STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty GRADUATION THESIS EFFECTS OF BANK MERGERS AND ACQUISITIONS ON COMMERCIAL BANKS: EVIDENCE FROM MALAYSIA AND LESSONS FOR VIETNAM Student name : Dao Ngoc Minh Class : ATCA-K11 Lecturers : PhD. Do Thi Kim Hao MA. Bui Le Minh June, 6th 2012 i ACKNOWLEDGEMENTS All my praises and gratitude to my supervisors, the Dean of Faculty of Banking, PhD. Do Thi Kim Hao from Banking Academy and MA.
Bui Le Minh from Hanoi University. This study would not have been possible without their constructive comments, suggestion, kindness and encouragements. I also would like to express my appreciation to my lecturers from Faculty of Foreign Languages of Banking Academy for their guidance and support throughout the completion of this research. In addition, my deepest thanks to my parents and my friends for their continuous source of inspiration and encouragement.
Thanks for giving a great support throughout the duration of my studies and unceasing prayers for my success. Dao Ngoc Minh – ATCA K11 | ii ABSTRACT Merger and acquisition (M&A) in banks will be boosted in the next five years as part of efforts to overhaul the entire banking system and speed up the formation of one to two regional class commercial banks in Vietnam. In order to give the reader a brief view of the necessity of banking consolidation, I have studied the experiences and organizational structure of other countries which have strong and efficient banking systems, particularly of neighboring countries in the ASEAN region. To some extent, Malaysia’s banking system has been at the forefront in ASEAN.
This study investigates the extent of merger and acquisition activity affect Malaysian banks’ performance after the consolidation of banking sector in year 2000 which was expedited by the Asian Financial crisis. By utilizing secondary data collected from several previous researches as well as the financial ratio analysis, it can be concluded that the merger program in Malaysia was relatively successful. So as a matter of fact, the thesis seeks to build up a safe and efficient banking system in Vietnam by learning from Malaysia’s model and experience. Dao Ngoc Minh – ATCA K11 | iii TABLE OF CONTENTS ACKOWLEDGEMENTS.ii TABLE OF CONTENTS.
iii LIST OF TABLES & FIGURES. v LIST OF ABBREVIATIONS. vi CHAPTER 1: INTRODUCTION .1 Current Problem Statement.2 Objective and research questions.3 Scope and limitations. 3 CHAPTER 2: THEORETICAL FRAMEWORK .1 Mergers and Acquisitions definition .2 Factors contributing to the occurrence of Mergers and Acquisitions .3 Effects of Mergers and Acquisitions on commercial banks.
7 Dao Ngoc Minh – ATCA K11 | iv 2.4 Summary of theoretical framework. 11 CHAPTER 3: EFFECTS OF BANK MERGERS AND ACQUISITIONS ON MALAYSIAN BANKING SYSTEM .1 Overview of Malaysian banking system .1 Financial Crisis in Malaysia 1997-1998 .2 Mergers and Acquisitions in Malaysia. Effects of bank Mergers and Acquisitions on Malaysian banking system .2 Cost efficiency ratio.4 Share performance ratio. Reasons for the success of merger program in Malaysian banking system.
27 CHAPTER 4: CONCLUSION & LESSONS FOR VIETNAMESE BANKING SYSTEM. Overview of Vietnamese banking system .2 Conclusion and lessons for Vietnamese banking system. ix Dao Ngoc Minh – ATCA K11 | v LIST OF TABLES & FIGURES List of tables Table 3.1: Growth Rate in Profitability Ratio 17 Table 3.2: Growth rate in cost efficiency ratio 19 Table 3.3: Growth rate in cost efficiency ratio 20 Table 3.4: Growth rate in share performance ratio 22 Table 3.5: Growth rate in leverage ratio 24 Table 4.1: Wholly foreign-owned and joint venture banks in Vietnam 35 List of figures Figure 4.1: Banking sector size of countries 33 Figure 4.2: Chartered capital of 11 largest banks 34 Dao Ngoc Minh – ATCA K11 | vi LIST OF ABBREVIATIONS M&A Merger and Acquisition BNM Bank Negara Malaysia SBV State Bank of Vietnam KLSE Kuala Lumpur Stock Exchange NPL Non-performing loan FSMP Financial Sector Master Plan ROA Return on Asset ROE Return on Equity TE/TR Total Expenses to Total Revenues NIE/TA Non- Interest Expenses to Total Assets TL/TD Total Loan to Total Deposit TL/TA Total Loan to Total Asset EPS Earnings per share DPS Dividends per share TD/CE Total Debt to Common Equity TD/TC Total Debt to Total Capital JSCBs Joint Stock Commercial Banks SOCBs State-owned Commercial Banks VBARD Agribank CTG Vietinbank VCB Vietcombank EIB Eximbank BIDV Bank for Investment and Development of Vietnam ACB Asian Commercial Bank STB Sacombank MB Military Bank Dao Ngoc Minh – ATCA K11 | -1- CHAPTER 1 INTRODUCTION 1.1 Current problem statement The global economic crisis during the period of 2008 and 2009 left negative impacts on many different economies and Vietnam is not an exception. Although the country still keeps its medium economic growth, there are several difficulties and challenges it has to cope with.
One of those is the consolidation of banking sector. Banks as financial intermediaries play a significant role in economic growth, provide funds for investments, and keep the cost of capital low. The failure of a bank will not only bring financial difficulties to its depositors and owners, but will certainly be harmful to public confidence in the banking system. During the last few decades, structure of banking sector has turned from a controlled system into liberalized one.
