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Determining the Impact of Merger on Bank's Financial JOURNAL OF CRITICAL REVIEWS ISSN- 2394-5125 VOL 7, ISSUE 17, 2020 DETERMINING THE IMPACT OF MERGER ON BANK’S FINANCIAL PERFORMANCE USING FINANCIAL LEVERAGE ANALYSIS" CASE REVIEW OF BANK OF RAJASTHAN WITH ICICI BANK MERGER” Ms. Ekta Saraswat,1 Dr. Abhishek Singh Bhadouria, 2 1Research Scholar, Birla Institute of Technology, Mesra, Ranchi 2Assistant Professor, Birla Institute of Technology, Mesra, Ranchi Email1:[email protected] Received: 24 April 2020 Revised and Accepted: 04 July 2020 ABSTRACT: Merger and acquisition is considered as a crucial part for restructuring financial operations and increasing the chance to improve market share of a business organisation. Merger and acquisition in widely used strategy in banking sectors and in section 1.1.1 impact of merger over business financial performance has been analysed. The present research has further analysed business performance of Bank of Rajasthan after merger with ICICI Bank. Section 1.1.2 and section 1.1.3 has analysed the necessity of this research work and based on that objectives for the study has been formed. In Literature Review section, impact of the merger with ICICI Bank over Bank of Rajasthan has been analysed. Apart from this, financial performance of Bank of Rajasthan has been analysed by calculating debt equity ratio, debt ratio and interest leverage ratio with the help of paired t-test. At the end of the study conclusion has been drawn which states that BoR has experienced an increase in their financial profitability after merger with ICICI Bank. KEYWORDS: ICICI Bank, Bank of Rajasthan, Debt Equity Ratio, Financial Leverage, Debt Ratio, Interest Coverage Ratio, Shares I. INTRODUCTION Merger represents an agreement that combine two existing companies into single new company. Merger and Acquisition is mainly done by a company to achieve or enhance its market share and shareholder value. Alternatively, merger is considered as financial operations that have been conducted by different types of industries. Hence, this study will analyze the impact of mergers over Debt equity ratio based on the case study of “Bank of Rajasthan with ICICI Bank merger”. Necessity of merger in banking industry will also be analysed in this study. 1.1.1 Effect of merger on performance In this competitive market, companies in banking sectors are adopting different types of strategies to enhance their market growth in new field or in their own sectors (Brueller, Carmeli & Markman, 2018). Merger and Acquisition or M&A is widely used strategy by the banking industry. It has been observed that different types of mergers have already taken place in this industry like State Bank of India with National Bank of Lahor and Bank of Bihar Ltd and others (Chen & Vashishtha, 2017). In 2010, merger of BoR (Bank of Rajasthan) with ICICI Bank have taken place to enhance financial profitability and market share. About 118 shares in BoR have converted into 25 shares with ICICI Bank (Ambika, 2015). Apart from this, after merger the customers in BoR Bank gets benefited as ICICI Bank has able to enhance their service network over 2500 other branches. 1.1.2 Need of the present study As mentioned in the above section, merger has the ability to increase financial as well as market share of a business organisation (Al-Hroot, 2015). Hence, with the help of present research, effect of merger between BoR and ICICI Bank can be analysed. Apart from this, the study will also evaluate the present situation of BoR and ICICI bank 2048 JOURNAL OF CRITICAL REVIEWS ISSN- 2394-5125 VOL 7, ISSUE 17, 2020 in the context of the bank’s financial leverage. BoR have been able to enhance their Current and Saving Account (CASA) by 40% with the help of ICICI bank that has helped in enhancing their CASA effectively (Bureau, 2019). Apart from this, it has also been observed that after merger ICICI Bank has enhanced their CASA ratio from 28.7% to 41.7 % respectively (Bureau, 2019). On the other hand, ICICI bank has 25times large assets as compared to BoR. In 2010, BoR have assets of Rs. 16904.89 and they have faced huge loss in that year due to which the bank decided to merge with ICICI bank (Ambika, 2015). 