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Methodology For Evaluation Of Mergers In The Indian Banking Sector

1463 words - 6 pages

METHODOLOGY FOR EVALUATION OF THE MERGER

This study is done following a before and after approach for evaluating the merger's impact. Accordingly we have tried to analyze the profitability, total income, efficiency of branch and share holding pattern has been looked into.

The analysis of pre merger has been done for the financial year 1999-2000 while the post merger has been done for the financial year 2000-2001.

Ratios have been broadly categorized under the following heads:

PROFITABILITY

Profit is the ultimate aim of any business. And the future of a business depends upon the level of profitability. Here the Spread -Burden model has been adopted to measure banks profitability. Where Spread denotes the difference between interest income and interest expense, Burden implies difference between non-interest income and non-interest expense and profit margin refers to the profit earned by the bank before making provisions and contingencies.

Item Pre Merger Post Merger
Spread/ Total Income -0.128 -0.081
Burden/ Total Income 0.344 0.350
Profit margin/ Total Income 0.246 0.355

Table 1: Profitability ratios for HDFC- Times Bank

It can be observed that all the above three ratios have shown a positive improvement, comparing the pre merger and post merger scenario. HDFC has been beneficial with higher non-interest income, though the interest income has decreased. Profit margin has also increased significantly creating synergy between the mergers of the banks.

INCOME RATIOS

Item Pre Merger Post Merger
Interest Income/ Total Income 0.472 0.389
Interest Expense/ Total Income 0.592 0.465
Non Interest Income/ Total Income 0.539 0.611
Non Interest Expense/ Total Income 0.195 0.261
Contingencies/Total Income 0.026 0.08

Table 2: Income ratios for HDFC- Times Bank

It can be observed that interest income has decreased, with non interest income increased. Similarly the interest expenditure has reduced and non interest expenditure has increased for HDFC.

This shows synergy for non interest income, interest expense, contingencies while showing no synergy for the interest income and non interest expenditure.

Efficiency for Branches

The branch of any bank is a representative of the whole banking business. Possessing geographically widespread network of branches is a valuable asset for any bank. It would assist mobilizing and disbursing huge amount of funds over a wider portfolio. Considering the importance of branches for the success of a bank it has been included as a variable.

Item Pre Merger Post Merger
Advance per branch 7.10 14.10
Deposits per branch 1.46 16.61
Net Revenue per branch -7.14 26.75
Working fund per branch 7.61 15.10
Transaction cost per branch 1.66 25.97

Table 3: Efficiency of branches for HDFC- Times Bank

Other than the transaction cost per branch and working fund per branch increasing, it shows an overall positive effect on all other branch related aspects as deposits and revenue per branch...

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