IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563

Vol. 5, No4, August 2015

Post-Merger Analysis of Profitability Ratio of

Acquiring Bank A Study of Merger of
HDFC Bank and Centurion Bank of Punjab
Dr. Maheshwari Patel Niranjan
Department of Management
Government Arts and Commerce College
Bhopal, India
Abstract - Merger and Acquisition is not an unknown
phenomenon in Indian banking industry. In fact
Merger and Acquisition are happening in Indian
banking industry since early twentieth century. With
modernization the Merger and Acquisition have
become more common among banks in India as this
helps banks to increase their market share and also
helps them the penetrate to regions where the
acquiring banks does not have any presence. This
paper aims to analyse the post-merger performance
of acquiring bank taking profitability ratio as key
parameter for the study and for the research merger
of HDFC bank with Centurion Bank of Punjab have
been considered.
Keyword- Merger and Acquisitions, Profitability
Ratio, Return on Equity, Net Profit Margin, Return on
Assets, HDFC Bank

I. INTRODUCTION
With recent growth rates among large countries
second only to Chinas, India has experienced
nothing short of an economic transformation since
the liberalization process began in the early 1990s.
The banking sector has seen major changes with
deregulation of interest rates and the emergence of
strong domestic private players as well as foreign
banks. Liberalization and globalization have
breathed new life into the foreign exchange
markets while simultaneously besetting them with
new challenges. Commodity trading, particularly
trade in commodity futures, have practically started
from scratch to attain scale and attention. The
banking industry has moved from an era of rigid
controls and government interference to a more
market-governed system. New private banks have
made their presence felt in a very strong way and
several foreign banks have entered the country.
Over last few decades mergers and acquisition have
been very common among the banking sector.
Some of the mergers and acquisition within the
banking industry were forced while some were
voluntary. The objective of this research is to
investigate the post-merger performance of a
selected private bank and analysis the performance

of the bank after the merger activity. For the

purpose of the research merger of HDFC bank has
been carefully chosen and analysed.
Merger and Acquisitions in Indian Banking
Industry dates back to early twenty century when
three presidency banks namely Bank of Bengal,
Bank of Bombay and Bank of Madras were merged
to form Imperial Bank of India which then came to
be known as State Bank of India.Since eighties
consolidation excitement began in both commercial
and rural banks of the country. Since early twenty
first century Merger and Acquisitions in Indian
Banking Industry took rapid hop where most of the
co-operative banks started merging with
commercial banks.
II. MERGER AND ACQUISITIONS: THEORETICAL
BACKGROUND
There are various strategic and financial
objectives that influence mergers and acquisitions.
According to Sudarsanam (2003) two organizations
with often different corporate personalities, cultures
and value systems are bought together.
Sudarsanam (2003) argues that a particular activity
is called merger when corporations or organization
come together to combine and share their resources
to achieve common objectives. In a merger, both
firms combine to form a third entity and the owners
of both the combining firms remains a joint owner
of the new entity. Acquisition can be explained as
event where a company takes a controlling
ownership interest in another firm, a legal
subsidiary of another firm, or selected assets of
another firm. According to Depamphilis (2008)
acquisition involves purchase of another firms
assets or stock. Ross et al. (2004) explains that
acquiring all the assets of target firm will avoid the
potential problem of having minority shareholders
as opposed to acquisition of stock however cost
involved in transferring of the assets are generally
costly.

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Vol. 5, No4, August 2015

Nalwaya and Vyas (2012) in their research

defined the concept of Merger and Acquisition.
According to them a merger is the combination of
two or more companies into one, wherein merging
entities lose their identities. No fresh investment is
made through this process. However, an exchange
of share takes place between the entities involved
in such process. On the other hand Nalwaya and
Vyas (2012) points out that an acquisition is
aimed at gaining a controlling interest in share
capital of the acquired company.In the globalized
economy, Merger and Acquisitions (M&A) acts as
an important tool for the growth and expansion of
the economy. The main motive behind the Merger
and acquisitions (M&A) is to create synergy, that is
one plus one is more than two and this rationale
beguiles the companies for merger at the tough
times. Merger and Acquisitions (M&A) help the
companies in getting the benefits of greater market
share and cost efficiency.
Merger and Acquisitions have become an
important medium have become an important
medium to expand product portfolios, enter new
markets, acquire new technology, gain access to R
& D and gain access to resources which would
enable the company to compete on a global scale
(Yadav and Kumar, 2005). However there have
been instances where mergers and acquisitions as
been entered info for non-value maximizing
reasons i.e. to just build the companys profile and
prestige (Malatesta, 1983; Rill, 1986).
Growth is always the priority of all companies
and confers serious concern to expand the business
activities. Companies go for Merger and
Acquisitions (M&A) for achieving higher profit
and expanding market share. Merger and
Acquisitions (M&A) is the need of business
enterprises for achieving the economies of scale,
growth, diversification, synergy, financial planning,
Globalization of economy, and monopolistic
approach also creates interest amongst companies
for Merger and Acquisitions (M&A) in order to
increase the market power.
Table 1 provides details of Bank mergers in
India in three different periods: Pre nationalizations
period (1961 1968), nationalization period (1969
1990) and post reform period i.e. after the year
1991.
TABLE I.

