IBIMA Publishing
Journal of Eastern Europe Research in Business & Economics
http://www.ibimapublishing.com/journals/JEERBE/jeerbe.html
Vol. 2012 (2012), Article ID 184557, 16 pages
DOI: 10.5171/2012.184557
Post M&A Accounting Performance of
Romanian Banks
Maria Carmen Huian
Alexandru Ioan Cuza University of Iasi, Iasi, Romania
__________________________________________________________________________________________________________________
Abstract
The purpose of this paper is to assess the financial performance of Romanian banks involved in
M&A activities, as target banks, over a period of 10 years (1998-2008). Performance is analyzed in
terms of profitability by using traditional accounting measures: ROE, ROA and NIM. Post-M&A
performance for a 3-year period is compared with the aggregate ratios from all Romanian banks.
The findings are mixed. On one hand, bank M&A in Romania does not result in improved ROE or
ROA in the post M&A 3-year period under review. On the other hand, merged banks report media
NIM above industry.
Keywords: mergers and acquisitions, performance, profitability, ROE, NIM.
__________________________________________________________________________________________________________________
Introduction
In this paper, the researcher examines the
post-transaction
performance
of
the
Romanian banks involved in merger and
acquisition (M&A) activities by using
accounting profitability ratios. The present
work is motivated by the relative shortage of
empirical evidence on the impact of mergers
and acquisitions on Romanian banks. The
current stream of literature dealing with the
effects of M&As on Romanian banks consists
of regional analyses (among other Eastern
European countries), such as those of Bonin
et al., 2003 and 2005; Clarke et al., 2005, or
cross-border analyses (Correa, 2008; Beccalli
and Frantz, 2008). In addition, there is a
handful of studies assessing the Romanian
banking performance in general, regardless
of the M&A operations (Grigorian and
Manole, 2002; Asaftei and Kumbhakar, 2007;
Gondor and Munteanu, 2010). Nevertheless,
the aforementioned studies do not explicitly
focus on the impact of M&As on the
accounting profitability of the Romanian
banking institutions. This paper therefore
aims to fill in this gap.
To our knowledge, this is the first study to
deal with post-M&A profitability of target
banks located in Romania based on
accounting information. Specifically, it
focuses on merger and acquisition deals that
took place in the period of 1998-2008,
involving only commercial banks. The
researcher measures performance by using
an indicator capturing bank profitability:
return on equity (ROE) further decomposed
according to the DuPont model. The
researcher also calculates net interest margin
(NIM) of the selected banks.
The present paper is organized as follows.
Section 1 briefly describes the development
of the Romanian banking system. In section
2, the main findings of the relevant literature
Copyright © 2012 Maria Carmen Huian. This is an open access article distributed under the Creative
Commons Attribution License unported 3.0, which permits unrestricted use, distribution, and reproduction in
any medium, provided that original work is properly cited. Contact author: Maria Carmen Huian E-mail:
maria.huian@uaic.ro
Journal of Eastern Europe Research in Business & Economics 2
dealing with post-M&A effects on banks
performance are summarized. Section 3
presents the accounting profitability ratios
used. The sample and methodology are
described in section 4, while the empirical
results are presented in section 5. Section 6
concludes.
Romanian Banking System
After the fall of the communism, Romanian
authorities made several attempts to reform
the national economy and to develop a
healthy banking system. This process
involved a major reorganization of the
financial industry which mainly comprised,
until late 1990s, a small number of stateowned banks and banks with domestic
private capital. In the beginning of the
transition period, banks’ primary role was to
channel their funds to some loss-making
state-owned enterprises (Asaftei and
Kumbhakar, 2007), without much evaluation
of the credit conditions of their clients. The
result was a significant share of nonperforming loans which, alongside risky
practices, mismanagement, “delays in
restructuring and privatization, difficulties
endangered by several bankruptcies and the
collapse of the largest investment fund” (NBR
2000), severely affected the financial
soundness of the banking sector. Therefore, a
stronger supervision and the establishment
of a better regulatory framework, as efforts
to ensure financial stability, were much
needed. The National Bank of Romania
assumed this important role and its efforts of
enhancing the regulatory system and
strengthening the prudential supervision
started to pay off in the beginning of the new
millennium. The pace of banks’ restructuring
and privatization increased, foreign banks
entered the market, thus increasing the
competition, the general state of the national
economy improved. All these changes
resulted not only in a larger volume of
banking activity and a better financial
stability of the sector, but also in an increase
in terms of financial intermediation and in a
wider range and sophistication of financial
services (Grigorian and Manole, 2002).
