"Merger & Acquisitions of Banks and Non-Performing Assets(NPAs)"

1. Inter Collegiate Research Paper Competition
On
Redefining Globalization: Can Asia Lead the World…?
Merger and Acquisitions of Banks and Non-Performing
Assets (NPAs)
Presented by
Mr. Sachin B. Bhurase
(MBA-I Finance )
Indian Institute of Cost and Management Studies & Research
(IndSearch), Pune.

2. Introduction
‘Has Asia been doing enough in leading world opinion on
how to manage, and in particular not to mismanage, the global
challenges we face today, including that of terrorism, violence, and
global injustice?’ asked Indian Nobel laureate Amartya Sen at a
forum in Bangkok in 2007.
Increase of risks in the world
• Geopolitical : (Political Tensions , Migrant Crisis & Risks of terrorism)
• Economical : (Slowdown in Economic Growth)
Such a wide range of risks rising simultaneously remind us of
the urgent need of global leadership to deal with them
appropriately.

3. Research Problem
• Can Mergers and Acquisitions in the Banking Sector in Asia help to
Achieve the Global Leadership with current Trend of Non-
Performing Assets (NPAs) in Banking Sector…?
Research Question
• Do mergers and Acquisitions of banks increases bank profitability
and financial performance…?
• Do current trend of NPAs in banking industry threats to growth of
banks…?
• Can mergers and acquisitions of banks help to overcome the
problem of NPAs in banks…?
• Can Regional governance in banks of Asia help to lead the World…?

4. Objectives of Study
• To evaluate the impact of Merger & Acquisitions
on bank profitability and financial performance.
• To analyze trend of NPAs in banking industry and
factors mainly contributing to rising NPAs of bank
industry.
• To evaluate impact of Merger & Acquisitions of
banks on their NPAs.
• To study causes of lacks in regional legitimacy in
Asian banks.

5. Need of Study
• Regional entities are now expected to play a larger role
in the management of such risks, based on the
assumption that the United States is becoming less
ready to take the leadership role in global governance.
• Asian regional governance is not well organized yet to
do so. Japan, China, South Korea and India are always
in conflicting situations.
• Anyhow, overall in Asia we do not yet have a
confirmed framework of regional governance assured
by rules or resources.
• Banking Sector is one of the most important sector
which can contribute in global governance by merger
and Acquisitions of banks in Asia.

6. Size Matters…!
For the Global Economy, Asia’s Size Does Matter
Emerging
markets
Population
(In Million)
GDP
Per
Capita
Banking
Penetration
(%)
FDI
Inflows
(Billion)
Trade Flows
Exports
(Billion)
Imports
(Billion)
China 1,368 $7,589 78.90% $128.50 $3,233 $3,342
India 1,260 $1,627 53.1% $34.4 $598 $819

8. Rank Bank
Total Assets
(USD
Billions)
Headquarters
1 Industrial and Commercial Bank of China 3,473.09 Beijing, China
2 China Construction Bank Corporation 3,016.45 Beijing, China
3 Agricultural Bank of China 2,815.92 Beijing, China
4 Mitsubishi UFJ Financial Group 2,626.29 Tokyo, Japan
5 Bank of China 2,611.43 Beijing, China
6 JPMorgan Chase & Co. 2,500.00
New York, United
States
7 HSBC Holdings PLC 2,374.15
London, United
Kingdom
8 BNP Paribas 2,189.27 Paris, France
9 Bank of America 2,187.70
Charlotte, United
States
10 Wells Fargo & Co. 1,930.12
San Francisco,
United States

