An Insight into Banking Sector Mergers and Acquisition-BRICS Nations

The banking and financial services (BFSI) sector is one of the most crucial areas in any economy. It is fastest growing and the listed players in this space has given high returns to the investors over the last decade. Commercial banks in the Indian context have witnessed radical changes in terms of enormous progression in off-balance sheet risk management of financial assets, regulatory amendments, NPA recognition norms, significant consolidation of the financial sector and introduction of e-commerce norms and online banking. In this context, Indian economy is similar to the other economies of BRICS countries. These countries are emerging economies with higher GDPs and undertaking various reforms to boost the consumption, transparency and business needs. So, it is pertinent to evaluate the M&A activities that have taken in India and other BRICS countries and comparing the same. This paper analyses the M&A that have taken place in India and other BRICS countries based on certain fundamental parameters which are based on regulatory requirements, profitability and overall returns on investments. The results of these tests indicate that there is insignificant change in most of parameters during post-merger phase. Further, other parameters showed a negative effect of merger on acquirer during post-merger period.


INTRODUCTION
Expanding business activities by way of organic or inorganic mode is an essential decision in terms of survival of business in today's world. In this context, mergers and acquisitions are one of the possible ways which can provide the expansion to the companies at a faster pace. Having said this, possible synergies arising from mergers and acquisitions is a much-debated issue in today's world. Certain theories which are based on efficiency and dominant market share argue in favour of mergers whereas most of the theories (especially in recent context) vote against the mergers due to agency cost, lack of integration and the cost paid for acquiring the firm.
In India, the service sector plays a significant role in terms of economic growth. The heterogeneous sector contributes ~60% of the gross domestic product (GDP) of India. Banking sector has been, over the years, is one of the top performers in terms of boosting the economic growth as well as in terms of the returns in the stock markets. However, recently, the sector has witnessed a down run due various issues, including governance and non-performing assets (NPA). Further, to resolve the issues especially in public sector banks, as recently as in August 2019, the Government of India (GOI) announced mergers of ten public sector banks into four banks, bringing down the total PSUs from 27 to 12. In this context, it pertinent to scrutinize the effects of M&As on banking sector and the effects it has on the merged entity in terms of its operations. Rationale for undertaking restructuring in the form of M&A has been provided below ( Figure 1): ranged between 5% and 8% p.a. similar to the GDP growth rate other BRICS countries. India is a developing economy and moving towards more transparent eco-system. Various reforms have been made by India such as introduction of goods and services tax, making the approval process for business faster etc. These reforms are in similar to the reforms that have implemented in Brazil and China which has undertaken various measures to improve the business environment and transparency.
These countries have different regulatory system for banking sector, however, there is close resemblance in terms of the economic structure of these countries. These countries are called as fast-growing economies which are challenging the developed economies across the world. Therefore, research paper have tried to analyze brownfield expansion undertaken by the banks in these countries and related the results with the wealth created by Indian banks.

Indian Mergers
In India, service sector plays an important role and contributes approximately 60% of the GDP. The financial services sector (which includes banks) have major pie of the service sector output and hence is one of the important components of the economy. The sector has outperformed all the other sectors in terms of performance and is the fundamental to the growth of an economy. The growth story of the banking industry is expected to continue despite the recent downturn in economic growth indicators and NPA issues faced by the industry as the downturn is cyclical and the economy is expected to revive over a period of time given the strong fundamentals of Indian economy.
Following Figure 2 provides the outline of banking sector in Indian Context: In this backdrop, M&As play an imperative role in shaping the economy especially in the context of banking sector. M&A activities have seen huge rise in numbers after the LPG Policy implemented in 1991 and various reforms that were implemented in terms of sector limits for Foreign Direct Investments (FDI).
M&As have been carried out in Indian sectors for variety of reasons which include, reviving the weak banks, operational efficiencies, market expansion, consolidation of the sector etc. Analyzing the past mergers of banking sector in India, provides an insight that they took place to protect the interests of weak bank customers, but later some mergers also took place voluntarily in the post-liberalization time for other reasons. The fastest growing Indian economy, has maintained its leadership, despite the global financial crisis that took place in 2008. The primary growth drivers of India are domestic consumption and investments. During the period 2005-2015, 19 mergers took place in India. Entire data relating to these mergers and the other BRICS countries have been in the Data Analysis section.

