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Impact of mergers on Indian Banking Sector: A comparative study of Public

and Private Sector merged Banks

by Dr. (Smt). A.N.Tamragundi [a]

Devarajappa S

[b]

Abstract

This paper examines the impact of mergers on performance of selected commercial banks

in India. The impact of mergers on performance of the banks has been evaluated from three

prospective i) Physical Performance of merged banks, ii) Financial Performance of Merged

Banks and iii) Share price performance. For this purpose 6 Indian commercial banks merged

during the period 2004 to 2008 were selected out of which, three are merger of public sector

banks with private sector banks and three are merger of private banks with private banks and

data have been collected from CMIE data base at IIM, Bangalore and Bank’s annual reports.

Statistical tool like, Mean, Standard deviation and T-Test have been used for analyzing the

performance and testing the hypotheses. Finally, the study concludes that, Merger is a useful

strategy, through this Banks can expand their operations, serve larger customer base, increases

profitability, liquidity and efficiency but the overall growth and financial illness of the bank can’t

be solved from mergers.

Keywords: Mergers, Commercial Banks, Performance, CMIE

[a]

Dr. (Smt). A.N.Tamragundi,

Associate Professor,

P.G. Department of Commerce,

Karnatak University,

Dharwad,

Karnataka State, India.

[b] Devarajappa S,

Assistant Professor,

Department of Commerce,

University College of Arts,

Tumkur University, Tumkur,

Karnataka State, India.

I. Introduction

Bank in general terminology is referred to as a financial institute or a corporation which

is authorized by the state or central government to deal with money by accepting deposits, giving

out loan and investing in securities. The main role of banks is the growth of economy by

providing funds for investment. In recent times banking sector has been undergoing a lot of

changes in terms of regulations and effects of globalization. These Changes have affected this

sector both structurally and strategically. With the changing Environment, many different

strategies have been adopted by this sector in order to remain efficient and to surge ahead in the

global arena. One such profitable strategy is the process of consolidation of the banks. There are

several ways to consolidate the banking industry; the most common adopted by banks is merger.

Merger of two weaker banks or merger of one healthy bank with one weak bank can be treated as

the faster and less costly way to improve profitability then spurring internal growth (Franz H

Khan 2007). The main motive behind the merger and acquisition in the banking industry is to

achieve economies of scale and scope. Mergers also help in the diversification of the products,

which help to reduce risk.



The Indian banking sector can be divided into two eras, the pre liberalization era and the

post liberalization era. In the pre liberalization era, Government of India nationalized 14 banks as

19 July 1965 and later on 6 more commercial banks were nationalized as 15 April 1980. In the

year 1993 government merged the New Banks of India and Punjab National banks and this was

the only merged between nationalized banks after that the number of Nationalized Banks reduces

from 20 to 19. In the post liberalization regime, government had initiated the policy of

liberalization and licenses were issued to the private banks which lead to the growth of Indian

banking sector. The Indian banking industry has shown a sign of improvement in performance

and efficiency after the global crises in 2008-2009. The Indian banking industry having far better

position now than it was at the time of the crises. Government has taken various initiatives to

strengthen the financial system. The economic recovery gained strength on the bank of variety of

monetary policy initiatives taken by the RBI.

The Government of India has adopted the route of mergers among others with a view to

restructure the banking system. Many small and weak banks have been merged with other banks

mainly have to protect the interests of depositors. These may be classified as forced mergers.

When a specific bank shows serious symptoms of sickness such as huge NPAs, erosion in net

worth or substantial decline in capital adequacy ratio, RBI imposes moratorium under section

45(1) of Banking Regulation Act 1949 for a specific period on the activities of sick bank. In the

moratorium period RBI identifies strong banks and asks that bank to prepare a scheme of merger.

In the merger scheme, normally the acquiring takes up all assets and liabilities of the weak bank

and ensures payment to all depositors in case they wish to withdraw their claims.

