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CHAPTER 1
INTRODUCTION
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1.1 INTRODUCTION
After the economic reforms introduced by the Government of India in 1991, Indian
economy have undergone major transformation and structural changes in all sectors.
Mergers and Acquisitions are the major outcome of the financial transformation process
occurred in the Indian Banking sector. The key driving force for the merger activity is
severe competition to attain market power and the creating synergies and cost- revenue
benefits.
Consolidation in the banking industry is crucial from various aspects. The factors
inducing consolidation include technological progress, excess retention capacity,
emerging opportunities and deregulation of various functional and product restrictions. A
strong banking system is critical for sound economic growth so it is natural to improve
the comprehensiveness and quality of the banking system to bring efficiency in the
performance of the real sectors. In the current scenario, if banks are to be made more
effective, efficient and comparable with their counterparts functioning abroad and
competitors from abroad, they would need to be more capitalized, automated and
technology oriented, even while strengthening their internal operations and systems. It
would be necessary that Bank Consolidation assumes significance from the point of view
of making Indian banking strong and sound apart from its growth and development to
become sustainable. The Indian banks are slowly but surely moving from a regime of
‗large number of small banks‘ to ‗small number of large banks‘. The new era is going to
be one of consolidation around identifying core competencies.

1.2 GENESIS OF THE PROBLEM

The banking industry in India has been in the process of transformation and consolidation
ever since 1961. The Banking Regulation Act, 1949 empowers the regulator with the
approval of
the government to amalgamate weak banks with stronger ones. Majority of the mergers in
India have been crafted to bail out weak banks to safeguard depositors‘ interest and to
protect the financial system. The report of the Committee on Banking Sector Reforms
(the Second Narasimham Committee - 1998), however, discouraged this practice. It
recommended a multi-tier banking system with existing banks to merge into 3-4
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international banks at the top most level, 8-10 national banks engaged in universal
banking at the next level and local and rural banks confined to specific regions.
Prior to 1999, the amalgamation of banks was primarily triggered by the weak financials
of the bank being merged, whereas in the post-1999 period, there have also been mergers
between healthy banks driven by business and commercial considerations. Thus, the new
generation mergers on the lines proposed by the Narasimham Committee are a recent
phenomenon in the country.

1.3 MAJOR CONCEPTS

Merger is a combination of two or more companies into one company. In India, mergers
are called as amalgamations, in legal parlance. The acquiring company, (also referred to
as the amalgamated company or the merged company) acquires the assets and liabilities
of the target company (or amalgamating company). Typically, shareholders of the
amalgamating company get shares of the amalgamated company in exchange for their
existing shares in the target company. Merger may involve absorption or consolidation.

Benefits of Consolidation
In Business the benefit achieved from the thing is the most important than anything else.
Any bank goes in for the merger or acquisition due the benefits which are associated with
it .Many papers talk about the benefits achieved, we will check empirically if the benefits
of the merger in Indian banking sector are really achieved and are they realized over a
short period of time. The details for this are given in the empirical methods section below
.We have already talked about the motives of the banks to merger and on the lines of
these motives, the benefits achieved by the banks after merger are perceived to be as
1. As the single line of business after the merger can be expanded and thus the cost
effectiveness is achieved
2. After the merger the bank will have large number of branches and its visibility will be
at more places which will help it to build the brand image. Brand plays a big role in
increasing the revenue of the bank
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3. Due to the merger the banks get an access to large amount of capital base which in
effect leads to the greater avenues for the bank to invest money and earn higher rate of
return and this increases the bottom line of the banks
4. Also due to the increase in the scale of the deposits the banks can get higher amount of
credit at a lower value .The banks credit worth also is increased due to the large deposit
size
5. The large amount of fixed cost which is required for collecting the data of the
customers is rationalized by the increase number of the products sold to the customer
base by the merged entity .Thus the per product fixed cost gets reduced
6. Also cross selling of the products to the existing customer base can also help increase
the revenue
7. This also helps in the diversifications of the products which help to reduce the risk as
well.

Synergy
Synergy implies a situation where the combined firm is more valuable than the sum of
the individual combining firms. It is defined as ‗two plus two equal to five‘ (2+2>4)
phenomenon. Synergy refers to benefits other than those related to economies of scale.
Operating economies are one form of synergy benefits. But apart from operating
economies, synergy may also arise from enhanced managerial capabilities, creativity,
innovativeness, R&D and market coverage capacity due to the complementarily of
resources and skills and a widened horizon of opportunities.
An undervalued firm will be a target for acquisition by other firms. However, the
fundamental motive for the acquiring firm to takeover a target firm may be the desire to
increase the wealth of the shareholders of the acquiring firm. This is possible only if the
value of the new firm is expected to be more than the sum of individual value of the
target firm and the acquiring firm. For example, if A Ltd. and Ltd. decide to merge into
AB Ltd. then the merger is beneficial if
V (AB)> V (A) +V (B)
Where;
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V (AB) = Value of the merged entity

V (A) = Independent value of company A
V (B) = Independent value of company B
A merger which results in meeting the test of increasing the wealth of the shareholders is
said to contain synergistic properties. Synergy is the increase in the value of the firm
combining two firms into one entity i.e., it is the difference value between the combined
firm and the sum of the value of the individual firms.

1.4 NEED FOR THE STUDY

"Consolidation alone will give banks the muscle, size and scale to act like world-class
banks. We have to think global and act local and seek new markets, new classes of
borrowers. It is heartening to note that the Indian Banks' Association is working out a
strategy for consolidation
among banks," P. Chidambaram.
Consolidation in the banking industry is crucial from various aspects. The factors
inducing consolidation include technological progress, excess retention capacity,
emerging opportunities and deregulation of various functional and product restrictions. A
strong banking system is critical for sound economic growth so it is natural to improve
the comprehensiveness and quality of the banking system to bring efficiency in the
performance of the real sectors. So it is necessary to identify the whether the
consolidations happening in the banking industry is being successful. This will help in the
future consolidations happening in the banking industry which will take the Indian
banking industry to a greater level.
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CHAPTER 2
REVIEW OF LITERATURE
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2.1 IMPORTANCE OF REVIEW OF RELATED LITERATURE

Literature review has helped in
 Identifying relationships between ideas and practices,
 Discovering important variables relevant to the topic,
 Synthesizing and gaining a new perspective,
 Relating ideas and theory to applications and
 Gaining methodological insights

2.2 STUDIES CONDUCTED ABROAD

 THE EFFECT OF MERGERS ON BANK PERFORMANCE: EVIDENCE
FROM BANK CONSOLIDATION POLICY IN INDONESIA
Source: SSRN
Author: Viverita, Department Of Management, University of Indonesia
Year : 2008
An inclusive merger mechanism became one option for the Indonesian banking
industry to response the Asian Financial crisis under its bank consolidation
program. This study gives insight into the effectiveness of economic policy
reforms in the Indonesian banking industry. This study examines the impacts of
merger on commercial bank‘s performance in Indonesia during 1997 to 2006. The
period was characterized by financial deregulation, the Asian economic crisis, and
bank restructuring programs. The traditional financial ratios and non-parametric
Data Envelopment Analysis approach is employed to investigate any efficiency
gains both in the pre and post merger periods, in order to detect whether bank
mergers produce any efficiency gains as well as factors contributed to the
performance. The evidence shows that merger created synergy as indicates by the
statistically and significantly increasing the post-merger financial and productive
efficiency performances.

 AN EMPIRICAL STUDY OF FIRMS‘ MERGER MOTIVATIONS AND

SYNERGY FROM TAIWANESE BANKING INDUSTRY
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Source: SSRN
Author: Ting Kun Liu, Dept of Finance , Chaoyang University of Technology,
Taiwan
Year : 2010
In recent years, the activities of merger from global enterprise have become more
frequently. Most literatures focus on the statements and explanations of the
reasons of
merger, but without using empirical model and data to further merger motivations
analysis. Besides, they always exclude the financial industry. What are the
motivations that influence firms‘ merger? Whether firms can reach the expected
effects after merger? These are issues that worthy to discuss. Therefore this paper
focuses on financial industry to detect the activities of merger from banking
industry. This paper constructs the panel data of financial industry by applying
logistic regression model to explore the merger motivations and the impacts of
variables on merger. Further by using factor analysis we discuss the difference of
performance between holding company banks and ordinary banks after merger.
The empirical results show that according to the performance scores there are six
banks of holding company on the top ten lists. This reveals that the merger
between financial institutions have improved merger synergy.