LITERATURE REVIEW
The banking sector has been analyzed from many perspectives especially in terms of acquisitions and mergers. Various studies have analyzed the impression of M&As on financial parameters such as profitability, return on investment/assets, stock prices  etc. Past research reflects that mergers and acquisitions at banks have produced combination of positive and negative results in performance of these banks during after merger period. Mehta and Kakani (2006) through their study came to a conclusion that merger strategy is imperious for the state to create large banks. The motives behind the merger and acquisitions in the Indian banking sector that have taken place post 2000 was highlighted by Revathy (2011). In the study conducted by Kumar and Kuriakose (2010) an attempt was made to access the strategic and financial similarities of both public and private sector banks. They concluded that although private banks were in favour of voluntary restructuring but public banks were reluctant to do so. A study with regard to merger and acquisitions in the Indian banking industry post liberalization was done by Dutta and Dawn (2012) who critically examined the reasons for mergers and analyzed whether the mergers attained success of not. Shobhana and Deepa (2012) in their study with respect to six selected mergers of Indian banks tried to determine the shareholder's value creation consequent to merger announcements during the post liberalization period. They concluded that shareholder's wealth declined when the securities were more prone to market risk, and when the market risk of the public and private sector banks were same as that of the benchmark portfolio, there was an increase in the shareholder's wealth. Ramakrishnan (2010) in his study with respect to companies listed in BSE, found that on an average, only the shareholders of the acquired firm appear to enjoy significant wealth gains. Ghosh and Dutta (2015) analysis the M&As undertaken in the BFSI sector using certain ratios. These ratios include, CAR (i.e. capital adequacy ratio), human capital return on investment, ROCE (i.e. return on capital employed), EPS (earning per share) and changes in loans and advances post-merger period. The period analyzed under this research was from 2000 to 2010 based on the data for 10 mergers that have taken place. The finding of their analysis was that there was no significant change in the performance of the Indian banks during post-merger period. Dr. (Mrs.) Athma and Bhavani (January, 2018) has done analysis of the M&As in respect of HDFC Bank and State Bank of India (SBI). The paper analyses the merger of HDFC Bank with Centurion Bank and SBI with State Bank of Sourastra. The analysis was on the following parameters in respect of pre and post-merger period: a. Deposits/employee and per branch b. Advanced/employee and per branch c. Profits/employee and per branch d. Productivity ratio/employee and per branch.
The conclusion of the aforesaid study was that in both the cases, overall growth was observed in key parameters.
Further, as discussed above, the event study was conducted in Anand and Singh (2008), to analyze the impact of share price movement due to merger announcements. It scrutinized 5 mergers in the Indian banking sector which includes banks like ICICI, HDFC, Oriental Bank of Commerce and Centurian Bank. They concluded the merger announcements in the Indian banking industry have positive and significant shareholder wealth effect for bidder and target banks.

OBJECTIVE
The basic rationale of undertaking a merger can be questioned in a scenario where the performance of the merged entity does not show any enhancements, as anticipated at the time of the merger, in the long run. Hence, the rationale of the study is to analyse the M&A that has taken place in India and other BRICS countries.
The paper tries to scrutinize whether mergers in banking sector have led to the enhancement in performance of acquirer bank or whether the same has deteriorated over a period.
The study analyses the pre and post effect of merger in case of acquirer in Indian context. Further, the analysis is done how Indian acquirers have performed in comparison with the other BRICS countries' acquirers in the banking industry. Given the similar nature of the economies, the study tries to identify whether Indian banks have performed better than the other BRICS counter-parts.
BRICS countries have different regulatory system for banking sector, however, there is close resemblance in terms of the economic structure of these countries. These countries are often called as fast-growing economies challenging the developed economies. They are the fastest growing largest economies. BRICS countries have large populations and vast territories. BRICS countries over the past decade have majorly contributed to the GDP growth of the world. Also, according to certain economists, BRICS countries are expected to overtake G7 countries by the year 2027.
Further, BRICS countries believe: • In the establishment of sustainable peace and improving the transparency in the respective countries