II. The Brief Overview of Indian Banking Sectors

Table-1

Structure of Indian Banking Sector (As on 31 March 2013)

S

No Bank Group

Numbers Amount Rs in Million

No of

Banks

Branch

es

No of

Employees

Investme

nt Advances Deposits

I Public Sector Banks 26 75,779 801659 17591058 44727740 57456972

Market Share (%)

82.27 73.08 67.31 76.07 77.34

a. State Banks & its

Associates 6 21,301 293965 47,29,979

1,37,92,2

40

1,61,84,4

49

b. Nationalized Banks 20 54,478 507694

1,28,61,0

79

3,09,35,5

00

4,12,72,5

23

II Private Sector Banks 20 16,001 26991 6261063 11432486

13,958,35

5

Market Share (%)

17.37 2.46 23.96 19.44 18.79

III Foreign Banks in India 43 334 25384 2280631 2636799 2879997

Market Share (%)

0.36 2.31 8.73 4.48 3.88

IV Total 89 92,114 1096984 26132752 58797025 74295324

Source: Calculated from the statistical tables relating to banks in India, RBI, 2012-13

*Note: Excluded Regional Rural Banks



In India, the Reserve Bank of India acts as a central bank of the country. Banking system

has a wide mix, comprising of scheduled and non-scheduled banks, co-operative sector banks,

post office savings banks, foreign and exchange banks. Table 1.1 provides a brief detail of Indian

commercial banks on the end of March 2013. As on March 2013, the number of commercial is

89 comprises 26 PSBs, 20 Private sector banks and 43foreign banks. It has been observed that

the market share of PSBs in terms of Investment, Advances and Deposits is more than 70%.

Therefore the public sector banks are the biggest player in the Indian Banking System and they

accounts for more than 82% of Branches of commercial banks in India. As on March 2013,

Private sectors banks accounts for nearly 17.37% while foreign banks constitutes less than 1

percent (i.e. 0.36%) and their Investment is near to 9 percent.

III. Background of M&As in Indian Banking Industry:

The banking system of India was started in 1770 and the first bank was the Indian bank

knows as the bank of Hindustan. Later on, some more banks like the bank of Bombay-1840, the

bank of Madras-1843 and the bank of culcutta-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 partially nationalized on July 1955 and was named as the state bank of

India along with its 8 associate banks(at 7%). Later on, the state bank of Bikaner and the state

bank of Jaipur merged and formed the state bank of Bikaner and Jaipur.

Improvement of operational and distribution efficiency of commercial banks has always

been issue for discussion in the Indian policy background and Government of India in

consultation with Reserve Bank of India (RBI) have, over the years, appointed several

committees to suggest structural changes towards this objectives. Some important committees

among these are The Banking commission-1972 and 1976, and committee for functioning of

public sector Banks-1978. All these committees have emphasized on restructuring of the Indian

banking system with an aim to improve the credit delivery and also recommended in favour of

having three to four large banks at the all Indian level and remaining at regional level. However,

the thrust on consolidation has emerged with the Narasimham committee (1991) emphasizing on

convergence and consolidation to make the size of Indian commercial banks comparable with

those of globally active banks. Further, the second Narasimham committee (1998) had

suggested mergers among strong banks/ financial institutions would make for greater economic

and commercial sense and would be a case where the whole is greater than the sum of its part

and have a “force multiplier effect”.



IV. Literature Review

In today’s liberalized economy the corporate has experienced a major restructuring

through M&A route. Mergers and Acquisitions have been considered as a popular strategy for

Growth and Expansion. Empirical studies in this field are few and far in number. Some attempts

have been made in by scholars in the area of mergers which are reviewed and organized into

three sections are as follows:

Section-I: Reviews the post-merger physical performance evaluation of commercial

banks in India.

Section-II: Reviews the literature relates post-merger financial performance of Indian

commercial banks.

