MERGER AND ACQUISITION

Group Member

• Faiza Tariq• Irum Afzal• Farah Naz

Road Map• Introduction of Merger and acquisition

• Purpose and categories of merger & acquisition.

• Merger and Acquisition in Banking Sector.

• Analysis

– Profitability

– Capital adequacy indicators

– Liquidity risk indicator

– Growth indicators

• Conclusion

• Recommendation

Introduction

• The wave of merger and acquisitions that currently swept through the banking sector started after the announcement by the state bank of Pakistan.

• Mergers and Acquisitions are:– Common place in developing countries of the

world but are just becoming prominent in Pakistan.

Cont,….

– More efficient, better-capitalized, more skilled industry.

– Primary driven by Business motives or market forces and Regulatory interventions.

– Singing a useful role in restructuring the banking industry with no risk and lack of opposition.

Merger

• Merger means combining two companies in one corporation which is completely absorbed by another company. The less significant company loses its name and operates with more important company, which exists with its identity.

Acquisition

• Acquisition is use to acquired property in ownership.

• In corporation combinations, an acquisition is to buy one company by getting controlling interest in all resources of other company.

Categories of Merger and Acquisition

• Vertical Combination• Horizontal Combination• Circular Combination• Conglomerate Combination• Market-extension • Product-extension

Merger and Acquisition in Banking Sector

• In Pakistan, banks have chosen to acquire / merge with other banks in order to comply with the statutory requirement of raising their paid up capital to at-least Rs.10 billion by the end of 2009.

• The privatization policy of the government has resulted in acquisitions of ABL, UBL and PTCL

Cont,…

• Some mergers took place at the time of nationalization of Pakistani banks on January 1, 1974 reducing the number of bank from 16 to 5.

• Merger and acquisition took place at large scale during 1980's, 1990's and 21st century. Foreign banks have usually small numbers of branches. If they acquire Pakistani bank they get lager branch network.

Cont,…

• Some small foreign banks were not running profitability so they merge themselves to Pakistani banks.

• For example was the Pakistani operations of bank of America and Emirates banks were sold to Union bank. Later on Union Bank itself bought by Standard Chartered Bank.

Standard Chartered Bank

• The history of Standard Chartered in Pakistan dates back to 1863, when the Chartered Bank of India, Australia and China first established its operations in Karachi.

Union Bank

• Union Bank was established in 1991, with its headquarters in Karachi, Sindh, Pakistan.

• Prior to the merger with Standard Chartered Bank in 2006 it was Pakistan's eighth largest bank and had 65 branches in some 22 cities, about US$2 billion in assets, and about 400,000 customers.

Merger Of Standard Chartered Bank And

Union • Union Bank and Standard Chartered Bank

have merged to become one bank. Now this bank has 115 branches and a network of 119 ATMs in 22 Major cities in Pakistan.

Analysis

Profitability Final

Table 1(a): Standard Chartered Bank (SCBPL)

2002 2003 2004 2005 2006 2007 2008 2009 Average

pre pre pre pre post post post post pre post

Return on assets 3.4 3.2 3.23 3.25 1.23 1.29 0.27 0.25 3.27 0.76

Return on

Equity 53 36 36.67 16.5 17.19 13.75 14.65 16.65 35.5415.56

Return on

deposits 5.39 4.64 4.56 4.57 3.29 3.73 1.57 0.36 4.79 2.23

capital

employed 58.0 54.01 64.03 69.05 49.08 45.08 47.16 47 61.23 47.08

Interpretation

The three ratio return on assets, return on equity and return on deposits showing same declining behavior but in return on capital employed ratio in first year value decrease but after that bank goes in increasing trend which depict a way toward better performance.