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In the robust commitment to international law and implementation of the same • That development and security are closely interlinked.
The approach of BRICS countries coincides on global issues international economic and financial situation, reform of the Bretton Woods Institutions, trade protectionism, climate change and food and energy security.
Given the aforesaid backdrop, the investigation of the study is to understand the pre-merger and post-merger effect on the acquirer in terms of various parameters as listed in methodology section. These factors have been designed to analyze the profitability, meeting of regulatory requirements, changes in share prices (underlying the market capitalization), return of assets and capital, ratio of non-performing assets (NPA). Therefore, these factors provide a holistic approach to analyze the performance of acquired company. Further, given the similarities between India and other BRICS countries, the result of the study could provide an insight into whether the pattern of result is similar in Indian context or they differ in other BRICS countries. That could give an insight into whether the merger activities in these countries are carried out in certain different manner. The analysis proposes to also undertake study mergers that have taken place in BRICS countries (except India) to evaluate their overall impact.
The paper proposes to analyze the mergers in these countries and provide an insight into the variations that have taken place in the fundamentals of the banks. These insights can be used by managers of the BFSI sector before taking any decision in respect of mergers or acquisitions.

RESEARCH GAP
There are various papers published which attempts to analyze the mergers and acquisitions. Further, specific analysis is conducted to analyze the effect of brownfield expansion undertaken by banks.
As stated above, in Ghosh and Dutta (2015) the analysis of certain parameters of acquirer was undertaken in the banking sector for the period 2000-2010.
However, these studies do not analyze the M&As that has happened in Indian banking sector and comparison of the same with the M&A of other BRICS countries. Further, they have not tried to attempt in any factor that has an impact on mergers undertaken in these countries. The study has not been undertaken to evaluate the mergers on the basis of the various parameters as cited above. The research in this paper is conducted for the period of 3 years pre and post-merger, each. The reason for selecting the 3 year period is that the impact of merger has to be assessed for long-term period. Often, the integration in terms of culture and merger takes more than years to fructify. Therefore, the assumption underlying the 3 years period is that the merger has been integrated and the synergy effect will be shown in the parameters that have been considered will be reflected.
Further, there have been other studies which tried to capture the event study i.e. the effect of merger on the share price of the companies and the effect of the announcement of merger on acquirer and acquire. However, the current study does not take into consideration the immediate impact of the announcement on mergers and only considers the long-term impact (i.e. period of 3 years) on the merger. Therefore, the same is not an event study but analysis of various parameters over the long-term period.

METHODOLOGY
As stated above, this study analyses mergers and acquisition undertaken in BRICS countries (including India) during the period 2005-2015. The changes in the performance heights/levels of the banks in the post-merger period have been compared with the pre-merger phase by use of selected financial parameters. The analysis undertaken from acquirer's perspective and data for the study has been taken from Bloomberg terminal.
Below mentioned parameters have been chosen to evaluate the pre and post-merger effects on the banks: Following is the null hypothesis for the tests which are conducted: H 0 : There is insignificant difference/change in the specific parameter for a given country during the pre-merger and post-merger period. H1: There is a significant difference/change in the specific parameter for a given country during the pre-merger and post-merger period.
The study have conducted Kolmogorov-Smirnov test to check the normality of the data. Given that are only 19 data points, the results showed that the data was not normally distributed. Therefore, the study have undertaken Wilcoxon Paired Sign-Rank Test to compare the results at a 95% confidence interval.
The confidence interval of 95% is considered as the data could have high variance due to mergers that have been considered over the period of 10 years. Therefore, higher confidence interval of 10 years may not show the appropriate result. Further, the samples in each of the countries do not exceed ~30 and hence, higher confidence interval may not provide desired output.