 FINANCIAL SYNERGY OF BANK MERGERS: THE CASE OF BANK OF

AMERICA
Source: SSRN
Author: Ting Kun Liu, Dept of Finance , Chaoyang University of Technology,
Taiwan
Year : 2010
The purpose of this study is to identify and describe some of the reasons why
BOA's acquisition was a rational step for management to take. This analysis will
look at the cost and assets management aspects of the two entities by comparing
costs and resources for a five-year period prior to the merger, and by looking at
the surviving entity's (BOA's) costs and management of assets for the three-year
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period after the merger. The first part of the study examines the non-interest
expense items in an attempt to demonstrate the economic benefits derived from
the changes in the cost of operations. The second part examines the effectiveness
of managing income-producing assets. The conclusion addresses synergy
resulting from combining the management of assets and other resources of the
two entities.

 BANKS CONSOLIDATION IN NIGERIA: A SYNERGISTIC HARVEST

Source: SSRN
Author: Enyi Patrick, Dept of Accountancy, Ebonyi University, Abakaliki
Year : 2009
In order to strengthen the competitive and operational capabilities of banks in
Nigeria with a view towards returning global and public confidence to the
Nigerian banking sector and the economy in general, the Central Bank of Nigeria
instituted a banking reform which saw most of the then existing 89 banks merging
with each other. It was earlier speculated in some financial analysis quarters that
the exercise might turn out to be one of those overblown hypes of an ailing
economy. This, however, has turned out to be the opposite as most post-merger
results tend to highlight that financial synergies exist. This paper tries to evaluate
the authenticity of this assertion. To do this, pre-merger and post merger financial
statements of 4 consolidated banks were obtained, adjusted, carefully analyzed
and compared. The result revealed that all the four merger groups produced in
addition to operational and relational synergy, financial gains far more than the
2+2=5 synergistic effects. The validating two-way ANOVA test also revealed that
variations in shareholders‘ funds can significantly affect the value of total assets
of a bank.

 BANKING SECTOR CONSOLIDATION IN NIGERIA: ISSUES AND

CHALLENGES
Source: SSRN
Author: Dr K.S.Adeyemi, Executive Director, University of Nigeria
Year : 2007
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This paper examines the issues and challenges arising from the recently
concluded banking sector reform program in Nigeria. It notes that since the
consolidation programme was policy induced, the 18 months given for total
compliance appeared inadequate, given the number of activities required for a
merger or acquisition to be successfully consummated. The author, however,
acknowledges that the programme could lead to the emergence of a sound and
efficient financial system that would support the growth and development needs
and aspirations of the Nigerian economy. Towards fully harnessing the synergies
and potentials of the consolidation programme, the paper calls for continuous
training and retraining of staff as well as proper handling of post-consolidation
challenges.

2.3 STUDIES CONDUCTED IN INDIA

 MERGERS IN INDIAN BANKING SECTOR-MOTIVES & BENEFITS
Source: SSRN
Author: Akhil Bhan
Year : 2008
This paper gives you an insight into the motives and benefits of the mergers in
Indian banking sector .This is done by examining the eight merger deals of the
banks in India during the period of reforms from 1999 to 2006 .This paper also
uses the empirical methods T-test to study the short term change in the returns of
the banks due the merger and EVA (Economic Value added) method to study the
efficiencies or benefits achieved due to the merger .Through this paper and the
sample taken for analysis it has been concluded that the mergers in the banking
sector in the post reform period possessed considerable gains which was justified
by the EVA of the banks in the post merger period.

 IMPACT OF MERGER ANNOUNCEMENTS ON SHAREHOLDERS

WEALTH:EVIDENCE FROM INDIAN PRIVATE SECTOR BANKS
Source: SSRN
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Author: Manoj Anand and Jagandeep Singh

Year : 2008
This study analyses five mergers in the Indian banking sector to capture the
returns to shareholders as a result of the merger announcements using the event
study methodology (Brown and Warner, 1980, 1985; and MacKinlay, 1997).
These are mergers of the Times Bank with the HDFC Bank, the Bank of Madura
with the ICICI Bank, the ICICI Ltd. with the ICICI Bank, the Global Trust Bank
with the Oriental Bank of Commerce, and the Bank of Punjab with the Centurion
Bank. The Fama and Miller (1972) market model and Cox and Portes. (1998) two
factor model form the theoretical framework of this study. The aim is to
understand the shareholder wealth effects of bank mergers.

 MOTIVES FOR MERGERS AND ACQUISITIONS IN THE INDIAN

BANKING SECTOR-A NOTE ON OPPORTUNITIES & IMPERATIVES
Source: SSRN
Author: Jay Mehta and Ram Kumar Kakani
Year : 2006
The aim of this paper is to probe into the various motivations for mergers and
acquisitions in the Indian Banking sector. Thus, literature is reviewed to look into
the various motivations behind a banks‘ merger/ acquisition event. The paper also
takes us through the international mergers & acquisitions scenario comparing it
with the Indian scene. Given the increasing role of the economic power in the turf
war of nations, the paper looks at the significant role of the state and the central
bank in protecting customer‘s interests vis-à-vis creating players of international
size. While, gazing at the mergers & acquisitions in the Indian Banking Sector
both from an opportunity and as imperative perspectives, the paper also glances at
the large implications for the nation.

 DOES THE FUTURE OF INDIAN PUBLIC SECTOR BANKS LIEIN

MERGERS & ACQUISITIONS
Source: SSRN
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Author: Indrajit Mallick

Indian PSBs have long been burdened with the responsibility of development
banking through mobilizing deposits at the countryside and providing finance to
agriculture and small scale industries at subsidized rates. For some PSBs today,
this implies the need for mergers. Given the current distribution of assets and
portfolio performance of the PSBs, most of them belong to the residual category.
The process of M&A will be socially beneficial and value adding if PSBs are
privatized before placing merger bids. Since bank privatization is not immediately
on the anvil, one may have to resort to relatively more distortionary means like
partial privatization and restructuring the incentives of the bank management.

 ASSESSING THE STRATEGIC AND FINANCIAL SIMILARITIES OF

MERGED BANKS: EVIDENCE FROM VOLUNTARY AMALGAMATIONS
IN INDIAN BANKING SECTOR
Source: SSRN
Author: Sony Kuriakose and Gireesh Kumar
Year : 2010
Synergies arising from the increased efficiency, cost savings, economies of scale
etc are the principal factors behind the voluntary amalgamations in the Indian
banking sector. Even though, mergers are the major way to adhere to the
regulatory requirements and the source of inorganic growth, the strategies adopted
by the merging entities have to be critically analyzed, because mergers seem to
produce strategic and financial growth and also have considerable public policy
implications. The merging partner‘s strategically similarities and relatedness are
very important in the synergy creation because the relatedness of the strategic
variables have a significant impact on the bank performance. On the basis of
existing literature, banks should be similar in some areas and dissimilar in some
other areas in order to improve post merger performance. In this paper we use
firm specific data to study the strategic similarities of bidder and target banks in
the voluntary amalgamations in the Indian banking sector. All relevant strategic
and financial variables of respective banks are considered to assess their
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relatedness. It is assumed that balance sheet resource allocation is the indicative

of the strategic focus of the banks.

 RE-ENGINEERING OF BANKING SECTOR THROUGH MERGER &

ACQUISITION
Source: SSRN
Author: Dr Murthy Pamarty

Merger and acquisition of Indian banking has occupied an important place

amongst the personnel and policy-makers of banking system in recent years, as a
sequel to economic reforms to bring in equilibrium sand stability in the banking
industry. Mergers have been considered as a possible avenue for improving the
structure and efficiency of the banking industry. There is variety of reasons to
induce merger proposals. Some of them are Synergy, Tax considerations,
Economies of scale in operations, Diversification. Merger taking place in India
are in line with the trend of consolidation that has characterized the financial
services industry and, in particular, the banking industry. The financial and
strategic management aspect of merger is to be analyzed from several angles and
the study evaluated financial implications before and after mergers in the banking
industry. Further, the reaction of security prices to announcement of M & A
decisions are also studied.

