Case Study

Mergers and Bank Performance in India:

A Case on the State Bank of India
Sujit Kumar Patra
Assistant Professor
School of Management
Birla Global University, Bhubaneswar, Email: [email protected]
Ajitabh Dash
Assistant Professor, Marketing
School of Management
Birla Global University, Bhubaneswar, Email: [email protected]

Background of the Study entity takes ownership of another entity’s stock,

Prior to the initiation of financial reforms, Indian equity interests or assets. However, from a
banks were operating in a highly regulated commercial and economic point of view, both
environment. In view of the social responsibility types of transactions generally result in the
placed on the banking sector, profitability was consolidation of assets and liabilities under one
not considered an important yardstick to judge entity, and the distinction between a “merger” and
their performance. From the time of an “acquisition” is less clear.
nationalization of 14 major scheduled Merger of SBI with its 5 associates namely State
commercial banks in 1969 till the early 1990s, Bank of Bikaner and Jaipur (SBBJ), State Bank
the main thrust of banking operation was on social of Mysore (SBM), State Bank of Travancore
banking. Accordingly, the emphasis was placed (SBT), State Bank of Hyderabad (SBH), State
on enhancing branch network in rural and semi- Bank of Patiala (SBP) and Bharatiya Mahila Bank
urban areas. Moreover, banks had to undertake took place on 1 April, 2017. Shri Arun Jaitely is
several other responsibilities which included the confident that the bank will become a global
player due to this step of its merger with its five
financing of fiscal deficit and facilitating the
associate banks and Smt. Arundhati Bhattachary,
development of certain specific factors as
Chairperson of SBI, expects that profits of the
reflected in high and increasing prescription of
Bank shall increase by Rs. 3,000 crores in the
SLR and direct lending. With initiation of coming 3 years. Therefore, the profitability
financial sector reforms, competition among the performance of State Bank of India and its
banks had increased. The competition is intense associates has become a fascinating topic for
and irrespective of the challenge from the conversation, comment and debate. The approach
multinational players, domestic banks, both of policy makers towards profitability has
public and private, are also seen to be earnest in changed, with the result that low profits have
their pursuit of gaining competitive edge by become a fact of life. However, the economies
opting for mergers and acquisitions. As a result, of scale and scope have to be exploited for facing
Mergers and Acquisitions (M&A) are the order competition. Efficiency and profitability have, as
of the day. As an aspect of strategic management, a result, become critical objectives to be aimed
M&A can allow enterprises to grow, shrink, and at. Hence, in the present paper, an attempt has
change the nature of their business or competitive been made to analyze the profitability
position. From a legal point of view, a merger is performance of SBI and its associates with the
a legal consolidation of two entities into one help of profitability ratios after completion of one
entity, whereas an acquisition occurs when one year.