BANK MERGERS IN DEIFFERENT PERIODS

Period
Pre-Nationalizations
Period (1961 1968)
Nationalization Period
(1969 1990)

Number of Mergers
46

Post Reform Period

27
(1991 2006)
Total number of
86
megers
Source: Jayadev & Sensarma(2007)
III. PROFITABILITY RATIOS
Profitability ratios measure a banks
performance and provide an indication of its ability
to generate profits. As profits are used to fund
business development and pay dividends to
shareholders, a banks profitability and how
efficient it is at generating profits is an important
consideration for shareholders. Profitability ratios
measure the bank's use of its assets and control of
its expenses to generate an acceptable rate of
return.
Profitability ratios reveal the banks ability to
earn a satisfactory profit and return on investment.
The ratios are an indicator of good financial health
and how effectively the bank in managing its
assets. Following ratios have been taken into
considerations to analyse profitability parameters
of selected banks. Return on Equity (ROE), Net
Profit Margin (NPM), Return on Assets (ROA).
IV. LITERATURE REVIEW
Saunders et al (2012) argues that available
literature helps researcher develop a fine
understanding of previous researches. A brief
review of literature has been carried out in order to
enhance the level of understanding in the area of
mergers, gain insight into the impact of mergers on
the financial performance of acquirer and target
bank and formulate research problem for further
investigation in this area.In the following section of
this examination an attempt has been made to
identify the literature concerned with Indian
banking system with special reference to
performance of bank post-merger and acquisition in
Indian banking sector. Several studies have been
conducted to examine the efficiency of banks.
Berger and Humphrey (1997) in their study provide
an extensive review of studies on the efficiency of
banking sector. Berger and Humphrey (1997) in
their study points out that majority of studies
focused on the banking markets of well-developed
countries with particular emphasis on the US
market. Tambi(2005) in his researchattempts to
evaluate the impact of such mergers on the
performance of a corporation. Though the
theoretical assumption says that mergers improve
the overall performance of the company due to
increased market power and synergy impacts,
Tambi (2005) uses his paper to evaluate the same
in the scenario of Indian economy.

13

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IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563
Vol. 5, No4, August 2015

Bhattacharyya et al. (1997) used DEA to

measure the productive efficiency of 70 Indian
commercial banks in the period 1986-1991. They
found that the public sector banks are the most
efficient banks as compared to foreign banks and
private banks. They also found a temporal decline
in the performance of public sector banks. Das
(1997) used the cross-section data and DEA to
examine the efficiency of 65 major banks for the
year 1995. He found that Indian banks were more
technically efficient than allocatively efficient.
Mukherjee et al. (2002) examined the technical
efficiency of 68 Indian commercial banks for the
period 1996-1999 and found that public sector
banks are more efficient than both private and
foreign banks. Ram Mohan and Ray (2004) also
found that public sector banks performed better
than private sector banks but not differently from
foreign banks. All these studies have compared the
efficiency of public, private and foreign banks by
using a common frontier and such comparisons are
not justified on the ground that public, private and
foreign banks are operated under different legal and
regulatory frameworks. Kaur and Kaur (2010) in
studies the impact of merger on the cost efficiency
of participated banks and the performance of the
banks have been compared before and after merger.
The result of their studies indicate that mergers led
to higher level of cost efficiency for the merging
bank and this study suggest that trend of merger in
Indian Banking Sector has no far been restricted to
restructuring of week and financially distressed
banks & the further finding suggest that strong
banks should not be merged with weak banks, as it
will have adverse effect upon the assets quality of
the stronger banks. They points out that the strong
banks should be merged with strong bank to
compete with foreign banks and enter in the global
financial market. Ravichandran and Alkhathlan
(2010) research analysis the efficiency and
performance of post-merger using CRAMELtype
variable of selected banks in India & Saudi Arabia
which are initiated by the market forces. The
CRAMEL model consists of the following: Capital
Adequacy, Resource raising ability, Assets Quality,
Management and Systems Evaluation, Earning
Potential
and
Liquidity/Assets
Liability
Management. The result of their research suggests
that the mergers did not seem to enhance the
productive efficiency of the banks as they do not
indicate any significant difference.Anand and
Singh (2008) 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.
There
studies
reveals that
the
merger
announcements in the Indian banking industry have
positive and significant shareholder wealth effect
both for bidder banks and target banks.

