Murger and acquisition

ABSTRACT

This research study addresses the mergers and provides insight to the effects of mergers in the financial performance of bank. It investigate the effects of mergers on profitability by using six financial ratios i.e. gross profit margin, operating profit margin, net profit margin, return on capital employed, return on net worth and debt to equity ratio& t stat. This study based on secondary source of data and the data were collected from annual reports. We were selected one bank and the dimension we used was longitudinal and collect data over the period from 2000 – 2011. We were analyzing the data for the period of ten years i.e. five year before merger and five years after merger. The results show that there were not consistently increase in financial ratios after merger and shows the mix results i.e. increase or decrease. The overall results show that after merger financial performance of bank was not satisfactory and not present frequently increase in financial ratios.

Keywords: Merger, Financial Performance, Bank

Table of Contents                                                                                  

Abstract	ii
CHAPTER NO 1       INTRODUCTION	1
Brief  Background	1
Significance Of Research	4
Broad Problem Area	4
Objective Of Research	5
Limitations Of Research	5
Layout Of Report	5
CHAPTER NO 2       LITERATURE REVIEW	6
CHAPTER NO 3       THEORETICAL  FRAMEWORK	15
Gross Profit Margin	15
Operating Profit Margin	15
Net Profit Margin	16
Return On Capital Employed	16
Return On Net Worth	16
Debt Equity Ratio	17
CHAPTER NO 4  HYPOTHESIS	18
CHAPTER NO 5      RESEARCH METHODOLOGY	19
Purpose Of Research	19
Mode Of Observation	19
Time Dimension Of Research	19
Sampling Design	20
Data Analysis	20
CHAPTER NO 6       DATA ANALYSIS AND FINDING	21
Financial Ratio Analysis	21
CHAPTER NO 7       CONCLUSION	30
REFRENCES	32

CHAPTER NO 1

INTRODUCTION

Brief Background:

Pakistan come into a state of Muslims on 14th August, 1947 and Pakistani banks follow the British pattern of banking system. 30 June, 1948 the number of offices of scheduled banks in Pakistan declined from 487 to only 197. The Pakistan faced great banking crises. There were only two Pakistani banks i.e. Habib Bank which transferred its office from Bombay to Karachi and the Australasia Bank. There was a panic of uncertain economic future which shook the confidence of the people. The Government therefore, announce the law or ordinance and the Banking Companies Ordinance, 1947 was passed. This ordinance was passed to safeguard the interest of both bankers and the public. The Central Bank of Pakistan i.e. State Bank of Pakistan was established on 1st July, 1948. The State Bank Pakistan takes the first step for the development of banking sector after their formation. Many new commercial banks were established and they increase their number of branches day by day. June 1988 the number of bank branch offices has increased to more than 7100 which are extended all over the Pakistan. After the nationalization in 1947 all the 14 commercial banks reorganized and merged into the following five banks:

·         National Bank of Pakistan (NBP)

·         Habib Bank Limited (HBL)

·         United Bank Limited (UBL)

·         Muslim Commercial Bank Limited (MCB)

·         Allied Bank of Pakistan Limited (ABL)

The other banks were merged into these banks. Bank of Bahawalpur was merged with the National Bank Pakistan, Habib Bank (Overseas) Limited and Standard Bank Limited were merged with Habib Bank Limited, Premier Bank Limited with Muslim Commercial Bank Limited, commerce bank limited with United Bank Limited, Sarhad Bank Limited and Pak Bank Limited with Australasia Bank Limited and renamed as the Allied Bank Limited.

Mergers are the process of combining two companies, banks or any other institutions into one corporate entity. It is a business combination that results in the creation of new reporting entity formed from the combining parties, in which the shareholders of both entities can work together for the benefits of the organizations. In mergers, the total assets or liabilities of one or more than one companies are transferred to another single company without liquidation.  In merger one company is acquiring company and other is acquired company. Acquiring company is a company that purchases more than fifty or fifty percent shares of one or more than one company. Acquired companies are those that surrender their majority share of acquiring company. They decide to come together and execute an agreement between them. Therefore after merger, acquiring company survives and acquired company does not work or survive anymore.