Section-III: studies the literature related to impact of mergers on shareholders wealth;

the summary review of each sections is given below Tables-2 & 3

Table-2

A summary of studies on financial performance of Merged Banks

Contributors Common Findings

Dimikris & Ketemina(2006),

Santos(2006),Nazir & Alam(2010), Mohamad

Akbar et all (2012)

Technical efficiency and productivity

have been increased but there has

been decline in the operating

efficiency after bank reforms

Healy et. all, Ghosh, Kruse et. all, Weston and

Mansigka, Vijay & Saxena, Altunbas &

Marques, Mantravadi and Reddy (2007)

Operating performance (i.e, cash

inflow) of Merging firms improved

significantly following acquisitions

Muhammad (2010) M&A fails improve the financial

performance of bank

Antony Akhil (2011), Pramod & Reddy, Tambi

(2005), Bhide et. al (2002), Anup Agraval

(1999), Beena P L (2000), Leepsa et al (2009),

Saplev V(2000)

There is a significant improvement in

the profitability of merging firm

Vardhan Pawaskar (2001), Kumar (2009), Surjit

(2002), Vanitha & Selvan (2007)

There was no increase in the post

merger profitability

Nedunchezhin and Premalatha (2011),

Sathye(2003), Ataullah et al (2006)

Public sector banks efficiency score is

more as compared to Private sector

banks in the post merger period as per

DEA Analysis

Singh and Kumar (1994), Ravi Shankar and Rao The rehabilitation of sick company by

merging with the healthy company is

the most effective way of their

rehabilitation



Table-3

A summary of studies on Shareholders wealth of Merged banks

Contributors Common findings

M Jayadev and Rudra

Sensarma

In case of forced merger neither the bidder nor target banks

shareholders have benefited

In case of voluntary merger the bidder bank shareholders

gained more than those of target bank

Gerard T O & Michael

S P(2005)

The acquiring banks dividend are economically significant

determinants of merged banks abnormal stock return

performance

Dr. K Das et al (2009)1 An Average wealth not significantly effect by Mergers and

Acquisition

Deo and Shah (2011),

Honston et al (2001)

The merger announcements have no significant impact on the

bidder portfolio. However M&A create significant positive

abnormal return for target shareholders

The issue of impact of mergers on the performance of banks has been well studied in the

literature. Most of the studies examined found that mergers and acquisition add significantly to

the profitability and positive impact on efficiency of banking sector except few Vardhan

Pawaskar (2001), Kumar (2009), Surjit (2002), Vanitha & Selvan (2007) and Muhammad (2010)

have contrary views.

V. Statement of the Problem

M & A in the industrial and service sector have brought new life to style of doing

business in today’s world. Globalization, technological changes, Market de-regulation &

liberasition have driven the M & As were across the world. The M & A deals are common not

only in the developed countries but also have become more apparent in the developing countries.

In the pre-liberasition period in India the phenomenon recorded and upsurge in the wake of

liberasition measures resulting into lessening the government controls, regulations and

restrictions where upon the corporate houses got freedom to expand, diversify modernize the

operation by reporting to mergers, takeovers etc with increasing competition and the economy

heading towards globalization M & A are expects to occur at a much larger scale than any time

in the past and have played a major role in achieving competitive edge in the dynamic market

environment.

The service industry is not far behind. According to the Reserve Bank of Indi’s Annual

Report 2007-2008, the year witnessed maximum mergers in financial services (15.70 per cent)

and the acquisition activity was also the largest (17.90 per cent) in the sector. It was due to

impact of liberalization in service sector. Bank Mergers and Acquisitions are not a new

phenomenon for Indian banking industry. Since 1961 there have been as many as 84



amalgamations between banks in India, out of which 46 took place before nationalization of

banks in 1969 while the remaining 38 occurred in post-liberalization period. Initially, bank

Mergers and Acquisitions were viewed as a regulatory mandate from the Reserve Bank of India

wherein the central bank forced a profitable bank to embrace the sick bank to revitalize the latter

(David, C. Cheng, 1989). In the pre period of 1999 the amalgamation of banks was primarily

triggered by the weak financial of the bank being merged, whereas in the post period of 1999 is

there have also been mergers between healthy banks driven by business and commercial

consideration. The government also proposed to recapitalize the weak banks (Sujit Sikidar 1996).

The recapitalized of weak banks has not yielded the expected results in the past and hence should

be linked to be a viable and time bound restructuring plan. With this backdrop, in the present

study, the researcher has made an attempt to analyze the performance evaluation of Mergers and

Acquisitions of scheduled commercial banks in India. Hence, the researcher wants to know the

answers for the following research questions:

1. What is the physical performance of select scheduled commercial bank in India during

the pre and post- period of Mergers and Acquisitions?

