Pre and Post Acquisition Performance of HDFC BANKS with various banks

A training report submitted in partial fulfillment of the requirement for the degree of

MASTERS OF BUSINESS ADMINISTRATION (2010-2012)

Submitted by: Name of Student: DEEPAK PANDEY MBA FINAL PROJECT Roll No. - 105512251600

Acknowledgement
No Learning is proper and effective without Proper Guidance Every study is incomplete without having a well plan and concrete exposure to the student. Management studies are not exception. Scope of the project at this level is very wide ranging. On the other hand it provide sound basis to adopt the theoretical knowledge and on the other hand it gives an opportunities for exposure to real time situation. This study is a part of our MBA program and to do this project in a short period was a heavy task. Intention, dedication, concentration and hard work are very much essential to complete any task. But still it needs a lot of support, guidance, assistance, cooperation of people to make it successful. Its our bear to imprint of people who have given their precious ideas and times to enable to complete the research and the project report. This report has added to my practical knowledge and built my confidence. Thanks again to all with the active support with whom I am able to complete this report successfully. In this regard, I shall remain indebted to DR. DEPAKSHI GUPTA, wish to thank for their consistent moral support and the assistance they regularly provided me.

PREFACE

Someone has rightly said that practical experience is far better and closer to the real world than mere theoretical exposure. The practical experience helps the students to view the real business world closely, which in turn widely influences their perceptions and arguments their understanding of the real situation.

The phenomenon of creation is a long process requiring time, energy and dedications well as skill and experience of those people engaged in the task, ultimately in the outcome as the final form of embodiment of the creator's vision. Research work constitutes the backbone of any management education program. A management student has to do research work quite frequently during her entire span.

MBA is a stepping stone to management career in order to reach practical and concrete results. Our contemporary lives have been influenced by the advancement and growth in industry. Wherein, the ultra-modern and advanced lifestyles of the 21st century are unthinkable. This study aims to explore all such phases

EXECUTIVE SUMMARY

At this juncture the Indian economy may be going through a bad patch but over the last three to five years it has seen steady growth. This has resulted in unprecedented growth in income levels of households. With this the income level of Indians are increasing but still the per capita savings and loans figures is very low as compared to countries like USA, UK, China, Korea etc. In the research we found that the Indian government is encouraging banks to go for mergers and acquisitions which would help the sector get some global and powerful brands. But, the million dollar question is that Are all these bank mergers and acquisitions adding value to these banks and the shareholders? Indian banks have been governed by RBI which is pretty good in its approach and its practices have ensured that Indian banks have not experienced the kind of situations that their American counterparts are experiencing. The study was started with an exploratory research and for that we studied secondary literature data from various sources like websites, databases, newspapers, books and journals. Then data collection was done from sources and banks websites regarding EPS, current ratio, capital adequacy ratio, net interest margin, net profit etc. This research helped us in finding that the net profit margin has actually gone down immediately after a merger or acquisition as compared to pre-merger times. Current ratio and net working capital have increased after acquisition which shows that there is increase in current assets. EPS values showed that there was mixed results with some banks achieving better EPS while some got lower EPS after the merger. Mergers and acquisitions have been happening in Indian banks quite frequently lately. The government of India has supported mergers of Indian banks for the mere reason that it wants globally powerful brands while current scenario shows many small players..

TABLE OF CONTENTS
S No.
1 2 3 4 5 6 7 8 9 10 11 12 13

PARTICULAR
INTRODUCATION REVIEW OF LITERATURE OBJECTIVE OF THE PROJECT RESEARCH METHODOLOGY PERFORMACE OF DIFFERENT BANKS IN ACQUISIATION HDFC ACQUIRES TIMES BANK ICICI BANK ACQUIRES BANK OF MADURA

PAGE No

6-10 10-12 12 13-14 14-25 26-42 42-64 65 65-66 66-67

LIMITATION
CONCLUSION RECOMMENDATION REFERENCES

CHAPTER -1 INTRODUCTION
Introduction In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons. One plus one makes three: The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, costefficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone In today's globalized economy, competitiveness and competitive advantage have become the buzzwords for corporate around the world. Corporate worldwide have been aggressively trying to build new competencies and capabilities, to remain competitive and to grow profitably. In the USA, since the early 1900s, there have been six distinct waves of mergers and acquisitions, each with its distinct characteristics and outcomes, (Based on a detailed analysis of more than 4,000 completed deals between 1992 and 2006 in India). As per the report, at the beginning of the twentieth century, there was a
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drive for market share, followed three decades later by a longer and more ambitious wave as companies connected together different elements of the value chain, from raw materials and production through to distribution. The most recent wave, which started in 2004, after the internet bubble at the turn of the century and the subsequent downturn, is driven by consolidation motives

Mergers and Acquisitions

Mergers and Acquisitions (abbreviated M&A) are featured with corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can finance, or help a growth oriented company in a given industry to grow rapidly. Merger is used as a tool by companies for the purpose of expansion, often aiming at an increase of their long term profitability. There are various types of actions that a company can take when deciding to move forward using M&A. Usually mergers occur by mutual consent, where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties.

Acquisitions can also happen through a hostile takeover by purchasing the majority of
outstanding shares of a company in the open market. It is mainly against the wishes of the target company. An acquisition, can be defined as a takeover, is buying of one company called target by another. An acquisition may be friendly or hostile. In the former case the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover

Benefits of Mergers and Acquisition

Synergy: Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit.

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.

Economies of scale - Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

Increased revenue/Increased Market Share: This is mainly used to increase companys power. Motive behind M&A assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices.

Cross selling: This can be defined as selling of complementary product or services For example; a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts.

Taxes: M&A also helps in reducing the tax liability of a profit making company .A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability.

Geographical or other diversification: M&A helps companies in diversification. This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders

Resource transfer: As we can observe resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's

standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Types of Mergers
Horizontal mergers take place where the two merging companies produce similar product in the same industry. Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine. Conglomerate mergers take place when the two firms operate in different industries. Market extension mergers two companies that sell the same product in different market. Product extension mergers two companies selling different but related products in the same market. Accretive mergers are those in which an acquiring company's earnings per share (EPS) increase. A way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. Dilutive mergers are the opposite of above, whereby a company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.

Need & Scope:This research study was aimed to study the impact of mergers on the operating performance of acquiring corporate in different industries, by examining some pre- merger and post-merger financial ratios, with the sample of firms chosen as all mergers involving public limited and traded companies in India between 1999 onwards. The results suggest that there are minor variations in terms of impact on operating performance following mergers, in different industries in India. In particular, mergers seem to have had a slightly positive impact on profitability of firms in the banking and finance industry, the pharmaceuticals, textiles and electrical equipment sectors saw a marginal negative impact on operating performance (in terms of profitability and returns on investment). For the Chemicals and Agriproducts sectors, mergers had caused a significant decline, both in terms of profitability margins and returns on investment and assets. Usually all persons want money for personal and commercial purposes. Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. To survive in this modern market every bank

implements so many new innovative ideas, strategies, and advanced technologies. For that they give each and every minute detail about their institution and projects to Public. They are providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to create their own image in public and corporate world. These banks always accept innovative notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc. So, as a student business management we take keen interest in Indian economy and for that banks are the main source of development. So this must be the first choice for us to select this topic. At this stage every person must know about new innovation, technology of procedure new schemes and new ventures. So the scope of study is limited to banking sector in which the study of various banks has been done.

Objectives of the Study Following are the trust areas of study: To make analysis of the acquisitions of Banks. (HDFC with Centurion Bank, Times Bank with HDFC, Bank of Madura with ICICI Bank, South Gujarat Local Area Bank with Bank of Baroda.) To analyze the pre & post performance of different banks after acquisitions.

To analyze the changing pattern of average share price of the acquirer company and whether the overall effect has been positive or not.

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CHAPTER -2 REVIEW OF LITERATURE

Kwansa. F. A (2001) through a lit on the phrase mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that could aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. In today's competitive environment, one of the most eye-catching strategies being discussed in the board rooms is "Mergers and Acquisitions". The global M&A activity had reached record highs during the previous few years beating all-time record of $3. 3 trillion M&A value in 1997. Economic and political stability across the globe had facilitated the same, encouraging corporate growth which in turn was generating more and more M&A activities. The basic mechanics of corporate combinations and the reasons (both legitimate and illegitimate) that such combinations occur. We found that corporate combinations were similar to the kinds of combinations and acquisitions that individuals often undertake in their everyday lives. Further, acquisitions are often made for solid business reasons.

Williams. S. A (2001) tell about until up to a couple of years back, the news that Indian companies having acquired American-European entities was very rare. However, this scenario had taken a sudden

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U turn. Nowadays, news of Indian Companies acquiring foreign businesses was more common than other way round. Buoyant Indian Economy, extra cash with Indian corporate, Government policies and newly found dynamism in Indian businessmen had all contributed to this new acquisition trend. Indian companies were now aggressively looking at North American and European markets to spread their wings and become the global players. .

Markus. F (2004) tells us that measuring merger performance had been one of the most difficult problems in front of researchers. Different tools and techniques in the forms of ratio analysis etc. were used by scholars to identify the effects of M&As and interestingly different results were there in the market. Performance could be measured on the basis of long-term and short-term time period; longterm performance could be checked on the basis of profitability of the firm. Fundamental analysis of the company with the help of ratio analysis, comparative statement analysis was there to see the potential and capitalized synergy in cases of M&as in long run.

Anand. M & Singh. J (2005) puts a light on the effects of mergers between commercial banks and investment banks on firm-bank relationships and the pricing of loan contracts, focusing on the role of information asymmetries. I found that, prior to a public securities issuance; junk rated firms were more likely to switch lenders to a merged commercial-investment bank when their existing lenders were pure commercial banks. Borrowers that issue public securities and were in local lending relationships are less likely to switch lenders after their bank merges with an investment bank. Also, when issuing public debt, junk-rated firms and companies in local lending relationships were likely to select their commercial-investment bank as underwriter. The revealed preference by firms that issue informational sensitive securities for commercial-investment bank relationships suggested that there were benefits from the banks ability to use private information from lending in investment banking. After merging with investment banks, commercial banks raised the interest rates of their junk rated and local continuing borrowers, but only when the firm had a single lending relationship, consistent with banks having information monopolies that allow for the extraction of merger-related gains. Mergers between commercial and investment banks did not affect firm-bank relationships or borrowing costs when the bank was less likely to acquire private information through lending or when firms are unlikely to issue public securities. Additional tests showed that the findings are not likely due to mergers between commercial banks, changes in economic conditions, or poor ex-post performance of borrowers.