Organizations merged because to improve the overall performance either external and internal growth or performance. They merged when they are not internally strong to run their organization. Mergers are taken to improve and enhancing productivity, profitability, technology, management performance, position in market, cutting down expenses and increasing in revenues and when an organization is not sufficient to operate its own operations. Another reason behind merger is that one company is very good at their administrations and other at marketing expertise or its operations. If the expertise’s of both organizations are merged or amalgamated, it creates synergy i.e. 2+2=5. A new company is formed has a potential much higher than previous individual organization.

Mergers or amalgamation can help organizations to strengthening their balance sheet; enhance their market share, to increase investment of cash, to reduce the threat of competition. To combine the two entity is very simple in merger and does not cost as much as other acquisition. In mergers organizations can enhance their business operations like gain on market share,

Introduce new branches and technology, investment in different areas and much more. Everything has some advantages or disadvantages so mergers has also some disadvantage like; culture difference, imperfect intention, communication problems, structural factor, not proper analysis and research and etc.

In Pakistan the list of banks who were merged. First Allied Bank Modaraba merged with Allied Bank  Limited, Royal Bank of Scotland Limited merged with Faysal Bank Limited, Atlas Bank merged into Summit Bank Limited , Emirates Global Islamic Bank with Al Baraka Islamic Bank, MCB Bank and KASB Bank interested to acquire, IGI Investment Bank acquire by Al Falah Bank, Summit Bank Limited completed merged with My Bank Limited. Askari Leasing Limited merged with Askari Bank Limited, Atlas Investment Bank Limited merged with Atlas Bank Limited, Al Zamin Leasing Modaraba merged with Invest Capital Investment Bank Limited, First Leasing Corporation Limited merged with First Standard Investment Bank Limited.

Significance

Our topic is very important because we research inpre and post mergers effect in Pakistani banks. In this area there is no as work in Pakistan this research is very helpful to the bank or other organizations that merged. This research study uses a particular example of bank that is very helpful to other organizations.

Broad Problem Area

The  research broad problem area is “effects of mergers and acquisitions in banking sector” and this study research this problem area in Pakistan that mergers have positive or negative effect on the bank’s.

Research Question

The research question is “is mergers effect on financial performance of bank in Pakistan?” this question is explanatory question. In which mergers effect is independent variable and financial performance is dependent variable. On the basis of literature review this can prove below yes mergers effect on bank financial performance.

Objective of My Research

·         To find out the effects of mergers in a particular bank.

·         To analyze the mergers effects on financial performance of acquiring bank.

·         To analyze the pre and post-merger financial ratios.

·         To analyze the bank data five year before and five year after merger.

CHAPTER NO: 2

LITERATURE REVIEW:

Ullah, Ullah and Usman (2010) worked on effects of mergers in the financial performance by using two banks i.e. Atlas investment bank, Al Faysal investment bank limited in Pakistan. They compared the data for analysis 4 year before and after merger from the financial statements of banks and use three measures i.e. solvency, capital adequacy and profitability. They found thatFaysal bank limited was progress inconsequentially in terms of profitability and decrease inconsequentially in terms of capital adequacy at the same time as solvency measure report momentous decline during the post-merger period. Faysal bank overall results of their finding shows average improvement in the after merger period. InAtlas bank they find out depressing representation, where it reports the inconsequential decrease in profitability, capital adequacy and significant reduction in solvency measure. Finally the overall shows the mix results of their findings.

Viverita (Department of Management, Faculty of Economics and Business) worked on banking sector of Indonesia and find out the positive effects of mergers on performance of commercial bank’s during the 1997 to 2006.They concluded that mergers create synergy and significantly increasing the post mergers financial and productive efficiency performance. Their study reveals that mergers increase bank’s ability to gain profit and also indicates by declining the ratio of loan to deposit collected from their customers. Samosir (as cited inViverita) find out that there were no performance differences between before and after the merger.

