A study on the impact of merger on Financial Performance of Public Sector Banks in India

1. Introduction

In India, the banking system has started in 1770 with the Bank of Hindustan and since then the banking system started its operation in various fields or aspects. Indian banking system is one of the important parts of the Indian financial system. It can be said that the banking system is the backbone of the Indian financial system as the monetary transactions are done through the banking system, regulated by RBI.

However, since many years the merger of banks has been taking place for better growth, better returns to stakeholders, future prospect etc. However presently when there were twenty-seven public sector banks the finance minister put a decision on merger of thirteen banks on 17th September 2018 and 30th August 2019 and as a result of which there are twelve public sector banks in India after this merger.

Table 1: List of Merged Banks in Recent Times with Business Size

2. Research Design, Objectives, Hypothesis & Methodology

The announcement of Bank of Baroda merger was made on 17th September 2018 and the bank started its functioning as a merged entity with effect from 1st April, 2019 and therefore data for the six quarters before 1st April, 2019 and six quarters after 1st April, 2019 has been taken for comparison of the financial performance, while for the other four bank mergers the date of announcement of merger was 30th August 2019 and the merged entity started its operation with effect from 1st April, 2020 and therefore data for these banks has been taken for six quarters before 1st April, 2020 and six quarters after 1st April, 2020. So, a pre-merger and post-merger comparative study on the financial performance of merged public sector banks in India has been done comparing the quarterly results in which the first quarter in pre-merger period is compared with first quarter in the post-merger period and similarly for the next five quarters.

3. Bank of Baroda (BOB): Quarterly Data & Paired t-Test Performance

Table 2: Data of Five Ratios of Bank of Baroda for Twelve Quarters

Table 3: Financial Performance of Bank of Baroda Before and After Merger

Interpretation: From Table 3 it can be observed that there is a significant impact of merger on CAR, percentage of gross NPA to advances and percentage of net NPA to advances of Bank of Baroda as significance value is less than 0.05 and it is also found that there is no significant impact of merger on EPS and ROA. The mean value of EPS improved as it arrived to a positive value from -1.8850 to 0.5617, ROA has also improved after merger with -0.2417 to 0.12 showing a better performance and also the mean value of percentage of gross NPA to advances and percentage of net NPA to advances has reduced after merger signifying a better performance.

4. Canara Bank: Quarterly Data & Paired t-Test Performance

Table 4: Data of Five Ratios of Canara Bank for Twelve Quarters

Table 5: Financial Performance of Canara Bank Before and After Merger

Interpretation: From Table 5 it can be observed that there is a significant impact of merger on percentage of net NPA to advances of Canara Bank as significance value is less than 0.05 and it is also found that there is no significant impact of merger on CAR, EPS, ROA, and percentage of gross NPA to advances. The mean value of EPS has improved from -3.5467 to 5.2600. ROA has become positive after merger from -0.2350 to 0.2983 showing a better performance after merger and also the mean values of percentage of net NPA to advances has fallen significantly from 5.5217 to 3.4167 which shows a better performance.

5. Indian Bank: Quarterly Data & Paired t-Test Performance

Table 6: Data of Five Ratios of Indian Bank for Twelve Quarters

Table 7: Financial Performance of Indian Bank Before and After Merger

Interpretation: From Table 7 it can be observed that there is a significant impact of merger on CAR and percentage of gross NPA to advances of Indian Bank as significance value is less than 0.05 and it is also found that there is no significant impact of merger on EPS, ROA, and percentage of net NPA. The mean value of EPS has increased significantly from 2.5383 to 7.6233 showing greater earnings, ROA has increased from 0.17 to 0.5683 showing a better performance after merger and the mean value of percentage of gross NPA to advances has increased for Indian bank while percentage of net NPA to advances has reduced after merger signifying a better performance.

6. Punjab National Bank (PNB): Quarterly Data & Paired t-Test Performance

Table 8: Data of Five Ratios of Punjab National Bank for Twelve Quarters

Table 9: Financial Performance of Punjab National Bank Before and After Merger

Interpretation: From Table 9 it can be observed that there is a significant impact of merger on CAR, percentage of Gross NPA to advances and percentage of net NPA to advances of Punjab National Bank as significance value is less than 0.05 and it is also found that there is no significant impact of merger on EPS and ROA. The mean value of CAR has increased from 12.0450 to 14.01 after merger. EPS became positive after merger from -1.7050 to 0.6717 a huge improvement in earnings, ROA also arrived at positive values from -0.2317 to 0.2067 showing a better performance after merger and the mean value of percentage of gross NPA to advances and percentage of net NPA to advances has reduced after merger signifying a better performance.

7. Union Bank of India: Quarterly Data & Paired t-Test Performance

Table 10: Data of Five Ratios of Union Bank of India for Twelve Quarters

Table 11: Financial Performance of Union Bank of India Before and After Merger

Interpretation: From Table 11 it can be observed that there is a significant impact of merger on percentage of gross NPA to advances and percentage of net NPA to advances of Union Bank of India as significance value is less than 0.05 and it is also found that there is no significant impact of merger on CAR, EPS, and ROA. However, we have observed that the mean value of EPS has improved after merger i.e., from -6.2050 (pre-merger) to 1.4267 (post-merger period) which signifies a greater profitability for the bank and we also found that Return on Assets has improved after merger from a mean value of -0.7733 (pre-merger) to 0.3450 (post-merger) and it is also found that the mean value of percentage of gross NPA to advances and percentage of net NPA to advances have decreased after merger signifying a better performance of the bank.

8. Comparative Analysis Across Merged Anchor Banks

Table 12: Comparative Analysis of Merged Banks Before and After Merger

Comparative Interpretation: Canara Bank has the highest rise in EPS from -3.54 to 5.26 followed by Union Bank of India and Indian Bank. PNB has a lowest rise in EPS. On the overall we can see that there is a rise in EPS as well. Union Bank of India has the highest rise in Return on Assets from -0.7733 to 0.3450 followed by Canara bank, PNB, Indian Bank and BOB that means the returns are good, assets are effectively utilized. All the banks had negative ROA in pre period except Indian Bank but after merger they had a positive ROA. We can see that there is decrease in the percentage of gross NPA to advances of all banks except Indian Bank which has a rise in the percentage of gross NPA to advances. The percentage of net NPA to advances has reduced in the case of all banks. We can see a positive impact of merger on performance of banks as we can see there is a growth in Capital Adequacy, EPS and ROA taking the average of all the banks and there is also a fall in the percentage of gross NPA to advances and percentage of net NPA to advances for all banks.

Empirical Synthesis: Significant Impact Matrix Across Variables

9. Strategic Role of Chartered Accountants (CAs) in Bank Mergers

10. Conclusion

In this study we analyzed the impact of merger on financial performance of public sector banks in India and it is found from the analysis that merger has a significant effect on financial performance with regard to Capital Adequacy, gross NPA to advances and net NPA to advances but there is no significant impact of merger on Earnings per Share and Return on Assets.