DATA ANALYSIS AND FINDINGS
The data collected from Bloomberg terminal was used for the purpose of statistical analysis. The study attempts to analyze the fundamental factors of the banks during post-merger period and accordingly, null and alternate hypothesis have been defined. The analysis tries to find out whether there was any impact, negative or positive in post-merger period of the acquirer banks. Further, Kolmogorov-Smirnov test was conducted to check the normality of the data. Based on the results of normality, the paired t-test was performed with a 95% confidence level for parameters and the Wilcoxon Paired Test was calculated for factors that do not follow the normal distribution 1 .

Mergers in Case of Indian Banks
During 2005-2015, 19 mergers have happened in the banking sector in India and the same are listed below (i.e. Table 1). Analysis of these banks have been undertaken in ensuing paras.

Data Analysis and Results
As depicted in the Table 2, there was insignificant change in majority of the ratios during pre-merger and post-merger period. However, 3 ratios viz. return on capital (ROC), return on assets (ROA) and net margin ratio (NM) has decreased substantially. Therefore, there is no positive impact of merger on acquired bank basis the analysis undertaken for 3 years period.
1 Given that the data for evaluating the mergers were less, Wilcoxon Test has been applied in most of the cases.  There is insignificant difference in average price to book value ratio in post-merger period

Mergers in Case of Chinese Banks
During the period 2005-2015, 19 mergers happened in the banking sector in China and the same are listed below (i.e. Table 3). Analysis of these banks have been undertaken in ensuing paras.

Data Analysis and Results
As depicted in the Table 4, there was insignificant change in majority of the ratios during pre-merger and post-merger period. However, 3 ratios viz. capital adequacy ratio, efficiency ratio and price to book value ratio has shown substantial deviations in the pre and post period. The Capital Adequacy ratio has been improved while the other two ratios has declined in the post-merger period.
Therefore, there is no substantial impact of merger on acquired bank basis the analysis undertaken for 3 years period in China.

Mergers in Case of Brazilian Banks
During the period 2005-2015, 20 mergers happened in the banking sector in Brazil and the same are listed below (i.e. Table 5).
Analysis of these banks have been undertaken in ensuing paras.

Data Analysis and Results
As depicted in the Table 6, there is a significant change in pre and post-merger ratios in Brazil. The majority of the ratios have been deteriorated post-merger and therefore, based on the aforesaid

Mergers in Case of Russian Banks
During 2005-2015, 28 mergers happened in the banking sector in Russia and the same are listed below (i.e. Table 7). Analysis of these banks have been undertaken in ensuing paras.

Data Analysis and Results
As depicted in the Table 8, there was insignificant change in majority of the ratios during pre and post-merger period. However, 2 ratios viz. Net Interest Margin and average price to book value ratio has shown substantial changes in the pre and post merger period. Both the ratios have declined in the post-merger period. Therefore, there is no substantial impact of merger on acquired bank basis the analysis undertaken for 3 years period in Russia.  There is significant difference in average price to book value ratio in post-merger period

Mergers in South Africa
During the period 2005-2015, 11 mergers happened in the banking sector in India and the same are listed below (i.e. Table 9). Analysis of these banks have been undertaken in ensuing paras.

Data Analysis and Results
As depicted in the Table 10, there was insignificant change in majority of the ratios during pre and post-merger period. However, 2 ratios viz. capital adequacy ratio and return on capital has shown substantial changes in the pre and post M&A period. Capital adequacy ratio has improved whereas return of capital has decreased substantially during the post-merger period. Therefore, there is no substantial impact of merger on acquired bank basis the analysis undertaken for 3 years period in South Africa.