Kaur and Kaur (2010) worked on Indian commercial banks they found positive impact of mergers on cost efficiency during the post liberalization period.The findings of their studies suggest that to some extent mergers programs were successful in Indian banking sector. They worked on both public and private sector banks and found the cost efficiency of 73.4% in public sector bank and 76.3 % in private sector bank. The overall results of their study shows that mergers lead to higher level of cost efficiency for merging banks

Said, Nor, Low and Rahman (2008) they worked on banking institutions of Malaysia and find out the negative efficiency effects of mergers. Their results suggest that mergers did not seem to enhance the productive efficiency of the banks. Berger and Humphery (as cited in Said, Nor and Rahman 2008) they compare each merged bank’s performance with non-merged banks, do not find any significant cost efficiency gains on average and the small insignificant gains identified were offset by reductions in scale efficiency.  Linder and Crane (as cited in Said, Nor, Low and Rahman 2008) they identify some indication that within the country mergers do not improve operating income. Rhodes (as cited in Said,Nor and Rahman 2008) their worked shows that efficiency gains and cost reduction are not significantly related to mergers activity and their study also shows that profitability and non-interest expense are not affected by mergers. 

Liargovas and Repousis (2011) worked on impact of mergers and acquisition on performance during the period 1996-2009 on the Greek banking sector. The result of their study shows that banks mergers not increase wealth and post-merger impact. They also found that operating performance of banks does not improve after mergers and acquisition.

Kouser, Saba (2011) they also worked on banking sector of Pakistan and also find out the negative effects of business combination on financial performance during the period from Saba 2011) discussed post-merger profitability for Royal Bank of Scotland. They used accounting ratios 1999 to 2010. They argue that it is not necessary that after merger bank’s performance increased. There is a decline of all ratios after merger. So they concluded that there is a negative impact of mergers on bank’s performance after mergers. Kamel (as cited in Kouser, to analyze the financial performance of RBS bank after merger. The results shows that before merger financial performance of the bank is quite satisfactory and after merger the bank financial performance is not improved it means that merger fail to improve the financial performance of the bank.

Badreldin and Kelhoefer (2009) study the effects of mergers and acquisition on bank performance of Egypt during the period 2002 to 2007and suggest that merged banks does not completely achieved their desired results. Their findings show that not all banks that merged shows as much improvement in performance of banks and return on equity when they compared

these banks before mergers and acquisition. Their analysis also found that a minor positive change to risk provisions reflected the improvement in credit risk position and not found enough supporting reason that mergers have positive or clear effect on profitability of Egyptian banking sector. Hubbard and Eccles (as cited inBadreldin and Kelhoefer 2009) their study shows that mergers and acquisition can be seen all over the world and mergers are not successful just about half of mergers and acquisitions unsuccessful and not meet their set objectives.

Leepsa and Mishra (2012) worked on post mergers financial performance in India and they select manufacturing companies for their study. The studies they used to find out the post mergers financial performance are accounting measures, event studied and multiple performance measures. The results shows that profitability decrease and increase in terms of return on net worth and return on capital employed. They also found that the motive behind mergers that financial performance of companies increases does not meet and after merger there is not significant improvement in financial performance of the companies. Their study also shows that financial performance may not be only indicator to measure pre and post mergers success.

Mahmood, Aamir, Sohail and Hussain (2012) study on impact of mergers and acquisition on share price in Pakistan during the period 2000 to 2002. They study eight companies in which some belong to the banking and other pharmaceutical industry. Their results show positive impact on the share price of five companies and negative impact of other two companies after one month of merger. Overall results of their study show that positive effect of mergers and acquisition on the share price of the companies. Ottone and Maurgia (as cited in Mahmood, Aamir, Sohail and Hussain 2012) they found that when deal of mergers is announced have positive impact on the firms value. Gugler etal (as cited in Mahmood, Aamir, Sohail and Hussain 2012) their study found that positive impact of profitability and negative impact on sales of such merged firms and companies.

Joshua (2011) study is based on comparative analysis of impact of mergers and acquisition on financial efficiency of banks in Nigeria. He found that after merger banks are more financially efficient than before merger. The results shows good and attractive financial performance that leads to improvement in financial efficiency and also found that after merger period higher

Performance in gross earning, net assets has better performance in before merger period and lower performance in profit after tax after merger period.

Ullah, Ullah and Usman (2010) used the profitability measures i.e. return on assets (ROA) or return on equity (ROE), capital adequacy measures i.e. shareholders equity to total assets or shareholders equity to total consumer deposits and long term solvency ratios i.e. total liabilities to total assets ratio. They also use statistical models for their research to find out the effects of mergers in performance.

