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Pre and Post Merger Financial Performance Analysis of State Bank of India
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ZENITH International Journal of Multidisciplinary Research _________ISSN 2231-5780
Vol.6 (10), OCTOBER (2016), pp. 1-8
Online available at zenithresearch.org.in
PRE AND POST MERGER FINANCIAL PERFORMANCE ANALYSIS

OF STATE BANK OF INDIA
HONEY GUPTA
JUNIOR RESEARCH FELLOW

FACULTY OF COMMERCE, BANARAS HINDU UNIVERSITY, VARANASI, UTTAR PRADESH, INDIA.
ABSTRACT:
With the globalization of the economy, increased competition from both foreign and
domestic banks and robust technology, there has been rapid change in the business
environment of banking industry in last two decades. In order to overcome these challenges
successfully, most of the banks have adopted a corporate restructuring strategy like merger
and acquisitions. The purpose of the present paper is to analyze the pre and post merger
financial performance of State Bank of India with the help of various financial parameters
such as investment ratios, management efficiency ratios, debt coverage ratios, leverage ratios,
profitability ratios and profit and loss account ratios. Paired sample t-test is applied for the
purpose of testing the statistical significance of various parameters. The study is based on
secondary data covering eight years annual data of pre and post merger period. The study
reveals that the State Bank of India (SBI) does not shows significant improvement in the
financial performance in the post merger period. There are some of the financial parameters
have shown significant improvement during the post merger period while most of the
parameters have not shown significant improvement during the post merger period.
KEYWORDS: Financial performance, Merger and Acquisitions, Pre and Post Merger, State
Bank of India, State Bank of Indore.
INTRODUCTION:
Since the liberalization of Indian economy in 1991, mergers and acquisitions have been one
of the important tools for corporate restructuring through consolidation. With the
globalization of the economy, increased competition from both foreign and domestic banks
and robust technology, there has been rapid change in the business environment of banking
industry in last two decades. In order to overcome these challenges successfully, most of the
banks have adopted a restructuring strategy like merger, acquisition, takeover, etc. to reap the
benefits of economies of scale, reduced costs, increased geographical coverage, customer
base, etc. Merger has been defined as “a combination of two or more companies into one,
wherein merging entities lose their identities. No fresh investment is made through this
process. However, an exchange of shares takes place between the entities involved in such
process” (Nalwaya and Vyas, 2012). In recent past, many merger and acquisitions took place
in the Indian banking sector, of which some were forced one like merger of ICICI Bank and
Bank of Rajasthan in 2010, merger of HDFC Bank and Centurion Bank of Punjab in 2008,
etc. while some were voluntary like merger of Kotak Mahindra Bank and ING Vysya Bank in
2014.
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Vol.6 (10), OCTOBER (2016), pp. 1-8
THE MERGER OF STATE BANK OF INDORE WITH STATE BANK OF INDIA

(SBI):
The State Bank of Indore, the largest bank among the six subsidiaries of SBI, merged with
the State Bank of India on 26th August, 2010 at a share swap ratio of 34:100 i.e., for every
100 shares of State Bank of Indore, the SBI agreed to give 34 shares of SBI. For this purpose,
SBI issued more than 1.16 lakh shares of face value of Rs. 10 each to the minority
shareholders of State Bank of Indore. The State Bank of Indore had over 470 branches,
mostly in Madhya Pradesh and Chhattisgarh and a business turnover of more than Rs.500
billion and net profit of Rs.279 crore at the time of merger. As a result, all the business and
branches of State Bank of Indore merged with State Bank of India. With this merger and the
merger of State Bank of Saurashtra with SBI in August, 2008; SBI is left with only five
associate banks. The purpose of the study is to analyze the financial performance of State
Bank of India before and after merger.
REVIEW OF LITERATURE:
Gupta (2015) in her paper “Merger and Acquisitions in the Indian Banking Sector: A Study
of Selected Banks” has evaluated the effects of merger and acquisitions on the financial
performance of the selected banks in India. The study concludes that during post merger most
of the financial parameters have shown significant improvement and there is a positive
impact of merger and acquisitions on the financial performance of the banks. Singh and
Gupta (2015) in their paper “Impact of Merger and Acquistions on Productivity and
Profitability of Consolidation Banking Sector in India” analyzed the impact on the
productivity and profitability of the sampled banks in India and examined the strength and
weakness of the merged banks in India. The study concludes that before and after merger the
financial performance of the banks has increased which margin to the gain of selected public
and private sector bank in Indian Banking sector. Jeelanbasha and Arun (2016) conducted a
study on “Financial Performance Analysis of Post Merger and Acquisition (A Case Study of
ICICI Bank)” by using various ratios. The study concludes that post merger profitability has
increased from the reduction in operating expenses and increase in non-interest income.
Hence, bank is focusing its business from aggressive policy to conservative policy of lending.
As observed from above studies, most of the work has been done on the merger of State Bank
of Saurashtra and State Bank of India. But very few studies have focused on pre and post
merger impact on the financial performance of the State bank of India (after the acquisition of
State Bank of Indore).
OBJECTIVES OF THE STUDY:

The main objective of the study is to evaluate the impact of pre and post merger on the
financial performance of State Bank of India using financial ratios.
RESEARCH METHODOLOGY:
RESEARCH DESIGN: In the present study exploratory research design has been adopted.
TYPE OF DATA AND DATA COLLECTION: The present study is based on secondary
data. This data has been collected from various sources like Annual reports, official website
of moneycontrol.com and various research papers, articles, etc.
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Vol.6 (10), OCTOBER (2016), pp. 1-8
PERIOD OF STUDY: The study covers eight years annual data to compare the pre and post
merger performance of the bank. Thus, pre merger period of four years from 2006-07 to
2009-10 and post merger period of four years from 2011-12 to 2014-15 are taken into
consideration. The year of merger is considered as base year.
TOOLS OF ANALYSIS: Descriptive and inferential statistics are the statistical tools
applied for analysis of data wherein the hypothesis formed for analysis have been tested by
considering pre and post M & A financial ratios. For the purpose of analyzing the financial
parameters of the bank (such as Investment, management efficiency, debt coverage, leverage
and profitability), mean, standard deviation, p-value and percentage are the tools used.
RESEARCH HYPOTHESIS:
H1: There is no significant difference between pre and post merger investment standards of
State Bank of India.
H2: There is significant difference between pre and post merger management efficiency
standards of State Bank of India.
H3: There is no significant difference between pre and post merger debt coverage ratios of
H4: There is no significant difference between pre and post merger Profitability standards of
H5: There is no significant difference between pre and post merger Profit and loss ratios of
ANALYSIS AND INTERPRETATION:
1. Investment Ratios
p-
Mean Standard Deviation Mean %
Parameters value(two
Difference Change
Pre Post Pre Post tailed)
Operating Profit Per
195.25 182.78 41.31 110.28 -12.47 -6.39 0.873
Share (Rs.)
Net Operating Profit
1066.45 1341.80 242.93 764.95 275.34 25.82 0.604
Per Share (Rs.)
Earnings Per Share 120.22 136.02 28.70 82.73 15.8 13.14 0.782
Book value per share 830.67 1113.26 190.31 642.20 282.59 34.02 0.514
Source: compiled from moneycontrol.com database and SPSS software
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Vol.6 (10), OCTOBER (2016), pp. 1-8
 Operating profit per share has decreased but net Operating profit per share has increased from pre
merger to post merger period gradually.
 As a result of merger, Earnings per share to the equity shareholders have increased by 13.14% from
pre merger to post merger period.
 During the study period of the event, Book value per share has maximized with the growth of 34.02%.
 On examination of paired sample t-test at 95% confidence level, Null hypothesis of Operating profit
per share, net Operating profit per share, Earnings per share and Book value per share are accepted
since there is no significant difference between pre-merger and post-merger.
2. Management Efficiency Ratios
Standard
Mean Mean p-value(two
Parameters Deviation % Change
Difference tailed)
Pre Post Pre Post
Interest
8.63 8.16 0.28 0.17 -0.47 -5.45 0.079
Income/Total Funds
Net Interest
3.83 3.06 0.04 0.23 -0.77 -20.10 0.005
Income/Total Funds
Non Interest
0.14 1.13 0.04 0.04 0.99 707.14 0.000
Income/Total Funds
Interest
Expended/Total 4.79 5.10 0.30 0.12 0.31 6.47 0.043
Funds
Operating
2.25 1.98 0.16 0.05 -0.27 -12 0.073
Expense/Total Funds
Profit Before
Provisions/Total 1.62 2.14 0.15 0.24 0.52 32.10 0.050
Funds
Net Profit/Total
0.97 0.80 0.10 0.16 -0.17 -17.53 0.200
Funds
Loans Turnover 0.15 0.13 0.01 0.01 -0.03 -20 0.010
Total
Income/Capital 8.76 9.28 0.26 0.15 0.53 6.05 0.049
Employed (%)
Interest
Expended/Capital 4.79 5.10 0.30 0.12 0.31 6.47 0.043
Employed (%)
Total Assets
0.09 0.08 0.01 00 -0.01 -11.11 0.058
Turnover Ratios
Asset Turnover
0.10 0.09 0.01 0.01 -0.01 -10 0.058
Ratio
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Vol.6 (10), OCTOBER (2016), pp. 1-8
 Interest Income to Total Funds and Net Interest Income to Total Funds have dropped from 8.63 and
3.83 to 8.16 and 3.06 respectively from pre-merger to post-merger. Faulty sanctioning of loans, non
recovery of loans and NPAs may be the reason.
 Non-Interest Income to Total Funds has increased from 0.14 to 1.13. This may be due to availability of
multi-services, quick and easy accessibility of services and cheaper affordability of services.
 Interest Expended to Total Funds has increased while Operating Expense to Total Funds has decreased
by 12% during the study period of the merger.
 The increased Profit before Provisions to Total Funds from 1.62 to 2.14 during the period depicts
increased managerial efficiency.
 Total Income to Capital Employed and Interest Expended to Capital Employed has increased during
the study period.
 Loans Turnover, Total Assets Turnover and Assets Turnover Ratio have decreased from pre-merger to
post-merger period.
 Paired sample t-test at 5% significance level has found that all the parameters of management
efficiency are significant except Interest Income to Total Funds, Operating Expense to Total Funds,
Net Profit to Total Funds, Total Assets Turnover Ratios and Assets Turnover Ratios.
3. Debt Coverage Ratios
Standard p-
Mean Mean %
Parameters Deviation value(two
Difference Change
Pre Post Pre Post tailed)
75.4
Credit Deposit Ratio 84.66 1.71 1.95 9.19 12.18 0.002
7
Investment Deposit 36.4
29.79 1.40 0.80 -6.64 -18.22 0.001
Ratio 4
Total Debt to Owners 12.4
12.17 1.24 0.27 -0.31 -2.49 0.647
Fund 7
Financial Charges
0.86 0.44 0.59 0.06 -0.42 -48.84 0.236
Coverage Ratio
 Credit Deposit Ratio has risen by 12.18% from pre-merger to post-merger period. This reveals that it
is more aggressive than conservative for making profits. Hence, there is a loss of NPAs.
 Investment Deposit Ratio has decreased by 18.22%.
 Total Debt to Owners Fund has declined of 2.49% from 12.47 times of pre-merger to 12.17 times of
post-merger period. This reveals reduction of financial risk to avoid from the loss of NPAs.
 Financial Charges Coverage Ratio has reduced drastically from 0.86 to 0.44. This has increased the
risk of payment of debt obligation.
 According to the statistical results, there has been significant difference with respect to Credit Deposit
Ratio and Investment deposit ratio between the pre and post merger period while no significant
difference in Total Debt to Owners Fund and Financial Charges Coverage Ratio was found.
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Vol.6 (10), OCTOBER (2016), pp. 1-8
4. Leverage Ratios
Mean Standard Deviation Mean % p-value(two

