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

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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

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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. As opined by Kanter et al. (2018), there was no relevant information about the Net Worth Ratio of BoR bank. However, in March SEBI had banned around 100 entities that were allegedly holding shares of BoR’s shares (Rouzies et al. 2019). Before the merger, BoR reported loss of amount accumulating to 1021 million rupees. The adequacy ratio of the bank at the end of the year 2010 stood at 7.74% (academia.edu). The swap ratio of BoR has been ascertained at 1:4.72. Presently, the ICICI capital adequacy ratio was 19.41% which was observed lower in the case of BoR at 11.71%. Mergers have significant impacts that affect both the share price of ICICI and the BoR bank. The share price of ICICI has declined to ₹809.35 from ₹901.10 (icicibank.com, 2012). Therefore impacts of the merger, as well as acquisition, have resulted in a positive outcome. Combining the results and analysis of the valuation of the financial fundamentals, it can be evaluated that the post-merger scenario of both banks has considerably resulted in boosting the performance of the merged entity (Faello, 2015). Apart from this, it has been found that Debt coverage ratio of ICICI bank has decreased after merger with BoR. Credit Deposit ratio of ICICI bank which was 104.72 and 105.08 in financial year 2015 and 2016 was decreased in 2017 and 2018 by 98.69 and 92.92 respectively. This ration was future decreased to 90.54 in 2018. On the other hand, leverage ratio that is current ration of ICICI bank is found to remain constant 2016, 2017 and 2018 by 0.12. In 2015 and 2016 this ratio was 0.06 and 0.13 respectively (Liang et al. 2016). After merger ICICI offered about 188.42 rupee per share to Bank of Rajasthan and it has been noticed that EPS, and profit margin has increased by 50% where as debt or equity ratio, and current ratio has decreased after merger of BoR with ICICI bank.

III. RESEARCH HYPOTHESIS The following hypothesis for fulfilling the research proposed objective is as follows: H0= There is no significant difference in financial leverage standards among pre and post merger and acquisition of BoR with ICICI bank H1= There is significant difference in financial leverage standards among pre and post merger and acquisition of BoR with ICICI bank IV. METHODOLOGY As per the view of Fletcher (2017), methodology within a research activity helps to collect all the relevant and necessary information based on the research topic. Hence, this research work has utilized explanatory, descriptive and positivism reach methodology. Secondary method has been used for collecting data and along with this deductive and quantitative approach has adopted for doing this research work systematically. 1.3.1 Data Source In this research work, for determining impact over ICICI bank after merging with Bank of Rajasthan and their financial performance in context of debt equity ratio, and financial leverage ratio, all the necessary financial data before merger from 2008 to 2010 and after merger from 2011 to 2018 has been gathered from the annual report of ICICI bank. 1.3.2 Financial Parameter According to the study of Dang, Li & Yang (2018), leverage ratio is considered as different types of financial measurement that analyse how much capital can be obtained from debt (loan) or assesses the capability of a business enterprise for meeting their financial obligations. Apart from this, it has been noticed that maximum debt can create negative impact over a company and its investors. Furthermore, leverage ratio can also be utilized by a company for measuring a company’s mix of operating expenses (Angwin et al. 2015). There are different types of particular ratios that can be considered as leverage ratio. The primary factors that which are considered as leverage ratio are debt, equity, assets, and interest ratio respectively. The debt equity ratio can be calculated using the following formula:

The interest coverage ratio can be calculated using the following formula:

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Where

V. Description of the sample ICICI Bank has recognized to be the 2nd largest bank over India and the bank has started their operation since 1994. The bank has focus on merger strategy for expanding their business as well as their customer base. In 2010, the organisation have about 5219 and 1709 ATM counter and branches (Ambika, 2015). The bank has about 37000 of employees and they have able to earn Rs. 304 core from each of their branches. Bank of Rajasthan or BoR is considered as an old private banking sector with strong market position in Rajasthan. However, between the financial year of 2009 and 2010, the bank lost of Rs. 102.13 core against 117.712 cores of profits in 2009 (Ambika, 2015). 1.3.4 Data analysis As per the view of Sutton & Austin (2015), data analysis refers to the evaluation of data by utilizing statistical and analytical tools. Hence, in this present research data analysis has involved analysis of paired t-test for determining the value of debt equity ratio. It has been found that paired t-test has been utilized for comparing the mean difference of pre and post merger on financial performance. 1.4 Results and discussion Debt equity Ratio Long term Debt Year (in crore) Shareholder's Funds Debt equity ratio

2002 51614.00 6382.06 8.09 2003 36721.58 7022.15 5.23 2004 34958.06 8105.91 4.31 2005 38369.02 12624.2 3.04 2006 44999.94 22591.77 1.99 2007 61,659.54 24,315.04 2.54 2008 84,566.05 45,072.33 1.88 2009 116066.30 46777.40 1.89 2010 115698.30 51296.40 2.26 2011 109554.28 55090.94 1.99 2012 140,164.91 60405.24 2.32 2013 145,341.49 66705.96 2.18 2014 154,759.05 73213.33 2.11 2015 172,417.35 80429.36 2.14 2016 174,807.38 89735.58 1.95 2017 147,556.15 99951.07 1.48 2018 182,858.62 105158.94 1.74