Viverita (Department of Management, Faculty of Economics and Business) they used financial ratios to evaluate of bank performance pre and post-merger. The financial ratios are: return on assets (ROA), return on equity (ROE), non-performing loans (NPL), loan to deposit ratio (LDR), capital adequacy ratio (CAR) and net interest margin (NIM). They also measure the bank’s efficiency performance before and after merger by using Malmquist Data Envelopment Analysis (DEA).

Kaur and Kaur (2010) use the cost efficiency (CE) for each bank by solving this envelopment form of linear programming problem. They also measure technical efficiency, CCR efficiency and use descriptive statistics i.e. mean and standard deviation.

Said, Nor, Low and Rahman (2008) they measure financial performance by using CAMEL type variables: capital buffer ratio, loan growth, loan loss reserve ratio, cost efficiency, interest earning ratio, loan deposit ratio and return on equity. They use a model of decision making unit and descriptive statistics of the CAMEL variables. 

Liargovas and Repousis (2011) use event study and operating performance methodology to find out the performance of Greek banking sector. In event study the most widely model is used to calculate a forecast result is Market Model Method. It is estimate by regression. They also estimate Average Abnormal Return (AAR) or Cumulative Average Abnormal Return (CAAR). They examine the performance by using 20 financial accounting ratios such as: Profitability Indicators (Return On Assets, Return On Equity, Return On Asset Plus Off Balance Sheet Items, Net Profit Margin, Net Interest Rate Margin), Productivity Indicator(Total Assets / Total

Employees, Net Income Before Tax / Total Employed, Total Revenues / Total Loans, percentage change in Total Assets per year, percentage change in Total Assets Off Balance Sheet Items per year), Liquidity Indicator(Total Loans / Total Assets, Total Loans / Total Deposits, Cash plus Securities plus Reserve / Total Assets) and Solvency Ratio.

Kouser, Saba (2011) they measure pre and post-performance of the bank by using different variables i.e. financial ratios (Gross Profit Margin, Operating Profit Margin, Net Profit Margin, Return On Capital Employed, Return On Worth ,Debt Equity Ratio). They used descriptive measures for financial ratios and the descriptive measures are Mean, Standard Error, Median, Standard Deviation, Sample Variance, Kurtosis, Skewness, Range, Minimum and Maximum.

Badreldin and Kelhoefer (2009) they used Return On Equity to measure the before and after merger performance of acquiring banks. They used Return on Equity (ROE) scheme to further assess the results and this scheme involves numerous financial ratios. The ratios used in basic ROE scheme are: Interest Margin, Commission Margin, Trading Margin, Extraordinary and Other Income Margin, Gross Income Margin, Operating Income Margin, Gross Profit Margin, Risk Provision Margin, Return On Assets, Equity Ratio, Return On Equity (pretax), Risk Provision Ratio and Cost Income Ratio.

Leepsa and Mishra (2012) measures post-merger financial performance using accounting based approach and using different financial parameters. Profitability parameters (Return On Capital Employed, Return On Net Worth), Leverage parameters (Total Debt Ratio, Interest Coverage Ratio), Liquidity parameters (Current Ratio, Quick Ratio and Networking Capital/Sale).

Mahmood, Aamir, Hussian And Sohail (2012) they used event study method to measure or find out the impact of mergers on share price of an organization one month per and post announcement. They analyze the impact of mergers on share price of acquiring and acquired company.

Joshua (2011) to analyze or measure the comparative impact of mergers on financial efficiency of banks they selected sample banks and those banks meet the following criteria:

The banks retain their identities before and after merger activities. Accounting year must be end on 31st march and made their published annual report and accounts available. Members of the group after merger proposal not go above three. Their managing director was not sacked by the CBN governor under the current reform process. They used t-statistic to analyze the collected data and use 5% significant level and use statistical packager for social sciences (SPSS) version 15.

Ullah, Ullah and Usman (2010) use secondary source of data for their research and use sample of two banks and use panel study research. Viverita uses secondary source of data for their research. Kaur and Kaur (2010) use also secondary data and use panel data, quantitative research. Said, Nor, Low and Rahman (2008) they also use secondary data from annual reports for their research. Liargovas and Repousis (2011) they used event study methodology and used secondary source of data from annual reports.Kouser and Saba (2011) used quantitative research techniques and secondary source of data for their research. i.e., use four year before and after merger.