Table 2: FBLP

1998 1999 2000 2001 2002 2003 2004 2005

Average

pre pre pre pre post post post post pre post

Return on

assets 6.9 6.54 7.023 7.12 6.03 6.00 5.57 5.12 7.12 5.12

Return on

Equity 65 64.12 57.37 61.89 45.12 40.39 41.57 48.34 61.89 48.34

Return on

deposits 4.45 5.12 4.78 5.32 4.11 5.19 3.89 4.12 5.32 4.12

capital

employed 61.5 59.23 60.05 59.78 48 48.89 52.07 51.34 59.78 51.34

Interpretation• The figures depict gradually decreasing in

return on assets which shows bank performance on assets is not going adequate.

• But in the case of Return on equity, it decline in first three years but in 2005 return in equity increased suitably. It indicates the improvement or bank is going to retain its pre-merger performance or improving its performance.

Cont,…

• Return on deposits also showing steadily decline in worth of bank's deposit ratio.

• Return on capital employed just decline in first year of post merger but in last three years (in sample) capital employed embark to boost in value.

Profitability final

• Return on assets in both banks decreased after merger which indicates that performance on both banks assets is not sufficient. The case of other three ratios is also same as return on assets.

• All these ratios show that the profitability indicators are slowly declining after merger and acquisition.

Capital Adequacy Indicators

Data finding (SCBPL)

Table 3. Capital Adequacy SCBPL

2002 2003 2004 2005 2006 2007 2008 2009 Average

pre pre pre pre post post post post pre post

Total capital to assets 7.82 7.89 8.27 7.31 7.99 6.93 7.25 7.72 7.31 7.72

Loans to total capital 0.95 0.99 1.72 1.22 0.98 1.29 0.99 1.96 1.22 1.96

Deposits to total capital 7.01 5.17 5.34 6.03 6.78 6.08 7.89 7.91 6.03 7.91

Capital/ risk assets 18.11 17.99 17.61 17.93 16.87 17.19 16.98 17.49 17.93 17.49

Interpretation

• Total capital to assets ratio is presenting escalating tendency year to year which is showing positive response for capital adequacy improvement.

• Loans to total capital ratio is growing very low in post-merger and acquisition period as compare pre-merger period.

Cont,…• Capital/risk assets ratio or capital adequacy ratio

basically find out how banks can cope up with the risks.

• It is a measurement which shows how much capital is used to maintain the banks' risk assets.

• This ratio determines the capacity of a bank in terms of meeting with the legal responsibility and extra risks such as credit risk and operational risk. So capital provides cushion for potential losses.

Cont,…

• There is no specific fluctuation in capital adequacy ratio as its representing same trend in pre-merger and acquisition period.

Data Finding (FBPL)

Table 4: Capital Adequacy Faysal Bank

1998 1999 2000 2001 2002 2003 2004 2005 Average

pre pre pre pre post post post post pre post

Total capital to assets 5.78 5.63 6.64 6.61 6.01 5.23 5.85 6.12 6.61 6.12

Loans to total capital 1.15 0.89 1.20 1.06 1.01 1.09 0.99 0.96 1.06 0.96

Deposits to total capital 6.34 6.67 5.34 5.43 5.78 5.98 6.19 6.51 5.43 6.51

Capital/ risk assets 15.78 14.89 15.09 16.03 11.07 13.15 13.68 15.09 16.03 15.09

Interpretation (FBPL)• Total capital to assets ratio is decreased in first year

after that ratio begin to increase which is showing improvement in performance of capital adequacy management.

• Loans to total capital ratio is growing very low in post-merger and acquisition period as compare pre-merger period.

• Capital adequacy ratio decreased in first couple of years but in last two years it perform well as pre-merger but not show as good as pre merger performance in all periods.

Liquidity Risk Indicator

Data Finding (SCBPL)

Table 5: Liquidity Risk Of SCBPL

2002 2003 2004 2005 2006 2007 2008 2009 Average

pre pre pre pre post post post post pre post

Loans to total assets

10.15 9.73 9.97 10.12 9.67 9.91 10.69 11.24 10.08 10.38

deposits to total assets

5.25 5.48 6.89 5.93 4.47 4.56 5.18 5.89 5.88 5.02

loans to deposits 75 69 71 73 67 62 70 74 72 67

Fixed assets to total assets

15 13 17 18.3 16 19 17.5 17 15.82 17

Interpretation• In SCBPL the loans to assets ratio increase

year to year which is risky for bank.• Deposits to total assets ratio in post merger

era is declining which is not in favor of bank performance.