2. What is the financial position of select scheduled commercial bank in India during the pre

and post- period of Mergers and Acquisitions?

3. What is the benefit to the shareholders of select scheduled commercial bank in India after

Mergers and Acquisition?

VI. Need for the Study:

Mergers and acquisitions are very older strategies. The reasons may be different from

time to time and may vary from company to company. The tasks of combinations have become

more convenient after the new economic policy (liberalization policy in 1991). There have been

a plethora of studies in the area of mergers and acquisitions, but most of them focused on

manufacturing sector. Further very few studies have attempted to analyze the M&A activity in

the service sector. Furthermore literature available on M&A vis-a-vis banking sector has been

scanty. Hence, there is a need for a study of the present nature.

VII. Objectives of the study:

The present study entitled “Impact of Mergers on Performance Indian Banking Sector: A

Comparative Study of Public and Private Sector Merged Banks” set forth the following

objectives:

1) To study the impact of Mergers on Physical Performance of Public and Private Merged

Banks.

2) To analyze the impact of Mergers on Financial Performance of Public and Private

Merged Banks.

3) To examine the impact of mergers on share price performance of the Public and Private

merged Banks.



VIII. Scope of the Study:

The study focused on various issues relating to mergers and acquisitions in Indian

Banking Sector. It covers the different aspects like- legal implications for M&As, trends and

progress of M&As, physical, financial performance and share price performance of selected

merged banks before and after the merger.

IX. Research Hypothesis:

Hypothesis-1:

This hypothesis is focuses on Physical performance of Merged Banks. The dimensions of

physical performance of Banks considered for testing include Number of branches, Number of

employees and Changes in growth of the Deposits, Advances.

Hence the statement of hypothesis is as under:

H0: There is no significant difference between the physical performance of Indian commercial

Banks before and after the merger.

H1: There is significant difference between the physical performance of Indian commercial


Hypothesis-2:

This hypothesis deals with financial performance of the Banks.

Hence the statement of hypothesis is as under:

H0: There is no significant difference between the financial performance of Indian commercial


H1: There is significant difference between the financial performance of Indian commercial


The above hypothesis is studied by using the CAMEL Model and the same is sub divided into

the following five hypotheses:

There is no significant difference between pre and post merger capital adequacy of the

merged banks

There is no significant difference between pre and post merger assets quality of the

merged banks

There is no significant difference between pre and post merger management efficiency of

the merged banks

There is no significant difference between pre and post merger earnings quality of the

merged banks

There is no significant difference between pre and post merger liquidity of the merged

banks



Hypothesis-3:

This hypothesis focuses on Impact of Mergers on short term share price performance of merged

banks. The dimension used for analysis is Abnormal Return (AR) and Cumulative Abnormal

Return (CAR)

H0: Mergers announcement do not have any significant impact on wealth of Merged Bank

Shareholders.

H1: Mergers announcement do not have any significant impact on wealth of Merged Bank

Shareholders.

X. Research Methodology:

a. Sample Descriptions:

As the complete sources of list of all the banks is not available, the data for this study

have been selected based on the convenience sampling method, among the banks list with RBI

Report. In the list of commercial banks only six scheduled commercial banks merged during the

period 2004 to 2008 were selected. During the course of study two major categories of mergers

were identified and accordingly six banks are divided into three Private and Public and

remaining three are Private and Private and the same is presented in Table-1.4.

Table-4

The list of Selected Merged Banks

S. No Target Bank Acquiring Bank Category Year

1 South Gujarat Local Area Bank Ltd. Bank of Baroda Pr-P 2004

2 Global Trust Bank Ltd. Oriental Bank of Commerce Pr-P 2004

3 Bharat Overseas Bank Ltd. Indian Overseas Bank Pr-P 2007

4 Ganesh Bank of Kurundwad Ltd. Federal Bank Ltd. Pr-Pr 2006

5 Sangli Bank Ltd. ICICI Bank Ltd. Pr-Pr 2007

6 Centurion Bank of Punjab Ltd. HDFC Bank Ltd. Pr-Pr 2008

Note: P=Public sector Pr=Private Sectors

In order to evaluate post merger financial performance of the merging banks in the long

run, at least 10 years financial data is required i.e., five years pre merger period and five years

post merger period. Only domestic mergers taking place were selected. Cross-border mergers,

i.e., in which either bidder or the target was based outside India were dropped. This was done to

ensure homogeneity of the economic and industrial environment so that generalizability of the

results could be achieved for Indian Mergers.