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 Mergers and Bank Performance in India:A Case on the State Bank of India
SBI at a Glance in 2016. The merger was approved by the Union
State Bank of India (SBI) is an Indian Cabinet on 15 June 2016. The State Bank of India
multinational, public sector banking and financial and all its associate banks used the same
services company. It is a government-owned blue keyhole logo. The State Bank of India word
corporation headquartered in Mumbai, mark usually had one standard typeface, but also
Maharashtra. The company is ranked 217th on utilized other typefaces.
the Fortune Global 500 list of the world’s biggest On 15 February 2017, the Union Cabinet
corporations as of 2017. It is the largest bank in approved the merger of five associate banks with
India with a 23% market share in assets, besides SBI. What was overlooked, however, were
a share of one-fourth of the total loan and deposits different pension liability provisions and
market. The Bank descends from the Bank of accounting policies for bad loans, based on
Calcutta, founded in 1806, via the Imperial Bank regional risks. The State Bank of Bikaner &
of India, making it the oldest commercial bank Jaipur, State Bank of Hyderabad, State Bank of
in the Indian subcontinent. The Bank of Mysore, State Bank of Patiala and State Bank of
Madras merged into the other two “presidency Travancore, and Bharatiya Mahila Bank were
banks” in British India, the Bank of Calcutta and merged with State Bank of India with effect from
the Bank of Bombay, to form the Imperial Bank 1 April 2017.
of India, which in turn became the State Bank of In the history of SBI it is not the first time when
India in 1955. The Government of India took SBI has merged with other banks. Earlier in 2008,
control of the Imperial Bank of India in 1955, State Bank of Saurashtra was merged with SBI
with Reserve Bank of India (India’s central bank) and in 2010 State Bank of Indore was merged
taking a 60% stake, renaming it the State Bank with SBI.
of India. In 2008, the government took over the Review of Literature and Identification of
stake held by the Reserve Bank of India. Research Gap
SBI and its Former Associate Banks Beena P.L. (2000) attempted to analyze the
SBI acquired the control of seven banks in 1960. They significance of mergers and its characteristics.
were the seven regional banks of former Indian princely The paper suggested acceleration of the merger
states. They were renamed, prefixing them with ‘State movement in the early 1990s is accompanied by
Bank of. These seven banks were State Bank of Bikaner the dominance of mergers between firms
and Jaipur (SBBJ), State Bank of belonging to the same business group or houses
Hyderabad (SBH), State Bank of Indore (SBN), State with similar product lines.
Bank of Mysore (SBM), State Bank of Pramod Mantravadi & Vidyadhar Reddy
Patiala (SBP), State Bank of Saurashtra (SBS) (2007)’s study on the operating performance after
mergers and acquisitions examined both pre-and
and State Bank of Travancore (SBT). All these banks
post-merger financial ratios, with chosen sample
were given the same logo as the parent bank SBI.
firms, and all mergers involving public limited
The plans for making SBI a single very large bank and traded companies of the nation between 1991
by merging the associate banks started in 2008, and 2003. The research suggested that there were
and in September the same year, SBS merged with minor variations in terms of impact on operating
SBI. The very next year, State Bank of Indore performance following mergers in different
(SBN) also merged. In the same year, a subsidiary intervals of time in India. The study also indicated
named Bharatiya Mahila Bank was formed. The that for mergers between the same group of
negotiations for merging of the 6 associate banks companies in India, there has been a deterioration
(State Bank of Bikaner and Jaipur, State Bank of in performance and return on investment,
Hyderabad, State Bank of Mysore, State Bank of suggesting that such mergers were only motivated
Patiala, State Bank of Travancore and Bharatiya by potential for increasing the assets through
Mahila Bank) by acquiring their businesses consolidation of different businesses, rather than
including assets and liabilities with SBI started driving efficiency improvements.

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 Mergers and Bank Performance in India:A Case on the State Bank of India
A Kaleichelvan (2011) has looked at the M&A as data related to these were not available in the
activity in the banking industry during the period public domain. The propositions developed can
1993-94 to 2004-05. He found that the financial be further tested over large sample sizes and
performance of both public and private sectors temporally validated after three to five financial
banks with respect to acquiring private limited years. This can pave the way for a more detailed
banks does not result in any notable changes in understanding of the corporate strategies of
its liquidity position as well as on its profitability Indian firms, especially in times when more and
levels. But the efficiency of the banks in more industries are maturing, leading to
generating income relating to their investment in consolidation of players.
fixed assets has declined in shorter time period. Kuriakose Sony & Gireesh Kumar G. S (2010)
In addition, the net earnings in longer time period analyzed the strategic and financial similarities
of five year tend to increase against taking over of merged banks, and relevant financial variables
of private limited banks by public and private of respective banks and found that only private
sector banks in India. sector banks were in favour of voluntary mergers.
Subramanya Prasad has evaluated the post- Azeem Ahmed Khan (2011) explored various
merger efficiencies of Indian commercial banks motivations of Merger and Acquisitions in the
(acquiring banks) which have undergone mergers Indian banking sector. The result of the study
during the post-reform period and analyzed the indicated that the banks have been positively
factors influencing the commercial bank affected by the event of merger and acquisitions.
efficiency in the Indian context and concluded These results also suggested that merged banks
with a positive note stating that the select bank’s could obtain efficiency and gains through Merger
efficiency improved post merger and Acquisitions and could pass the benefits to
Anand Manoj & Singh Jagandeep (2008) studied the equity shareholders’ in the form of dividend.
the impact of merger on the shareholders of five Devarajappa S, (2012) explored various motives
banks: Times Bank with the HDFC Bank, the of merger in Indian banking industry. It also
Bank of Madurai with the ICICI Bank, the ICICI compared pre and post merger financial
Ltd with the ICICI Bank, the Global Trust Bank performance of merged banks with the help of
with the Oriental Bank of Commerce and the financial parameters like, Gross Profit margin,
Bank of Punjab with the Centurion Bank. The Net Profit margin, Operating Profit margin,
study revealed that the announcement of merger Return on Capital Employed, Return on Equity,
of the banks had positive and significant impact and Debt Equity Ratio. Finally the study indicates
on shareholders’ wealth. that the banks have been positively affected by
Sarangapani and Mamathaa (2008) examined the event of merger.
some large Indian M&A deals were studied. The The above review of literature points to the fact
intent of the study was to understand the strategic that studies have been made on mergers relating
intent behind M&A activity by analyzing the mainly to the performance of select banks;
recent M&A in India. Intents of M&A using analysing the problems of mergers and benefits
anecdotal evidence gathered from public to the stakeholders; financial performance of the
statements of top management personnel in the transferee bank after the merger. However, an
media were analyzed. The data can be analysis relating to Employee Productivity;
corroborated through collecting primary data Branch Productivity and the Profitability of the
from specific companies involved. This study can SBI before and after the merger till 31st March
be furthered with a more detailed study of the 2018 has not been done so far. Hence, the study
M&A intents. Issues related to taxation and is undertaken to fill the research gap.
regulations are not within the scope of this work

