggered by the weak financials of the bank being merged, whereas in the post-1999 period, there have also been mergers between healthy banks, driven by the business and commercial considerations. Recently the process of M&As in the Indian banking sector is generally market driven. As given in the policies and objective of mergers, most of the mergers have taken place voluntarily for strategic purposes. The Reserve Bank of India has been encouraging the consolidation process for the small banks that are facing difficulty to compete with large banks which enjoy enormous economies of scale and scope. Most of the amalgamations of private sector banks in the post nationalization period were induced by the Reserve Bank in the larger public interest, under Section 45 of the Act. In all these cases, the weak or financially distressed banks were amalgamated with the healthy banks.
transaction. Antoniou et al. (2005) find that cash acquirers continue to achieve positive significant abnormal returns in the three years following the merger. The findings of Abhyankar et al. (2005) support cash over stock financing. In this dissertation, however, we consider the possibility of a combination of cash and stocks in addition to cash-only and stock-only methods of payment. Consequently, the method of payment here is not represented by a dummy variable, but by the percentage of cash used in the transaction. The second non-efficiency variable included in our regression model is the relative size of the target. James and Wier (1987) find that a merger between equals is positively related to the acquirer’s returns. Delong (1999) finds that abnormal returns due to a merger announcement increase in relative size of target to bidder. We argue in this dissertation that the relative size of the target to bidder plays an important role in manipulating the market reaction to the merger announcement. Again, this result can be explained by the expected efficiency that the target can pass to the acquirer (e.g., if an inefficient bank acquires an efficient bank of the same size, then we can argue that the target will pass efficiency to the combined firm, especially if it has a meaningful share in operating the combined bank’s operations ( see Rhodes et al., 2004).
After doing the financial analysis it is concluded that averages of all the ratios showed the downward trend except infection ratio which is just opposite the recent study done by Hussain, M., & Mubeen, M. (2018). Averages of ROE and ROA showed negative values after merger. By taking averages it’s clear that banks average rate of lending increased which is a good sign for the bank but banks average rate of borrowing also increased which shows bad effects due to increase in both ratio the spread is low after merger. The infection ratio showed an upward trend after merger. Provisions to classified advances showed a downward trend which shows a decline in provision made against non-performing loans. Admin to deposit ratio increased after the merger because management was unable to control its admin expenses against its deposits. CRR declined after merger which is red signal for bank and forces bank to meet SBP regulations and make CRR Up to 10% of its time and demand liabilities. So, it is concluded that merger is not the solution for all the problems as different cultures of the organization can affect negatively.