The efficiency effects of bank mergers :

An overview of case studies of nine mergers

Stephen A. Rhoades ,1997

財研一 羅孝君 邵子寧

Agenda

Motivation of Research Methodology Study framework and data Summary of finding Cases on Taiwan mergers ( associated with

CEPA )

Motivation of Research Bank mergers will yield efficiency gains ?

1980s—bank mergers result in efficiency gains. Recently empirical research shows no evidence of

efficiency gains from bank mergers. The typical cross-section studies ---But there are exceptions that bank mergers do result in efficiency gain.

The issue matters for individual bank strategy , public policy, and industry performance , so it ‘s necessary to resolve the continuing debate over the mergers efficiency issue.

Non-random selecting

The mergers selected were generally large horizontal mergers that are thought to be the kind of mergers most likely to yield efficiency gains.

During the time there had been considerable emphasis in the industry on cutting costs.

The finding may point toward what condition surrounding a mergers are most likely to yield efficiency gains and why efficiency gains are , or are not , realized.

Methodology

Distinguish between cost reductions and efficiency improvements

Case study approach Planning meetings Selection of merger cases

Distinguish between cost reductions and efficiency improvements

Reductions in expenses may be accompanies by corresponding reductions in assets and revenues

simply represent shrinkage of the firm rather than efficiency improvement.( expense ratio )

An improvement in efficiency requires that costs be reduced by more than any decline in assets (revenues).

Methodology

Case study approach

Not use cross-section approach The case study methodology may provide

insights into firm (industry) behavior and performance that can not be captured in a cross-section study.

Methodology

Planning meetings

Roughly one-half of savings from mergers will occur during the first year ,and all savings will be achieved within three years.

Most significant cost savings could be accomplished without merger.

Any cost saving or efficiency should be observable in public financial data such as Call reports.

Methodology

Observations

Selection of merger cases

Large firm Firms with considerable office overlap Mergers that occurred in recent years , during which

time cost cutting and efficiency received a great deal of attention in banking as well as other industries.

Methodology

The mergers were selected on the basis of characteristics that…

Study framework and data

Financial ratio Econometric cost measure Other information

The effect of the merger announcement on the stock price of the acquiring and acquired firms.

Data Consolidated Financial Statements for Bank Holding

Companies (Y-9 Report) The standard ratio are based on foreign and domestic data

for the consolidated holding companies.

The analyzed time

All ratios were analyzed for three years preceding the year of the merger and three years after the merger.

For the pre-merger period Ratios for both the acquirer and the target were examined to

get an indication as to the relative efficiency and performance of the acquirer and target.

A hypothetical combined firm was created by calculating simple average ratios from the data for the acquired and target.

Control (peer) group providing a basis for comparison. For the post-merger period

Focus on the combined firm relative to a control group.

reflect changes in the economic environment or instead

were unique to the combined firm. Balance sheet ratio valuable

Financial ratio

EfficiencyExpense ratios

ProfitabilityProfitability ratios

Balance sheet ratios providing information on other changes that may have occurre

d ,aside from or as a result of the merger, that might have affected efficiency or profitability.

To examine…

Efficiency

The analysis of expenses was based on a ratio of expenses to assets or operating revenue rather than absolute expenses in order not to confuse pure expense (cost) reduction with efficiency gain.

Financial ratio

Efficiency Denominator :

Revenue- based ratio Reflecting the ability of the firm to generate revenue from it’s expenditure. Revenues reflect interest rate change just as total expense

do. Revenue reflect income earned off the balance sheet. Off-balance sheet activities result in expenses but no assets.

Assets- based ratio Assets reflect the earning base of the bank and not highly variable.

Financial ratio

Profitability

Net income / average assets (ROA) A good overall indicator of a banking organization’s

performance. Biased upward—because of profits generated from

off-balance sheet operating .

Financial ratio

Econometric analysis

Scale efficiency Measures efficiency solely associated with size. X-efficiency Measures closeness to the efficiency frontier for that

size. Total efficiency The product of scale and X-efficiency.

Alternative three efficiency measure

Other information

Stocks price changes of the merging firms around the announcement date and numerous other sources .

Ex. Post-mergers interview

There are questions unique to individual

firms because of special circumstances.

Summary of findings

ResultsVaried considerablyOnly to show the direction of change, NOT

Magnitude Better or worse than the peers

Cumulative Abnormal Return(CAR)

DefinitionSum of the differences between the

expected return on a stock (systematic risk multiplied by the realized market return) and the actual return often used to evaluate the impact of news on a stock price.

Brief overview of the findings

All of the studies find that significant cost cutting objectives were achieved or surpassed fairly quicklyStaff reductionsData processing systems and operations

Brief overview of the findings

5 of the 9 mergers showed clear efficiency gains relative to peers

Brief overview of the findings

7 of the 9 mergers exhibited an improvement in ROA relative to peers. In addition, the net wealth effect, based on the stock price reaction to the merger announcement, was positive for 5 of the 7 mergers for which data were available.

Does “office overlap” guarantee success in increasing

efficiency? Both the G and I mergers had the

greatest office overlap

Absolute size of two firms?

Both the F and I mergers involves two larges

Relative size of two firms?

The F merger involved two firms not too disparate in size

The A merger which was of very different size

Various other factors having had a positive influence on a merger Solidly improving economy External pressure for success A new headquarters office

But most of these case-specific

Given the above, you should know that…

Generalizations are risky!

Even…

a strong commitment to cutting costs and a relatively efficient acquirer may increase the likelihood that a merger will enhance efficiency, but they are clearly NOT a guarantee

To sum up

Again, mergers not randomly selected Strong commitment to cost cutting Relatively efficient acquirer(by at least one measu

re) Reduction of noninterest costs did achieve in

all of these mergers However, not all of these mergers unambiguo

usly yielded efficiency and profitability improvements

Even if it does not achieve operating efficiency gains

Such benefits to the bank might includeA more diversified deposit and loan baseA different strategic orientationA good vehicle for growth

CEPA 對台灣金融業的策略影響

以富邦金控併購港基銀行為例

何謂 CEPA?

Closer Economic Partnership Agreement

根據大陸規定 外資銀行要進入大陸市場，需

總資產超過 200 億美元，才能設立分行成立辦事處兩年後，才可以成立分行三年之後，才能承作人民幣業務

但根據 CEPA 規定 香港銀行業至大陸市場發展

總資產僅需 60 億美元申請人民幣業務的資格，由三年放寬到兩年

借道香港地區，透過 CEPA 前進大陸 因應兩岸監理單位「王不見王」的僵局 突破遭蠶食鯨吞的台商商機

Thanks for your attentions!