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to very high CAR registered by Bank of Madura. The merger announcements in the Indian banking industry had positive and significant shareholder wealth effect both for bidder banks and target banks.

Gourlay. A et al (2006) offers an insight into the effectiveness of economic policy reforms in the Indian Banking System by examining the efficiency benefits of mergers among Scheduled Commercial Banks in India over the post-reform period 1991-92 to 2004-05. It did this by using the methodology developed by Bogetoft and Wang (2005). We also provided a metric for judging the success or failure of a merger. Overall, we found that bank mergers in the post-reform period possessed Considerable potential efficiency gains stemming from harmony gains. Post-merger efficiency analysis of the merged bank with a control group of non-merging banks reveals an initial merger related efficiency advantage for the former that, while persistent, did not show a sustained increase this failing to provide merging banks with a competitive advantage vis-a-viz their nonmerging counterparts.

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RESEARCH METHODOLOGY Research is an art of scientific investigation. In other word research is a scientific and systematic search for pertinent information on a specific topic. The logic behind taking research methodology into consideration is that one can have knowledge about the method and procedure adopted for achievement of objectives of the project. With the adoption of this others can evaluate the results also. Its main aim is to keep the researchers on the right track.

Research Design

Type of Study: - Research Design is an arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy on procedure. The research problem having been formulated in clear-cut term helps the researcher to prepare a research design. In this research descriptive study is used. Data Collection The objectives of the project are such that only secondary data is required to achieve them. The methodology adopted for studying the objectives was to evaluate the pre and post performance of various Indian banks after acquisitions. Only secondary data was used for the project. The mode of collecting secondary data are research articles, websites etc.

Secondary Data Secondary data has been collected through the various bank sites, capitalize & by surfing on Internet and the bank employees in the organization were consulted at many times.

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PERFORMANCE OF DIFFERENT BANKS AND THEIR ACQUISITIONS

About HDFC Housing Development Finance Corporation Limited, more popularly known as HDFC Bank Ltd, was established in the year 1994, as a part of the liberalization of the Indian Banking Industry by Reserve Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval from RBI, for setting up a bank in the private sector. The bank was incorporated with the name 'HDFC Bank Limited', with its registered office in Mumbai. The following year, it started its operations as a Scheduled Commercial Bank. Today, the bank boasts of as many as 1412 branches and over 3275 ATMs across India. The bank has pursued both organic and inorganic growth strategies to emerge as a strong player in private banking space. It acquired Times Bank in Feb 2002 and Centurion Bank of Punjab (CBoP) in year 2008. Bank has extensive network of more than 1500 branches and balance sheet size of about Rs1939bn. The integration process of erstwhile CBOP branch in complete and will be brought to HDFC Bank productivity standards within next 1215 months. The banks strengths include its strong brand image, proficient management, strong earnings traction, high CASA ratio and relatively better asset quality. Bank also has two nonbanking subsidiaries HDFC Securities, which is primarily into broking business and HDB Financial services, which is in to microlending, distribution and collection business. Capital Structure At present, HDFC Bank boasts of an authorized capital of Rs 550 crore (Rs5.5 billion), of this the paid-up amount is Rs 424.6 crore (Rs.4.2 billion). In terms of equity share, the HDFC Group holds 19.4%. Foreign Institutional Investors (FIIs) have around 28% of the equity and about 17.6% is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue). The bank has about 570,000 15

shareholders. Its shares find a listing on the Stock Exchange, Mumbai and National Stock Exchange, while its American Depository Shares are listed on the New York Stock Exchange (NYSE), under the symbol 'HDB'.

1. HDFC Bank with Centurion Bank of Punjab Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The bank serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. On 29th August 2007, Centurion Bank of Punjab merged with Lord Krishna Bank (LKB), post obtaining all requisite statutory and regulatory approvals. This merger has further strengthened the geographical reach of the Bank in major towns and cities across the country, especially in the State of Kerala, in addition to its existing dominance in the northern part of the country. Centurion Bank of Punjab was operating on a strong nationwide franchise of 404 branches and 452 ATMs in 190 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the major Indian stock exchanges, the Banks shares are also listed on the Luxembourg Stock Exchange. The bank aims to serve all the banking and financial needs of its customers through multiple delivery channels, each of which is supported by state of the art technology architecture. Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab, both of which had strong retail franchises in their respective markets. Centurion Bank had a well managed and growing retail assets business, including leadership positions in two wheeler loans and commercial vehicles loans and a strong capital base. Bank of Punjab brings with it a strong retail deposit customer base in North India in addition to a sizable SME and agriculture portfolio.

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The book value of the bank would also go up to around Rs 300 crores. The higher book value should help the combine entity to mobilize funds at lower rate. The combined bank will be full service commercial bank with a strong presence in the Retail, SME and Agricultural segments.

Motives for Merger HDFC Bank with Centurion Bank of PunjabMotives are as followings

Wider distribution reach: 32% of CBoP branches are in metros

The merger added close to 394 branches to HDFC Banks network, by adding close to 19% to its asset base. HDFC Banks branches are currently spread throughout the country, whereas CBoP has a strong presence in Punjab, Maharashtra, and with the acquisition of LKB, now in Kerala as well. In view of RBIs stringent license policy, metro licenses have been hard to come by for most banks. With the merger, HDFC Banks metro branches will increase by 44% in one shot, while its non metro branches will increase by 57%. One of the best liability franchises and further building muscle HDFC bank has one of the best liability franchises with more than 70% of branches located in the CASA rich metro and urban regions of the country. Traditionally, bank had strong presence in North, West and southern region, which has been further, amplified with acquisition of CBoP. Most of the banks have realized importance of maintaining adequate branch network, which helps in procuring low cost CASA deposits and thus control cost of funding in long run to maintain margins. HDFC bank has been aggressive on this front since its inception and has even acquired banks to expand its branch network. Historically, bank has maintained higher CASA ratio in the range of about 40%55%, which provides the flexibility to lend at competitive rates to customers and still maintain one of the best margins in the industry.

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 To be largest private sector bank The merger of CBoP with HDFC Bank created the largest private sector bank in terms of branch network with 1,140 branches. HDFC Banks branches are currently widely spread throughout the country, whereas CBOP has strong presence in Punjab, Maharashtra, and with Lord Krishna Banks (LKB) acquisition, now in Kerala as well. Merger to create seventh largest bank in India A long term positive Merger of CBoP with HDFC Bank will create an entity with a balance sheet size of ~INR 1,600bn. The merged entity will be the seventh largest bank in India. While CBoPs balance sheet size is 19% that of HDFC Banks, it will add almost 53% to HDFC Bank's existing branch network. HDFC, CBoP merger marginally in favor of former

HDFC

Bank and Centurion Bank of Punjab (CBoP) boards have given in- principle

approval for a merger between the two banks. The deal is valued at just under Rs100bn based on February 22nd closing prices and a swap ratio of 1:29. HDFC Bank is to issue 67 million shares to CBoP shareholders, resulting in 19% expansion in current equity base to Rs 4.2bn from Rs3.5bn at present. Post merger, HDFC Banks shareholding is to come down from 23.3% at present to 19.6% and the bank has made an offer to HDFC to make a preferential allotment post the merger to help it maintain its current share holding in the bank. Post preferential allotment to HDFC, the total equity base is likely to increase by 25% to Rs4.4bn from Rs3.5bn at present. The deal is priced on the higher side, considering CBoPs profitability and return ratios being much lower than that of HDFC Bank. The positive side is that HDFC
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Bank gains access to 394 branches of CBoP, which will make the combined entity have the highest private banking branch network of 1,148 branches in the country.
Analysis of HDFC Bank after Acquiring Centurion Bank of Punjab 1. HDFC Bank would become the seventh largest Indian bank in terms of total assets (as on March 2007), up from the 11th place earlier. 2. It will have the largest branch network among private sector banks. 3. Will have a larger footprint in the northern and southern parts of the country. 4. NIM likely to decline as CBoPs margins are lower than that of HDFC Bank. 5. Asset quality likely to deteriorate post merger.

Comparative Analysis of P&L Account & Balance Sheet for the year 2007-08 & 2008-2009
Table 1: - Comparative Profit & Loss account of HDFC Bank

Comparative Profit & Loss account of HDFC Bank ------- in Rs. Cr. -----Mar, 08 Mar,09 12 12 Absolute Months Months change Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp 10,115.00 16,332.26 2,205.38 3,470.63 12,320.38 19,802.89 4,887.12 1,301.35 974.79 271.72 3,295.22 0 8,911.10 2,238.20 2,851.26 359.91 3,197.49 0 6217.26 1265.25 7482.51 4023.98 936.85

% Change 61.465 57.371 60.734 82.337 71.99

1876.47 192.499 88.19 32.456 -97.73 -2.965 0 19

Capitalised Operating Expenses Provisions & Contingencies Total Expenses

3,935.28

7,290.66

3355.38 -551.6 6827.76

85.264 -28.912 63.631

1,907.80 1,356.20 10,730.20 17,557.96

Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet

1,590.18 -0.06 1,932.03 3,522.15 0 301.27 51.2 44.87 85 324.38

2,244.94 -0.59 2,574.63 4,818.98 0 425.38 72.29 52.77 100 344.44

654.76 41.175 -0.53 883.333 642.6 33.26 1296.83 36.819 0 124.11 41.195 21.09 41.191 0 7.9 17.606 15 17.647 20.06 6.184 0 205.2 65.48 145.2 654.76 47.058 41.177 41.194 41.175

436.05 159.02 352.47 2,574.61

641.25 224.5 497.67 3,455.57

Comparative Balance Sheet of HDFC

Table 2:- Comparative Balance Sheet of HDFC Bank
Comparative Balance Sheet of HDFC Bank ------------------- in Rs. Cr. ------------------Mar '08 12 months Capital and Liabilities: Total Share Capital Equity Share Capital 354.43 354.43 Mar '09 Absolute change %change 12 months 20.018 20.018