 Bhatnagar.R.G.(2001) in his paper – “Banking too much on Mergers” pointed

out that the urge to merge is overwhelming in the corporate sector in the context
of globalization. However, size base mergers need not be the best of strategies
especially in the banking sector. A cost cut strategy is a better option. The author
remarked that bank mergers in India might facilitate compliance with the
stipulation of dilution of the promoter‘s stake to 40%.
 Deeksha Verma (2001) in her study stated that Indian banking system has
decisively entered the consolidation phase through mergers. The merger of UTI
bank with Global Trust Bank enhanced the branch network to 158, most of them
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in metro and urban areas. The challenges in future will be in the form of
integration of work culture and higher exposure of Global Trust Bank to sensitive
sector financing.
 According to Sangita Mehta (2001), in the study of major financial institutions of
India like IDBI, IFCI and ICICI etc., are in a restructuring phase. These
institutions are shunned by the bourses because of the problems of rising non-
performing assets and high fund costs. The author pointed out that Government
interference and disparity in pay scales are the hindering factors towards
restructuring.
 The article entitled „Mergers – The Emerging Reality‟ written by Giridharan. R.
(2001) points out the possible causes for the explosive spurt in mergers that have
rocked the banking industry. The author elaborated the risk associated with
mergers and remarks that the success or otherwise of mergers would depend on
the success of the measures discussed in the article.
 ALTERNATIVE FOR PAYMENT IN M & A DEALS: a Strategic Evaluation of
the Choices at Hand‟ by Anurag Saxena and Naresh Grandhy (2001) proposes to
demystify the strategic intent behind each of the modes of payment in M & A
deals. The issues including Indian legal framework, the tax and accounting
implications have also been discussed. The authors attempt to deal with
quantifying the financial risk involved in such deals.

 ASSESING THE STRATEGIC AND FINANCIAL SIMILARITIES OF

MERGED BANKS:EVIDENCE FROM VOLUNTARTY AMALGAMATIONS
IN INDIAN BANKING SECTOR
Source: SSRN
Synergies arising from the increased efficiency, cost savings, economies of scale
etc are the principal factors behind the voluntary amalgamations in the Indian
banking sector. Even though, mergers are the major way to adhere to the
regulatory requirements and the source of inorganic growth, the strategies adopted
by the merging entities have to be critically analyzed, because mergers seem to
 P a g e | 15

produce strategic and financial growth and also have considerable public policy
implications. The merging partner‘s strategically similarities and relatedness are
very important in the synergy creation because the relatedness of the strategic
variables have a significant impact on the bank performance. On the basis of
existing literature, banks should be similar in some areas and dissimilar in some
other areas in order to improve post merger performance. In this paper we use
firm specific data to study the strategic similarities of bidder and target banks in
the voluntary amalgamations in the Indian banking sector. All relevant strategic
and financial variables of respective banks are considered to assess their
relatedness. It is assumed that balance sheet resource allocation is the indicative
of the strategic focus of the banks.

 Ravens craft and Scherer (1989) have examined pre-merger (251 companies) and
post-merger (2732 companies) performance for the period 1950-1977 in US. He
used cash flow over sales for analysis and found negative abnormal return in post-
merger period.
 Healy, Pelpu, and Ruback (1992) addressed the issue of long term economic gains
due to mergers in US corporate sector. They used cash flow analysis [sales-(cost
of goods sold+selling and administration expenses) + depreciation + goodwill
expenses].They found an increase of 2.8% in operating cash flow. They also
found a positive correlation
Figure 1. Reasons and context of bank mergers in India 53 between this gain and
share price movement.
 Ghosh and Jain (2001), using the same methodology, they analysed 315 mergers
in US and found positive abnormal return. Further they suggested that cash offers
are associated with higher performance.
 Cornett and Tehranian (1998) compared the pre and post merger performance and
found positive abnormal growth.
 Sara B Moeller, Federric.P.Schcingemann and Rane N .Statz (2005) analysed
12023
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acquisitions (1980-2001).They observed that acquiring shareholders lost 12%

around acquisition announcement.
 Dirk Hackbarth and Erwan Morellec (2008) have developed a framework to
analyse
dynamics of stock returns and firm level betas. They concluded that a run-up
(rundown)
in the beta of bidding firm prior to the announcement and a drop (rise) in beta at
the time of announcement when acquiring firm has a higher (lower)
preannouncement beta than its target.
 Geoffrey Meeks (1977) explored the gains from merger for a sample of 233
transactions in UK (1969-1971). He analysed the data by ROA (Return on assets)
method and found
underperformance in 75% deals.
 Jason Karceski, Steven ongena, and David smith (2005) established the impact on
welfare of the borrowers. They took the sample of Norwegian banks and found
8% decline in the return of targets borrowers and increase in acquirer‘s borrowers.
 Marina Martinova, sjoerd Oosting and Luc Renneboog (2006) investigated the
long term profitability of companies in continental Europe or UK. They found
abnormal return for the acquirer. Sharma and Ho (2002) observed negative return
post- merger performance from a sample of 36 Australian companies.
 Rehman and Limmack (2004) investigated 94 mergers in Malaysia (1998-1992).
Using operating cash flow returns on assets they found positive merger gains.
 Cybo-Ottone and Murgia.s (2000) event study analysis of 54 mergers and
acquisitions deals covering 13 European banking markets of the European Union
and the Swiss market for the period 1988 to 1997 find positive and significant
increase in the shareholder value of bidder and target banks at the time of the
deal.s announcement.
 Ismail and Davidson.s (2005) examination of 102 merger announcements in the
European financial services industry between 1987 and 1999 finds positive
returns for target bank shareholders in different event windows.
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 Penas and Unal (2004) find positive and significant adjusted returns of merging
banks. bonds across premerger and announcement months due to diversification
gains and gains associated with too-big-to-fail statu.
 Pandey (2001) has examined the issue of takeover announcements, open offer and
its impact on shareholder value in the Indian corporate sector.
 Kumar and Rajib (2007) identify the characteristics of merging firms in India
based on their study of 227 acquirer and 215 target firms during the period 1993-
2004.
 Pawaskar analysed 36 mergers (1992-1995) using operating cash flow returns and
do not found any increase in profitability
 Rajesh Chakrabarti (2008) examined both domestic as well as foreign deals, and
found that they are associated with positive announcement results and in long
term it is worse than pre-merger performance.
 M.Jayadev and Rudrasensarma (2007) analysed the critical issues of consolidation
in the Indian banking sector from the point view of shareholders and managers.
They found
that in forced merger, both bidders and target‘s share price has been reduced. In
case of voluntary merger results are mixed.
 Levine and Aaronovich (1981) and Lubatkin (1983) are introduced the relevance
of studying the strategical and organisational aspects of M&As. Ramaswamy
(1997) analysed the impact of strategic similarities on bank performance in US
and found banks
exbiting similar features result in better performance.
 Yener Altunbas, David Margues Ibanez (2004) analysed the impact of strategic
similarities of bidder and target banks in European banking sector and they found
different results for both domestic and cross-boarder mergers.
 Andreas Behr and Frank Heid (2008) suggested a new matching strategy to
control for the selection bias.
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2.4 HOW THE REVIEW WAS USEFUL

The literature concerned with empirical research reveals that there are various factors
affecting merger decisions. It also helps to identify the importance of the merger and the
synergy benefits realized there in. it gives us the idea about determining the performance
of various banks using various methods and the importance of the variables.
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CHAPTER 3
DESIGN AND METHOD OF STUDY
 P a g e | 20

3.1 STATEMENT OF THE PROBLEM

Due to the fragmented nature of the banking industry, Indian banks are not able to
compete globally in terms of fund mobilization, credit disbursal, investment and
rendering of financial services. To overcome this problem Indian banks are considering
mergers and acquisitions with other banks. But there are many factors for a merger to be
successful.

3.2 OBJECTIVE OF THE STUDY

The purpose of this study is to identify whether the merger between Oriental Bank of
Commerce and Global Trust Bank proved to be successful and also to identity whether
the synergy benefits are realized. And also
 To compare the financial and performance productivity of Oriental Bank Of
Commerce, pre- and post-mergers
 To identify the factors that drive the mergers in banking industry
 To see if bank mergers in India are able to deliver according to the pre-merger
expectations

3.3 HYPOTHESIS
Null Hypothesis:
Synergy benefits are realized after the merger between oriental Bank of Commerce and
Global Trust Bank.
Alternate Hypothesis:
Synergy benefits are not realized after the merger between oriental Bank of Commerce
and Global Trust Bank.

3.4 DESIGN OF THE STUDY

The information required for the study is collected through
(i) Primary Data
(ii) Secondary Data
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Primary Data:
The primary data was collected by interacting with various Managers and Employees of
Oriental Bank of Commerce. This helped to understand the impact of merger on the
Oriental Bank of Commerce and the forces which drive the merger in the banking
industry.The questionnaire was prepared keeping the requirements in mind.
Secondary Data:
The secondary data were collected through various mediums including newspapers,
internet, magazines, etc which provided useful insights into the research and study of the
project.