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2019 165,319.97 108368.04 1.53

Table 1: Debt equity ratio of ICICI bank before and after merger (Source: refer to excel)

Interest Coverage Ratio EBIT(in Year crore) Interest Interest Coverage Ratio

2002 1819.6659 1560.31 1.17

2003 9,298.58 8,126.79 1.14

2004 8,749.13 7,167.66 1.22

2005 8,623.11 6,804.38 1.27

2006 12,430.69 10,101.48 1.23

2007 20,192.79 17,675.72 1.14

2008 29,157.83 25766.97 1.13

2009 30613.83 26487.20 1.16

2010 25936.56 20729.10 1.25

2011 25660.67 19,342.57 1.33

2012 32950.88 25,013.25 1.32

2013 38415.29 28,285.41 1.36

2014 41387.73 29,710.61 1.39

2015 45260.45 32,318.15 1.40

2016 44923.36 33,996.47 1.32

2017 46176.16 34,835.83 1.33

2018 43361.59 34,262.05 1.27

2019 44866.7 39,177.54 1.15

Table 2: Interest leverage ratio of ICICI bank before and after merger (Source: refer to excel)

Debt Equity ratio has been calculated by the researcher after collecting all the required authentic and relevant financial information and data of the company from their respective financial reports (Laitinen, 2017). Pre-merger ratio includes the year after and before merger. Moreover, in this research analysis of pre merger would include

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ISSN- 2394-5125 VOL 7, ISSUE 17, 2020 between the years 2008 to 2010. On the other hand, post merger ratio mainly includes the after merger and in this context, this year involved between 2011 and 2018 has been used. In the above figure, calculation of debt equity ratio before and after merger has been done for ICICI bank. From year 2008 to 2012 long term debt of ICICI bank was 21.13, 19.27, 27.56, and 31.81. However, shareholder equity of the bank has been increased from 2008 to 2012 by 11.18, 10.2, 12.11, and 12.97 respectively (Annual report, 2018). Moreover, from the above table it has been found that shareholder equity of ICICI bank has been increased after merger with BoR. Thus, from this context it can be stated that ICICI bank have able to enhance their shareholder’s value after merging with BoR in 2010. Apart from this, the above table also shows that debt equity ratio of ICICI bank has increased 1.89 to 2.45 between the year 2008 and 2014 and in 2015 this ration has started to decrease. In 2019 debt equity ratio of ICICI bank has decreased to 1.74 (macrotrends.net, 2019). Debt ratio as well as interest leverage ratio of ICICI bank has also increased from 2008 to 2018. In 2019 debt equity ratio and interest leverage ratio has decreased to 1.74 and 2.85 whereas equity ratio of the bank remains constant to 0.17 as compared to the year 2018.

t-Test: Paired Two Sample for Means

Variable 1 Variable 2

Mean 3.46868721 1.9371232

Variance 4.36000313 0.08788429

Observations 9 9

Pearson Correlation 0.45873197

Hypothesized Mean Difference 0

df 8

t Stat 2.33261161

P(T<=t) one-tail 0.02398287

t Critical one-tail 1.85954803

P(T<=t) two-tail 0.04796574

t Critical two-tail 2.30600413

Table 3: Final result of paired t-Test (Source: refer to excel)

As mentioned by Geng, Bose & Chen, X. (2015), paired t-test refers to the statistical technique that has been utilized for determining whether calculated mean differences between two variables is zero or not. From the t-test analysis it has been found that mean after merger has decreased to 1.9371232 as compared to the mean in pre-merger. On the other hand, table 3 also defines that the value of P two-tail has increased from 0.02398287 to 0.04796574 after merger and thus, it can be stated that null hypothesis in this case is rejected, which means there is significant difference in the values of leverage before and after merger. Apart from this, based on the financial report and data analysis of the BoR, it has been found that BoR has able to enhance their market

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share after merger with ICICI bank in 2010. It has also been found that in FY 2011, the total assets of the ban BoR has increased from Rs. 363,400 to Rs. 406,234 respectively (icicibank.com, 2019). Moreover, the net profitability of BoR has also enhanced from 4,025 to 5,151 between the financial year 2010 and 2011 respectively. Therefore, it can be mentioned that, merger with ICIC Bank provides BoR benefits in their financial growth through which they could able to expand service network over 14000 location in India.

VI. Discussion and Conclusion The above discussion has analyzed the merger of BoR with ICICI Bank in the context of their financial performance. It could be concluded that there is significant difference between pre merger and post merger financials related to leverage analysis. The study shows that merger helps any business organization or in banking industry by improving its financial performance, market share and shareholder value. Apart from this, it has also been analyzed that in 2010, BoR faced a huge loss of Rs 102.13 crore. This was the only reason that has made for BoR to merge with ICICI Bank as ICICI bank had the ability to pay more market valuations as compared to BoR which. Debt equity ratio of ICICI bank shows that share holder ratio of the organization has been increased after merging with BoR however after 2014 debt equity ratio has started to decreased significantly. Moreover, debt ratio and interest leverage ratio has also increased after merging with BoR.

VII. REFERENCES

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