425.78 425.78

70.95 70.95

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Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets

0 400.92 0 0 11,142.80 14,226.43 0 0 11,497.23 15052.73 1,00,768.60 142811.58 4,478.86 2685.84 1,05,247.46 1,45,497.42 16,431.91 22,720.62 1,33,176.60 1,83,270.77 Mar 08'0 Mar '09 12,553.18 2,225.16 63,426.90 49,393.54 2,386.99 1,211.86 1,175.13 13,527.21 3,979.41

0 3083.63 0 3555.5 42042.98 -1793.02 40249.96 6288.71 50094.17

0 0 27.673 0 30.924 41.7223 -40.03 38.24 38.271 37.614

974.03 1754.25 35456.15 9424.01 1569.64 1038.04 531.6 0 1954.14 50094.18

7.759 78.83 55.9 19.07 65.75 85.65 45.23 0 44.38 37.61

98,883.05 58,817.55 3,956.63 2,249.90 1706.73 0 4,402.69 6,356.83 1,33,176.60 1,83,270.78

Contingent Liabilities Bills for collection Book Value (Rs)

5,82,835.94

3,96,594.31 186241.63 17,092.85 17,939.62 846.77 324.38 344.44 20.06

-31.95 4.95 6.1841

Financial Performance
The Scheme of Amalgamation (the Scheme) of Centurion Bank of Punjab Limited (CBoP or eCBoP) with HDFC Bank Ltd. (HDFC Bank or the Bank) under section 44 A (4) of the Banking Regulation Act, 1949 which was approved by the shareholders of both the banks on March 27, 2008 was sanctioned by the RBI vide their order dated May 20, 2008, and is effective from May 23, 2008. The appointed date of the merger was April 1, 2008. Both the entities were banking companies incorporated under the 21

Companies Act, 1956 and licensed by the RBI under the Banking Regulation Act,1949 As per the Scheme, upon its coming into effect from the appointed date i.e. April 1,2008, the entire undertaking of CBoP including all its assets and liabilities stood transferred/deemed to be transferred to and vest in HDFC Bank. Accordingly 6,98,83,956 equity shares of Rs. 10/- each of HDFC Bank were allotted at par to the shareholders of CBoP vide board resolution dated June 24, 2008. The excess of the value of net assets transferred over the paid up value of shares issued in consideration have been adjusted in Amalgamation Reserve as per the Scheme of Amalgamation. Capital Infusion Pursuant to the amalgamation of eCBoP with HDFC Bank Ltd. and post approval of the shareholders of the Bank at its extraordinary general meeting held on March 27, 2008, the Bank issued 2,62,00,220 warrants to its promoter HDFC Ltd. on a preferential basis on June 3, 2008. These warrants are convertible into equity shares of the Bank at a price of Rs. 1,530.13 each (as determined under the SEBI (DIP) guidelines for preferential issues). In accordance with the terms of the warrants, 10% of the aforesaid price of the equity shares is payable on allotment of the warrants. Accordingly, the Bank received an amount of Rs. 400,92 lacs on June 3, 2008 on allotment of the warrants and the same is shown as Equity Share Warrants in the Balance Sheet. HDFC Ltd. can exercise the option any time upto December 2, 2009.

Ratio Analysis of HDFC

Capital Adequacy Ratio Table 3: Capital Adequacy Ratios of HDFC

ITEM PRE-MERGER AT THE TIME OF MERGER POST MERGER

TOTAL INCOME

10.21

11.05

10.21
22

Operating Profit per Share Net operating profit CAR

86.19 259.98 13.08

107.32 348.57 13.60

86.19 259.98 13.08

Chart 1 Capital Adequacy Ratios

500 400 300 200 100 0 2006-07 2007-08 2008-09

Total Income Operating Profit Per Share Net Operating Profit CAR

Interpretation
As per the chart, Total Income of bank increases after the merger as compared to previous years. There is very much hike in the Net Operating Profits per Share while Operating Profit decreased after merger. Estimates suggest that, based on currently available facts on the merger, FY08E & FY09E EPS (for HDFC Bank post merger) are likely to decline by 11% from the standalone expected EPS for the same period.

Working Capital Ratios Table 4:-Pre & Post Merger Working Capital Ratios HDFC

ITEM

PRE-MERGER

AT THE TIME OF MERGER

POST MERGER

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Interest Income/ Total Fund Non Interest Income/ Working Fund Total Income/Working Fund Interest Expense/ Working Fund Non Interest Expense/ Working Fund Total Expense/ Working Fund

10.08 6.22

11.01 6.66

12.50 6.86

10.21

11.05

12.50

3.86

4.36

5.63

0.13 2.88

0.04 3.27

-4.38

Chart 2:- Pre &

Post Merger Working Capital Ratios HDFC

Liquidity Ratios Table 5:- Pre & Post Merger Liquidity Ratios HDFC
ITEM PRE-MERGER AT THE TIME OF MERGER POST MERGER

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Current Ratio Quick Ratio

0.04 4.07

0.04 4.89

0.04 5.23

Chart 3: - Pre & Post Merger Liquidity Ratios HDFC

Interpretation:
As per the chart, current ratio remains same for before and after merger i.e 0.04 is very low as per golden rule There is increase in Quick Ratio, but as per rule it is very high.

Deposit Ratios

Table 6: -Pre & Post Merger Deposit Ratios HDFC

25

ITEM Investment To Deposit Credit Deposit Ratio Cash Deposit Ratio Total Debt to Owners Fund

PRE-MERGER

AT THE TIME OF MERGER

POST MERGER

47.51 66.08 6.84 10.62

47.29 65.28 10.49 8.76

44.43 66.64 10.71 9.75

Chart 4:- Pre & Post Merger Liquidity Ratios HDFC

Interpretation:

Cash Deposit Ratio increases as per the effect of merger.

Whereas other all deposit ratios indicate decrease.

HDFC Bank acquiring TIMES Bank

HDFC Bank has recorded a net profit of Rs. 120 crores for the financial year ended March 31, 2000, 45.7 per cent higher than Rs. 82.4 crores achieved in 1998-99. With the amalgamation of Times Bank with HDFC Bank, effective February 26, 2000, the 26

profit figures reflect the standalone HDFC Bank's revenues and expenses till February 25 and those of the merged HDFC Bank from February 26 till March 31, 2000. The directors have recommended a dividend of Rs. 1.60 per share (16 per cent) for 1999-2000. The shareholders of erstwhile Times Bank, who have been allotted equity shares on March 29 are be entitled to receive dividend on a pro-rata basis with effect from February 26, pursuant to the scheme of amalgamation. The total income of the bank has shot up to Rs. 805.2 crores from Rs. 444.2 crores, a growth of 81 per cent. The bank provided Rs. 74.8 crores for income taxes as against Rs. 34.5 crores in the previous year. According to a bank release, ``The balance sheet parameters have also grown significantly during the year, partly due to the Times Bank merger and partly reflecting the robust growth in business volumes and a more favourable macro environment.'' The bank's total deposits increased by 189 per cent to Rs. 8,428 crores, while savings accounts deposits, reflecting the success of the retail franchise, grew 224 per cent to Rs. 1,125 crores. Total advances increased from Rs. 1,401 crores to Rs. 3,362 crores, a growth of 140 per cent. In addition, investment in corporate debt (credit substitutes like commercial paper and debentures) increased from Rs. 569 crores to Rs. 1,080 crores during the year. Total customer assets therefore, grew by 125 per cent to Rs. 4,442 crores as of March 31, 2000. The net non-performing assets (NPAs net of specific loan loss provisions) were 0.77 per cent of customer assets as against 1.08 per cent as of March 31, 1999. On account of the amalgamation of Times Bank and the preferential issue of equity shares approved by the shareholders in line with the SEBI guidelines in January this year, the bank's share capital increased by a total of Rs. 43.28 crores to Rs. 243.28 crores as on March 31, 2000. The bank's capital adequacy ratio as of March 31, 2000 was a healthy 12.1 per cent as against the regulatory minimum of 9 per cent

27

Times Bank was a new generation private sector bank established by the Times group. As part of HDFC Bank's strategy of attaining great heights it decided to merge with Times Bank. As per the scheme of amalgamation issued by HDFC bank to its shareholder the following were the reasons cited for the merger deal. 1. Branch Network would increase by over 50 percent and thus providing increased geographical coverage. 2. Increase the total number of retail customer accounts so as to increase deposit and loan products. 3 After the merger the bank would be able to use Times Bank's lower cost alternative channels like phone banking, internet banking etc. and thereby the reducing of operating costs. 4. The merger would increase the presence of HDFC bank in the depository participant activities. 5. Improved infra structure facilities and central processing would help in deriving economies of large scale and share holding pattern have been looked into.
Profitability

Profit is the ultimate aim of any business. And the future of a business depends upon the level of profitability. Here the Spread Burden model has been adopted to measure banks profitability. Where Spread denotes the difference between interest income and interest expense, Burden implies difference between non interest income and non- interest expense and profit margin refers to the profit earned by the bank before making provisions and contingencies.
Table 7:- Pre & Post Merger

Profitability Ratios HDFC

ITEM

Spread/Total Income Burden/Total 418.55 Income Profit Margin/ Total -18.25 Income

COMBINED PRE-MERGER AVERAGE 6.56

POSTMERGER -9.85 -14.52 9.20

Total Incom e

Income refers to the

streams of revenue of a business. Bank may generate income from activities directly 28

related to its activities or other activities. Since it assumes great importance it has been chosen as a variable for measuring the impact of merger .
Table 8: - Pre

& Post Merger Income Ratios HDFC

ITEM Interest Income/Total Income Interest Expenses/Total Income Non-Interest Income/Total Income Non-Interest Expense/Total Income Contingencies/ Total Income

COMBINED AVERAGE MERGER

POST-MERGER PRE-

6.15

-0.49

8.53

6.56

26.49

2.63

0.22

1.69

34.28

16.31

Chart 5:- Pre & Post

MergerIncome Ratios HDFC

Efficiency of Branch

29

The branch of any bank is a representative of the whole banking business. Possessing geographically widespread network of branches is a valuable asset for any bank. It would assist mobilizing and disbursing huge amount of funds over a wider portfolio. Considering the importance of branches for the success of a bank it has been included as a variable.
Table 9:- CAGR

of Branch Wise Performance of HDFC

ITEM

Advance Branch Deposits Per Branch Net Revenue Per Branch Working Fund Per Branch Transaction Cost Per Branch

COMBINED PRE- POST-MERGER MERGER AVERAGE Per 7.10 14.70 1.45 7.14 7.61 1.66 16.61 26.75 15.10 25.97

Chart 6:- CAGR Branch wise of HDFC

Deposit Mobilization Efficiency

30

Deposits are an important source of Finance for all banks. In this era of globalization there is intense competition among banks in mobilizing deposits. In the private sector, remuneration of bank officials to an extend depends upon the targets of deposits raised by them. Thus deposits being an important component for a bank it is taken as a variable for measurement. Here deposit mix refers to the ratio of total of current and saving deposits to total deposits. Investment refers to the total of all investments made by the bank.