3.5 SAMPLING PROCEDURE

3.5.1 Sample Selection:
The technique used for sampling is ‗Deterministic Sampling‘, as we collected a list of
Oriental Bank of Commerce in Bangalore region. Hence the size of the sample can be
determined.

3.5.2 Scaling Technique:

One scaling technique that will be used to measure the attitudinal change is the
questionnaire will be 5 point scale. The questions in the main questionnaire will be
extracted answers by this scale. This was maintained throughout the questionnaire to
keep the reliability and validity in control. The 5 point scale technique is widely used to
determine the level of preferences of an issue in the questionnaire. The scale was
designed with five response categories as shown below.

1--- Least Important

2--- Less Important
3---Neutral
4---More Important
5---Most Important
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3.5.3 Designing Questionnaire:

Based on the extensive reading about the factors that banks look in to before they merge
with any other bank and using scaling method the final questionnaire is prepared.

3.6 EXPLANATION ABOUT THE INPUT

3.6.1 Data Collection
Data will be collected from different small and medium enterprises companies which are
within the reach.

3.6.2 Analysis of the Data Collected

All the data collected will be fed into a database created in Microsoft Excel especially for
this purpose. The various tools and functions available on excel will be used for
necessary calculation. SPSS software was used for the purpose of detailed analysis.

3.6.3 Data Analysis

Data analysis model is econometric model and was planned to be done with the statistical
tool SPSS. The data was got mainly in the semantic differential for this purpose. The
various tools and functions available on Excel were used for necessary calculations. Bar
graphs and pie charts were generated to make the interpretation of the results. SPSS
software was used for the purpose of descriptive analysis.

3.6.4 Plan of Data Analysis:-

The data analysis done as in the plan given below
1. Filtering of the questionnaire will be done
2. The questionnaires will be sorted into the respective groups.
3. Coding of the questions will be done
4. All the data will be entered into different excel sheets
5. This data will be copied to the SPSS tool and all the variable will be explained
 P a g e | 23

6. Analysis will be done for proving the hypothesis is framed

7. Results are tabulated and conclusion and recommendations are drawn

3.7 TOOLS USED IN THE STUDY

Tool used for analysis is IBM SPSS Statistics 19.0. It is a computer program used for
statistical analysis. And also Microsoft excel is used to draw various graphs.

3.8 STATISTICAL ANALYSIS

Factor analysis attempts to identify underlying variables, or factors, that explain the
pattern of correlations within a set of observed variables. Factor analysis is used here in
data reduction to identify a small number of factors that explain most of the variance that
is observed in a much larger number of manifest variables. Principle component analysis
extraction method is used for the study and Varimax with Kaiser Normalization method
is used for rotation.
A chi-square test (also chi squared test or χ2 test) is any statistical hypothesis test in
which the sampling distribution of the test statistic is a chi-square distribution when
the null hypothesis is true, or any in which this is asymptotically true, meaning that the
sampling distribution (if the null hypothesis is true) can be made to approximate a chi-
square distribution as closely as desired by making the sample size large enough.
Some examples of chi-squared tests where the chi-square distribution is only
approximately valid: Pearson's chi-square test, also known as the chi-square goodness-of-
fit test or chi-square test for independence. When mentioned without any modifiers or
without other precluding context, this test is usually understood.
 P a g e | 24

CHAPTER 4

ANALYSIS
 P a g e | 25

4.1 DATA:
Primary Data:
Primary data is obtained from various respondents from various banks. It is obtained
using the questionnaire method. From the primary data obtained from the bank, the
various factors affecting the merger of Oriental Bank of Commerce with the Global Trust
bank is ranked. This data is used in the Factor analysis to reduce the ten factors in to the
most important factors.
Secondary Data:
Historical data is obtained and analyzed for the research problem. The before and after
effects of the merger is compared with the help of Paired t test. Secondary data is used for
paired t test.

4.1.1 Case Study Approach

Global Trust Bank Ltd has been amalgamated with the Oriental Bank of Commerce. The
merger took place on 14th August, 2004. Global Trust Bank Ltd provided various kinds
of services to its clients prior to its amalgamation with the Oriental Bank of Commerce.
The various services provided by the Bank had been overdrafts, term loans, letters of
credit, cash credit, bank guarantees, and bill inland discounting. Global Trust Bank Ltd
had also launch in partnership with Visa, the Proton International Debit Card.

After the amalgamation, the depositors as well as the other customers of Global Trust
Bank Ltd function as the customers of the Oriental Bank of Commerce. Oriental Bank of
Commerce has taken steps in order to ensure that the customers of Global Trust Bank Ltd
continue to receive proper services. According to the Amalgamation Scheme, the
shareholders of Global Trust Bank Ltd may receive pro- rata payment, if extra money is
left behind after all the liabilities of the Bank are met with the realization of its assets.

Before the deal Global trust bank‗s operations were suspended by the Central bank of
India
 P a g e | 26

.The GTB‗s bad loans accounted for about fifty of its 32.7 billion rupees of deposits .This
deal was driven by the Central bank .At that time OBC was looking for merger options
with other banks and RBI decided to merge GTB with OBC to safeguard the interests of
the depositors. So at that time OBC took this opportunity and decided to acquire GTB
and turn it around in one and a half year .GTB had 103 branches in southern part of India
and has a strong retail products in
the market which proved to be a value adds for the synergy of the deal .

Intent
For Oriental Bank of Commerce there was an apparent synergy post merger as the
weakness of Global Trust Bank had been bad assets and the strength of OBC lay in
recovery.10 In addition, GTB being a south-based bank would give OBC the much-
needed edge in the region apart from tax relief because of the merger. GTB had no
choice as the merger was forced on it, by an RBI ruling, following its bankruptcy.
Benefits
OBC gained from the 104 branches and 276 ATMs of GTB, a workforce of 1400
employees and one million customers. Both banks also had a common IT platform.
The merger also filled up OBC's lacunae - computerization and high-end technology.
OBC's presence in southern states increased along with the modern infrastructure of
GTB.
Drawbacks
The merger resulted in a low CAR for OBC, which was detrimental to solvency. The
bank also had a lower business growth (5% vis-a-vis 15% of peers). A capital
adequacy ratio of less than 11 per cent could also constrain dividend declaration,
given the applicable RBI regulations.
 P a g e | 27

4.2 ANALYSIS I:
Identification of major factors affecting the mergers in banks in India:
There are various factors which are taken into consideration when it comes to mergers
and acquisitions in banking industry. These factors lead to the choice of a particular bank
for meeting their requirements. Therefore it becomes important to understand the major
reasons which drive a particular bank to the merger, and hence analyzing the importance
of these factors in knowing the determinant factors amongst the mergers in banking
industry. A number of variables were considered out of which ten major variables were
taken into account, which would further reduce to principal components depending upon
the score given by the respondents (sample) to the importance of these variables.
Respondents were asked to rate these variables based upon the importance of them for
merger in Indian banking Industry.

The ratings were done on a scale of 1 to 5 (1-least important, 5- Most important)

The variables defined are-

Table:1 Factors affecting Merger Decision

1. Merger Waves
2. Economies of scale
3. Restructuring of Weak banks
4. Size expansion
5. Greater market share
6. BASEL norms
7. Tax shield
8. Diversified risk
9. Increased capital
10. Operational efficiency
 P a g e | 28

Table 2 :Communalities
Initial Extraction
Wave 1.000 .965
Economies 1.000 .882
Restructuring 1.000 .999
Size 1.000 .992
Market 1.000 .988
Basel 1.000 .998
Tax 1.000 .957
Risk 1.000 .878
Capital 1.000 .965
OPFF 1.000 .801
Extraction Method: Principal
Component Analysis
Communalities indicate the amount of variance in each variable that is accounted for.
Initial communalities are estimates of the variance in each variable accounted for by all
components or factors.Extraction communalities are estimates of the variance in each
variable accounted for by the factors (or components) in the factor solution.