b. Data Collection:

The data variable required for the study and respective sources are discussed below;

Financial statements and Accounting ratios

For the purpose of analyzing the impact of mergers on physical performance and

financial performance of selected commercial banks in India, the various financial variables and

accounting ratios have been used. For this purpose the data have been obtained from CMIE

database, Capitaline database, RBI reports and Bank’s annual reports.



Share price performance in short term

Another important objective of the research is, to examine the impact of merger on short

term performance of share price by calculating abnormal return (AR) and Cumulative Abnormal

return (CAR). AR and CAR have been determined as per Event Study methodology. For this

purpose the required data is collected from yahoofinance.com

c. Data Analyses Method:

The statistical tool like- Mean, Standard deviation, simple and multiple correlation, Regression,

T-test, one way and two way ANOVA are used to study the trends & progress of M&A,

Physical and financial performance and share price performance of the selected merged banks

before and after merger. The year of merger was considered as a base year and denoted as 0 and

it is not considered for analysis.

XI. Analysis and Interpretation

Comparative Analysis Of Physical Performance Of Public And Private Sectors Merged

Bank:

From the table 5 & 6, it can be say that, there is a perfect positive correlation between

explanatory variable (deposits, advances, business, number of branches and number of

employees) and predictor of profit of both public and private sector merged banks. As per the

Analysis of Variance (see table 5.26), the merger of public sector banks with private sector banks

are highly significant (F<0.001<0.05) and the merger of private sectors banks with private sector

banks is insignificant (F>1.687>0.05). This is indicates that, the physical performance of public

sector merged banks is well after the merger while the private sector banks not performed well

after the merger.

Table-5: Regression Analysis of select public and private merged banks

Sector* Multiple R R Square Adjusted R Square Standard Error

Public sector 0.986 0.973 0.945 220.733

Private sector 1.000 0.999 0.998 223.834

Source: CMIE Database, Bank’s Annual Reports

Table-6: ANOVA of select public and private merged banks

Sector Df SS MS F** Significance F*

Public Sector

Regression 5 8644935.179 1728987.036 35.486 0.001

Residual 5 243614.549 48722.910

Total 10 8888549.728

Private sector

Regression 5 251969652.751 50393930.550 1005.833 1.687

Residual 5 250508.482 50101.696

Total 10 252220161.232

Source: Source: CMIE Database, Bank’s Annual Reports

*predictor variable- profit at 5% level of significance

**explanatory variable-deposits, advances, business, no. of branches and no. of employees



Comparative Analysis of Financial Performance of Public and Private sectors merged

Banks

Table-7

Statistical summary of financial performance of Public sector and Private Sector Banks in India

Parameters Ratios Merger N df

PUBLIC SECTOR BANKS PRIVATE SECTOR BANKS

Mean SD t Stat P(T<=t)

two-tail Mean SD t Stat

P(T<=t)