Parameters
Pre Post Pre Post Difference Change tailed)
Current Ratio 0.05 0.04 0.01 0.01 -0.01 -20 0.252
Quick Ratio 6.87 12.22 1.50 1.27 5.35 77.87 0.028
 Current ratio has declined from 0.05 to 0.04 during the period of study.
 Quick Ratio has improved its liquidity position from 6.87 to 12.22 times and by growth of 77.87 %.
This reveals that there is no problem of short-term insolvency.
 Quick Ratio rejects the null hypothesis of indifference at 5% level of significance.
5. Profitability Ratios
Parameters
Interest Spread 4.17 6.21 0.24 0.49 2.04 48.92 0.007
Net Profit Margin 11.13 9.84 0.95 1.84 -1.30 -11.68 0.319
Return on Long Term
95.35 92.96 6.12 4.75 -2.39 -2.51 0.643
Fund (%)
Return on Net Worth
14.46 11.90 0.92 2.58 -2.56 -17.70 0.208
(%)
 Interest Spread has increased by almost 1.5 times during the period of study.
 Net Profit Margin has decreased by 11.68% from 11.13 in pre merger to 9.84 in post merger period.
This indicates negative impact of merger on the profitability of the bank which may be due to decline
in income.
 Return on Long term Fund has reduced moderately by 2.51%.
 Based on the results of Paired sample t-test at 5% level of significance level, null hypothesis of no
significant improvement on Net Profit Margin, Return on Long Term Fund and Return on Net Worth
has been accepted. It reveals statistically reliable difference between pre-merger and post-merger of
Interest Spread.
6. Profit and Loss Account Ratios