Table 3 :Total Variance Explained

Initial Eigenvalues Extraction Sums of Squared Loadings

% of Cumulative % of Cumulative
Component Total Variance % Total Variance %
1 5.501 55.014 55.014 5.501 55.014 55.014
2 2.717 27.172 82.186 2.717 27.172 82.186
3 1.207 12.070 94.256 1.207 12.070 94.256
4 .574 5.744 100.000
5 7.396E-16 7.396E-15 100.000
6 2.873E-16 2.873E-15 100.000
7 5.394E-17 5.394E-16 100.000
8 -6.699E-17 -6.699E-16 100.000
9 -5.869E-16 -5.869E-15 100.000
10 -1.677E-15 -1.677E-14 100.000
Extraction Method: Principal Component Analysis.
 P a g e | 29

Table 4 :Component Matrixa

Component
1 2 3
Wave .895 .339 .220
Economies .215 .858 .316
Restructuring -.840 -.248 .982
Size .289 -.828 -.472
Market .964 -.221 -.103
Basel .639 .480 -.691
Tax .322 .526 .031
Risk .420 .686 -.155
Capital -.595 .539 .220
OPFF -.384 .781 .208
Extraction Method: Principal Component
Analysis.
a. 3 components extracted.

This table reports the factor loadings for each variable on the unrotated components or
factors. Each number represents the correlation between the item and the unrotated factor.
These correlations can help to formulate an interpretation of the factors or components.
This is done by looking for a common thread among the variables that have large
loadings for a particular factor or component. It is possible to see items with large
loadings on several of the unrotated factors, which can make interpretation difficult. In
these cases, it can be helpful to examine a rotated solution.

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .555

Bartlett's Test of Sphericity Approx. Chi-Square 385.415

Df 36

Sig. .000
 P a g e | 30

Graph 1 : Scree Plot

Interpretation:-

 The scree plot is graph representing the set of Eigenvalues against the component
number in the order of their extraction.

 The graph shows a bent near the 3rd component after which it begins to trail of
steeply which indicates that out of the 10 variables indentified
3 Components have been extracted
 P a g e | 31

Table 5 :Rotated Component Matrixa

Component
1 2 3
Wave .941 -.160 .230
Economies -.108 .590 .723
Restructuring -.903 -.266 .336
Size .021 .994 .055
Market .837 .481 .236
Basel -.300 -.170 -.938
Tax .974 -.044 .082
Risk .903 .247 .037
Capital .941 -.160 .230
OPFF -.110 .843 -.280
Extraction Method: Principal Component
Analysis.
Rotation Method: Varimax with Kaiser
Normalization.
a. Rotation converged in 4 iterations.

Table 6 :Component Transformation Matrix

Component 1 2 3
1 .939 .258 .228
2 .338 -.814 -.472
3 -.064 -.520 .851
Extraction Method: Principal Component
Analysis.
Rotation Method: Varimax with Kaiser
Normalization.
Roatation converged in 4 iterationsRotation is a method used to simplify interpretation
of a factor analysis.
 P a g e | 32

Interpretation:

 The rotated component matrix shows that from the 10 variables identified, they
have been classified into 3 components which are important for the mergers in
banking industry.

 The components have been classified as-

*component 1-External forces

*component 2- Internal factors
*component 3-Restructuring of weak banks
 Component 1 external forces, which includes Merger Waves, Market share,
BASEL norms are the most important factors affecting the mergers in banking
industry.
 Component 2 internal forces, which include economies of scale, diversified risk,
capital requirements, tax shield.
 Component 3 Restructuring of weak banks is another important factor which
determines the mergers and acquisitions in banking industry.

CHI SQUARE TEST:

Hypothesis 1:
Null hypothesis:
Merger decision is independent of external forces.
Alternate hypothesis:
Merger decision is not independent of external forces.
 P a g e | 33

Table 7 : Case Processing Summary-1

Cases

Valid Missing Total

N Percent N Percent N Percent

Row * Column 60 100.0% 0 .0% 60 100.0%

Table 8 :Row * Column Cross tabulation-1

Column

1.00 2.00 3.00 4.00 5.00 Total

Row 1.00 Count 1 2 5 8 4 20

Expected Count 1.0 2.3 5.7 5.7 5.3 20.0

2.00 Count 1 3 8 4 4 20

Expected Count 1.0 2.3 5.7 5.7 5.3 20.0

3.00 Count 1 2 4 5 8 20

Expected Count 1.0 2.3 5.7 5.7 5.3 20.0

Total Count 3 7 17 17 16 60

Expected Count 3.0 7.0 17.0 17.0 16.0 60.0

 P a g e | 34

Table 9 :Chi-Square Tests-1

Asymp. Sig. (2-

Value df sided)

a
Pearson Chi-Square 5.345 8 .720

Likelihood Ratio 5.118 8 .745

Linear-by-Linear Association .470 1 .493

N of Valid Cases 60

6 cells (40.0%) have expected count less than 5. The minimum expected count is
1.00
Calculated Value = 5.345
Table Value = 3.482
Since Calculated value > Table value,
Reject Null Hypothesis.
External Forces are not independent of Merger Decision.
 P a g e | 35

Graph 2 : External Forces

HYPOTHESIS 2:
Null Hypothesis:
Merger decision is independent of the internal forces.
Alternate Hypothesis:
Merger decision is not independent of the merger decision.
 P a g e | 36

Table 10:Case Processing Summary-2

Cases

Valid Missing Total

N Percent N Percent N Percent

Row * Column 90 100.0% 0 .0% 90 100.0%

Table 11:Row * Column Crosstabulation-2

Column

1.00 2.00 3.00 4.00 5.00 Total

Row 1.00 Count 1 11 7 10 1 30

Expected Count 3.3 9.3 8.3 6.3 2.7 30.0

2.00 Count 3 10 4 2 1 20

Expected Count 2.2 6.2 5.6 4.2 1.8 20.0

3.00 Count 2 3 4 6 5 20

Expected Count 2.2 6.2 5.6 4.2 1.8 20.0

4.00 Count 4 4 10 1 1 20

Expected Count 2.2 6.2 5.6 4.2 1.8 20.0

Total Count 10 28 25 19 8 90

Expected Count 10.0 28.0 25.0 19.0 8.0 90.0

 P a g e | 37

Table 12: Chi-Square Tests-2

Asymp. Sig. (2-

Value df sided)

a
Pearson Chi-Square 27.106 12 .007

Likelihood Ratio 26.484 12 .009

Linear-by-Linear Association .085 1 .770

N of Valid Cases 90

a. 11 cells (55.0%) have expected count less than 5. The minimum

expected count is 1.78.

Calculated Value = 27.105

Table Value = 21.02
Since Calculated value > Table value,
Reject Null Hypothesis.
Internal Forces are not independent of Merger Decision.
 P a g e | 38

Graph 3:Internal Forces

HYPOTHESIS 3:
Null Hypothesis:
Merger decision is independent of restructuring of weak banks.
Alternate Hypothesis:
Merger decision is not independent of restructuring of weak banks.

Table 13:Case Processing Summary-3

Cases

Valid Missing Total

N Percent N Percent N Percent

Row * Column 40 100.0% 0 .0% 40 100.0%

 P a g e | 39

Table 14:Row * Column Crosstabulation-3

Column

1.00 2.00 3.00 4.00 5.00 Total

Row 1.00 Count 2 2 2 8 6 20

Expected Count 4.0 5.0 2.0 5.0 4.0 20.0

2.00 Count 6 8 2 2 2 20

Expected Count 4.0 5.0 2.0 5.0 4.0 20.0

Total Count 8 10 4 10 8 40

Expected Count 8.0 10.0 4.0 10.0 8.0 40.0

Table 15 :Chi-Square Tests-3

Asymp. Sig. (2-

Value df sided)

a
Pearson Chi-Square 11.200 4 .024

Likelihood Ratio 11.896 4 .018

Linear-by-Linear Association 9.100 1 .003

N of Valid Cases 40

a. 6 cells (60.0%) have expected count less than 5. The minimum

expected count is 2.00.

Calculated Value = 11.2

Table Value = 9.4877
Since Calculated value > Table value,
Reject Null Hypothesis.
Restructuring of Weak Bank is not independent of Merger Decision.
 P a g e | 40

4.3 ANALYSIS II:

Identifying Synergy effects of merger using paired t test:(Hypothesis Testing)

To identify the synergy benefits various ratios are calculated. The CAMEL ratios are
taken before and after merger.

CAMEL RATING SYSTEM

The CAMEL rating system is based upon an evaluation of five critical elements of a
credit union's operations: Capital Adequacy, Asset Quality, Management, Earnings and
Asset/Liability Management. This rating system is designed to take into account and
reflect all significant financial and operational factors examiners assess in their
evaluation of a credit union's performance. Credit unions are rated using a combination of
financial ratios and examiner judgment.