two-tail

CA

PIT

AL

AD

EQ

UA

CY

CAR PRE 5

8 12.68 0.85 -

0.704** 0.501

11.91 0.84 -

12.649* 0.000

POST 5 12.98 0.37 17.95 0.66

DER PRE 5

8 16.87 1.63

1.879** 0.097 12.45 0.93

12.980* 0.000 POST 5 15.00 1.50 6.71 0.34

AAR PRE 5

8 45.87 4.19

-6.831* 0.000 51.32 2.66

-4.479* 0.002 POST 5 60.63 2.41 57.47 1.54

GS/TI PRE 5

8 32.87 0.85

-4.618* 0.002 72.33 4.65

1.522** 0.166 POST 5 36.47 1.52 68.09 4.14

AS

SE

TS

QU

AL

ITY

NNAP /

NA

PRE 5 8

2.78 1.22 3.211* 0.012

2.14 1.54 2.120** 0.067

POST 5 1.00 0.21 0.67 0.18

TI / TA PRE 5

8 39.11 1.44

13.340* 0.000 34.69 3.00

3.756* 0.006 POST 5 26.01 1.66 29.35 1.06

MA

NA

GE

ME

NT

EF

FIC

IEN

CY

TA / TD PRE 5

8 114.61 1.77

-3.322* 0.011 141.18 11.07 -

0.973** 0.359

POST 5 118.11 1.55 146.07 1.92

PPE PRE 5

8 0.24 0.09

-4.052* 0.004 0.66 0.08

-2.640* 0.030 POST 5 0.47 0.09 0.88 0.16

PPE PRE 5

8 26.17 9.05

-4.810* 0.001 67.32 4.25 -

3.181** 0.013

POST 5 87.60 27.08 78.82 6.88

RONW PRE 5

8 22.46 3.22

5.890* 0.000 19.52 2.52

4.928* 0.001 POST 5 12.36 2.08 12.56 1.90

EA

RN

ING

S

QU

AL

ITY

OP / WF PRE 5

8 1.57 0.39

2.824* 0.022 1.75 0.28

-3.520* 0.008 POST 5 1.06 0.12 2.42 0.32

NP / WF PRE 5

8 1.07 0.23

2.879* 0.021 1.38 0.15

-2.659* 0.029 POST 5 0.74 0.12 1.69 0.21

PAT

Growth

PRE 5 8

130.93 28.64 0.713** 0.496

156.39 54.11 1.371** 0.208

POST 5 117.81 29.50 123.02 5.99

LIQ

UID

IDT

Y LA / TD

PRE 5 8

45.88 2.72 6.302* 0.000

46.48 3.02 3.208* 0.012

POST 5 37.38 1.31 40.57 2.80

LA / TA PRE 5

8 40.06 2.72

6.539* 0.000 33.47 0.72

4.916* 0.001 POST 5 31.67 0.91 28.04 2.36

GS / TA PRE 5

8 12.50 2.01

2.928* 0.019 24.92 0.84

8.932* 0.000 POST 5 9.64 0.84 19.77 0.98

Source: CMIE Database, Bank’s annual Reports *Significant, **Not Significant at 5 percent level



From the Table-7, the following observation can be made;

Capital Adequacy:

Capital Adequacy Ratio (CAR) and Debt equity ratio (DER) of public sector banks got

insignificant t value while private sector bank’s CAR and DER got significant t value. Therefore,

it can conclude paying capacity and financial health of private sector bank has been increased

after the merger but paying capacity public sector banks is more or less during pre and post-

merger.

Assets quality:

Mean Net NPA ratio of both the sector is decreased after the merger but NPA ratio of public

sector banks got significant t value while private sector banks got t value insignificant t value. It

shows that, assets quality of public sector banks increased after the merger while private sector

banks efficiency is more or less same during pre and post merger period.

Management Efficiency:

All management efficiency ratios of public sector banks got significant t value while private

sector bank’s efficiency ratios also go significant t value except the TA to TD ratio. Therefore it

can conclude that, the overall productivity and efficiency of both the sector improved during

post-merger.

Liquidation:

Liquidity ratios of both the sector are deceased after the merger, this is positive sign for the bank

and all the ratios got significant t value. Hence it is concluded that efficiency of both sector

banks increased after the merger.

Performance of Public Sector and Private Sector Banks

To evaluate market reaction to public sector and private sector bank’s activities acquiring other

private limited banks, the AAR and CAAR for 20 days surrounding the event day (41 days event

period) based on market adjusted model are given in table -8.

Public Sector Banks

According to table 7.7, during pre-announcement period, the risk adjusted average abnormal

return (AAR) is negative for 14 days out of 20 days, n which 8 days (-20, -19, -18, -11, -10, -8, -

4 &-3) AAR is negative and significant at 1 percent level. During period after the announcement,

the AAR is negative on +1 to +3, +5, +6, +8, +9 & +12 and significant at 1 percent level. On the

day of event the AAR is negative and significant at 1 percent level. The CAAR is negative

during the whole window period. Significantly, the AAR is positive only for few days.