Romania’s admission to the European Union
in January 2007 was a turning point in the
evolution of the national economy and the
banking system. It triggered a significant
strengthening of competition among banks,
entailing structural changes. In this new
competition-driven environment, doubled by
the years of economic boom (2004-2007),
the main focus of the banking system became
gaining a bigger market share. In order to
achieve this goal, banks expanded their
products (by providing both newly-created
products and special offers whose
accessibility and extra facilities made them
more attractive) and territorial networks. In
their effort to increase their market share,
“credit institutions kept boosting their
lending activity even after the onset of the
global financial turmoil” (NBR 2007).
Initially, Romanian financial institutions
performed surprisingly well during the first
stages of the crisis. This was explained by the
small portion of financial securities held “over the past few years, trading portfolios in
the Romanian banking system accounted for
less than 3 percent of total investments”
(Dardac and Moinescu, 2009) and by the lack
of toxic assets arising from the securitization
of subprime credit packages (Isarescu, 2008).
Eventually, the financial crisis and the
worsening of the macroeconomic climate
made an impact on the Romanian credit
institutions. Therefore, in 2008, the banking
system switched from excess liquidity to
liquidity shortfall, and from aggressive
lending to promotions aimed at attracting
deposits (NBR 2008).
The general factors that led to the global
economic crisis also caused banking business
to slow down. The loan market witnessed a
significant stagnation, and the quality of the
loan
portfolio
worsened
worryingly.
Although non-performing claims were at a
manageable level, their growth rate raised
concerns for financial stability (NBR [a]
2010). Still, so far there was no need for
banks’ capitalization with public funds.
Moreover, national authorities claim that
currently, Romanian banking system may be
deemed as stable, with capitalization,
3 Journal of Eastern Europe Research in Business & Economics
solvency and liquidity levels in line with
prudential requirements (NBR [b] 2010). Yet,
in 2010 profitability entered a negative
territory. After a severe decrease of profits in
2009, many banks reported losses in 2010.
This situation was ascribed mainly to the
unprecedented provisioning costs. The falling
trend of reported earnings was alleviated by
some measures taken to reduce expenses:
banks started to better control their costs by
cutting down the number of units and
employees and by putting on hold their
investment plans. The drastic economic
measures initiated by the government in
2010 and the persistent recession
significantly impacted the risk appetite of
banks and even changed their business
model (it shifted towards lending mainly
non-financial companies).
Literature Review
According to Altunbas and Ibanez (2004) and
Focarelli et al. (2002), most of the studies
measuring the level of success of bank
mergers and acquisitions in terms of
financial performance follow two main
empirical methods.
The first group analyzes the impact of M&As
by making comparisons of pre-merger and
post-merger performance. Berger et al.
(1999) divide these studies into static
analyses (studies that relate the potential
consequences of consolidation to certain
characteristics of financial institutions that
are associated with consolidation, such as
institution size; although they do not use
data on M&As, they may prove useful in
predicting the consequences of M&As) and
dynamic analyses (studies that compare the
behavior of financial institutions before and
after M&As or compare the behavior of
recently consolidated institutions with other
institutions that have not recently engaged in
M&As). Regarding the latter, Huizinga et al.
(2001) make a distinction between studies
analyzing the impact of M&As with
performance ratios based on accounting
variables (Rhoades, 1993; Ramaswamy,
1997; Mylonidis and Kelnikola, 2005; Correa,
2008; Badreldin and Kalhoefer, 2009) and
studies investigating the evolution of the cost
and profit X-efficiency relative to a shifting
industry benchmark for merging and nonmerging banks (Berger and Humprey, 1992;
Huizinga et al., 2001; Vander Vennet, 2003;
Koetter, 2005; Ekkayokkaya et al., 2009). In
addition, a number of studies combine the
two approaches by comparing pre- and postmerger levels of simple accounting ratios
with more complicated frontier-based (cost
or profit) efficiency (Pilloff, 1996; Beccalli
and Frantz, 2008; Lozano-Vivas and Weill,
2009).