Since the composite CAMEL rating is an indicator of the viability of a credit union, it is
important that examiners rate credit unions based on their performance in absolute terms
rather than against peer averages or predetermined benchmarks. The examiner must use
professional judgment and consider both qualitative and quantitative factors when
analyzing a credit union's performance. Since numbers are often lagging indicators of a
credit union's condition, the examiner must also conduct a qualitative analysis of current
and projected operations when assigning CAMEL ratings.

CAPITAL ADEQUACY

Capital base of financial institutions facilitates depositors in forming their risk perception
about the institutions. Also, it is the key parameter for financial managers to maintain
adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it
signals that the institution will continue to honor its obligations. The most widely used
indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According
to Bank Supervision Regulation Committee (The Basle Committee) of Bank for
International Settlements, a minimum 8 percent CRWA is required. Capital adequacy
ultimately determines how well financial institutions can cope with shocks to their
 P a g e | 41

balance sheets. Thus, it is useful to track capital-adequacy ratios that take into account the
most important financial risks—foreign exchange, credit, and interest rate risks—by
assigning risk weightings to the institution‘s assets.

Determining the adequacy of a credit union's capital begins with a qualitative evaluation
of critical variables that directly bear on the institution's overall financial condition. The
examiner should also consider the interrelationships with the other areas:

 Capital level and trend analysis;

 Compliance with earnings transfers requirements and risk-based net worth
requirements;
 Composition of capital;
 Interest and dividend policies and practices;
 Adequacy of the Allowance for Loan and Lease Losses account; Quality,
type,liquidity and diversification of assets, with particular reference to classified
assets;
 Loan and investment concentrations;
 Growth plans;
 Ability of management to control and monitor risk, including credit and interest
rate risk;
 Earnings: Good historical and current earnings performance enables a credit union
to fund its growth, remain competitive, and maintain a strong capital position;
 Liquidity and funds management;
 Economic Environment.

ASSET QUALITY

Asset quality determines the robustness of financial institutions against loss of value in
the assets. The deteriorating value of assets, being prime source of banking problems,
directly pour into other areas, as losses are eventually written-off against capital, which
ultimately jeopardizes the earning capacity of the institution. With this backdrop, the
asset quality is gauged in relation to the level and severity of non-performing assets,
adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include
 P a g e | 42

nonperforming loans to advances, loan default to total advances, and recoveries to loan
default ratios.

Asset quality is rated in relation to:

 The quality of loan underwriting, policies, procedures and practices;

 The level, distribution and severity of classified assets;
 The level and composition of nonaccrual and restructured assets;
 The ability of management to properly administer its assets, including the timely
identification and collection of problem assets;
 The existence of significant growth trends indicating erosion or improvement in
asset quality;
 The existence of high loan concentrations that present undue risk to the credit
union;
 The appropriateness of investment policies and practices;
 The investment risk factors when compared to capital and earnings structure; and
the effect of fair (market) value of investments vs. book value of investments

MANAGEMENT

Management of financial institution is generally evaluated in terms of capital adequacy,

asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,
performance evaluation includes compliance with set norms, ability to plan and react to
changing circumstances, technical competence, leadership and administrative ability. In
effect, management rating is just an amalgam of performance in the above-mentioned
areas. Sound management is one of the most important factors behind financial
institutions‘ performance. Indicators of quality of management, however, are primarily
applicable to individual institutions, and cannot be easily aggregated across the sector.
Furthermore, given the qualitative nature of management, it is difficult to judge its
soundness just by looking at financial accounts of the bank.
 P a g e | 43

EARNINGS

Earnings and profitability, the prime source of increase in capital base, is examined with
regards to interest rate policies and adequacy of provisioning. In addition, it also helps to
support present and future operations of the institutions. The single best indicator used to
gauge earning is the Return on Assets (ROA), which is net income after taxes to total
asset ratio.

Strong earnings and profitability profile of banks reflects the ability to support present
and future operations. More specifically, this determines the capacity to absorb losses,
finance its expansion, pay dividends to its shareholders, and build up an adequate level of
capital. Being front line of defense against erosion of capital base from losses, the need
for high earnings and profitability can hardly be overemphasized. Although different
indicators are used to serve the purpose, the best and most widely used indicator is Return
on Assets (ROA). However, for in-depth analysis, another indicator Net Interest Margins
(NIM) is also used. Chronically unprofitable financial institutions risk insolvency.
Compared with most other indicators, trends in profitability can be more difficult to
interpret—for instance, unusually high profitability can reflect excessive risk taking.

Key factors to consider when assessing the credit union's earnings are:

 Level, growth trends, and stability of earnings, particularly return on average

assets;
 Quality and composition of earnings;
 Adequacy of valuation allowances and their effect on earnings;
 Future earnings prospects under a variety of economic conditions;
 Net interest margin;
 Net non-operating income and losses and their effect on earnings;
 Quality and composition of assets;
 Net worth level;
 Sufficiency of earnings for necessary capital formation
 P a g e | 44

LIQUIDITY

An adequate liquidity position refers to a situation, where institution can obtain sufficient
funds, either by increasing liabilities or by converting its assets quickly at a reasonable
cost. It is, therefore, generally assessed in terms of overall assets and liability
management, as mismatching gives rise to liquidity risk. Efficient fund management
refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive
liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate
exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total
asset ratio.

Initially solvent financial institutions may be driven toward closure by poor management
of short-term liquidity. Indicators should cover funding sources and capture large
maturity mismatches

The ―L‖ of CAMEL represents the concept of Asset/Liability Management - the

identification, monitoring and control of:

 Interest rate risk sensitivity and exposure

 Liquidity risk and control
 Technical competence in asset/liability management techniques

Table 16 : CAMEL ratios

 P a g e | 45

2003 2004 2005 2006 2007

CAPITAL
ADEQUACY
1 capital adequacy ratio 14.04 14.47 9.21 11.04 12.51
2 Debt to equity ratio 14.49511 13.58861 14.60123 9.877405 11.5384
debt=deposits+borrowings+unsecured debts
equity=capital+reserves and surplus
3 Advance/total assets 46.12631 47.99416 46.79018 56.97105 59.69799

ASSET QUALITY
1 gross NPA ratio 7.3 6.2 6.4 5.95 3.2
2 Loans Turnover 15 14 15 16 15
3 Asset Turnover Ratio 5.15 5.87 7.54 4.66 5.3
4 fair market value/book value 27.90116 35.72577 34.07891 18.4151 25.02822

MANAGEMENT
1 market value/equity capital 15.875 25.797 30.585 15.17 22.33
2 total advance/total deposits 52.59215 55.16913 52.87153 66.89032 68.9707
3 business per employee 4.30375 4.049324 5.108207 5.599165 7.100095
business=advance+deposits
4 profit per employee 4.323493 5.0188 5.312919 5.367999 5.428825
profit=net profit

EARNINGS
1 operating profit to average working funds
interest spread=interest earned – interest
2 expenditure
3 net profit to avg assets
avg assets=(opening assets+closing assets)/2
4 interest income to total income
5 non interest income to total income
6 operating expense to average assets
6.721504 5.532357 4.394385 4.964558 5.306502
36.56672 44.10793 42.65741 38.96822 32.74642
1.37946 1.829661 1.600424 1.421436 1.244506
85.32151 81.95152 93.12493 93.42115 93.38989
14.67849 18.04848 6.875065 6.578846 6.610107
3.064487 2.630043 2.020572 1.718763 1.323408

LIQUIDITY
1 liquid assets to total assets 7.426849 8.779983 13.95111 9.375546 10.15633
liquid assets=cash with RBI+cash for short
notice
2 liquid assets to total deposits 8.46792 10.09256 15.76434 11.00793 11.73388
 P a g e | 46

Weightages are given to each ratios in each category like Capital adequacy, asset quality,
Management ratios, Earnings and Liquidity ratios.

REASONS FOR WEIGHTAGE

1. Capital

In Capital ratios, we have given 0.5 to capital adequacy ratio as it is the most important
ratio which has significant impact on capital of the bank. Second most important ratio
which affects the capital ratio is debt – equity ratio and rest of them are of low impact.

2. Assets

In assets Ratio, there is no specific ratio which has specific importance. All ratios have
equal impact so here we have equal weightage to all the ratios.

3. Management

In management ratios, there is no specific ratio which has specific importance. All ratios
have equal impact so here we have equal weightage to all the ratios.