Badreldin and Kelhoefer (2009) they use secondary data for their research. Their study is longitudinal study and used 10 banks for their sampling.Leepsa and Mishra (2012) they used data for their research from stock exchange, securities exchange board of India and websites and used secondary data. The time dimension of their study is cross sectional study and used quantitative data for their research. Mahmood, Aamir, Hussian and Sohail (2012) used qualitative research for their study and use eight samples companies and also used secondary source of data. They used event study for their research. Joshua (2011) they collect data from annual reports of selected banks and their study is cross sectional study and used quantitative data.

The above all worked on banking sector of different context, use different measures and found different results of mergers effects on banks. All they use secondary data for their research.This study research question is same but this work in Pakistan because there was no work, so this research will be helpful in future.

CHAPTER NO 3

THEORETICAL FRAMEWORK

Gross Profit Margin:

To analyze the pure trading activities of the business we can use gross profit margin. The company used gross profit for the computation of gross profit margin and at the same time as one indication of business financial health. The higher the gross profit margin as judge against to competitor the organization run better and it also means that more percentage of currency is left for other operating expenses and net profit. It shows or indicates how much profit of a company makes after paying it cost of goods sold (CGS).

Operating Profit Margin:

It is a type of profitability ratio. It gives the set of information about the firm profitability to the business owner. Higher operating profit margin shows or means that company has good cost control and the sales are increasing faster than cost. A higher the operating profit margin means that the firm has a low cost operating model. It gives the vital information about the profitability of the firm and particularly with regard to cost control.

Net Profit Margin

The profit margin provides a simple measure of performance for profit centers. The higher net profit margin shows how successful your business is converting sales into profit. The higher the net profit margin is better for an organization. Net profit is used to pay for taxes, interest and allocation to owners. It shows the proportion of sales that is left out by paying all expenses and remains as net profit. A business with a low profit margin strength to take on debt to pay it expenses.

Return on Capital Employed

Return on capital employed is also called Return on Investment. Capital employed is a good for business to compute the total resources that available to it. Higher the figure of return on capital

Employed is better for an organization. Return on capital employed is a measure of efficiency and profitability of a company capital investment. It is assess to get idea of the overall profitability of the company operations and it does not consider profit margins.

Return on Net Worth:

It is also called Return On Equity and used in finance as a measure of company profitability. Return on net worth is useful for comparing the profitability of the company and it measures how much the company can generate return from its equity shareholders. It considers only equity shareholders as base for deciding efficiency of organizational operations.

Debt Equity Ratio

Debt equity ratio is common measurement of capital structure. It shows the direct assessment or relationship of debt to equity shareholders. It indicates the affiliation or connection among the internal equities and external equities. Debt equity ratio help to owners where they locate. It shows result in percentage and if the company debt more than 40% - 50% , company wants or wishes to look its financial statements more vigilantly and evaluate itself to other companies in the industry because it might be in financial complexity.

After these ratios we apply t- stat to find out the effects and on the bases of t-stat we can accept or reject (Ho, H1). The formula of t-stat is given below:

CHAPTER NO 4

HYPOTHESIS

Ho = µ1 = µ2:  No gross profit margin sign difference

Ho = µ1 = µ2:  No operating profit margin sign difference

Ho = µ1 = µ2:  No net profit margin sign difference

Ho = µ1 = µ2:  No return on capital employed sign difference 

Ho = µ1 = µ2:  No return on net worth sign difference

Ho = µ1 = µ2:  No debt equity ratio sign difference

H1≠ µ1 ≠ µ2:  Gross profit margin sign difference

H1≠ µ1 ≠ µ2:  Operating profit margin sign difference

H1 ≠ µ1 ≠ µ2: Net profit margin sign difference

H1≠ µ1 ≠ µ2:  Return on capital employed sign difference 

H1≠ µ1 ≠ µ2:  Return on net worth sign difference

H1≠ µ1 ≠ µ2:  Debt equity ratio sign difference

CHAPTER NO 5

RESEARCH METHODOLOGY

Purpose of Research:

This research study is explanatory causal research. In which independent variable is mergers effects and dependent variable is financial performance.