Table 10:- Pre & Post Merger Deposit Mobilization Ratios of HDFC

ITEM

Investment Deposit Credit Deposit -7.76 Ratio Operating 1.00 Expense/Total Deposit Deposit Mix 31.88 Income To Deposit 1.51

COMBINED MERGER AVERAGE To 12.03

PRE- POST-MERGER

-0.15 -1.63 8.03

6.33 9.88

Chart 7:- Pre

& Post Merger Deposit Mobilization Ratios of HDFC

31

Working Capital

Working fund refers to that part of capital which is required for financing the activities during its operating cycle. Working capital has assumed such significance that it is now being taught as a discipline in various universities. Here working fund refers to total of all assets and this definition has been adopted from the annual reports of HDFC Bank.
Table 11:- Pre & Post Working Capital Funds of HDFC

ITEM

COMBINED PRE- % MERGER AVERAGE POST MERGER Interest Income/ -5.63 10.78 Working Fund Non Interest Income/ -34.58 14.25 Working Fund Total -11.13 11.33 Income/Working Fund Interest Expense/ -3.24 18.62 Working Fund Non Interest -11.54 9.44 Expense/ Working Fund Total Expense/ -5.81 15.82 Working Fund Contingent Liability/ -18.56 -7.46 Working Fund

Chart 8:- Pre & Post Working Capital Funds of HDFC

32

Operating Performance Variables

Some more variables which are considered to be indicators of a banks operating performance have also been included to measure exactly the real impact of merger between HDFC and Times bank.

Table 12:- Pre & Post Merger CAGR of Operating Performance Variables

ITEM

TOTAL INCOME EBT PAT CAR

COMBINED PRE-MERGER AVERAGE 36.39 22.65 23.78 -12.92

% POST MERGER 59.03 47.63 57.32 3.62

33

Share Holding Pattern

The share holding pattern that might be influenced in a merger deal has also been closely analyzed.
Table 13: -Pre & Post Merger Share Holding Patterns of HDFC bank

ITEM

PRE-MERGER AVERAGE HDFC GROUP 28.78 INDIAN PRIVATE 10.00 EQUITY FUND INDOCEAN 4.99 FINANCIAL HOLDINGS BENNET, COLEMAN NIL

% POST MERGER 25.74 8.95 4.46

7.78
34

COMPANY GROUP PUBLIC

AND 56.23 100

Chart 9:- Pre

53.07 100

& Post Merger Share Holding Patterns of HDFC bank

On analyzing all the above variables it can be found that Before the merger the combined average non-operating losses of the bank was only 2.2 per cent of the total income. But that has increased to 6.15 per cent after the merger. 2. The average spread has increased by 10 per cent after the merger. This implies that HDFC Bank has truly benefited by merging with Times bank that had a good retail banking business.

35

 3. During the pre merger era the combined entity used to consume only 8.08 per cent of its total income for provisions. But after the merger this increased to 13.82 per cent denoting a rising level of N.P.A 4. After the merger the bank has been following a policy of generating income from non-business activities. This is very clear from the investment deposit ratio. 5. The post merged HDFC bank has been able to mobilize more amounts of cheap funds in the form of current and savings deposits. So it can inferred that the HDFC bank could properly utilize the good foundation that Times bank had in retail banking. 6. The merger deal did not result in a huge dilution of ownership as the Times group promoters got only a 7% stake in the newly merged entity. The findings with regard to the aspect of achieving synergy or not on an account of the merger. From the foregoing analysis we can see that out of the 25 variables which have been identified for measuring the impact of merger, 15 ratios indicate a synergy. This implies a success ratio of 60 percentages. So we conclude that the merger between times and HDFC Bank has turned out to be successful.

Table 14:- Average

Movement of Important Ratios of HDFC

ITEM

PRETIMES MERGER BANK HDFC

COMBINED % PREPOST MERGER MERGER

36

BURDEN/TOTAL INCOME SPREAD/TOTAL INCOME PROVISION/TOTAL INCOME INVESTMENT DEPOSIT DEPOSIT MIX

-2.53 33.55 11.39 58.23 42.17

-1.91 15.4 4.77 35.30 20.69

-2.2 24.5 8.08 46.76 31.43

-6.15 34.6 13.82 65.83 42.6

Chart 10:- Average

Movement of Important Ratios of HDFC

Comparative income statement of HDFC bank for year 2000 & 2001

Table 15:- Comparative

income statement of HDFC bank for year 2000-01

37

Particulars

2000

2001

Increase (+) Decrease (-) (Rs.) 579.59 (23.24) 556.35

Increase(+) Decrease(-) (percentages)

Income 679.87 Interest earned Other income 888.64 Total income Expenditure Interest expended Employee cost Selling and Admin. Exps Depreciation Misc. Exps. Preoperative Exp. Capitalized Operating expenses Provisions and contingencies 174.84 0.00 171.39 139.51 685.18 Total expenses Net profit 203.46 218.88 0.00 322.97 158.15 1234.87 210.1 44.04 0.00 151.58 18.64 549.69 6.66 25.19 0.00 88.44 13.36 80.23 3.27 374.21 48.53 61.07 26.46 753.75 78.00 116.92 67.32 379.47 29.47 55.85 40.86 101.38 60.72 91.45 154.42 1444.99 62.60 208.77 1259.46 185.53 85.25 (11.12)

Comparative balance sheet of HDFC bank

38

As on 31.3.2000 and 31.3.2001

Table 16:- Comparative balance sheet of HDFC bank

(Amount in Rs.crore) Particulars Capital and liabilities Total share capital Equity share capital Preference share capital Reserves Net worth Deposits Borrowings Total debt Other liabilities and provisions 765.10 8427.72 1587.74 10006.46 884.58 2000 2001 Absolute Percentage change change ( %) 0.32 0.13 0.32 10.67 0.13 0.00

243.60 243.28 243.28 0.00 243.60 10.67

923.76 11658.11 1432.90 13091.01 1602.56

158.66 3230.39 (145.84) 3084.55 717.98

20.74 38.33 (9.24) 30.82 81.17

Total liabilities

11656.14

15617.33

3961.19

33.98

Assets Cash &cash balance with RBI Advances Investments Accumulated depreciation 849.82 16.07 3362.27 5748.28 103.73 986.35 4636.66 7145.14 158.02 1274.39 1396.86 52.29 136.53 37.90 24.30 22.37

39

Other assets

691.19

934.14

242.95

35.15

Total assets

11656.14

15617.33

3162.36

29.62

Comparative balance sheet of HDFC bank As on 31.3.2000 and 31.3.2002 ------------------- in Rs. Cr. ------------------Absolute change

Mar '00 12 mths Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities 243.28 243.28 0 0 521.82 0 765.1 8,427.72 1,578.74 10,006.46 884.58 11,656.14 Mar '00 12 mths

Mar '02 12 mthss

%change

281.37 38.09 281.37 38.09 9.05 9.05 0 0 1,660.91 1139.09 0 0 1,951.33 1186.23 17,653.81 9226.09 2,023.02 444.28 19,676.83 9670.37 2,159.22 1274.64 23,787.38 12131.42 Mar '02 12 mths

15.66 15.66 0 0 219.29 0 155.04 109.47 28.14 96.64 144.09 104.07

Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

849.82

1,211.17

361.35 1479.2 3451.45 6255.74 260.42 126.08 134.34 0 449.16

45.52 192.64 102.65 108.82 76.48 121.55 56.74 0 64.98 104.07 81.54 -1.98 119.49

767.82 2,247.02 3,362.27 6,813.72 5,748.28 12,004.02 340.49 600.91 103.73 229.81 236.76 371.1 0 0 691.19 1,140.35

11,656.14 23,787.38 12131.24 10,676.88 19,383.54 2,021.23 1,981.31 31.45 69.03 8706.66 -39.92 37.58

40

Comparative income statement of HDFC bank for year 2000-02 ------------------- in Rs. Cr. ------------------Mar '00 12 mths Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses 679.87 208.77 888.64 374.28 48.53 61.07 26.46 174.84 0 171.39 Mar '02 Absolute change 12 mths 1023.12 124.48 1147.6 699.46 60.71 76.69 61.72 155.44 0 265.72 88.84 1054.02 %change

1,702.99 333.25 2,036.24 1,073.74 109.24 137.76 88.18 330.28 0 437.11

150.49 59.624 129.14 186.88 125.09 125.56 233.75 88.9 0 155.04 63.68 153.8

139.51 228.35 685.18 1,739.20 Mar Mar '00 '02 203.46 0 88.19 291.65 0 32.39 3.82 297.04 0 0 297.04 0 70.34

Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

93.58 0 -88.19 5.39 0 37.95 -3.82

45.99 0 -100 1.848 0 117.17 -100

8.36 16 31.45

10.56 25 69.03

2.2 9 37.58

26.32 56.25 119.49

41

Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

30.6 0

180.98 29.71

150.38 29.71

491.44 0

36.21 224.84 291.65

70.34 16.01 297.04

34.13 -208.83 5.39

94.255 -9.29 1.85

HIGHLIGHTS:

Due to the amalgamation of Times Bank Limited with the bank effective 26th February, 2000, the Profit & Loss Account reflects the merged bank's figures from that date i.e the standalone HDFC Bank revenues, expenses and profits till 25th February, 2000 and those of the merged HDFC Bank from 26th February, 2000 to 31st March, 2000.