9. Research
MethodologyResearch Sample Data Collection

10. Data Analysis & Interpretations
Mergers by ICICI Bank
S.
No.
Mergers by ICICI Bank Year of Merger
1. SCICI 1996
2. ITC Classic Finance Ltd. 1997
3 Anagram Finance 1998
4. Bank of Madura Ltd. 2001
5. ICICI Personal Financial Services Ltd 2002
6. ICICI Capital Services Ltd. 2002
7. Standard Chartered Grindlays Bank 2002
8. Sangli Bank Ltd. 2007
9. The Bank of Rajasthan Ltd. (BoR) 2010
Major Merger by ICICI Bank
• Merger of The Sangli Bank Limited
Sangli Bank was an unlisted private sector
bank headquartered at Sangli in the state of
Maharashtra, India. At March 31, 2006, Sangli
Bank had deposits of Rs. 2,004 cr. advances of
Rs. 888 cr. net NPA ratio of 2.3% and capital
adequacy of 1.6%. In the year ended March 31,
2006, it incurred a loss of Rs. 29 cr.
• Merger of The Bank of Rajasthan
Bank of Rajasthan is a listed old Indian private sector
bank with its corporate office at Mumbai in
Maharashtra and registered office at Udaipur in
Rajasthan. At March 31, 2009, Bank of Rajasthan had
463 branches and 111 ATMs, total assets of Rs. 172.24
billion, deposits of Rs. 151.87 billion and advances of
Rs. 77.81 billion. It made a net profit of Rs. 1.18 billion
in fiscal 2009 and a net loss of Rs. 0.10 billion in the
nine months ended December 31, 2009.

11. Financial Ratio Analysis
Net Interest Margin Ratio
=(Interest Earned – Interest Expended) / Total Assets
Return on Assets & Return on
Equity
ROA= (Net Income – Pref. Dividend) / Total Assets
ROE= (Net Income – Pref. Dividend) / Shareholder’s Equity

12. Financial Ratio Analysis
Loan to Deposit Ratio
=loans & Advances / Deposits *100
Financial Leverage Ratio
= Total Assets / Shareholder’s Equity

13. Financial Ratio Analysis
Borrowings to Net-Worth Ratio
= Borrowings / Shareholder’s Equity
Revenue and EPS Growth Rate
EPS= (Net Income – Pref. Dividend / No. of Equity Shares

14. Non-Performing Assets (NPAs)
Net NPA Ratio NPA Provisions

15. Factors Contributing to rise in NPAs of Banks
Internal Factors
• Defective Lending
Processes.
• Inappropriate Technology.
• Improper SWOT Analysis.
• Poor Credit Appraisal
System.
• Managerial Deficiencies.
• Absence of Regular
Industrial Visit.
• Re-loaning Processes.
External Factors
• Ineffective Recovery
Tribunals.
• Willful defaults.
• Natural Calamities.
• Exchange rate fluctuations
• Change in government
policies
• Industrial Sickness.
• Lack of Demand.

16. Key Findings of the Research Study
• Good Net Interest Margin (NIM) in last five years which is more than 3%
• Return on Assets (ROA) is effective after merger of Bank of Rajasthan (2010)
which is above 1% after 2011.
• Return on Equity (ROE) has been increased after merger in 2010 with Bank of
Rajasthan which is more than 10% good for a bank.
• Loan to Deposit Ratio is very close to unhealthy levels which is 100% after
merger with banks.
• Financial Leverage Ratio is good after merger with banks below 10% is
conservative and above 10% is aggressive.
• Borrowings to Net-worth is not healthy (above the 150% ratio is not healthy for
bank.)
• NPA ratio is healthy after merger which is below 1% up to 2014 but after 2014
bank assets are not healthy. Below 1% is good sign of Management.
• There is decrease in the quality of Assets due to increase in Non-Performing
Assets in the case of Merger with the Sangli Bank Limited.
• In the Case of Merger with the Bank of Rajasthan there is decrease in the Net
non-performing assets and it increased quality of assets.

17. Conclusion
• Merger & Acquisitions of future should aim at creation of
strong regional entity and to develop ability to withstand
the market shocks instead of protecting the interests of
depositors of weak banks.
• Asia needs few banks but large banks to lead the World and
lacks in the regional legitimacy & a collective regional idea
about world order is yet to develop.
• Asia’s role in global governance cannot be delinked from
the question: Who leads Asia…?
• The obvious answer to Amartya Sen’s question posed at
the introduction of this paper is that Asia is doing more
than before, but this is still far from doing enough.