Mode of Observation:

This research work mode of observation is case study because this work on a particular bank i.e., Allied Bank Limited and this study under the qualitative research. This study use secondary data i.e. annual reports for research work.

Time Dimension of Research:

The time dimension of this research work is longitudinal panel study because this work over an extended period and  this research study work on effects of bank  merger per and post financial performance and study gathers information on the same bank at each time point. This study will use ten years data for this research work five years before merger and five years after merger.

Sampling Design:

There will no sampling design of this research study because this study work on a single bank and the particular bank will be this work sample of study

Data Analysis:

This study will analyze the financial statements data through six financial ratios and apply T- stat to these financial ratios. After this analysis we will find out the effects of mergers pre and post in the financial performance of a particular bank i.e. Allied Bank Limited and on this bases we accept or reject our hypothesis.

CHAPTER NO 6

DATA FINDING AND ANALYSIS

Financial Ratios Analysis:

The six financial ratio calculations of ALLIED BANK LIMITED are given below to find out the mergers effect on before and after financial performance:

1.     Gross Profit Margin:

I will calculate gross profit margin from the following formula:

Gross Profit ÷ Revenue or Sale × 100

Gross profit = Revenue   ̶   Cost of goods sold

                                 OR

Gross Profit = Interest Income   ̶   Interest Expense

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Gross profit	(1,460,514)	(25,621)	(693,216)	254,455	3,474,690
Revenue	1,062,970	1,472,179	2,143,280	1,739,649	9,226,897
Ratio	(137)%	(2)%	(32)%	15%	37%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Gross profit	4,747,819	5,124,836	9,075,690	1,075,405	1,1167,693
Revenue	12,313,669	15,006,838	20,160,239	24,153,445	29,111,828
Ratio	38%	34%	45%	45%	38%

2.     Net Profit Margin:

Net profit margin I will calculate from the following formula:

Profit after Tax ÷ Revenue × 100

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Profit after tax (PAT)	(1,122,065)	(1,069,257)	385,580	168,270	3,090,133
Revenue	1,062,970	1,472,179	2,143,280	1,739,649	9,226,897
Ratio	(106)%	(73)%	18%	7%	33%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Profit after tax (PAT)	40,761,158	4,156,686	7,122,167	8,225,332	10,139,681
Revenue	12,313,669	15,006,838	20,160,239	24,153,445	29,111,828
Ratio	33%	28%	35%	34%	35%

3.     Operating Profit Margin:

Operating profit margin is calculated by the following formula:

Operating Income or Earnings before Interest and Tax (EBIT) ÷ Total Revenue × 100

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
EBIT	(839,266)	(1,586,704)	954,059	456,960	4,834,195
Revenue	1,062,970	1,472,179	2,143,280	1,739,649	9,226,897
Ratio	(79)%	(108)%	44%	26%	52%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
EBIT	5,953,076	6,120,940	10,536,120	12,343,106	15,108,482
Revenue	12,313,669	15,006,838	20,160,239	24,153,445	29,111,828
Ratio	48%	41%	52%	51%	52%

4.     Return on Capital Employed:

Return on capital employed is calculated by following formula:

Earnings Before Interest and Tax ÷ Capital Employed × 100

Capital Employed = Equity + Long term debt

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
EBIT	(839,266)	(1,586,704)	954,059	456,960	4,834,195
Capital employed	3,324,439	2,215,617	(2,303,824)	21,408,834	22,607,890
Ratio	(25)%	(72)%	(41)%	2%	21%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
EBIT	5,953,076	6,120,940	10,536,120	12,343,106	15,108,482
Capital employed	41,342,047	48,583,268	65,709,810	51,940,902	87,613,558
Ratio	14%	12%	16%	24%	17%

5.     Return on Net Worth:

Return on net worth formula is given below:

Net Income ÷ Shareholders Equity

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Net income	(1,122,065)	(1,069,257)	385,580	168,270	3,090,133
Shareholders’ equity	(4,418,317)	(5,267,451)	(4,869,107)	9,514,152	12,914,105
Ratio	25%	20%	(8)%	2%	24%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Net income	40,761,158	4,156,686	7,122,167	8,225,332	10,139,681
Shareholders’ equity	18,408,391	20,805,117	25,891,278	31,166,452	37,620,358
Ratio	22%	20%	27%	26%	27%

