merger of bank and financial institution
- 2. CITIGROUP Citigroup, the largest financial services company in the world, is the product of the 1998 megamerger of banking behemoth Citicorp and nonbanking financial services and insurance giant Travelers Group Inc. THE MERGER Announced on April ,1998 Merged into Citigroup Inc on October 8 Con generic Merger Combined commercial banking, investment banking, insurance underwriting and brokerage under one roof for the first time in the US. Co-CEO„s： John Reed from Citicorp Sandy Weill from Travelers Each held half of the equity of Citigroup Exchange rate of stock： Citicorp → 1：2.5 ； Travelers → 1： 1 The deal paved the way for the repeal of the Glass-Steagall Act of 1933, the law that separated investment banks and commercial banks.
- 3. THE MERGING COMPANIES: CITICORP AND TRAVELERS CITICORP Citibank was the 3rd largest bank in the U.S. Major global reach with Customer accounts in more than 90 countries. The largest credit card and charge card issuer and service in the world TRAVELERS GROUP Travelers is one of the largest providers of personal insurance products in the United States Major business credit services, consumer finance, brokerage, and insurance Revenues ： Investment banking(57%), life insurance(12%), property insurance(26%), consumer banking(5%)
- 4. REASONS FOR THE MERGER To be a customer - centered organization that offered a wide variety of product lines that could be cross-marketed and cross-sold to its customers to be a financial one-stop supermarket. Cross Selling : The merger was largely revenue driven to take maximum advantage of the two firms‟ strengths in products and distribution channels dispersed in different geographies. Economies of scale and scope: In an industry with high fixed costs such as the financial services, there is a huge potential for scale economies. In this case too, there were potential cost advantages, since the cost of maintaining customer relationships could be spread over more products. Diversification: Combining the two institutions make them less dependent on volatile earnings streams. The two Companies in this case stressed on the reduced risk that comes with greater diversity. Explore/Dominate new markets: The merger gave them an opportunity to grow and explore new markets and market segments. For instance, the deal gave Travelers instant access to Citi‟s 750 offices outside USA and made it an international financial service provider.
- 5. MAJOR BUSINESS Citi is organized into two major segments – Citicorp and Citi Holdings. Citicorp contains Consumer and Institutional Clients Group core businesses. Citi Holdings contains Citi's Brokerage and Asset Management (includes Smith Barney), Global Consumer Finance, and Citi's Special Asset Portfolios 1. Global Consumer Business: Citi's Global Consumer Business (GCB) is one of the largest retail banks in the world. Its revenues made up 50% of the total revenue within Citicorp in 2011. Citi's GCB businesses consists of five divisions: Retail Banking (Citibank), Citi Branded Cards (CitiCards), CitiMortgage, Citi Commercial Banking and Citi Retail Services (formerly Citi Retail Partner Cards) 2. Corporate businesses It contributes about 40% to the total income, two-third coming from the Corporate and Investment Bank. Divided into five primary businesses: Citi Markets and Citi Transaction Services(CTS), Citi Private Bank, Citi Capital Advisors, and Citi Corporate & Investment Banking.
- 6. IMPACT OF THE MERGER IMMEDIATE EFFECTS Shares of Citibank and Travelers Group shot up at the announcement of the merger, raising the combined value of the companies by $30 billion. Cross selling enabled citigroup to generate profits in some of its businesses in the initial years. Citicorp with a number of new mortgage orientations every year was able to bundle travelers insurance in a package for customers. Cross selling alone enabled Citigroup to generate over the next two years an additional $600 million in earnings. Merger retail businesses, private banks and asset management showed increased revenues. Mainstream investment banking, saw substantial progress with market share increasing from about 7% in 1998 to over 10% in 2001.
- 7. LONG RUN EFFECTS In the long run, It was seen that an antiquated regulatory structure, with different financial services regulated by different agencies, made integration harder. Maintaining any sort of agility in such a monumental entity was a major challenge. Ability to respond to changing market requirements, technology up gradation from time to time posed a challenge. This merger often faced structural problems. Culturally it often seemed disjointed. Travelers spin off : Citigroup spun off Travelers Property and Casualty into a subsidiary company in 2002. Citigroup entered the financial crisis as a huge, highly complex institution that ended up needing a bigger bailout than any other bank. It has since struggled to regain its footing, not to mention the favor of shareholders.
- 8. QUESTION ANALYSIS 1. Major businesses in which Citigroup operated after the merger were: Global Consumer group, Citi Markets & banking, Global Wealth Management, Citi Alternative Investments & other corporate affairs. Citicorp already had the most extensive international branch network for any American bank at the time of the merger. This immensely helped many of the businesses of the newly formed Citigroup. The businesses in which broad range of products has proved to be helpful is primarily consumer based business that included credit cards, retail banking, mortgages and life insurance. 2. Citigroup‟s initial success can be attributed to economies of scale and scope and cross selling resulting from the merger. Citigroup, the new name created out of Citicorp and Travelers Group, was, after the merger, able to service its customers with a wide variety of products, which was important in a client-focus industry such as the financial sector.