The second group of studies investigating the
effects on bank M&As takes a more
comprehensive approach and uses eventstudy methodology (examination of the
market reaction to merger announcements
through the analysis of changes in
share/bonds prices) (Cybo-Ottone and
Murgia, 2000; Knapp et al., 2005; DeLong and
DeYoung, 2007) [1]. Moreover, there are
papers that combine dynamic analyses and
event-study methodology (Healy et al., 1992;
Cornett and Tehranian, 1992, Campa and
Hernando 2005, Mylonidis and Kelnikola
2005).
As our paper falls under the dynamic analysis
approach, we further dwell on the findings of
some of these studies.
Overall, the dynamic analyses on M&As
provide mixed results: some studies found
improved performance, others reported no
improvement, while a handful of studies
showed a deterioration in performance. In
the first category, Cornett and Tehranian
(1992) showed that the merged banks
outperform the banking industry. Their
better performance appeared to result from
improvements in the ability to attract loans
and deposits, in employee productivity, and
in profitable asset growth. Healy et al. (1992)
examined
post-acquisition
operating
performance of merged firms and found that
these had significant improvements in asset
productivity relative to their industries after
the merger, leading to higher post-merger
Journal of Eastern Europe Research in Business & Economics 4
operating cash flow returns. Ramaswamy
(1997) reached the conclusion that mergers
between banks exhibiting similar strategic
characteristics
resulted
in
better
performance
than
those
involving
strategically profitability ratios associated
with the M&A operations. All the cited
studies involved US banks. In Europe,
Altunbas and Ibanez (2004), after the
examination of the impact of strategic
similarities between bidders and targets on
post-merger financial performance, reported
that, on average, bank mergers resulted in
improved return on equity. Focarelli et al.
(2002) found that mergers of Italian banks
resulted in improved return on equity
because of a decrease in capital while
acquisitions leading to improved lending
policies resulted in higher profits. They
suggest the separate examination of mergers
and acquisitions, as they are driven by
different factors. Campa and Hernando
(2005) concluded that their paper provided
evidence
on
changes
in
operating
performance for the mergers involving
banks, namely significant improvements in
target banks’ performance (return on equity
increased by an average of 7%), beginning on
average two years after the transaction was
completed. After having investigating long
term effects on the target banks in 17
countries in Central and Eastern Europe and
the Commonwealth of Independent States,
Fritsch (2007) found that though the
absolute values of profitability and efficiency
of the target banks three years after the
acquisition did not differ from those of
domestic banks not involved in M&A
activities, the improvements in performance
and loan growth were significantly better in
the post merger phase.
A great number of studies found no evidence
of any performance improvement associated
with the M&As. Correa (2008) found there
was no positive performance effect in the
first two years after a cross-border
acquisitions. He stated that profitability was
affected by a reduction in the net interest
margin and by the lack of cost-efficiency
gains. Vander Vennet (2002) found no
improvements in cost efficiency and return
on assets for European target banks on the
first year after an acquisition. While Pilloff
(1996) reported no significant change in
post-merger return on equity of US banks,
DeLong and Deyoung (2007) concluded the
same – no evidence of clear positive effects of
M&A operations on the performance of the
selected US banks. Badreldin and Kalhoefer
(2009) found no clear effect on the
profitability of the Egyptian banks, but only a
minor positive effect on their credit risk
position.
Some studies reported a deterioration of
performance induced by the bank M&As.
Findings by Beccalli and Frantz (2008)
showed that European M&A operations were
associated with a slight deterioration in
return on equity in the 1-6 years after the
deal (in comparison to the 3/6 years prior to
the deal). Still, banks involved in mergers and
acquisitions were more profitable than their
peers not involved in M&As. Knapp et al.
(2005), in their study of the financial
performance of 80 US bank holding company
mergers, found that the merged entity
experienced a profitability below the
industry average.
As our paper includes M&A operations under
the form of bank privatization, we also
reviewed some studies dealing with this
subject in developing countries (mainly
Eastern Europe). Bonin et al. (2003) found
that foreign-owned banks are most efficient
and government-owned banks are least
efficient. In addition, their research showed
that early privatized banks are more efficient
than later-privatized banks. Their findings
are consistent with the ones of Clarke et al.
(2005) which reported that although bank
privatization
usually
improves
bank
efficiency, gains are greater when the
government fully relinquishes control, when
banks are privatized to strategic investors,
when foreign banks are allowed to
participate in the privatization process and
when the government does not restrict
competition.