4. Earnings

In Earnings ratios, there is no specific ratio which has specific importance. All ratios have
equal impact so here we have equal weightage to all the ratios.

5. Liquidity

In Liquidity ratios, there is no specific ratio which has specific importance. All ratios
have equal impact so here we have equal weightage to all the ratios
 P a g e | 47

EARNINGS 2003 2004 2005 2006 2007

1 operating profit to average working funds 1.344301 1.106471 0.878877 0.992912 1.0613
2 interest spread (0.2) 7.313344 8.821587 8.531482 7.793645 6.549285
3 net profit to avg assets (0.2) 0.275892 0.365932 0.320085 0.284287 0.248901
4 interest income to total income (0.2) 17.0643 16.3903 18.62499 18.68423 18.67798
5 operating expense to average assets (0.2) 0.612897 0.526009 0.404114 0.343753 0.264682
Total 26.61074 27.2103 28.75955 28.09883 26.80215

Liquidity
1 liquid assets to total assets (0.5) 3.713425 4.389992 6.975555 4.687773 5.078164
2 liquid assets to total deposits (0.5) 4.23396 5.046281 7.882171 5.503964 5.86694
Total 7.947385 9.436273 14.85773 10.19174 10.9451

CAPITAL
ADEQUACY
1 capital adequacy ratio (0.5) 7.02 7.235 4.605 5.52 6.255
2 Debt to equity ratio (0.3) 4.348532 4.076584 4.380368 2.963222 3.461519
3 Advance/total assets (0.2) 9.225262 9.598833 9.358037 11.39421 11.9396
TOTAL 20.59379 20.91042 18.34341 19.87743 21.65612

MANAGEMENT
1 market value/equity capital (0.25) 3.96875 6.44925 7.64625 3.7925 5.5825
2 total advance/total deposits (0.25) 13.14804 13.79228 13.21788 16.72258 17.24268
3 business per employee (0.25) 1.075937 1.012331 1.277052 1.399791 1.775024
4 profit per employee (0.25) 1.080873 1.2547 1.32823 1.342 1.357206
Total 19.2736 22.50856 23.46941 23.25687 25.95741

ASSET QUALITY
1 gross NPA ratio (0.25) 1.825 1.55 1.6 1.4875 0.8
2 Loans Turnover (0.25) 3.75 3.5 3.75 4 3.75
3 Asset Turnover Ratio (0.25) 1.2875 1.4675 1.885 1.165 1.325
4 fair market value/book value (0.25) 6.975291 8.931444 8.519728 4.603774 6.257055
total 13.83779 15.44894 15.75473 11.25627 12.13206

Table 17:CAMEL ratios with weightages

 P a g e | 48

2003 2004 2005 2006 2007

CAPITAL
ADEQUACY 20.59379 20.91042 18.34341 19.87743 21.65612
ASSET QUALITY 13.83779 15.44894 15.75473 11.25627 12.13206
MANAGEMENT 19.2736 22.50856 23.46941 23.25687 25.95741
EARNINGS 26.61074 27.2103 28.75955 28.09883 26.80215
Liquidity 7.947385 9.436273 14.85773 10.19174 10.9451

Table 18:Sum of all values

35

30

25

2003
20
2004
15 2005
2006
10
2007
5

0
Capital Asset Quality Management Earings Liquidity
Adequacy

Graph 4: CAMEL ratios(2003-2007)

 P a g e | 49

T-Test
Table 19:Paired Samples Statistics
Mean N Std. Deviation Std. Error Mean

Pair 1 Y03 17.6527 5 7.07585 3.16441

Y06 18.5362 5 7.71613 3.45076

Table 20:Paired Samples Correlations

N Correlation Sig.

Pair 1 Y03 & Y06 5 .943 .016

Table 21:Paired Samples Test

Paired Differences

95% Confidence Interval

Std. Std. Error of the Difference Sig. (2-

Mean Deviation Mean Lower Upper t df tailed)

Pair Y03 - - 2.56865 1.14874 -4.07297 2.30584 .769 4 .485

1 Y04 .88357

Calculated Value = 0.769

Table value = 0.542

Accept null Hypothesis if calculated value < table value

Reject null Hypothesis if calculated value > table value

Null Hypothesis:
Synergy benefits are realized after the merger
 P a g e | 50

Alternate Hypothesis:
Synergy benefits are not realized after merger.

Based on the above results the null hypothesis is accepted which proves that the synergy
benefits are realized after the merger of Oriental Bank Of Commerce and Global Trust
bank. This proves that the merger between the banks is successful.

4.4 QUESTION NAIRE ANALYSIS:

 Are you of the opinion that the merger happened as a result of merger waves ?
a. Yes - 14
b. No - 6

Merger Decision as a result of

Merger Waves

Yes
No

 Rank the factors based on importance in driving banking industry into merger (in
the view of the acquirer)?
1 2 3 4 5
Merger Waves 1 2 5 8 4
Economies of Scale 1 1 7 10 1
Restructuring of Weak Banks 2 2 2 8 6
Expansion of size 2 3 7 7 1
 P a g e | 51

To achieve greater market share 1 3 8 4 4

To adhere to BASEL norms 1 2 4 5 8
To avoid Tax constraints 4 4 10 1 1
Diversified Risk 3 10 4 2 1
Increased Capital 2 3 4 6 5
Operational Efficiency 3 2 4 5 6

100%
90%
80%
70%
60%
50% 5
40% 4
30%
3
20%
10% 2
0% 1

 Please rate the following factor in the order of their importance being post merger
financial benefits
1 2 3 4 5
Improved Revenue 4 3 5 4 4
Cost reduction 4 3 7 3 3
Increased Capital 3 5 5 3 4
Increase reach 1 2 2 7 8
Diversified Risk 3 4 4 5 4
Tax Shield 4 5 6 3 2
 P a g e | 52

100%
90%
80%
70%
5
60%
4
50%
3
40%
2
30%
1
20%
10%
0%
Improved Cost Increased Incresed Diversified Tax sheild
Revenue reduction Capital reach Risk

 Which among the following contributes the most towards achieving cost
efficiency?
a. Ability to raise resources -6
b. Current funding profile -3
c. Portfolio yield -6
d. Asset liability management -5

Cost Efficiency
Ability to raise
resources
Current funding
profile
Portfolio Yeild

Asset Liability
 P a g e | 53

 Rank the importance of the following to the success of a merger

FACTORS 1 2 3 4 5
Cultural integration 3 4 4 4 5

Management integration 3 3 3 6 5

Resource integration 2 3 6 5 4

Did the acquiring company 4 4 5 4 3

overvalue the target?
Is the acquisition EPS accretive for 3 6 5 3 3
the shareholders of the acquiring
company?
Will the acquisition affect the 1 4 6 5 4
capital structure of the acquiring
company?
Time frame for acquisition process 3 4 4 5 4

100%
90%
80%
70%
60%
50%
40%
30% 5
20%
10% 4
0%
3
2
1
 P a g e | 54

 Merger & Acquisition in Indian banking industry have been successful and banks
have achieved their target synergic financial benefits. What is your opinion about
this statement?
a. Completely Successful -5
b. Partially Successful -7
c. Completely Unsuccessful - 2
d. Partially Unsuccessful -6

Mergers in Indian Banking

Industry
Completely Successful

Partially Successful

Completely
unsuccessful
Partially unsuccessful
 P a g e | 55

CHAPTER 5

CONCLUSION
 P a g e | 56

5.1 MAJOR FINDINGS

 The merger decision is based on several factors in the banking industry. Ten such
factors are identified and bank professionals are asked to rate the factors on the
order of importance.
 Using Factor Analysis, the factors are reduced to three components. The three
components are named as External forces, internal forces and Restructuring of
banks.
 Component 1 external forces, which includes Merger Waves, Market share,
BASEL norms are the most important factors affecting the mergers in banking
industry.
 Component 2 internal forces, which include economies of scale, diversified risk,
capital requirements, tax shield.
 Component 3 Restructuring of weak banks is another important factor which
determines the mergers and acquisitions in banking industry
 Chi Square- Test of independence test results on the above mentioned extracted
components indicate that they are not independent of the merger decision. This is
proved
by forming a hypothesis.
 Performance of the bank before and after merger is found by calculating the
capital adequacy ratios for the period before and after merger.
 The results indicate that the performance has increased after merger but the
benefits are not realized immediately.
 This is proved by using a Paired t test with the help of the hypothesis.