The above picture implies that, the market has anticipated the merger events in public sector

banks and considered the merger activity as unfavorable, in turn destructing the shareholders

wealth.



Private Sector Banks

According to table 8, AAR of public sector bank is positive for 21 days out of 41 days

window period. During pre announcement period AAR is positive for 11 days out of 20 days, in

which AAR is significant at 1 percent level on day -20 (AAR=0.0161, t=6.05), -19

(AAR=0.0166, t=6.24), -18 (AAR=0.0177, 6.67) -16 (AAR=0.0129, t=4.84) -11 (AAR=0.106 ,

t=3.9745) -8 (AAR=0.0293, t=11.009), -3 (AAR=0.0071, t=2.68), -2 (AAR=0.0158, t=5.922).

Though the significant negative AAR in some days of pre announcement period, it can

be said that, market has anticipated the merger activity and considered the activity as favorable.

On the day of event the AAR is also positive and significant at 1 percent level (AAR=0.0083,

t=3.123), this is further supported the favorable positive reaction of the market to private sector

banks.

During post-merger period also positive 9 days out of 20 days and which is significant on

+1(AAR=0.005, t=1.88, p<0.10), +5 (AAR=0.0072, t<2.69 p<0.05), on +13, +14, +17 & +18

AAR is positive and significant at 1 percent level.

From the above it is cleared that, market has anticipated and welcomed the merger

activity of Private sector Banks in turn resulting in increased the wealth to the shareholders.



Table-7.6

Result of Average Abnormal return, CAAR ant Statistical test of Public Sector Banks and Private Sector