Parameters
Interest
Expended/Interest 64.63 62.52 3.62 2.15 -2.11 -3.26 0.066
Earned
Other Income/Total
1.55 12.14 0.50 0.51 10.59 683.23 0.000
Income
Operating
25.71 21.29 2.59 0.70 -4.43 -17.23 0.060
Expense/Total Income
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Vol.6 (10), OCTOBER (2016), pp. 1-8
 Interest Expended to Interest Earned has reduced by 3.26% during the period of study.
 Other Income to Total Income has substantially increased from 1.55 in pre-merger period to 12.14 in
post-merger period. This reveals diversification of investment.
 Operating Expenses to Total Income has reduced by 17.23% during the study period.
 Based on the statistical results, null hypothesis is accepted except for Other Income to Total Income.
CONCLUSIONS:
The results of the analysis of the merger of State Bank of Indore with the State Bank of India
(SBI) reveal that the State Bank of India (SBI) does not shows significant improvement in the
financial performance in the post merger period. There are some of the financial parameters
have shown significant improvement during the post merger period but most of the
parameters have not shown significant improvement. There has been positive impact of
merger on investment and liquidity parameters while merger had negative impact on the
profitability of the bank. The profitability has declined not because of decrease in non-
interest income and other income and increase in operating expenses but because of increased
interest expended, ineffective utilization of assets and loan and reduced interest income.
Thus, it can be concluded from the study that the positive impact of merger may accrue in
later years i.e., in long run as the present study is limited to time period of four years before
and after merger.
REFERENCES
1. Gupta, K., 2015, „Mergers and Acquisitions in the Indian Banking Sector: A Study of
Selected Banks‟, International Journal of Advanced Research in Management and
Social Sciences 4(3), 94-107.
2. Geete, V., 2013, „A Study on Impact of Merger of State Bank of India with its
Associate Banks and Bankers View towards Merger‟, Wealth: International Journal
of Money, Banking & Finance 2(1).
3. Jeelanbasha, V. & Arun, S.S., 2016, „Financial Performance Analysis of Post-Merger
and Acquisition (A Case Study of ICICI Bank)‟, International Journal of Business
and Administration Research Review 1(1), 209-213.
4. Nalwaya, N. & Vyas, R., 2012, „Post-Merger Financial Performance Analysis of
ICICI Bank and Erstwhile Bank of Rajasthan Ltd.‟, Pacific Business Review
International 5(6), 64-72.
5. Singh, G. & Gupta, S., 2015, „An Impact of Mergers and Acquisitions on Productivity
and Profitability of Consolidation Banking Sector in India‟, Abhinav International
Monthly Refereed Journal of Research in Management & Technology 4(9), 33-48.
Websites
1. https://en.m.wikipedia.org/wiki/State_Bank_of_India. Retrieved on 20-08-2016.

2. https://en.m.wikipedia.org/wiki/State_Bank_of_Indore. Retrieved on 20-08-2016.
3. www.business.mapsofindia.com/banks-in-india/state-bank-of-indore.html Retrieved
on 20-08-2016.
7
Vol.6 (10), OCTOBER (2016), pp. 1-8
4. www.m.moneycontrol.com/stock/statebankofindia/SBI/financials/financials-ratio
Retrieved on 20-08-2016.
5. www.wap.business-standard.com/article/finance/state-bank-of-indore-to-become-
sbi-branch-from-aug-27-110082400218_1.html Retrieved on 21-08-2016.
6. www.wap.business-standard.com/article/companies/sbi-state-bank-of-indore-swap-
ratio-at-34-100-110032900147_1.html Retrieved on 21-08-2016.
7. www.thefreelibrary.com/Pre+and+post+merger+financial+performance+of+acquirer+ba
nks+in+India.-a0428183026 Retrieved on 22-08-2016.
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Article · October 2016

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PRE AND POST MERGER FINANCIAL PERFORMANCE ANALYSIS

JUNIOR RESEARCH FELLOW

THE MERGER OF STATE BANK OF INDORE WITH STATE BANK OF INDIA

OBJECTIVES OF THE STUDY:

ANALYSIS AND INTERPRETATION:

2. Management Efficiency Ratios

3. Debt Coverage Ratios

Mean Standard Deviation Mean % p-value(two

6. Profit and Loss Account Ratios

1. https://en.m.wikipedia.org/wiki/State_Bank_of_India. Retrieved on 20-08-2016.

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