10th Annual International Conference on Industrial Engineering and Operations Management

Evaluation of Pre Versus Post Merger of Banks

Prabhavathi Kalshetty, Shekar Babu & Dinesh Prasad G
Publisher: IEOM Society International
0 Paper Citations
Track: Financial Engineering

Over the year’s Indian economy has been going through continuous fluctuations due to the recent government reforms. With reforms are various structural levels, banks were also looked into detail. Even though the Indian banking sector are known for maintaining stability at International levels, due to operational issues there has been several concerns at the Indian Banks which has led to issues like Net Performance Assets (NPA). The merger is a combination of two or more companies with an objective of wealth maximization to add more value with a stand of one. The aim of the present paper is to evaluate the pre and post performance and NPA of the merging banks in the Indian banking industry. The financial performance evaluation was based on various financial metrics like profitability and liquidity. In addition to financial performance, NPAs are evaluated using various aspects of bank’s financial parameters like Net profit, Loans, Advances, Net NPA (NNPA), Gross NPA (GNPA), Enterprise value, Book value, Market capitalization, Deposits, Deposits (CAGR%), CASA deposits, Return on Assets (ROA), and Return on Equity (ROE).

The study has employed on a sample size data of 12 banks, where all of them are government owned banks and the data has been collected over a period of three years from 2016 to 2018. Through an extensive literature review the researchers explored that through the comparison of financial performance it is evident that the amalgamation of the banks into a single bank is positively affected in the future. The mergers of big banks may fructify over the next 18-24 months. Though the integration is long-drawn it will disrupt lending. There will be issues of book dilution, which will happen due to government infusing capital at low valuations and issues additional shares to investors of amalgamated banks. The researchers through their insights show how the “Big-Four” category of banks after the mergers are performing through various metrics. The researchers through their statistical analysis shown key takeaways. The merger of 12 banks into 4 categories or groups show mixed and interesting results. The results show how a strong bank will make the merger strong, trade on similar valuations, less painful to investors, lead dilution in capital. Another result show how a weak anchor bank is equal to that of an added challenge. How an elevated GNPA of combined bank would be elevated and how the merged entity would trade at a premium valuation and further dilution. In another result, the results show how a lead anchor bank which is already under stress will make the merger more complex. On the advances side all banks have a similar mix of loan portfolios. Hence, the loan mix of the combined entity will have a minimal change. For all the 4 categories of banks the cost synergies would come into play if the infrastructure is rationalized. The researchers critically evaluated the NPA of each of the 12 banks separately and then the each of the 4 groups which were merged. Hence, a pre-merger and a post-merger NPA was evaluated. The researchers did not look into their employees or locations. These factors were not included into the study.

Published in: 10th Annual International Conference on Industrial Engineering and Operations Management, Dubai, United Arab Emirates

Publisher: IEOM Society International
Date of Conference: March 10-12, 2020

ISBN: 978-1-5323-5952-1
ISSN/E-ISSN: 2169-8767