Banks

Event Days

Public sector Banks Private sector Banks

AAR CAAR t-test AAR CAAR t-test

-20 -0.0238 -0.0238 -9.8335 0.0161 0.0161 6.0512

-19 -0.0151 -0.0389 -6.2324 0.0166 0.0327 6.2472

-18 -0.0262 -0.0652 -10.8312 0.0177 0.0505 6.6701

-17 0.0151 -0.0501 6.2374 0.0040 0.0545 1.5117

-16 0.0057 -0.0443 2.3623 0.0129 0.0674 4.8419

-15 -0.0021 -0.0464 -0.8472 -0.0314 0.0360 -11.7926

-14 0.0071 -0.0393 2.9268 -0.0141 0.0219 -5.2876

-13 -0.0292 -0.0685 -12.0598 -0.0056 0.0163 -2.1206

-12 0.0169 -0.0516 6.9902 -0.0150 0.0013 -5.6344

-11 -0.0158 -0.0674 -6.5144 0.0106 0.0119 3.9745

-10 -0.0146 -0.0820 -6.0306 -0.0011 0.0108 -0.3955

-9 0.0063 -0.0757 2.5842 -0.0008 0.0100 -0.3142

-8 -0.0094 -0.0851 -3.8632 0.0293 0.0393 11.0009

-7 0.0065 -0.0786 2.6669 -0.0118 0.0274 -4.4402

-6 0.0323 -0.0463 13.3378 0.0005 0.0280 0.1986

-5 0.0104 -0.0359 4.2943 0.0021 0.0301 0.8071

-4 -0.0238 -0.0597 -9.8047 -0.0077 0.0225 -2.8755

-3 -0.0249 -0.0845 -10.2595 0.0071 0.0296 2.6841

-2 -0.0022 -0.0867 -0.9153 0.0158 0.0454 5.9221

-1 -0.0013 -0.0881 -0.5488 -0.0148 0.0306 -5.5559

0 -0.0097 -0.0978 -4.0218 0.0083 0.0389 3.1232

1 -0.0122 -0.1101 -5.0527 0.0050 0.0439 1.8862

2 -0.0033 -0.1134 -1.3608 -0.0162 0.0277 -6.0911

3 -0.0036 -0.1170 -1.4969 -0.0011 0.0266 -0.4314

4 0.0166 -0.1004 6.8627 -0.0049 0.0216 -1.8588

5 -0.0098 -0.1102 -4.0517 0.0072 0.0288 2.6930

6 -0.0303 -0.1405 -12.4967 -0.0364 -0.0076 -13.6856

7 0.0062 -0.1342 2.5662 -0.0398 -0.0474 -14.9462

8 -0.0017 -0.1359 -0.7005 0.0403 -0.0071 15.1557

9 -0.0193 -0.1553 -7.9837 0.0019 -0.0052 0.7021

10 0.0157 -0.1396 6.4903 -0.0077 -0.0130 -2.9079

11 0.0122 -0.1274 5.0301 -0.0256 -0.0385 -9.6085

12 -0.0088 -0.1362 -3.6478 -0.0181 -0.0567 -6.8145

13 0.0002 -0.1360 0.0882 0.0085 -0.0482 3.1778

14 0.0048 -0.1312 1.9906 0.0176 -0.0306 6.6293

15 0.0113 -0.1199 4.6524 -0.0046 -0.0352 -1.7271

16 0.0111 -0.1088 4.5617 -0.0081 -0.0433 -3.0494

17 0.0146 -0.0943 6.0053 0.0249 -0.0184 9.3418

18 0.0190 -0.0753 7.8364 0.0173 -0.0011 6.4970

19 0.0103 -0.0650 4.2663 0.0060 0.0049 2.2484

20 0.0191 -0.0458 7.8920 -0.0035 0.0014 -1.3126

Source: Computed on the basis of Yahoofinance data base

*Significant at 1% level, **Significant at 5% level ***Significant at 10% level



Figure-7.13

Shows the relationship between Average Abnormal Return (ARR) to time

during the event period (day -20 to +20)

Figure-7.14

Shows the relationship between Cumulative average abnormal return (CAAR) to time

during the event period (day -20 to +20)

Test of Hypothesis:

H0= there is no difference in abnormal return of merged bank before and after announcement of

period.

H1= there is a difference in abnormal return of merged bank before and after announcement of

period.

Conclusion: Reject Null Hypothesis, because there is difference in abnormal returns of merged

banks before and after announcement period.



XII. Suggestions and Conclusion:

The banking industry is one of the rapidly growing industries in India. The growth rate of

this sector is remarkable and it has become the most preferred banking destinations for

International Investors. After economic reforms, 1991, there have been paradigm shift in Indian

banking sectors. A relatively new dimension in Indian banking industry has accelerated through

Mergers and Acquisitions. It is observed in the study that, the finance and banking industries

contributes highest number of M&As deals during the study period 2008 to 2014 (Kar (1990-

2000) and Priya Bhalla (2001-2007) were also found the same) and the trends of consolidation in

Indian Banking Industry is so for restricted to merger of small and weak banks with large and

public sector banks. To this backdrop, the present study examined the ‘Impact of Mergers on

Performance of selected commercial banks in India’. The impact of mergers on performance of

the banks has been evaluated from three prospective i) Physical Performance of merged banks,

ii) Financial Performance of Merged Banks and iii) Share price performance.

Analysis of physical performance of merged banks emphasizes that, there is a significant

improvements in Deposits, Advances, Businesses and Number of Employees of all selected

banks. Therefore, this result indicates that Mergers can help commercial banks to achieve

physical performance. While the analysis of financial performance of merged banks yields mixed

results, the results indicates that, a significant improvement in Assets Quality, Management

Efficiency, Earnings quality and liquidity of the selected banks and Capital Adequacy of Public

sector banks did not indicate improvements, this may be the policy matters of public sectors

banks but on an average the overall financial performance of merged banks increased after the

merger. So Merger could be considered as a useful strategy in order to achieve financial

performance of commercial banks by achieving economies of scale, competitiveness, and

increased efficiency and Market share. Further the analysis of share price performance of merged

banks shown that, there is no consistent pattern of Abnormal Returns of selected merged banks,

Market positively reacted only in case ICICI Bank and Federal Bank. The rest of the cases

market negatively reacted for merger announcement. Therefore from this result it can be said

that, Merger is not a preferable tool to achieve shareholders wealth of banks in short term.

It is also suggested to Government of India and RBI to liberalize their policies in

connection with Mergers and Acquisitions to increase number of deals between the banks. To

conclude, Merger is a useful strategy, through this Banks can expand their operations, serve

larger customer base, increases profitability, liquidity and efficiency but the overall growth and

financial illness of the bank can’t be solved from mergers.



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