- 9. 3. Economies of scale and scope are important in this sector, but having said that, a giant with different financial services regulated by different agencies can be difficult to handle. Apart from that various reasons like such mergers being unsuccessful in past, vulnerability of oversized companies and structural problems faced by firms being mergered, prevent the firms from following citibank‟s strategy 4. Distribution through various channels has become a key differentiator in the current environment for the retail banks just to stay ahead of the competitor. Financial industry requires channel flexibility and support for an ever widening portfolio of products to meet the consumer expectations. Thus, focusing on distribution gives a clear advantage. This can be followed through by continuous innovation, more talented local teams to support distributors, targeting segments having profit potential, and improving cross channel distribution. 5. Our suggestion to Sandy Weil would be that citigroup should continue its expansion but along with the expansion it should fine tune its range of products and services. The inability of citigroup to do this successfully had resulted in losses for some of these segments like global corporate, investment activities and global consumer activities in sectors like insurance and e-consumer. Fine tuning of services along with innovation and a strong distribution network would make citigroup
- 10. INDIAN CASE Merger of HDFC with Centurion Bank of Punjab
- 11. • A Mumbai based financial services company incorporated in august 1994 and was promoted by the Housing Development Finance Corporation •The largest bank by market capitalization as of November 1, 2012 and has 2,776 branches and 10,490 ATMs, in 1,399 cities in India •Deals with three key business segments. - Wholesale Banking Services, Retail Banking Services, Treasury •Entered the banking consortia of over 50 corporate for providing working capital finance, trade services, corporate finance, and merchant banking •Provides a wide range of commercial and transactional banking services to its corporate customers, mutual funds, stock exchange members and banks. •First bank in India to launch an International Debit Card in association with VISA (Visa Electron) •Also one of the leading players in the “merchant acquiring” business
- 12. • Indian private sector bank that provided retail and corporate banking services • Incorporated on 30 June 1994 and received its certificate of Commencement of Business on 20 July •Was a joint venture between 20th Century Finance Corporation and its associates and Keppel Group of Singapore •On 29 June 2005, the Boards of Directors of Centurion Bank and Bank of Punjab agreed to a merger of the two banks. The combined bank took as its name Centurion Bank of Punjab •Till the merger it operated on a strong nationwide franchise of 403 branches and had over 5,000 employees
- 13. . THE MERGER •The merger of HDFC Bank with the Centurion Bank of Punjab took place on 23rd May, 2008 which made HDFC Bank the seventh largest bank. •The name of the bank remained as HDFC Bank •The acquisition was around 9510 crore and the combined entity had a nationwide network of 1,148 branches Nature and context of the merger: (1)It was a horizontal merger with principal objectives : -Achieve economies of scale -Widening the line of products -To get more dominance in the market (2) The merger was also important to face the competition posed by foreign banks looking to enter on account of RBI‟s liberal policies and the domestic competition posed by ICICI Bank (3)CBoP had traditionally been strong in high yielding in SME and retail segments while HDFC had an enviable retail deposit franchise. (4)Both the banks had a strong foothold in vehicle financing which formed the basis for a natural synergy.
- 14. The bottlenecks of the merger were: • Operational issues like account opening, net banking, cheque book issue, recurring deposits. • Technological issues • HR issues that involved mapping of employees. •Infrastructural issues-multiplicity of branches, ATMs. • Risk issues that involved NPA,CASA and cost of funds.
- 15. IMPACT OF THE MERGER The merger strengthened the distribution network of HDFC Bank in the northern and southern regions and led to an increase in asset base of around 15-20%. The bank‟s main task was to harmonize the accounting policies and, as a result, HDFC Bank took a hit of Rs. 7 Billion to streamline the policies of CBoP. The actual benefits filtered in, in the next 12-24 months, with improved productivity in terms of net revenue and CASA growth of CBoP branches on par with HDFC outlets.The CASA ratio at the end of June 2008 was 45% which was in line with expectations of analysts as CBoP had a much lower CASA ratio of around 25% compare to 56% of Pre-merged HDFC Bank. The cost/income ratio of the merged entity had increased to around 56% from 50% levels for standalone HDFC Bank. The integration of the two banks' technology-based platforms also improved the cost efficiencies
- 16. Pre-Merger Post-Merger Gross Profit Margin 70.2136 75.2397 Net Profit Margin 18.8413 17.2680 Operating Profit Margin 46.7550 53.4248 Return on Capital Employed 1.1877 1.3220 80 70 60 Gross Profit Margin 50 Net Profit Margin 40 30 Operating Profit Margin 20 Return on Capital Employed 10 0 PreMerger PostMerger
- 17. HDFC Bank has always maintained that fast branch expansion is a key ingredient that will sustain its high CASA deposits and margins. This merger with CBoP had resulted in the largest branch distribution network for a private bank in India. Retail segment continues to be the main focus for the combined entity and is the crucial growth driver. 2009 2010 2011 Gross Profit Margin 74.76217 74.66454 76.29250 Net Profit Margin 13.74548 18.23227 19.70267 Operating Profit Margin 54.61426 51.12141 54.53866 Return on Capital Employed 1.22493 1.32550 1.41566 Return on Equity 527.75165 644.18447 843.96749 Debt-Equity Ratio 342.04104 393.93570 479.29082 Gross Profit Margin 900 800 700 600 500 400 300 200 100 0 Net Profit Margin Operating Profit Margin 2009 2010 2011 Return on Capital Employed Return on Equity
- 18. SUMMARY Positive aspects of the merger were: Negative aspects of the merger were: •Increased footprint and metro presence •Recorded growth figure: -Net profit grew by 44.6% -Net interest income grew by 74.9% -Advances grew by 79.8% and deposits by 60.4% • Enhanced scope that would enable entry in to International business •Both banks have senior managements of high calibre who have worked with Citigroup at some point in their career. • Merger likely to be EPS dilutive due to valuations in the near future • Integration of Lord Krishna Bank branches may pose a challenge. •High level of write-offs due to bad asset quality of CBoP in personal loans and two wheeler loans. •Net interest margins and CASA were impacted adversely.