V. METHODOLOGY AND DATA

For the purpose of this research archival
research strategy has been employed. This research
does make use existing research done on merger
and acquisition (M & A) with context to banking
sector. Bryman (1989) argues that the term archival
here can refer to both recent as well as any
historical documents. Archival research strategy
focus on past and current changes is it exploratory,
descriptive or explanatory (Saunders et al, 2012). A
noted disadvantage of archival research strategy
may be missing data or refused data due to
confidentiality reasons (Saunders et al, 2012) thus
as a part of this research the researcher will
establish its own data.
The research primarily relies on Secondary
Data. When a researcher are increasingly expected
to consider undertaking further analyses of data
that have already been collected for some other
purpose, such data are known as secondary data.
Secondary data includes both raw and published
summaries. The investigators for the purpose of
this paper the researcher have gathered required
data from websites of HDFC bank and Money
Control.
The study is carried out over various years
under consideration using Accounting Based
Approach using different financial parameters and
Event study methodology. The pre-merger and
post-merger averages for a set of key financial
ratios were computed for 4 years prior to, and 4
years after, the year of merger completion. For the
years prior to a merger, the key financial ratios of
the acquiring firm alone are considered. Post the
merger, the operating ratios for the combined firm
are taken. For the purpose of research the average
ratios were compared using paired t-test. A
confidence interval of 95% has be set for difference
in means.
VI. HDFC BANK AND ITS MERGER WITH CBOP
Housing Development Finance Corporation
(HDFC) was established in the year 1994. HDFC
Bank was amongst the first to receive an "in
principle" approval from the Reserve Bank of India
(RBI) to set up a bank in the private sector, as part
of RBI"s liberalisation of the Indian Banking
Industry in 1994. The bank was incorporated in
August 1994 in the name of "HDFC Bank
Limited", with its registered office in Mumbai,
India. HDFC Bank commenced operations as a
Scheduled Commercial Bank in January 1995.
HDFC Bank is headquartered in Mumbai. As
on June 30, 2013, the Bank has a network of 3,119
branches in 1,891 cities across India (HDFC Bank,

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Vol. 5, No4, August 2015

2013). All branches are linked on an online realtime basis. Customers in over 1397 locations are
also serviced through Telephone Banking. The
Bank's expansion plans take into account the need
to have a presence in all major industrial and
commercial centres, where its corporate customers
are located, as well as the need to build a strong
retail customer base for both deposits and loan
products. Being a clearing/settlement bank to
various leading stock exchanges, the Bank has
branches in centres where the NSE/BSE has a
strong and active member base.The Bank also has a
network of 11,088 ATMs across India (HDFC
Bank, 2013).
The Centurion Bank of Punjab (CBOP) was
an Indian private sector bank that provided retail
and corporate banking services. It operated on a
strong nationwide franchise of 394 branches 452
ATMs in 180 locations which was supported by
over 7,500 employees. Centurion Bank was
incorporated on 30 June 1994. The Bank was a
joint venture between 20th Century Finance
Corporation and its associates and Keppel Group of
Singapore through Kephinance Investment
(Mauritius). In the year1995 Centurion Bank
amalgamated 20th Century Finance Corporation.
On 29 June 2005, Centurion Bank and Bank of
Punjab agreed to a merger of the two banks. The
combined bank took as its name Centurion Bank of
Punjab. Bank of Punjab had been founded in the
year 1995. In the year 2006 Centurion Bank of
Punjab acquired Kochi-based Lord Krishna Bank.
On May 23, 2008, the amalgamation of
Centurion Bank of Punjab with HDFC Bank was
formally approved by Reserve Bank of India (RBI)
to complete the statutory and regulatory approval
process. As per the scheme of amalgamation,
shareholders of CBOP received 1 share of HDFC
Bank for every 29 shares of CBOP. The
amalgamation added significant value to HDFC
Bank in terms of increased branch network,
geographic reach, and customer base, and a bigger
pool of skilled manpower. The merger between the
two banks created a nationwide network of 1,148
branches a strong deposit base of around Rs. 1,200
billion and net advances of around Rs. 850 billion.
The balance sheet size of the combined entity after
the merger was over Rs. 1,500 billion
TABLE II.
Categories
Branches
ATM

VALUE ADDED AFTER MERGER OF HDFC BANK

AND CBOP
HDFC
Bank
754
1525

CBOP
394
452

Merged
Entities
1,148
1977

Source: HDFC Bank & Moneycontol.com (2013)

The merger made HDFC bank largest private

bank in the country in terms of number of branches
ahead of its competitor ICICI which had 955
branches across the country at the time of merger
(figure 1). Before merger HDFC had 754 branches
and COBP had 394 branches. The merger made
HDFC largest private banks with 1,148 branches.