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 Mergers and Bank Performance in India:A Case on the State Bank of India

Objectives of the Study • CAGR: to analyse the growth in deposits,

The objectives of the study are advances and profits of the select banks
• To study the reasons behind the merger of • t test: to test the Hypothesis as to whether there
SBI with its five associated banks is any significant difference in the performance
• To analyse the employee productivity of SBI of the select banks before and after the merger.
• To analyse the branch productivity of SBI Reasons of Merger
• To analyse the post merger performance of The reasons behind the merger of SBI with its
SBI
associate banks and Bharatiya Mahila Bank are
Methodology listed as follows:
Sources of Data • Government of India provides subsidy and
The study is based on secondary sources which contribution for bad debt recovery and share
includes the Annual Reports of the SBI; RBI capital to SBI and its associate banks. It will
Database Profile of Banks –various issues; become easy for government to provide aid
research publications, etc. to this single amalgamated bank instead of
Period of Study giving it separately to SBI and its associate
The period of the study is the post - liberalisation banks.
period, i.e. from 1st April 2014 to 31st March • Profitability of SBI was going down for last
2018. few years and this merger will be able to show
Hypothesis better position of profitability in the books of
• Ho: There is no significant difference in the SBI. Net profit of the group fell from Rs.
deposits per employee and per branch of SBI 12,225 crores in Financial Year 2016 to Rs.
before and after merger. 241 crores in Financial Year 2017 and the
• H1: There is a significant difference in the losses were mainly due to associate banks.
deposits per employee and per branch of SBI • To recover loans which have turned bad and
before and after merger . to reduce NPA of SBI and associate banks in
• Ho: There is no significant difference in future.
advances per employee and per branch of SBI • For reconstruction of SBI and associate banks
before and after merger. in the face of financial crises so that it can
• H 1: There is a significant difference in meet its liabilities
advances per employee and per branch of SBI
• With the merger, SBI has become bigger than
before and after merger.
before. Now it has a larger asset base and
• Ho: There is no significant difference in the ranks 45th among top banks of the world.
profits per employee and per branch of SBI
before and after merger. • Management of the Bank will become easier
• H1: There is a significant difference in the as earlier all the branches were managed by
profits per employee and per branch of SBI separate managements though the holding was
before and after merger. same and it used to make the whole process
cumbersome.
Tools for Analysis
The following tools are used for the analysis of • Cost of managing large number of branches
the data apart from percentages and averages. will reduce which will increase profitability
• Employee & Branch Productivity ratios for of the Bank.
evaluating the employee efficiency and branch
efficiency