• Loan to deposit ratio decreased in first three years of merger but in last it boosts up. Which means that in first 3 years banks may not be earning as much as they could be but in last they can generate more earnings.

Cont,…..

• Fixed assets to total assets ratio increased in post merger era which indicates that the liquidity condition of banks is fetching weaker.

Table 6: Liquidity Risk Of FBPL

1998 1999 2000 2001 2002 2003 2004 2005 Average

pre pre pre pre post post post post pre post

Loans to total

assets9.12 9.89 10.18 10.01 9.91 10.02 9.89 10.19 9.8 10.0025

Deposits to

total assets6.14 6.00 5.89 5.23 5.21 5.98 6.12 6.29 5.8155 5.9

Loans to

deposits69 67 71 79 70 68 67 72 71.5 69.25

Fixed assets to

total assets17 18 16 19 20 19 18 22 17.5 19.75

Interpretation

• In FBPL all ratios of liquidity except loan to deposit showing increasing trend that is a sign of low performance.

Liquidity final

• The above tables indicates the average measurement of pre and post merger of both SCBPL and FBPL banks. The overall liquidity performance of both banks is declining after merger and acquisition.

Growth indicators

Data Finding (SCBPL)

Table 7: Growth Indicator Of SCBPL

2002 2003 2004 2005 2006 2007 2008 2009 Average

pre pre pre pre post post post post pre post

EPS 5.36 4.87 5.12 5.19 5.89 4.91 5.09 5.37 5.13 5.43

Price Earnings

ratio4.89 4.38 5.10 4.79 4.12 4.92 5.67 5.84 4.79 5.13

Dividend Yield ratio

35 29 37 33 32 38 41 45 33.5 39

Dividend Payout ratio

24 22 28 31 26 31 37 39 26.5 33.25

Interpretation

• EPS increased in post merger period which is showing better performance in stock.

• The price earning ratio is increasing which shows that in post merger era the market growth of bank is going well.

• The growth indicators are going toward performance in a good health condition.

Table 8: Growth Indicator Of FBPL

1998 1999 2000 2001 2002 2003 2004 2005 Average

pre pre pre pre post post post post pre post

EPS 4.86 4.83 3.92 4.19 4.89 4.91 5.29 5.97 4.45 5.265

Price Earnings

ratio8.9 8.08 7.11 6.79 6.82 8.12 8.83 8.34 7.72 8.0275

Dividend Yield

ratio28 32 31 29 35 38 38 41 30 38

Dividend Payout

ratio11 9 17 21 19 23 20 22 14.5 21

Interpretation

• FBPL is showing same trend in growth indicators as SCBPL so the above interpretation is same for FBPL.

Growth Final

• The growth indicator of both banks is boosting up with positive response in performance which shows that the market value of bank turns into better-quality after merger.

CONCLUSION

• The study shows that mergers and acquisitions in banking commerce are among the policy trusts of SBP to correct the variance in the industry.

• The merger has sharpened the competitive edge in the industry that they need to play in the emerging global financial markets.

• It further shows that one of the fall outs of the mergers is the shrinkage in the industry.

• Pakistan has banks with huge capital to invest now, but it is instructive to note that size and huge capital do not necessarily make a good and sound bank.

Recommendation

• There are some recommendations after conclusion of this study;

• Government should provide enabling environment that will encourage more merger in Pakistan, whereby our nation can have a strong bank with good capital bases.

• SBP should make such policies which can control monopoly creation in banking industry.

• SBP should be fix minimum capital base for all banks to run their operation successfully and in risk free environment.

THANK YOU