5 Journal of Eastern Europe Research in Business & Economics
Accounting Ratios as Profitability
Measures
This paper analyses banking performance as
a bank’s capacity to generate sustainable
profitability. Profitability offers clues about a
bank’s ability to undertake risks and to
expand its activity. It is a bank’s first line of
defense against unexpected losses, as it
strengthens its capital position. The most
common way of assessing profitability is by
using the traditional accounting measures:
return on equity (ROE) and return on assets
(ROA). In addition, given the importance of
the intermediation function for banks, net
interest margin is typically monitored (ECB
2010).
The most popular measure of bank’s
performance is ROE as it is considered a
critical performance indicator by both
investors and management (Lindblom and
Von Koch 2002). It divides the net income for
the year by average total equity. ROE
constitutes the most poignant expression of
profit, highlighting the results of bank
management in its entirety and indicating to
shareholders the efficiency level of their
investments (Cocriş and Chirleşan 2007).
The most important advantages of ROE are:
(a) it proposes a direct assessment of the
financial return of a shareholder’s
investment; (b) it is easily available for
analysts,
only
relying upon
public
information; and (c) it allows for comparison
between different companies or different
sectors of the economy (ECB 2010). Still,
there are some shortcomings deriving from
its use. Mainly, the ratio relies on the
properties of accrual accounting to assess
performance (Beccalli and Frantz 2008),
hence it is affected by the accounting method
used for recording the M&A or the method
used to finance the M&A. In addition, it is
subject to certain accounting choices that are
left at the discretion of bank’s management.
Many studies decompose ROE into its main
drivers, the so-called DuPont analysis, as it
allows an analysis of the components
affecting profitability and facilitates trend
analysis which is useful for detecting the
source of a shift in profitability and taking
corrective action before it is too late (Walker
2007). The DuPont model firstly breaks
down ROE into two elements: the return on
assets (ROA) and the financial leverage. ROE
is ROA multiplied by the financial leverage.
The return on assets is the net income for the
year divided by total average assets. ROA
reflects the profitability of all the capital
engaged in the operating activities (Mironiuc
2006). A higher value of ROA confirms that
banks have appropriately formed their assets
portfolio, contributing to higher financial
results. Meeks and Meeks (1981) argue that
of all the accounting measures of
profitability, ROA is the least sensitive to the
upward or downward estimation bias that
can be induced by changes in leverage or
bargaining power resulting from a merger. In
other words, ROA is considered a more
reliable profitability indicator than ROE, in
terms of efficiency performance, since it is
adjusted for the leverage effect. Financial
leverage (FL) divides total assets by total
equity and therefore indicates the total
assets banks have available per unit of equity
invested by the shareholders. Sometimes, the
inverse of the financial leverage, also known
as equity ratio (ER), can be used. Equity ratio
shows the portion of total assets financed by
stockholders and not by creditors. It reflects
the bankruptcy risk of the bank (Badreldin
2009).
Further on, ROA is decomposed into two
components: net profit margin (NPM) which
divides net income by total revenues and
asset turnover (ATO) which shows the
connection between total revenues and total
(average) assets. Consequently, ROE equals
NPM multiplied by ATO multiplied by FL.
The other accounting measure of profitability
used in this paper is net interest margin
(NIM). Computed as the difference between
interest income and interest expenses over
total assets, NIM shows the amount by which
the interest received from the loan portfolio
exceeds the interest paid on deposits or
Journal of Eastern Europe Research in Business & Economics 6
borrowed funds. It is a key indicator of asset
productivity since a high NIM is indicative of
effective use of earning assets and sensible
mix of interest-bearing liabilities (Brissimis
et al. 2007).
Data Set, Sample and Methodology
The data set is obtained by combining three
sources: Zephyr database provided by
Bureau van Dijk for data on the M&A
operations; Bankscope for balance sheet and
profit and loss data of some of the banks
involved in M&A operations (M&A sample)
and financial statements provided by The
Romanian National Trade Register Office
where data on Bankscope were not available.
In this paper we examine the profitability of
Romanian banks having taken part in M&A
activities in a period between 1998 and
2008. The sample is limited to target banks
located in Romania. Moreover, it excludes
banks that are not commercial, such as
cooperative and savings banks in order to
obtain a relatively homogeneous group of
banks. The list of M&A transactions extracted
from Zephyr database was reduced to
completed transactions which meant a
sample of 96 transactions. For further
analysis, we excluded from the sample the
deals in which the target bank’s control was
not transferred to the acquirer and the ones
representing intra-group transactions. The
final sample comprised 12 transactions, out
of which two were mergers and ten were
acquisitions
(including
two
bank
privatizations). Table 1 presents the 12
transactions and the banks involved.