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 Mergers and Bank Performance in India:A Case on the State Bank of India
Data Analysis
Pre & Post Merger Key Parameters of SBI
Table 1: Pre- and Post- Merger Key Parameters of State Bank of India
Year Deposits Advances Net Profit No of No of
Employees Branches
2014 1,394,408.51 1,209,828.72 10,891.17 222,033 16,059
2015 1,576,793.24 1,300,026.39 13,101.57 213,238 16,524
2016 1,730,722.44 1,463,700.42 9,950.65 207,739 16,784
2017 2,044,751.39 1,571,078.38 10,484.10 209,567 17,170
2018 2,706,343.29 1,934,880.19 -6,547.45 264,041 22,414
CAGR (%) 94.1 59.9 -160.1 18.9 39.6
Mean 1,890,603.77 1,495,902.82 7,576.01 223,323.60 17,790.20
Median 1,730,722.44 1,463,700.42 10,484.10 213,238 16,784
SD 514645.82 282663.87 7985.77 23416.96 2616.15
Skewness 1.19 1.00 -2.11 1.95 2.10
Kurtosis 1.16 0.88 4.58 3.86 4.54
Source: Compiled by the Author
Deposits advances; net profit, number of year excepting in the years 2013-14 and 2015-
employees and branches of SBI four years before 16; the number of branches increased during the
the merger and one year after the merger of State overall study period excepting in the year 2002-
Bank of Saurashtra with itself in the year 2008- 03 during the pre merger period. With regard to
09 are presented in Table 1. The year of merger the number of employees it is observed that from
2008-09 is taken as a base year for calculating the year 1999-2000 there has been a consistent
CAGR. The deposits and advances of State Bank fall year after year in the number of employees
of Saurashtra at the time of the merger were Rs. during the pre and post merger periods with an
4,19,425 and Rs. 12,309.29 crores; net profit Rs. exception in the years 2010-11 and 2012-13 and
35.45crores; employees was 7399 and the Bank recorded a lowest growth rate of .20 % during
had a network of 460 branches compared to that the post merger period an against a negative
of SBI which had deposits of Rs. 7, 42,073 crores growth rate of -3.00% during the pre merger
and advances of Rs. 5, 42,503 crores; 2, 05,896 period. The average increase during the pre and
crores of profits; had 12,022 employees and a post merger period in deposits was Rs.
branch network of 9,121. The deposits and 3,56,018.63 crores and Rs. 13,41,388.923
advances of SBI, post merger grew by 11.92 % Crores. Advances were Rs. 2,18,545.86 crores
and 12.54% as against 13.22% and 18.97 % and Rs. 11,05,807.851 crores. net profits were
during the pre merger period. Profits have Rs. 3850.5 crores and Rs. 10,936.09 crores. The
recorded a CAGR of 1.56 % as against pre merger number of employees was 2,01,153.3 and
CAGR of 21.30%. Number of Employees 2,14,948.3. There was number of Branches
increased by 20% during the post merger period 9420.75 and 15525.13. These figures only
and its CAGR was in negative during the pre indicate the fact that, the Bank has been doing
merger period and the number of branches well, by generating increased amounts of deposits
increased by 4.04% as against 3.17 % during the and disbursing increased amount of advances. T
pre merger period. It is evident from the above test is employed to see whether the difference in
tables that there has been an increase in the two the key parameters before and after the merger is
parameters of deposits and a advances all significant or not and the results are presented in
through; there is increase in the profits year after table 4.

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 Mergers and Bank Performance in India:A Case on the State Bank of India
Table 2 t-Test Results of Key Parameters of State Bank of India

Year Deposits Advances Net Profit No of No of

Employees Branches
Pre-Merger 1,686,668.90 1,386,158.48 11,106.87 213,144.25 16,634.25
Mean
Post-Merger 2,706,343.29 1,934,880.19 -6,547.45 264,041.00 22,414.00
Mean
t Stat -3.310783989 -3.02983 11.40568 -7.16713 -11.0845
t critical 3.182446305 3.182446 3.182446 3.182446 3.182446
two tail
P two 0.045365538 0.056319 0.001446 0.002798 0.001573
tail value
Source: Calculated on values in table1
T test is employed to see whether the difference and its CAGR was in negative during the pre
in the key Pparameters is significant or not for merger period; and the number of branches
pre and post merger periods. The t stat values as increased by 4.04% as against 3.17 % during
per test at 5% significance level in case of all the the pre merger period. Furthermore, the results
parameters is less than the t critical two tail value; of t-test revealed a significant difference in
p value less than .05, indicating that there is a performance during pre merger and post merger
significant difference in their performance, periods for State Bank of India.
rejecting the null hypothesis. As seen in the above Reference
table over a period of sixteen years, eight years Azeem Ahmed Khan (2011), “Mergers and
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