6.     Debt to Equity Ratio

The formula for calculation of debt to equity ratio is given below:

Total debt ÷ Shareholders Equity

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Total debt	8,969,756	8,883,125	4,338,013	14,429,045	12,142,045
Shareholders’ equity	(4,418,317)	(5,267,451)	(4,869,107)	9,514,152	12,914,105
Ratio	(203)%	(169)%	(89)%	152%	94%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Total debt	26,428,040	30,730,641	42,980,961	24,893,241	54,008,517
Shareholders’ equity	18,408,391	20,805,117	25,891,278	31,166,452	37,620,358
Ratio	143%	147%	166%	80%	144%

After these calculations we apply t- stat to find out the effects and on the bases of t-stat we can accept or reject (Ho, H1). The formula of t-stat and calculations are given below:

t-Test: Two-Sample Assuming Equal Variances on the basis of Gross profit margin
	Before	After
Mean	-23.8	40
Variance	4639.7	23.5
Observations	5	5
Pooled Variance	2331.6
Hypothesized Mean Difference	0
Df	8
t Stat	-2.08
P(T<=t) one-tail	0.035
t Critical one-tail	1.86
P(T<=t) two-tail	0.070
t Critical two-tail	2.31

T-calculated value is greater than t-critical value than reject Ho otherwise don’t reject Ho. In above table t- stat calculated value is -2.08 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No gross profit sign difference) and there is no significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of Net profit margin
	Before		After
Mean	-24.2		33
Variance	3774.7		8.5
Observations	5		5
Pooled Variance	1891.6
Hypothesized Mean Difference	0
Df	8
t Stat	-2.08
P(T<=t) one-tail	0.04
t Critical one-tail	1.86
P(T<=t) two-tail	0.07
t Critical two-tail	2.31

In above table t- stat calculated value is -2.08 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No gross profit sign difference) and there is no significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of operating margin
	Before		After
Mean	-13		48.8
Variance	5594		21.7
Observations	5		5
Pooled Variance	2807.85
Hypothesized Mean Difference	0
Df	8
t Stat	-1.84
P(T<=t) one-tail	0.05
t Critical one-tail	1.86
P(T<=t) two-tail	0.10
t Critical two-tail	2.31

In above table t- stat calculated value is -1.84 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No operating margin sign difference) and there is no significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of return on capital employed
	Before	After
Mean	-23	16.6
Variance	1322.5	20.8
Observations	5	5
Pooled Variance	671.65
Hypothesized Mean Difference	0
Df	8
t Stat	-2.42
P(T<=t) one-tail	0.02
t Critical one-tail	1.86
P(T<=t) two-tail	0.04
t Critical two-tail	2.31

In above table t- stat calculated value is -2.42 and t critical value is 2.31. Our t calculated value is greater than t critical value and we reject Ho (i.e., No return on capital employed sign difference) and there is significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of Return on equity
		Before		After
Mean		12.6		24.4
Variance		218.8		10.3
Observations		5		5
Pooled Variance		114.55
Hypothesized Mean Difference		0
Df		8
t Stat		-1.74
P(T<=t) one-tail		0.06
t Critical one-tail		1.86
P(T<=t) two-tail		0.12
t Critical two-tail		2.31

In above table t- stat calculated value is -1.74 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No return on return on equity sign difference) and there is no significant sign difference after merger

t-Test: Two-Sample Assuming Equal Variances on the basis of debt equity ratio
	Before	After
Mean	-43	136
Variance	25096.5	1067.5
Observations	5	5
Pooled Variance	13082
Hypothesized Mean Difference	0
Df	8
t Stat	-2.47
P(T<=t) one-tail	0.02
t Critical one-tail	1.86
P(T<=t) two-tail	0.04
t Critical two-tail	2.31

In above table t- stat calculated value is -2.47 and t critical value is 2.31. Our t calculated value is greater than t critical value and we reject Ho (i.e., No return on return on equity sign difference) and there is significant sign difference after merger.