Other Income relates to income from non- fund based banking activities including commissions, fees, foreign exchange earnings and debt securities.

The Board of Directors have recommended a dividend of Rs.1.60/-. per share (16 %) for the year ended 31st March, 2000 ( Previous Year - Rs. 1.30 per share @ 13 % ).

The shareholders of erstwhile Times Bank Limited, who have been allotted equity shares on 29th March, 2000 shall be entitled to receive dividend on prorata basis with effect from 26th February, 2000 pursuant to the Scheme of Amalgamation.

42

The bank has made an allotment of 1,98,00,000 equity shares of Rs. 10/each at a issue price of Rs.94/- per share in favour of Promoters and strategic investors on 29th March, 2000. These allottees will be paid dividend on prorata basis.

ICICI Bank Ltd. Acquires Bank of Madura (March '01) ICICI Bank Ltd wanted to spread its network, without acquiring RBI's permission for branch expansion. BoM was a plausible target since its cash management business was among the top five in terms of volumes. In addition, there was a possibility of reorienting its asset profile to enable better spreads and create a more robust microcredit system post merger. BoM wanted a (financially and technologically) strong private sector bank to add shareholder value, enhance career opportunities for its employees and provide first rate, technology-based, modern banking services to its customers.

Benefits
The branch network of the merged entity increased from 97 to 378, including 97 branches in the rural sector. The Net Interest Margin increased from 2.46% to 3.55 %. The Core fee income of ICICI almost doubled from Rs 87 crores to Rs 171 crores. IBL 43

gained an additional 1.2 million customer accounts, besides making an entry into the small and medium segment. It possessed the largest customer base in the country, thus enabling the ICICI group to cross-sell different products and services.

Drawbacks
Since BoM had comparatively more NPAs than IBL, the Capital Adequacy Ratio of the merged entity was lower (from 19% to about 17%). The two banks also had a cultural misfit with BoM having a trade-union system and IBL workers being young and upwardly mobile, unlike those for BoM. There were technological issues as well as IBL used Banks 2000 software, which was very different from BoM's ISBS software. With the manual interpretations and procedures and the lack of awareness of the technology utilisation in BoM, there were hindrances in the merged entity.

ICICI Bank + Bank of Madura = ?

The proposed merger between ICICI Bank and Bank of Madura (BoM) is a remarkable one. The pre--merger market capitalization of ICICI Bank was roughly Rs.2500 crore while BoM was at roughly Rs.100 crore. BoM is known to have a poor asset portfolio. What will the merged entity be worth? The key rationale underlying every merger is the question of synergy. Can ICICI Bank's products and technology bring new life to the 263 branches of BoM? Will ICICI Bank (which has 1,700 employees) be able to overcome the 2,600 employees that BoM carries, given that Indian labor law makes it troublesome and expensive to sack workers?

44

As a benchmark calculation, however, suppose we pretend that there are no synergies, and focus on a purely financial evaluation of the merged entity. In applying these ideas to ICICI Bank and to BoM, we need to believe that the stock market effectively processes information to produce estimates of the price and volatility of the shares of both these banks. This assumption is suspect, because both securities have poor stock market liquidity. Hence, we should be cautious in interpreting the numbers shown here. There are many other aspects in which this reasoning leans on models, which are innately imperfect depictions of reality. However, these models are powerful tools for understanding the basic factors at work, and they probably convey the broad picture quite effectively.

ICICI Bank. The pre--merger status of ICICI Bank is as follows: it had liabilities of
Rs.12,073 crore, equity market capitalization of Rs.2,466 crore and equity volatility of 0.748. Working through options reasoning, we find that this share price and volatility are consistent with assets worth Rs.13,249 crore with volatility 0.15. Thus, ICICI bank had assets which are 9.7% ahead of liabilities, which is roughly consistent with the spirit of the Basle Accord, and has leverage of 5.37 times.

Bank of Madura. The pre--merger status of Bank of Madura is as follows: it had

liabilities of Rs.4,444 crore, equity market capitalisation of Rs.100 crore and equity volatility of 0.69. Working through options reasoning, we may say that the stock market thinks that its assets are worth Rs.4,095 crore with a volatility of 0.02. Hence, BoM is bankrupt (with assets which are Rs.350 crore behind liabilities) and has a leverage of 41 times. If we needed to bring BoM up to a point where its assets were 10% ahead of liabilities, which is broadly consistent with the Basle Accord, this would require an infusion of Rs.800 crore of equity capital. How do we combine these to think of the merged entity? Assets and liabilities are additive, so the total assets of the merged entity would prove to be roughly Rs.17,345 crore and the liabilities would prove to be Rs.16,517 crore. The merged entity would hence need roughly Rs.800 crore of fresh equity capital in order to come up to a point where assets were atleast 10% ahead of liabilities. 45

How can we estimate the market capitalisation of the merged entity? The value of equity is the value of a call option on the assets of the merged entity. Pricing the call requires an estimate of the volatility of the merged assets, i.e. it requires a knowledge of the extent to which the assets of the two banks are uncorrelated. We find that using values of the correlation coefficient ranging from 80% to 95%, the volatility of assets of the merged entity proves to be around 0.12. In this case, the valuation of the call option, i.e. an estimate of the market capitalisation of the merged entity, proves to be roughly Rs.2,500 crore. This number is not far from the pre--merger market capitalisation of ICICI Bank, which was Rs.2,466 crore. Hence, we can say that on purely financial arguments, the merger is roughly neutral to ICICI Bank shareholders if BoM was merged into ICICI Bank for free. Indeed, if banking regulators took their jobs more seriously, they would force the shareholders of BoM to walk into such a merger at a zero share price as a way of reducing the number of bankrupt banks in India by one. Such a forced-merger would be a politically easier alternative for the RBI when compared with closing down BoM. The shareholders of ICICI Bank have paid a non-zero fee for BoM. This reflects a hope that the products and processes of ICICI Bank will rapidly improve the value of assets of BoM in order to compensate. In addition, the merged entity will have to rapidly raise roughly Rs.800 crore of equity capital to obtain a 10% buffer between assets and liabilities. Hence, this proposed merger is a godsend for BoM, which was otherwise a bankrupt entity which was headed for closure given the low probability that it would manage to raise Rs.800 crore of equity on a base of Rs.100 crore of market capitalisation. It is useful to observe that BoM probably did not see things in this way, given the willingness of India's banking regulators to interminably tolerate the existence of bankrupt banks. Closure of BoM would normally involve pain for BoM's shareholders and workers; instead both groups will get an extremely pleasant ride if the merger goes through. 46

The proposed merger is a daunting problem for ICICI Bank. It will need to rapidly find roughly Rs.800 crore in equity. If India's banking regulators were serious about capital adequacy, ICICI Bank should have to pay roughly zero to merge with BoM (it is doing a favour to BoM and to India's banking system); instead ICICI Bank has paid a positive price for BoM. The key question that will be answered in the next two/three years is: Will ICICI Bank's superior knowledge of products and processes revitalise the assets and employees of BoM, and generate shareholder value in the merged entity? ICICI's top management clearly thinks so, and it would be a very happy outcome if this did indeed happen. The proposed merger is a good thing for India's economy, since the headcount of bankrupt banks will go down by one, and there is a possibility of obtaining higher value added out of the poorly utilised assets and employees of BoM. If the merger goes through, then it will reduce the say of the management team of BoM in India's resource allocation, which is a good thing.

MERGER OF ICICI BANK WITH BANK OF MADURA

The merger between ICICI Bank and Bank of Madura (BoM) is a remarkable one. The pre--merger market capitalization of ICICI Bank was roughly Rs.2500 crore while BoM was at roughly Rs.100 crore. BoM is known to have a poor asset portfolio. As a benchmark calculation, however, suppose we pretend that there are no synergies, and focus on a purely financial evaluation of the merged entity. This is not easy to do using conventional accounting measures. Instead, arguments based on option pricing theory yield useful insights. In applying these ideas to ICICI Bank and to BoM, we need to believe that the stock market effectively processes information to produce estimates of the price and volatility of the shares of both these banks. This assumption is suspect, because both securities have poor stock market liquidity. Hence, we should be cautious in interpreting the numbers shown here. There are many other aspects in which this reasoning leans on models, which are innately imperfect depictions of reality. 47

Pre-Merger status of ICICI Bank:

The pre--merger status of ICICI Bank is as follows: it had liabilities of Rs.12,073 crore, equity market capitalization of Rs.2,466 crore and equity volatility of 0.748. Working through options reasoning, we find that this share price and volatility are consistent with assets worth Rs.13,249 crore with volatility 0.15. Thus, ICICI bank had assets which are 9.7% ahead of liabilities, which is roughly consistent with the spirit of the Basle Accord, and has leverage of 5.37 times.