Combined BRICS Countries (Excluding India)
Analysis has been undertaken for all the mergers undertaken between the period 2005 and 2015 in all BRICS countries excluding India. In this case, paired t test has been applied for evaluating the results. Following (i.e. Table 11) is the summary of results: There was insignificant change in majority of the ratios. However, 4 ratios as highlighted above have deteriorated during post-merger period.

Summary of the Analysis
As can be seen from the above summary (i.e. Table 12), in all the countries except Brazil, there is no substantial effect on various parameters of the merged banks. In Brazil, however, majority of the ratios have deteriorated as compared with the pre-merger period. Capital adequacy ratio has shown positive effect in respect of China and South African Banks.
As depicted in the above table, following ratios have shown deterioration in the context of all the BRICS countries (excluding India) has been deteriorated:

Capital Adequacy Ratio (CAR) and Return on Capital (ROC)
Basel III norms state that the CAR should be 8% (i.e. CAR is ratio of capital to risk weighted assets). As provided in the aforesaid table, the mean CAR is much higher than 8 but has decreased over the periods post-merger substantially. One of the most important reason in this context is managing the NPAs due to which risk weighted assets have increased leading to decrease in the ratio. The NPAs of post-merger period has increased leading to higher provision/ providing for loss assets thereby, decreasing the return on capital of the banks substantially. The same is the case with Brazil and South Africa as is the case with India. Further, some of the mergers are stemming out of the regulator and hence, this is one of the factors which explains the rationale for decrease in the aforesaid ratios.

Net Interest Margin
Net Interest Margin for Brazil and Russia has shown negative effect substantially. This is because of the cost of funds have increased and the net spread between the interest has decreased. This is more so relevant where the economic uncertainties and unstable environment which existed in Brazil and Russia. Further, both the countries faced the issue of higher economic growth during the period under consideration leading to drop in interest margins of the banks as overall corporates in these countries have not performed well.

Average Price to Book Value
Given the adverse ROC and Net interest margin ratio and the challenges faced by the economies in terms of growth, average price to book value of the banks have fallen in merged entities. Further, this decrease is attributable to the mergers of statecontrolled banks merging with others in different territories initiated by the regulator/government.

CONCLUSION
This paper studied various parameters that can verify whether the merger in Indian and BRICS countries can be concluded as a success. The parameters chosen were fundamental to the performance of the bank. Banking sector is fundamentally different from other sectors in terms of its business operations. It operates under the asset light model and its assets and revenue source includes loans and advances that it has made against the liabilities which are in the form of deposits from the customers, corporates etc. Further, it is highly regulated by the regulator (i.e. RBI) and hence, the parameters chosen for analyzing banking sector are different from the parameters that are otherwise chosen for analyzing any other industry. The parameters are chosen from the perspective that analysis of all the BRICS countries can be undertaken.
To check on the regulatory aspect, capital adequacy ratio has been considered. To understand the increase in real share price, growth in market price is evaluated. Further, to check the returns on capital and assets, ROC and ROA are analyzed. NPA ratio has been evaluated to understand the increase/ decrease in NPAs of the merged entity during post-merger period. Profitability ratios such as operating margin, net interest margin (NIM), pre-tax margins and net margins are considered. All of these ratios encompass the operations of banks and considers regulatory, profitability and return on investment aspects.
The mergers that have happened during 2005-2015 has been analyzed. Further, period of 3 years pre-merger and post-merger was considered for the evaluation.
In this respect, the costs in relation to greenfield expansion can be estimated with reasonability and are under the control of the management. However, the cost paid for acquiring a company in real sense is not only the purchase price but also the integration expenses which acquirer has to undertake. In this context, there is no substantial improvement over the pre-merger period fundamentals and hence, all the managers have to look at the target in a skeptical manner and should look at the worst-case scenario before undertaking mergers.