The efficiency of banks, which reflects the ability of banks in transforming its resources to output by making its best allocation, is essential for the growth of an economy. The competition among banks at domestic and global level has increased and it has compelled the banking industry to improve their efficiency and productivity. Moreover, the government and policy makers have considered carefully various policies and measures out of which consolidation of banks emerged as one of the most preferable strategy. There are diverse ways to consolidate the banking industry and the most commonly adopted by local Vietnamese banks is mergers and acquisitions (M&A).
However, skepticism also arises due to the suspicion on post- merger performance and the risk of too big too fails. Size may itself become a Dao Ngoc Minh – ATCA K11 | -2- constraint, and dis-economies of scale may set in. Lower competition may also lead to a relatively more relaxed management, thereby leading to productivity losses. Therefore, another issue related to M&A is the concern on whether the merger of bank has strengthened the financial condition and effectiveness management to increase bank’s efficiency.
Meanwhile, Malaysia’s banking system is at the forefront in the ASEAN region and also plays the leading role in the regional banking industry. Majority consolidation activity in Malaysian banking industry was executed in mid of year 2000 when it was proposed and imposed by the Bank Negara Malaysia (BNM). Troubles in the banking system are specific to a country and so are the solutions. However, the learning experience and systemic structure of a well-managed, safe and efficient banking system such as that of Malaysia will assist banking merger in Vietnam by giving some valuable lessons to be learned.
Objective and research question 1. Objective The main objectives of this study is to measure the state of efficiency of Malaysian banks pre- and post merger and to investigate whether the M&A activity in the past time has enabled banks to take advantage of economies of scale and enjoy greater financial performance and improve bank’s efficiency. By the lessons to be learned from Malaysian commercial banks, the thesis hopefully can give some recommendations to Vietnamese government during the restructuring of banking industry. Dao Ngoc Minh – ATCA K11 | -3- 1.
Research questions The thesis should be able to answer three of the following questions: Has the merger resulted in better efficiency of Malaysian banks? Should the State Bank of Vietnam (SVB) encourage the mergers and acquisitions between local banks? What are the lessons that Vietnam could learn from Malaysia’s experiences? 1. Scope and limitations The research solely focuses on identifying whether merger program in Malaysian banking system was successful or not through the collected data of financial ratio pre- and post-merger of nine Malaysian commercial banks. Also, the study points out the reasons for the success of merger program in Malaysia by reviewing the past era researches related to the topic so that it could hopefully give some highlights that SBV should pay attention to when implementing M&A in Vietnam. However, the research does not give a comparison of the performance between the two banking systems, since there are some differences between the two (Vietnam and Malaysia) e.
economic and political conditions, development history, and legal framework. Research methodology The study uses the secondary data collected from several previous researches and from the respective banks’ annual reports and DataStream for the selected periods. Then comparison and analysis of ratios are used to compare the performance of Malaysian local banks during the pre-merger period (1999-2001) and post-merger period (2002- Dao Ngoc Minh – ATCA K11 | -4- 2010). Majority consolidation activity in Malaysian banking industry was executed in mid of year 2000 when it was proposed and imposed by the Bank Negara Malaysia (BNM).
Therefore, the performance from 1999 to 2001 will be treated as pre- merger performance in order to compare with post-merger performance. Year 1998 was not included in the selection period in assessing the pre-merger performance due to the Asian Financial Crisis in 1997. Thus, the period 2002 to 2010 was chosen as the post- merger period to measure the overall performance for merged banks and to identify whether the merger activity worked out in increasing the merged banks’ efficiency and profitability. Moreover, financial statement analysis was chosen since accounting measurement is easy to understand and generally accepted in reflecting the financial performance of banks.
By comparing the financial ratio, the thesis will be not only reporting how does a bank perform, it also deliver supplementary information such as which bank has better performance than others. The list of banks selected for this study are as follows: Affin Bank, Alliance Bank, AmBank , CIMB Bank, EON Bank , Hong Leong Bank, Maybank, Public Bank RHB Bank. After the Southern bank was acquired by CIMB bank on March 2006, there were only nine local banks in Malaysia banking industry. The independent variables that need to collected including the pre-tax income, total asset, total equity, total expenses, total revenue, dividend expenses, earning per share, total loan, total deposit, common equity, and non- interest expenses.
Dao Ngoc Minh – ATCA K11 | -5- CHAPTER 2 THEORETICAL FRAMEWORK 2. Mergers and Acquisitions definition According to Oxford Dictionary the expression, “Merger means combining two commercial companies into one.” A merger takes place when two or more banks disappear in order to give their place to a new bank or when a bank or a company more generally, buys out another one – or more than one – and absorbs it into one unified operational structure, usually maintaining the original corporate identity of the buying out bank. It is, therefore, the unification of two or more banks into one new bank. In essence, the merger is expressed by the following two steps: Settlement of all banks that are merged Exchange of shares of the old banks with shares of the new bank Meanwhile, Acquisitions have to do with the transfer of the whole or part of the ownership of a company (company being bought) to another (company that buys out), which pays the agreed on price.
The transfer usually takes place with the payment of cash or with buying and exchanging shares, through the Stock Exchange. In many cases, even the acquisition of a minority interest of a bank is possible to secure for the buying bank real control, if with the transfer is in a position to affect critical choices of the management and the strategy of the bank being bought or if the rest of the shares of the particular bank are held by many different owners.