CHAPTER NO 7

CONCLUSION

 We conclude from data analysis that some main reasons of the merger and insufficient performance. These include deficiency claim receivable, inward bills of collection, unused commercial letter of credit, outstanding guarantees issued, outward bills of collection and late deposits (payment) received and confirmed export letters of credit and others. The fair values of results shows on the statement of condition represent the current credit risk exposure but not the maximum risk exposure that could rise in the future as a result of change in values.

Some major notes regarding insignificant performance (acceptance of Ho) are below:

Unclassified loans

These are loans that do not have a greater-than normal risk and don’t possess the characteristics of classified loans. The borrower has the apparent ability to satisfy his obligations in full and therefore no loss in ultimate collection is estimated.

Classified loans

These are loans which possess the characteristics outlined here under. Classified loans are subdivided into four categories:

·         Loans especially mentioned;

·         Substandard

·         Doubtful

·         Loss

·        Loans especially mentioned

These are loans and advances that have potential weaknesses that deserve management’s close attention.

·        Substandard

These are loans or portions thereof which appear to involve a significant and unreasonable degree of risk to the Bank because of unfavorable record or unsatisfactory characteristics. There exists in such loans the possibility of future lot have a well-defined weakness or weaknesses that

risk their liquidation. Such well-defined weaknesses may include adverse trends or development of financial, managerial, economic or political nature, or a significant weakness in collateral.

·        Doubtful

These are loans or portions thereof which have the weaknesses inherent in those classified as ‘Substandard’, with the added characteristics that existing facts, conditions, and values make collection or liquidation in full highly improbable and in which substantial loss is possible.

·        Loss

These are loans which considered uncollectible or worthless and of such little value that their continuance as bankable assets is not warranted although the loans may have some recovery or salvage value. The amount of loss is difficult to measure and it is not practical to defer writing off these basically worthless assets even though partial recovery may be obtained in the future.

The overall results show that after merger financial performance of bank was not satisfactory and not present increase in financial performance. In literature review point of view it is unnecessary that mergers can increase financial performance of bank.  Hence, the after mergers of bank show no as much improvement in performance.

REFERENCES:

·         Kaur, p., and Kaur, G., (2010). Impact of mergers on the cost efficiency of Indian commercial banks. Eurasian journal of business and economics, 3(5), 27 – 50.

·         Ullah, O., Ullah, S., and Usman, A., (2010). Post mergers performance of Atlas investment and Al – Faysal investment bank Ltd. in Pakistan. International research journal of finance and economics, (60), 1450–2887.Retrieved from http: //www.eurojournals .com. /finance.htm.

·         Said, R. M., Nor, F. M., Low, S. – W., and Rehman, A.A., (2008). The efficiency effects of mergers and acquisition in Malaysian banking institutions. Asian journal of business and accounting, 1(1), 47 – 66.

·         Viverita., (n. d.). The effects of mergers on bank performance:evidence from bank  in Indonesia. Retrived from http://www.jstor.com.

·         Leepsa, N. M., and Mishra, C. S., (2012). Post mergers financial performance: a study with reference to select manufacturing companies in India. International research journal of finance and economics, (83), 450 – 2887. Retrieved from http://www.internationalresearch journaloffinanceandeconomics.com

·         Badrelin, A., and Kalhoefar, C., (2009). The effects of mergers and acquisition on bank in Egypt.Retrived from http://www.jstor.com

·         Kouser, R., and Saba, I., (2011). Effects of business combination on financial performance: evidence from Pakistan’s banking sector. Australlian journal of business and management research, 1(8), 54 – 64.

·         Liargovas, P., and Repousis, S., (2011). The impact of mergers and acquisition in Greek banking sector: an event study approach. International journal of economics and finance, 3(2).doi: 10.5539|ijef.v3n2p89.

·         Mahmood, I., Aamir, M., and Hussain, C. M., (2012).Impacts of mergers | acquisition on share price – a case study of Pakistan.European journal of scientific research, 67(4), 617 – 624. Retrieved from http://www.europeanjournalofscientificresearch.com 

·         Joshua, O., (2011). Comparative analysis of the impact of mergers and acquisition on financial efficiency of banks in Nigeria.Journal of accounting and taxation, 3(1), 1 – 7.Retrieved from http://www.academicjournals.org/JAT.