Table 17:- Financial standing of ICICI Bank & Bank of Madura

Parameters

ICICI Bank 1998-1999 19992000

Bank of Madura 19981999 211.32 3013.00 1393.92 30.13 11.08 18.83% 19992000 247.83 3631.00 1665.42 45.58 11.08 14.25%

Net worth Total Deposit Advances Net Profit Share Capital

308.33 6072.94 3377.60 63.75 165.07

1129.90 9866.02 5030.96 105.43 196.81 19.64%

Capital Adequacy 11.06% Ratio Gross Advances / 4.72% Gross NPs Net Advances / Net NPs 2.88%

2.54%

8.13%

11.09%

1.53%

4.66%

6.23%

Comparative P&L & Balance sheet of ICICI Bank

Comparative balance sheet of ICICI bank As on 31.3.2001 and 31.3.2002

Table 18: Comparative balance sheet of ICICI bank

48

Liabilities Equity share capital Share application money Reserves Total share capital Current liabilities 16378.21 Deposits Borrowings Other liabilities 1032.79 1012.97 19736.59 Total liabilities Contingent liabilities provided for future Rs.12561.10 for 2001 and 37707.48 for 2002 49218.66 16207.58 104109.92 48185.87 15194.61 84373.33 4665.60 1500 427.49 32085.11 15706.9 95.90 196.82 23.54 1092.26 1312.62 220.36 742.67 5635.54 6598.57 23.54 719.13 4543.28 5285.95 11.96 3054.92 415.95 402.70

Comparative income statement of ICICI bank

Table 19:- Comparative income statement of ICICI bank 2001- 2002

particulars

2001

2002

Increase (+)

Increase(+) Decrease(-)
49

Decrease (percentages) (-) (Rs.) Income 1242.13 Interest earned 220.34 Other income 1462.47 Total income Expenditure Interest expended Employee cost 36.76 Selling and Admin. Exps Depreciation Misc. Exps. Preoperative Exp. Capitalized Operating expenses Provisions and contingencies 255.46 0.00 324.15 129.08 1290.90 64.09 499.69 0.00 613.42 301.39 2473.73 27.33 244.23 0.00 289.27 172.31 1182.83 74.34 95.60 0.00 89.23 133.49 91.62 837.67 51.71 109.30 1558.92 147.18 203.85 721.25 95.47 94.55 86.10 184.62 86.50 2741.19 1278.72 87.43 589.26 368.92 167.43 2151.13 909 73.18

Total expenses Net profit

171.57

267.46

95.89

55.88

Comparative balance sheet of ICICI bank As on 31.3.2001 and 31.3.2003

50

Table 20:- Comparative balance sheet of ICICI bank

2001 Particulars Current assets Cash and balances with RBI Balance with banks, money at call fixed assets Advances 1231.66 2362.03

2003

4886.14 1602.86

Absolute Percentage change change ( %) 3654.48 296.71 (759.17) -32.14

7031.46 8186.86 381.13 19.23 524.23

53279.41 35462.30 4060.72 156.21 7364.31

46247.95 27275.44 3679.59 136.98 6840.08

657.72 333.16 965.44 712.32 1304.78

Investment

Net block

Capital work in progress Other assets Total assets

19736.60

106811.95 87075.35

441.18

Liabilities Equity share capital Share application money 1092.26 6320.65 196.82 23.54 0.00 612.66 0.00 350 350 416.14 (23.54) 211.43 -100 -------

5228.39 478.67 51

Preference share capital

1312.62

7283.31

5970.69

454.86

Reserves

Total share capital

Comparative income statement of ICICI bank(2001-2003)

Table 21:- Comparative income statement of ICICI bank (2001-2003) particulars 2001 Increase 2003 (+) Increase(+) Decrease () Decrease(-) (Rs.) (percentages) 9368.06 8125.93 654.19 3158.72 2938.38 11064.31 1333.56 756.54

Income Interest earned Other income Total income Expenditure Interest expended Selling and Admin. Exps Depreciation Misc. Exps. Preoperative Exp. Capitalized Operating expenses Total expenses Net profit

1242.13 220.34

1462.47 12526.78

837.67 51.71 109.3 36.76 255.46 0 324.15 129.08

7944 403.02 1745.52 505.94 722.11 0 3332.67 43.92

7106.33 351.31 1636.22 469.18 466.65 0 3008.52 -85.16 10029.69 1034.62

848.34 679.38 1496.99 1276.33 182.67 0 928.12 -65.97 776.95 603.03

1290.9 11320.59 171.57 1206.19

52

Ratio Analysis of ICICI Bank Pre & Post Merger

Capital adequacy ratio

Table 22:- Pre & Post Merger Capital Adequacy Ratios of ICICI Bank

ITEM

PREMERGER 2000 17.81

AT THE TIME POST OF MERGER MERGER 2001 2002 15.66 13.08 11.57 16.12 29.52 20.37

Operating Profit Share Net operating profit 14.02 CAR 19.64

35

30
25 20 15 10 5 0 Operating profit Net operating profit

Capital adequacy ratio

2000

2001

2002

Chart 11:- Pre & Post Merger Capital Adequacy Ratios ICICI

INTERPRETATION The operating profits of the bank is decreasing in the year 2001 and are increasing in the year 2002 that means the performance of the bank is good.
53

Whereas net profits are concerned they are also increasing at the same rate at which the gross operating profits are increasing. Bank is having high capital adequacy ratio in the year 2000 and is declined in year 2001 and then again increased in the year 2001.

Working capital ratio

Table 23:- Pre & Post

Merger Working Capital of ICICI Bank

ITEM Interest Income/ Total Fund Non Interest Income/ Working Fund

PREMERGER 2.58 1.67

AT THE TIME OF POST MERGER MERGER 3.78 2.85 2.75 1.96

Chart 12:- Pre

& Post Merger Working Capital Ratios of ICICI Bank

INTERPRETATION 54

From the above graph, the interest income increased to great extent in the year 2001 and declined after the merger and came equals to the interest income of year 2000. But if we consider non-interest income to working fund it is increasing in the year 2001 and then also decreasing in the year 2002.

Liquidity Ratios

Table 24:-

Pre & Post Merger Liquidity Ratios of ICICI Bank

ITEM PRE-MERGER Current Ratio Quick Ratio 1.23 4.82 AT THE TIME OF POST MERGER MERGER 1.22 4.32 1.38 5.82

Chart 13:- Pre

& Post Merger Liquidity Ratios of ICICI Bank

INTERPRETATION 55

As per the chart, current ratio is increased rapidly after merger that means the assets and the liabilities of bank had increased after the merger. Quick asset decreased in year 2001 that is good for the bank but it is increasing which shows a bad performance of the bank.

Deposit Ratios
Table 25:- Pre & Post

Merger Deposit Ratios of ICICI Bank

ITEM PREMERGER AT THE TIME POST OF MERGER MERGER 37.58 48.39 39.02 6.45 24.81 5.24 21.57

Investment To 35.42 Deposit Credit Deposit 48.92 Ratio 45.17 Cash Deposit 7.1 Ratio Total Debt to Owners Fund 22.45

56

Chart 14: Pre & Post Merger

Deposit Ratios of ICICI Bank

INTERPRETATION
Investment of the bank are decreasing after acquisition more speedily in proportion to its deposits

Cash Deposit Ratio is stable but are decreased a little after merger. Total debt increased in the year 2001 but is also decreasing in the year 2002 Bank of Baroda Acquires South Gujarat Local Area Bank Ltd (June '04) Introduction to the Bank
Bank of Baroda (BOB), Indias fifth largest bank and prominent among the global top 200, has a centurys financial experience backing it. With assets in excess of USD 32 billion, the bank has a network of over 2800 branches and offices, and about 700 ATMs. Bank of Baroda offers a wide range of banking products and financial services to 29 million global corporate and retail customers, through various delivery channels, its specialized subsidiaries and affiliates in the areas of investment banking, credit cards and asset management. Today, Bank of Baroda has international presence across 5 continents, with a network of 71 offices in 25 countries, including branches of the bank, its subsidiaries and the representative offices. The bank also has a joint venture in Zambia with 9 branches. The bank's international operations today contribute around 20% to its global business and

57

well as over 30% to its net profits. Growing its presence across new geographies and strengthening its equity in existing markets, Bank of Baroda is on the path to establish itself round the clock around the globe. The bank is exploring out-of-the-box means to identify novel ways to tailor its growing repertoire of products and services to meet segment-specific requirements across geographies. Automation-led process and cost optimization, orchestration of the offices network and greater attention to compliance with global regulations are aggressively being focused on to help the bank achieve its ambitious goals. Bank of Baroda, gearing to leverage the opportunities that the flat world presents and nimbly skirting its threats, is charting a coherent strategy to not just cope but break path and emerge with the winning edge, in the changing global business scenario.

ACQUISITION
According to the RBI, South Gujarat Local Area Bank had suffered net losses in consecutive years and witnessed a significant decline in its capital and reserves. To tackle this, RBI first passed a moratorium under Section 45 of the Banking Regulation Act 1949 and then, after extending the moratorium for the maximum permissible limit of six months, decided that all seven branches of SGLAB function as branches of Bank of Baroda. The final decision about the merger was of the Government of India in consultation with the RBI. Bank of Baroda was against the merger, and protested against the forced deal. .

Drawbacks
There was no widespread criticism or any apparent drawback of the merger since the financials involved were not very high.

Ratio Analysis ITEM EPS CURRENT RATIO Net Working Capital PRE-MERGER 32.970 0.550 -2,728.420 POST MERGER 25.960 0.615 -2,540.260 58

Capital adequacy 13.910 ratio Net Interest Margin 2.88 Net Profit Margin 12.13

13.135 2.97 10.265

Table 26:- Pre & Post Ratios of Bank of Baroda

INTERPRETATIONS: Earnings per share are a very important indicator which shows the rate of return for ordinary shareholders. In case of mergers, it is even more important to find out as to see if the merger has actually contributed in increasing shareholders wealth. Bank of Baroda has seen a dip by 15%. Also, the book value per share has gone down for Bank of Baroda from Rs 52 to Rs 32. A bank is deemed to be sound if it is in a position to carry on its daily transactions smoothly and meet all its obligations both long-term as well as short term without any strain. The current ratio is the most commonly used ratio for measuring liquidity position of manufacturing sectors. It expresses the relationship between current assets and current liabilities. A higher current ratio shows that the manufacturing company is able to pay its debts maturing within a year. From the management point of view, a higher current ratio is an indication of poor planning since an extensive amount of funds would lie idle. On the contrary, a low ratio would mean inadequacy of working capital, which may later interfere with the smooth functioning of an enterprise. In a sound business, a current ratio of 2:1 is considered an ideal one. The net working capital refers to the difference between current assets and current liabilities. There is always a time gap between the receipt of cash and repayment of loan and working capital is required for this intervening period in
59

order to sustain the activities. In case adequate working capital is not available, the manufacturing company may not be in a position to sustain its activities. Almost the bank is having negative net working capital which means current liabilities are far more than current assets. Capital adequacy ratio is the ratio that shows the amount of capital a bank has to cover all its risk that is risky assets. According to RBI, Indian banks are required to keep 9% capital adequacy whereas, the banks actually are having a much better state as most Indian banks are conservative in their approach and thus far complex instruments like options, swaps etc are not fully traded in India. Again this capital consists of tier-1 and tier-2 capital. Tier-1 capital consists of equity capital, cash reserves, retained earnings etc while tier-2 capital consists of subordinate debt, revaluation reserves, and general provisions etc. the capital adequacy ratio of Bank of Baroda has seen small amount of decline in capital adequacy ratio. The net interest margin is a performance metric that examines how successful a firm's investment decisions are compared to its debt situations. A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returns generated by investments. Here average total assets are taken as this keeps varying and hence an average of the values gives a fair view. BOB has experienced growth in their NIM. The primary objective of any business entity is to earn profits. A bank needs profits not only for its existence but also for expansion and diversification. Investors want adequate returns on their investments while the workers want higher wages and the creditors want higher security for their interest and loan. A bank can discharge its obligations to the various segments of the society only
60

through earnings of profits. The profit is, thus, a useful measure to examine the overall efficiency of a bank. The profit to the management is the test of efficiency and a measurement of control to owners, the measure of worth of their investment to the creditors, the margin of safety to employees as a source of benefits, to Government a measure of taxpaying capacity and the basis of legislative action to demand better quality and price cuts and to an enterprise less cumbersome source of finance. Profits are an index of economic progress. Hence the profitability ratios are calculated to measure the overall efficiency of the banking sector. Net profit ratio establishes a relationship between net profit (after tax) and income. It indicates overall efficiency of the banking sector. If the profit is not sufficient, the firm will not be able to achieve satisfactory returns on investment. This ratio also indicates the firms capacity to face adverse economic conditions such as competition, low demand etc. Obviously, higher the ratio, better the profitability. While interpreting the ratio, it should be kept in mind that the performance of profits must also be seen in relation to investments or capital of the firm. The bank has seen decrease in their net profit after merger.