Although the size of the sample is relatively
small compared to other studies conducted
in the United States or Europe, we must
underline that the total number of M&A in
the Romanian banking sector is not quite as
large as other countries, with a total number
of banks at time of publication of 42 banks
(NBR 2010). In addition, we considered the
final sample of 12 deals satisfactory as it
includes all the M&A operations involving
Romanian
target
banks
in
the
aforementioned period and also reliable in
comparison to prior accounting studies that
were conducted in significantly larger
markets: USA and EU (see Healy et al. 1992: n
= 50; Cornett and Tehranian 1992: n = 30;
Mylonidis and Kelnikola 2005: n = 9, among
others).
The accounting ratios were computed for a
period of three years after the M&A as many
researchers (Rhoades 1993) and bank
analysts suggest investigating the postmerger performance of banks for a period of
3 years. The year of the deal itself is left out
of the analysis as it is strongly affected by the
accounting practices used to report the M&A.
Hence, the results could be have been
seriously distorted.
As far as the accounts used were concerned,
we used the consolidated ones, where
available. We also preferred the financial
statements prepared in accordance with
IAS/IFRS, but in some cases such information
was not available, so we used data reported
under the Romanian accounting standards
(applicable for credit institutions, either
harmonized with the European accounting
directives and IAS for the years between
2000-2005 or compliant with the European
accounting directives for the period between
2006-2010). In some situations, IAS/IFRS
data were available for only one or two years
out of the three selected, while for the
remaining period were available in
Romanian standards. In such cases we used
Romanian standards for the whole period.
7 Journal of Eastern Europe Research in Business & Economics
Table 1 Descriptive of Transactions Selected in the Sample
Type of
transaction
Privatization
Target
Acquirer
Resulting entity
1
Year of
transaction
1999
BRD
BRD-GSG SA
2
2000
Acquisition
Finansbank
Groupe Societe
Generale
FIBA Group
3
2000
Acquisition
PaterBank
Piraeus Bank
4
2002
Merger
Banca Agricola
Raiffeisen
Raiffeisenbank
5
2003
Acquisition
Banca
Romaneasca
National Bank of
Greece
Banca Romaneasca
SA membra a
Grupului National
Bank of Greece
6
2004
Acquisition
RoBank
OTP Hungary
7
2006
Acquisition
MKB Hungary
8
2006
Acquisition
Romexterra
Bank
Eurombank
9
2006
Acquisition
Mindbank
ATE Bank
10
2006
Acquisition
Daewoo Bank
11
2006
Privatization
12
2007
Merger
Banca
Comerciala
Romana
UniCredit
Romania
Cassa di
Risparmio di
Firenze SpA
Erste Bank
OTP Bank Romania
SA
MKB Romexterra
Romania SA
Bank Leumi Romania
SA
ATE Bank Romania
SA
Banca CR Firenze
Romania SA
Because the first deal in the sample took
place in 1999, the first year for which the
accounting ratios were computed was 2000,
the last year being 2010. The year 2007
marked the onset of the worldwide financial
turmoil. Therefore, we separated the sample
into two sub-samples: sample A contains the
deals taking place before 2006 (meaning 6
deals) which locates the post-M&A 3-year
period between 2000 and 2007. Sample B
comprises the deals that took place after
2006 (the remaining 6 deals) which locates
the post-M&A 3-year period between 2007
and 2010. In the case of OTP Bank Romania,
the acquisition took place in 2004, hence the
3-year period was 2005-2007. This bank was
included in the first sample.
Leumi Group
HVB Tiriac Bank
Credit Europe Bank
Romania SA
Piraeus Bank
Romania SA
Raiffeisen Bank
Romania SA
Banca Comerciala
Romana SA
UniCredit Tiriac Bank
SA
ROA and ROE were calculated using the net
income as a percentage of the average total
assets and the net income as a percentage of
the
average
common
stock
equity
respectively. In addition, NIM was computed
as the difference between interest income
and interest expenses over total average
interest-bearing
assets.
Post-merger
performances of target banks were
compared to those obtained by the whole
industry for each of the 3 years and for the
whole period. Mean ratios, but also median
values were calculated as accounting ratios
are often susceptible to outliers (in some
cases, banks with extraordinarily high or low
results distorted the mean values).
