3. 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
4. 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.
5. 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.
6. 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.
7. 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.
9. 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
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
16. 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 35.54
15.56
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
17. 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.
18. Table 2: FBLP
Average
1998 1999 2000 2001 2002 2003 2004 2005
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
19. 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.
20. 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.
21. 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.
23. 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
24. 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.
25. 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.
26. Cont,…
• There is no specific fluctuation in capital
adequacy ratio as its representing same trend
in pre-merger and acquisition period.
28. 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
29. 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.
31. 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 10.15 9.73 9.97 10.12 9.67 9.91 10.69 11.24 10.08 10.38
assets
deposits to
total 5.25 5.48 6.89 5.93 4.47 4.56 5.18 5.89 5.88 5.02
assets
loans to
75 69 71 73 67 62 70 74 72 67
deposits
Fixed
assets to
15 13 17 18.3 16 19 17.5 17 15.82 17
total
assets
32. 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.
33. Cont,…..
• Fixed assets to total assets ratio
increased in post merger era which
indicates that the liquidity condition of
banks is fetching weaker.
34. 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
9.12 9.89 10.18 10.01 9.91 10.02 9.89 10.19 9.8 10.0025
assets
Deposits to
6.14 6.00 5.89 5.23 5.21 5.98 6.12 6.29 5.8155 5.9
total assets
Loans to
69 67 71 79 70 68 67 72 71.5 69.25
deposits
Fixed assets to
17 18 16 19 20 19 18 22 17.5 19.75
total assets
35. Interpretation
• In FBPL all ratios of liquidity except loan
to deposit showing increasing trend that
is a sign of low performance.
36. 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.
38. 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
4.89 4.38 5.10 4.79 4.12 4.92 5.67 5.84 4.79 5.13
ratio
Dividend Yield
35 29 37 33 32 38 41 45 33.5 39
ratio
Dividend Payout
24 22 28 31 26 31 37 39 26.5 33.25
ratio
39. 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.
40. 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
8.9 8.08 7.11 6.79 6.82 8.12 8.83 8.34 7.72 8.0275
ratio
Dividend Yield
28 32 31 29 35 38 38 41 30 38
ratio
Dividend Payout
11 9 17 21 19 23 20 22 14.5 21
ratio
41. Interpretation
• FBPL is showing same trend in growth
indicators as SCBPL so the above
interpretation is same for FBPL.
42. 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.
43. 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.
44. 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.