Qualitative Analysis
South Gujarat Local Area Bank was failed and the merger was aimed to aid it in reviving. Its customers and employees were fortunate to have association with a strong player like Bank of Baroda. There were only seven branches of South Gujarat Local Area Bank. The performance of SGLABL which had its registered office at Navsari, Gujarat, had deteriorated in all major parameters, namely deposits, investments, advances and profitability.

Pre-merger Expectations
61

The pre-merger expectations were that, this merger would help Bank of Baroda in getting a better position in western India. South Gujarat Local Area Bank was mainly operating in Gujarat and thus this was a chance for its employees and customers to get alliance with a bank with wider reach. Bank of Baroda expected its strong recovery system would enable it to deal with NPAs of the SGLABL.

Post-merger Effects
Bank of Barodas EPS decreased by around 21% over the average of two years EPS prior to the merger. So, clearly, the merger was not helpful in maximizing the shareholders value. Its net profit went down by 16% and operating profit by 37% after merger. Its current assets went up by 20% from Rs 34 billion to Rs 41 billion as compared to current liabilities going down by 2% from Rs 61 billion to Rs 60 billion. Hence, average current ratio moved up from 0.55 to 0.61 and average net working capital went up from Rs -27 billion to Rs -25 billion. This shows a stronger position in liquidity.

Pre Acquisition Comparative Balance Sheet

Table 27:-Comparative Balance Sheet of Bank of Baroda (2003 & 2004)

Balance Sheet of Bank Of Baroda ------------------- in Rs. Cr. ------------------absolute change %change

Mar '03 Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth 294.34 294.34 0 0 4,092.63 0 4,386.97

Mar '04 294.53 294.53 0 0 4,836.40 0 5,130.93

0.19 0.19 0 0 743.77 0

0.06451 0.06451

15.37859

62

Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

66,366.37 72,967.32 625.33 875.11 66,991.70 73,842.43 5,039.17 6,135.31 76,417.84 85,108.67 3,465.82 3,056.78

743.96 6600.95 249.78 6850.73 1096.14 8690.83

14.49952 9.046447 28.5427 9.277498 17.86609 10.21145

3,351.28 4,210.03 35,348.08 35,600.88 30,179.38 38,018.81 1,391.15 1,575.04 693.83 759.77 697.32 815.27 0 0 3,375.96 3,406.89 76,417.84 85,108.66 21,891.92 27,564.27 6,754.57 7,584.79 148.21 174.96

-409.04 -13.3814 858.75 20.39772 252.8 0.710095 7839.43 20.61987 183.89 11.67526 65.94 8.678942 117.95 14.4676 0 30.93 0.907866 0 5672.35 20.57863 830.22 10.94585

Post Acquisition Comparative Balance Sheet

Table 28:-Comparative Balance

Sheet of Bank of Baroda (2005 & 2004)

Balance Sheet of Bank Of Baroda ------------------- in Rs. Cr. ------------------absolute %age change change 0 0 0 0 -496.83 0 -496.83 0 0

Mar '05 Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits

Mar '04

294.53 294.53 294.53 294.53 0 0 0 0 5,333.23 4,836.40 0 0 5,627.76 5,130.93 81,333.46 72,967.32

-10.2727 -9.68304 -11.4656

63

8366.14 Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets 1,640.83 875.11 -765.72 9131.86 73.12 9555.57 344.46 2331.85 -7799.5 944.37 -132.64 -87.11 -45.53 0 -667.52 9555.57 5502.72 2183.48 -16.94 -87.4999 -12.3667 1.19179 -11.2275 11.26872 -55.388 -21.9082 2.483955 -8.42137 -11.4653 -5.58465 -19.5932 -11.2275 -19.9632

82,974.29 73,842.43 6,062.19 6,135.31 94,664.24 85,108.67 2,712.32 6,541.88 3,056.78 4,210.03

43,400.38 35,600.88 37,074.44 38,018.81 1,707.68 1,575.04 846.88 759.77 860.8 815.27 0 0 4,074.41 3,406.89 94,664.23 85,108.66 33,066.99 27,564.27

Contingent Liabilities Bills for collection Book Value (Rs)

9,768.27 191.9

7,584.79 174.96

-28.7876 -9.68221

POST ACQUISITION COMPARATIVE INCOME STATEMENT

Table 29:- Post Acquisition Comparative Income Statement P & L Bank of Broda in crores Absolute %age change change -284.35 414.18 129.83 123.33 -128.53 518.17 -4.63 24.09 1.65 3.45 -10.26 40.61

Mar '05 Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses

Mar '04

6,431.42 6,147.07 1,304.83 1,719.01 7,736.25 7,866.08 3,452.15 3,575.48 1,381.05 1,252.52 757.74 1,275.91

64

Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses Net Profit for the Year Extraordinary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

81.88 75.57 1,386.63 719.59 0 0 2,411.58 2,764.89 1,195.72 558.7 7,059.45 6,899.07 676.8 0.04 0 676.84 0 166.96 0 23.08 50 191.9 177.49 332.39 166.96 0 676.84 967 0 0 967 0 190.62 24.42 32.97 65 174.96 725.68 26.28 215.04 0 967

-6.31 -667.04 0 353.31 -637.02 -160.38 290.2 -0.04 0 290.16 0 23.66 24.42 9.89 15 -16.94 548.19

-8.35 -92.70 12.78 -114.02 -2.32 30.01

30.01 12.41 100.00 30.00 23.08 -9.68

75.54 -306.11 1164.80 48.08 0 290.16 30.01 22.36

INTEPRETATIONS

Total Business (Deposit+ Advances) increased by 14% to 15% on an average. Gross Profit and Net Profit were Rs 4,305.01 crore and Rs 2,227.20 crore respectively. Net Profit registered a growth of 20.2%

Credit-Deposit Ratio stood at 82.36% as against 77.32%. Retail Credit posted a modest growth of 16.3% constituting 17.8% of the Banks Gross Domestic Credit in FY05.

Net Interest Margin (NIM) as per cent of interest earning assets was at the level of 2.91%.

Net NPAs to Net Advances stood at 0.31% this year against 0.47% Capital Adequacy Ratio (CAR) as per Basel I stood at 12.88% & as per Basel II at 14.05%.

Net Worth improved to Rs 11,387 crore registering a rise of 19.52%. 65

LIMITATION, CONCLUSION & RECCOMENDATIONS Limitations One of the basic limitations of the study was availability of data, which was not sufficient to analyze different banks performance before and after merger. Time period available with us was very short. The study is fully based on secondary data so surety of correct data cannot be provided.

Another limitation of this study may be time horizon as a long period of 9 years i.e. (from2000 to 2009) in this long time span there may be change in the economy condition, tax system, regulation authorities and time value of the money.

Conclusion The process of mergers and acquisitions has gained substantial importance in today's corporate world. This process is extensively used for restructuring the business organizations. In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy.

The merger of ICICI bank with Bank of Madhura had created a strong entity, which will redefine banking in the highly competitive era of globalization and liberalization.
66

But the merger of Bank of Borada and South Gujarat Local area bank were unfavourable. Whereas the merger of HDFC Bank and Centurian Bank of Punjab and merger of HDFC Bank and Times Bank was favorable as they resulted into profits and increased performance of the banks. The various benefits that are enjoyed by Banks after the merger are Economies of scale through volumes in ,Operating costs, Technology deployment, Large product suite, Cross-selling potential, Optimization of Human capital, Optimization of Financial capital and many more.

Recommendations
Recommendations on The Basis Of Study of HDFC Bank and Centurion Bank of Punjab Bank should take some important steps to increase EPS, as merger is likely to dilutive EPS for the next two years, due to valuation. Also the bank should take SME loans into consideration as they are prone to defaults at the signs of economic contraction as these businesses are highly leveraged.

Recommendations on The Basis Of Study Of HDFC Bank And Times Bank Banks should take steps to reduce NPAS, as because of increase in NPA bank has to increase in provisions for it which ultimately affects the profits of the bank. HDFC bank should open more branches in order to serve more no. of people. Also the bank should give training to its employees because it has been observed that the employees cost has increased after acquisition which has resulted in decrease in net profits of bank. Keeping the best employees and firing the unproductive employees will result in achieving better results.

67

Recommendations on the basis of study of ICICI bank and Bank of Madura: ICICI bank should go for more mergers & acquisitions in order to become the leading private player in Indian banking sector, in the era of globalization & Liberalization. ICICI bank should take some initiative customer relationship factor also by which they can improve their performance after knowing the need of the customer & acting in the same direction. ICICI bank should frame some competitive strategies to compete the existing leading competitors like HDFC & Axis

Recommendations on the basis of study of Bank of Baroda and South Gujarat Local area bank:

Bank mergers are occurring quite frequently in India now as the government is encouraging them to do so in order to become globally powerful brands. But, the expectations may not always come as is evident in the case of Bank of Baroda and South Gujarat Local Area Bank.