5.2 CONCLUSION

Mergers and acquisitions in the Banking sector are going to be the order of the day. India
is slowly but surely moving from the regime of ‗large number of small banks‘ to ‗small
number of large banks‘. The new era in banking is going to be one of consolidation over
identified core competencies. The trend in Indian Banking industry is mainly for the
restructuring of the weak banks and one such example is taken is the study.
 P a g e | 57

In this research to study about the synergy on bank consolidation in Indian Banking
industry a case study approach is taken. The merger which took place in August 2004
between Oriental Bank of Commerce and Global trust Bank is taken. Through this
research we have looked into various factors which affect the merger decision for a
particular bank. Hypothesis is created and with the help of CAMEL ratios and Paired t
tests the performance before and after the merger is identified.

Based on the findings from the paper it is clearly identified that mergers and acquisitions
strategy in the Indian Banking industry has proved to be successful if done rightly for the
right cause. In the Indian Banking industry the effects of the merger is not seen
immediately and it takes atleast two to three years to reap the benefits fully. As the
mergers and acquisitions is proved to be successful in the Indian banking Industry, many
future voluntary mergers should be done in order to improve the banking industry in
India and to make them compete with the International standards. It is also clear from
above research that the mergers should be synergy driven. It is also important to consider
the Shareholders of both the acquiring company and the target company. It is important
to raise their wealth after the merger.

Overall the banks mergers are proved to be beneficial and India is yet to recognize the
potential for large number of merger deals in the Banking industry.

5.3 LIMITATIONS OF THE STUDY

The research is subjected to the following limitations

 Since case study approach is taken only one merger deal is taken for study.
 Non-availability of matters regarding confidential matters
 Not able to reach the required persons with in the timeframe.
 Secondary data used to calculate the CAMEL ratios are subject to errors as
different sites give different data.
 Questionnaire is collected from bank people and it is subject to their mood and
situation.
 The findings are limited due to lack of time.
 P a g e | 58

5.4 SUGGESTIONS FOR FURTHER STUDY

 Since only one merger is taken for study, further study can be carried by taking
many mergers.
 Here in the study only the synergy effects based on the CAMEL ratios is
discussed, whereas the further study can be carried out by considering other
synergy factors.
 The study is carried out only from the companies‘ point of view and the further
study can be done by considering the shareholders point of view and maximizing
their wealth.
 Qualitative factors like brand image etc are not discussed in the study which can
be included in the further study.
 Premium paid for the mergers is not discussed as it is a forced merger but this
cannot be same for all the mergers and can be included in the further study.
 Post merger reforms are very important for the success of a merger and they can
be discussed in the further study of the merger.
 P a g e | 59

BIBILIOGRAPHY
1. Bhatnagar.R.G. (2001) ―Banking too Much on Mergers‖ , Professional Banker.
2. Deeksha Verma. (2001). ― Banking on Merger‖, Professional Banker.
3. Sangita Mehta.(2001). ― The Writing on the Wall‖, Professional Banker.
4. Giridaran.R. (2001). ―Mergers- The Emerging Reality‖, IBA Bulletin.
5. .Anuraag Saxena and Naresh Grandly. (2001). ―Alternative for Payments in M
&A Deals.. A Strategic Evaluation of the Choices at Hand ―The Management
Accountant.
6. Manoj Anand and Jagandeep , 2007 ―Impact of Merger Announcements on
Shareholders' Wealth: Evidence from Indian Private Sector Banks‖ SSRN .
7. TNN ,24.02.2009 ―Commission should be set up to decide on mergers‖
8. Dario Fokarelli and other , 2001 ,‖Why do banks merge‖
9. Akhil Bhan ,2009 , ―Merger in Indian banking sector benefits and motives‖
10. Berger, A. (1998). ―The Efficiency Effects of Bank Mergers and Acquisition: A
Preliminary Look at the 1990s Data.‖ in Bank Mergers & Acquisitions, edited by
Y.
11. Amihud and G. miller. Boston, MA. Kluwer Academic: 79-111.
12. Berger.A, R. S. Demsetz, and P.E.Strahan (1999). ―The Consolidation of the
Financial
Services Industry: Causes, Consequences and Implications for the Future‖,
Journal of
Banking and Finance, 23, 135-90
13. Chandler, Jr A. D, (1962). Strategy and Structure. (Cambridge, MA, MIT Press)
14. Dymski, A. (2002). ―The Global Bank Merger Wave: Implications for
Developing
Countries‖. The Developing Economies XL-4: 435-66.
15. Lakshminarayanan, P. (2005) ―Consolidation in the Banking Industry through
mergers
and Acquisitions‖, IBA Bulletin, 92-99
16. Mallick, I. (2004). ―Comparative Advantage in Banking and Strategic
Specialization in
 P a g e | 60

17. Cournot Games‖, in Trade, Finance and Development, edited by B.Chatterjee and
18. A.Raychaudhuri. DEEP & DEEP Publications Pvt. Limited.
19. P. Milgrom and J. Roberts (1992). Economics, Organization and Management.
(Prentice
20. Hall, Englewood Cliffs, New Jersey 07632)
 P a g e | 61

APPENDIX
Dear Madam/ Sir ,
I am an MBA finance student of Christ University .I am conducting a study on the
Synergy Benefits in Consolidation of banking industry. This is for educational purpose
only .Kindly extend your corporation in filling up this questionnaire .

Name :................................................................................
Name of company :...........................................................
Designation :......................................................................

1. Are you of the opinion that the merger happened as a result of merger waves ?
c. Yes
d. No

2. What type of merger it was?

a. Horizontal b. Vertical c. Conglomerate d. Others

3. How was the purchase consideration settled?

a. Cash b. Share swap c. Both d. Others

4. Do you think the deal was rightly priced?

a. Yes
b. No
c. Can‘t say

5. Rank the factors based on importance in driving banking industry into merger (in
the view of the acquirer)?
1 2 3 4 5
To achieve economies of scale
Restructuring of weak banks
 P a g e | 62

Expansion of size
To achieve greater market share
To avoid Competition
To adhere to BASEL norms
To become an International bank
To avoid Tax constraints
Others

6. Mergers have helped banks to achieve financial synergies?

a. Strongly agree b. Agree c. Can‘t say d. Disagree e. Strongly disagree

7. Please rate the following factor in the order of their importance being post merger
financial benefits
1 2 3 4 5
Business development
Best Investment
Improved Revenue
Economies of Scale
Cost reduction
Increased Capital
Increase reach
Diversified Risk
Tax Shield

8. The merger have helped in achieving cost efficiencies?

a. Yes b. No c. Can‘t Say
 P a g e | 63

9. Which among the following contributes the most towards achieving cost
efficiency?
e. Ability to raise resources
f. Current funding profile
g. Portfolio yield
h. Asset liability management

10. Why that particular bank was chosen for merger?

a. To gain its resource
b. Tax benefit
c. Market share
d. Diversification
e. Others ..................................

11. Rank the importance of the following to the success of a merger

FACTORS 1 2 3 4 5
Cultural integration

Management integration

Resource integration

Did the acquiring company

overvalue the target?
Is the acquisition EPS accretive for
the shareholders of the acquiring
company?
Will the acquisition affect the
capital structure of the acquiring
company?
Time frame for acquisition process
 P a g e | 64

12. Merger & Acquisition in Indian banking industry have been successful and banks
have achieved their target synergic financial benefits. What is your opinion about
this statement?
e. Completely Successful
f. Partially Successful
g. Completely Unsuccessful
h. Partially Unsuccessful

13. Loss of identity of acquired company effect the employee performance?

a. Yes b. No c. Can‘t say

14. Was any special training or orientation given to the employees prior to merger?
a. Yes b. No c. Others

15. Time frame required by the acquired company to adjust to cultural diversity?
a. 0-2 months b. 2- 6 months c. 6 – 12 months d. > 12 months

16. Has the merger contributed to improving the capital adequacy ratios, consider
each of the parameters given below?

1 2 3 4 5
Debt equity ratio
Capital Buffer ratio
Advances to total assets
 P a g e | 65

17. Merger has helped in improving the asset quality in terms of portfolio risks, write
offs etc ?
a. Agree b. Can‘t Say c. Disagree

18. Indicate the level of increment in the following factors due merger?
1 2 3 4 5
EPS
Interest earning ratio
Price earning
Return on total assets
Profit margin
Return on share holders fund

19. Liquidity of the bank has improved post merger?

a. Agree b. Can‘t say c. Disagree

20. The merger has helped in improving the operational efficiency of the bank?
a. Yes b. No c. Can‘t say