1.1.3 Objective of the research The primary objective that would be required for completing this research work successfully is: ● To determine the effect of merger with BoR and ICICI Bank ● To analyse the performance of the ICICI bank in the context to Financial Leverage Ratios. II. LITERATURE REVIEW 1.2.1 Merger impact on performance Mergers help a financial organization in diversifying products and services that ultimately reduces the risk. The results of acquisition and merger have a detrimental impact on the company’s performance. Bank of Rajasthan (BoR) is a private sector bank with its registered office of operation situated in Udaipur, Rajasthan. BoR has suffered a net loss of amount ascertaining to ₹102.13 in the years 2009 and 2010. Whereas, on the other hand, ICICI Bank is the largest bank operating in India and is the first Indian bank to be listed on the New York Stock Exchange (Corsi et al. 2016). ICICI has been involved in the merger for expanding their business and increasing the customer base. Merger with BoR is considered to be 4th acquisition of financial institution ICICI. This got approved on May 23rd, in the year 2010 and with the effect of that all the respective bank branches of Bank of Rajasthan shall function as ICICI bank branch. In the merger procedure that took place between both, the banks will consist of including all the functions of BoR with new features as well as charges. In accordance with the opinions based on Lee et al. (2018), the financial ratios involve analysis of different ratios for explaining the merger. Likewise, Credit to Deposit Ratio (CD ratio), this indicates the number of advances given by banks through deposits. The higher, the ratio is ascertained higher will be loan-assets created from a substantial amount of deposits. However, the limit of the minimum capital adequacy ratio maintained by the Reserve Bank of India (RBI) is 9% for all the other banks. As suggested by Li et al. (2018), the limit of the ratio indicates that banks should not expand their existing business organization without having a sufficient amount of capital. The financial performance of ICICI post-merger and the reasons behind the merger decision of BoR and ICICI have been explained. The primary objective behind the merger is to assist the banking industry in enhancing the performance and achieving economies of operation and scale. However, it was found that there were many causes for mergers and acquisitions in the Indian banking and finance sector. According to the opinions of Nguyen et al. (2017), the consequent impact of the merger on the operational performance of firms involved in the acquisition was done by using post and pre ratios to examine the firm's merger. The merger will eventually result in increasing the firms' value only under the situation when there exist proper integration of economic, strategic and financial aspects (Uhlenbruck et al. 2017). Additionally, a shareholder in BoR will get 25 shares in return for every 118 shares held in BoR. The analysis includes ICICI bank’s capitalization in the market around ₹99,125 crore ultimately the bank requires to dilute the equity that will have a reduction of 3%. Moreover, a swap transaction will be proposed by ICICI with BoR. Information regarding cross-border acquisitions and mergers besides being domestic acquisitions of the firms have analyzed the effect on employment concerning the various merger process (Akkus et al. 2015). It was evaluated that manufacturing employment and the impacts of the cross-border acquisition process had was at a much weaker position and resulted in employment losses. It was ascertained that data collection of around 23 countries in the period 1990-2001 has explained the increase acquisition number. Apart from that, it was analyzed that when two indulge in a merger, under that situation the size of the target bank is an integral part of the post-performance merger. Moreover, the cost to income ratio (CIR) is taken into consideration both BoR and ICICI were dissimilar that might harm the performance of post-merger during the short-run (Hou et al. 2015). Likewise, the net NPA of BoR was 1.6% as compared with that of ICICI resulted in 1.87% in the year 2010 (academia.edu). Hence, it can be stated that the operational performance of BoR was significant much lower than that of ICICI. In addition to this, the Capital Adequacy Ratio (CRAR) of the ICICI has been 19.4% which was stronger than the target bank. On the other hand, CRAR of BoR was 7.74% this could adversely affect the pots merger scenario (academia.edu). As far as the share price movement has been observed, merger negotiation had zero effect on the considerable prices of the merging entities (Byrne et al. 2016). Debt equity ratio of ICICI bank was 5.750 in 2010 and this ratio has increased to 6.639 in 2015 that means debt equity 2049 JOURNAL OF CRITICAL REVIEWS ISSN- 2394-5125 VOL 7, ISSUE 17, 2020 ratio has increased after merger with BoR. Additionally, Earning Per share (EPS) of ICICI bank was 37.3100 before merger and after merger EPS has increased to 58.12250 significantly. The ration which has been derived after analysis and evaluation of balance sheet, as well as market capitalization, was figured around 0.329 that was higher than the actual ratio. It was evaluated that the position of BoR remained undervalued.
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