FIGURE 1: NUMBER OF BRANCHES OF PRIVATE BANK IN THE

YEAR 2008

VII.

HYPOTHESIS OF THE RESEARCH

The following hypothesis has been formulated and

has been tested to draw the conclusions for the
research:1
1.

Testing the significance difference

between pre & post-merger Net Profit
Margin

2.

There is no significant association

between return on assets of the selected
banks pre and post-merger

3.

Testing the significance difference

between pre & post-merger Return on
Equity

VIII.

ANALYSIS AND INTERPRETATIONS

Table (3) shows the mean, standard deviation,

correlation, calculated t-value and significance of
the perception of the selected bank in pre and postmerger context of Net Profit Margin of HDFC
Bank. For the HDFC bank the test of difference of
mean was found to be not significant (0.967<1.9432, df=6) i.e. calculated t-value is less
than tabulated t-value at 5% level of significance.
This implies that pre and post-merger performance

For the purpose of research following research have been take

into consideration: Net Profit Margin, Return on Equity and
Return on Assets

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IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563
Vol. 5, No4, August 2015

of HDFC bank do not differ in context of net profit

margin.

Pre/Post - Merger

TABLE III: T-TEST OF PRE AND POST-MERGER OF NET PROFIT

MARGIN OF HDFC BANK
Particulars
HDFC Bank
Pre/Post - Merger

Pre-Merger

17.9

19.15

19.2

16.18

18.5

15.1

19.1

Mean

17.94

18.67

Standard Deviation

2.84

0.60

-0.564

Calculated t-value

-0.967

Tabulated value of (t)

1.9432

Significance (.05
Level)

Not Significant

Similarly, Table 4 for the Return of Assets

(ROA) of HDFC bank the test of difference of
mean was found to be not significant
(0.052<1.9432, df=6) i.e. calculated t-value is less
than tabulated t-value at 5% level of significance.
This implies that pre and post-merger performance
of HDFC bank do not differ in context of return on
assets. Therefore the hypothesis taken There is no
significant association between return on assets of
the selected banks pre and post-merger is
accepted.
TABLE IV: TESTING SIGNIFICANT ASSOCIATION BETWEEN
RETURN ON ASSETS OF THE SELECTED BANKS PRE AND POSTMERGER

Particulars
Pre/Post - Merger

16.12

17.74

16.74

19.46

18.69
20.34

Mean

18.34

17.97

Standard Deviation

0.81

1.92

-0.017

Calculated t-value

-0.024

Tabulated value of (t)

1.9432

Significance (.05
Level)

Not Significant

Test of difference of mean (Table 5) was found

to be not significant (-0.024<1.9432, df=6) i.e.
calculated t-value is less than tabulated t-value at
5% level of significance. This implies that pre and
post-merger performance of HDFC bank do not
differ in context of Return on Equity (ROE).
IX. CONCLUSION
On analysing three key profitability ratios
of selected banks it is observed that net profit
margin, return on equity and return on assets the
selected bank noticed increase after the merger.
However on analysing the pre and post-merger
performance of the selected bank using student ttest it is found that for the selected ratios which
were tested it is observed that there is no significant
relationship between selected bank pre and postmerger performance.
REFERENCE

HDFC Bank
Pre-Merger
1.42
1.39
1.39
1.42

Mean

1.405

Standard Deviation

0.02

Post-Merger
1.45
1.57
1.68
1.82
1.630
0.16

0.037

Calculated t-value

0.052

Tabulated value of
(t)
Significance (.05
Level)

1.9432

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Not Significant

Testing of significance difference between pre

& post-merger Return on Equity (ROE) of HDFC
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between banks pre & post-merger Return on Equity
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TABLE V: T-TEST OF PRE AND POST-MERGER OF RETURN ON
EQUITY (ROE) OF HDFC BANK
Particulars
HDFC Bank

Post-Merger

18.45

17.74

Post-Merger

21.33

Pre-Merger

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