Banks should do a proper due diligence process before deciding to go for a merger. The synergy they look for has to comply with their human resource, technical expertise, market reach as well as financial health.

68

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 Timothy A. Kruse, Hun Y. Park, Kwangwoo Park, and Kazunori Suzuki, (2003): Long-term Performance following Acquisitions of Japanese Companies: The Effect of Diversification and Affiliation, presented at American Finance Association meetings in Washington D.C, pp 1 40

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Annexure
Balance Sheet of HDFC Bank ------------------- in Rs. Cr. ------------------Mar '07 Mar '08 12 mths 12 mths Mar '09 12 mths

72

Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

319.39 354.43 425.38 319.39 354.43 425.38 0 0 400.92 0 0 0 6,113.76 11,142.80 14,226.43 0 0 0 6,433.15 11,497.23 15,052.73 68,297.94 100,768.60 142,811.58 2,815.39 4,478.86 2,685.84 71,113.33 105,247.46 145,497.42 13,689.13 16,431.91 22,720.62 91,235.61 133,176.60 183,270.77 5,182.48 3,971.40 46,944.78 30,564.80 1,917.56 950.89 966.67 0 3,605.48 12,553.18 2,225.16 63,426.90 49,393.54 2,386.99 1,211.86 1,175.13 0 4,402.69 13,527.21 3,979.41 98,883.05 58,817.55 3,956.63 2,249.90 1,706.73 0 6,356.83

91,235.61 133,176.60 183,270.78 202,126.73 582,835.94 396,594.31 7,211.88 17,092.85 17,939.62 201.42 324.38 344.44

Balance Sheet of ICICI Bank ------------------- in Rs. Cr. ------------------Mar '00 Mar '01 Mar '02 Mar '03 12 mths 12 mths 12 mths 12 mths Mar '04 12 mths

73

Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets

196.82 196.82 0 0 952.69

196.82 196.82 23.54 0 1,092.26

220.36 220.36 742.67 0 5,635.54 0 6,598.57 32,085.11 49,218.66 81,303.77

962.66 612.66 0 350 6,320.65 0 7,283.31 48,169.31 34,302.42 82,471.73

966.4 616.4 0 350 7,394.16 0 8,360.56 68,108.58 30,740.24 98,848.82

0 0 1,149.51 1,312.62 9,866.02 16,378.21 491.47 1,032.79 10,357.49 17,411.00

565.63 1,012.97 16,207.58 17,056.93 18,019.49 12,072.63 19,736.59 104,109.92 106,811.97 125,228.87

721.89 2,693.27 3,657.34 4,416.68 315.14 93.02 222.12 5.18 356.14

1,231.66 2,362.03 7,031.46 8,186.86 589.68 208.55 381.13 19.23 524.23

1,774.47 11,011.88 47,034.87 35,891.08 4,494.29 254.94 4,239.35 0 4,158.28

4,886.14 1,602.86 53,279.41 35,462.30 4,812.98 752.26 4,060.72 156.21 7,364.31

5,408.00 3,062.64 62,095.52 42,742.86 5,090.20 1,033.79 4,056.41 93.99 7,769.45

12,072.62 19,736.60 104,109.93 106,811.95 125,228.87

Contingent Liabilities 15,495.73 12,561.10 Bills for collection 1,610.40 2,516.71 Book Value (Rs) 58.4 65.5

37,707.48 3,062.52 265.74

40,677.03 5,661.98 113.1

74,091.00 8,025.13 130.67

Profit & Loss account of ICICI Bank ------------------- in Rs. Cr. ------------------Mar '00 Mar '01 Mar '02 Mar '03 12 mths 12 mths 12 mths 12 mths Mar '04 12 mths

74

Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses

852.87 1,242.13 2,151.93 9,368.06 8,894.04 194.05 220.34 589.26 3,158.72 3,064.92 1,046.92 1,462.47 2,741.19 12,526.78 11,958.96 666.95 36.37 44.54 24.79 168.97 837.67 1,558.92 51.71 147.18 109.3 203.85 36.76 64.09 255.46 499.69 7,944.00 403.02 1,745.52 505.94 722.11 7,015.25 546.06 921.58 539.44 1,299.53

0 0 0 0 0 153.3 324.15 613.42 3,332.67 2,955.35 121.37 129.08 301.39 43.92 351.26 941.62 1,290.90 2,473.73 11,320.59 10,321.86 Mar '00 Mar '01 171.57 0 0.8 172.37 0 44.07 4.5 8.72 20 65.5 Mar '02 267.45 0 0.83 268.28 0 44.07 4.5 12.14 20 265.74 Mar '03 1,206.18 0 19.56 1,225.74 0 459.78 58.91 19.68 75 113.1 Mar '04 1,637.11 0 5.05 1,642.16 0 544.06 69.71 26.71 75 130.67

Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

105.3 0 0.13 105.43 0 24.75 2.72 5.35 15 58.4

77.82 0 27.47 0.14 105.43

112.5 0 48.57 0.83 161.9

191 0 48.57 19.56 259.13

702 0 518.69 5.05 1,225.74

975.3 0 613.77 53.09 1,642.16

Balance Sheet of Bank Of Baroda

75

------------------- in Rs. Cr. ------------------Mar '05 Mar '06 Mar '07 Mar '08 12 mths 12 mths 12 mths 12 mths Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs) 294.53 294.53 0 0 5,333.23 0 5,627.76 81,333.46 1,640.83 82,974.29 6,062.19 365.53 365.53 0 365.53 365.53 0 365.53 365.53 0

Mar '09 12 mths 365.53 365.53 0

0 0 0 0 7,478.91 8,284.41 10,678.40 12,470.01 0 0 0 0 7,844.44 8,649.94 11,043.93 12,835.54 93,661.99 124,915.98 152,034.13 192,396.95 4,802.20 1,142.56 3,927.05 5,636.09 98,464.19 126,058.54 155,961.18 198,033.04 7,083.90 8,437.70 12,594.41 16,538.15

94,664.24 113,392.53 143,146.18 179,599.52 227,406.73

2,712.32 6,541.88 43,400.38 37,074.44 1,707.68 846.88 860.8 0 4,074.41

3,333.43 10,121.21 59,911.78 35,114.22 1,873.17 952.44 920.73 0 3,991.16

6,413.52

9,369.72

10,596.34

11,866.85 12,929.56 13,490.77 83,620.87 106,701.32 143,985.90 34,943.63 43,870.07 52,445.88 2,244.62 3,787.14 3,954.13 1,155.81 1,088.81 0 5,212.50 1,360.14 2,427.00 0 4,301.83 1,644.41 2,309.72 0 4,578.12

94,664.23 113,392.53 143,146.18 179,599.50 227,406.73 33,066.99 9,768.27 191.9 34,678.87 10,407.04 215.35 54,999.86 12,976.53 237.46 75,364.33 15,105.51 303.18 64,745.82 22,584.64 352.37

Profit & Loss account of Bank Of Baroda

76

------------------- in Rs. Cr. ------------------Mar '05 Mar '06 Mar '07 Mar '08 12 mths 12 mths 12 mths 12 mths Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

Mar '09 12 mths

6,431.42 7,100.00 9,212.64 11,813.48 15,091.58 1,304.83 1,191.69 1,381.79 2,051.04 2,757.66 7,736.25 8,291.69 10,594.43 13,864.52 17,849.24 3,452.15 3,875.09 1,381.05 1,523.79 757.74 81.88 714.77 111.13 5,426.56 1,644.06 646.25 194.28 1,656.81 0 2,771.45 1,369.95 7,901.67 1,803.76 927.2 232 1,564.36 0 3,370.27 1,157.05 9,968.17 2,348.13 885.24 230.5 2,189.99 0 3,844.66 1,809.20

1,386.63 1,016.85 0 0 2,411.58 2,724.77 1,195.72 641.77

7,059.45 7,241.63 676.8 1,050.07 0.04 -223.11 0 0 676.84 826.96 0 0 166.96 207.68 0 0

9,567.96 12,428.99 15,622.03 1,026.46 0 0 1,026.46 0 252.46 0 1,435.52 0 0 1,435.52 0 340.94 0 2,227.20 0 0 2,227.20 0 383.56 0

23.08 50 191.9

28.83 50 215.35

28.18 60 237.46

39.41 80 303.18

61.14 90 352.37

177.49

-828.76

271.5 502.5

444.23 650.35

1,136.23 707.41

332.39 1,448.04

166.96 0 676.84

207.68 0 826.96

252.46 0 1,026.46

340.94 0 1,435.52

383.56 0 2,227.20

77

Profit & Loss account of Bank Of Baroda ------------------- in Rs. Cr. ------------------Mar '00 Mar '01 Mar '02 12 mths 12 mths 12 mths Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total Mar '03 12 mths Mar '04 12 mths

5,220.19 5,757.34 5,955.55 6,097.56 6,147.07 641.43 706.28 993.17 1,261.70 1,719.01 5,861.62 6,463.62 6,948.72 7,359.26 7,866.08 3,506.63 3,819.55 4,076.11 3,994.19 3,575.48 896.45 1,145.73 1,056.26 1,128.59 1,252.52 210.04 52.37 693.34 227.41 77.25 919.01 259.92 91.27 919.23 663.1 1,275.91 88.61 75.57 711.99 719.59

0 0 0 0 0 1,303.30 1,607.59 1,563.35 2,045.30 2,764.89 548.9 761.81 763.33 546.99 558.7

5,358.83 6,188.95 6,402.79 6,586.48 6,899.07 502.77 0 0 502.77 0 118.4 17.91 16.99 40 109.28 274.66 0 0 274.66 0 118.4 12.08 9.28 40 113.39 545.93 0 0 545.93 0 118.4 0 18.44 40 129.32 772.78 0 0 772.78 0 177.6 15.17 26.11 60 148.21 967 0 0 967 0 190.62 24.42 32.97 65 174.96

158.86 207.6 136.31 0 502.77

65.27 78.91 130.48 0 274.66

368.59 58.94 118.4 0 545.93

527.86 52.15 192.77 0 772.78

725.68 26.28 215.04 0 967

78