Journal of Eastern Europe Research in Business & Economics 8
Empirical Results
In this section, we discuss the results of the
empirical tests. Tables 2a-2g report the postM&A financial accounting ratios for the
merged banks and the corresponding
accounting profitability ratios for the whole
industry. The mean and median figures
correspond to a 3-year period for both
sample A/B and industry and are computed
based on the data available on Bankscope,
the official reports published by the National
Bank of Romania and own calculations. The
ratios displayed for the industry take into
account the profitability of the whole 42
banks representing the Romanian banking
system.
During the 3 years after the M&As, the
sample A mean return on assets (ROA) is
1.09% below industry, while the median
ROA, although below industry, is significantly
closer to the industry median – 0.44% below
industry (table 2a - panel A). This ratio
shows that the merged banks underperforme
the industry in all 3 years with better results
in the 3rd year (bank median is just 0.16%
below industry) and the worst results in the
2nd year (in absolute figures, bank median is
0.58% below industry). For sample B banks,
median ROA is much closer to the industry
median (0.12% below industry), the merged
banks outperforming the industry in the 3rd
year when the sample B median ROA is
0.48% above the industry (table 2a-panel B).
Overall, the evolution (rise or decline) of
median ROA for both samples during the 3year post-M&A period could be explained by
the superior dynamics (faster or slower) of
average aggregate assets as compared with
the net income.
Table 2a Bank and Industry Mean/Median Annual ROA for 12 Target Banks in Years after
the M&A
Year relative to
merger&acquisition
1
Bank mean
Industry
Bank
Industry
mean
median median
Panel A - post M&A 1-3 year before 2007
0,90
2,10
1,33
1,90
Number of
observations
6
2
0,70
2,25
1,72
2,30
6
3
1,34
1,85
1,74
1,90
6
Mean annual
performance for year 13
0,98
2,07
1,60
2,03
Panel B - post M&A 1-3 year after 2007
1
0,54
1,31
0,87
1,31
6
2
0,16
0,93
0,52
0,93
6
3
-2,89
0,05
0,53
0,05
6
Mean annual
performance for year 13
-0,73
0,76
0,64
0,76
ROE fluctuates over the period under review
for both samples (table 2b). The significant
positive evolution noticed for the median
ROE in the 2nd year after the merger (2nd year
ratio is almost double than the 1st year one)
is largely due to the faster rate of growth
recorded by the net income comparing to the
equity
dynamics.
This
pace
slows
considerably in the 3rd year when median
ROE shrinks by 40.12%. Nevertheless,
sample A median ROE remains at a range
between 8% to 16% (on average, the median
9 Journal of Eastern Europe Research in Business & Economics
is 3.74% below industry). In the meantime,
for sample B banks, median ROE records a
sharp decline to values ranging between 24%. The 2nd year shows a significant decrease
(the relative change is -46.93%), while the
3rd year shows a surprising recovery (the
relative change is 29.33%). This evolution is
ascribed to the dramatic decrease of net
income due to the financial crisis (which
caused higher provisioning costs attributable
to the rise in non-performing loans, and
lower returns on investments in government
securities – NBR [a] 2010) that affected the
whole industry (in this case, further analysis
needs to be done in order to separate the
M&A impact on bank performance from the
impact of the global financial crisis). On
average,
sample
B
merged
banks
underperform the industry by 4.78%, but
manage to outperform it in the 3rd year by
2.33%.
Table 2b Bank and Industry Mean/Median Annual ROE for 12 Target Banks in Years after
the M&A
Year relative to
merger&acquisition
Bank
Industry
Bank
Industry
mean
mean
median
median
Panel A - post M&A 1-3 year before 2007
Number of
observations
1
8,03
15,66
8,13
14,15
6
2
3,69
16,49
16,20
16,95
6
3
10,38
14,01
9,70
14,15
6
Mean annual
performance for year
1-3
7,37
15,39
11,34
15,08
Panel B - post M&A 1-3 year after 2007
1
5,89
13,22
4,24
13,22
6
2
1,35
9,95
2,25
9,95
6
3
-34,84
0,58
2,91
0,58
6
Mean annual
performance for year
1-3
-9,20
7,92
3,13
7,92
Both median ROA and ROE computed for
sample A banks are situated below industry
median, at almost the same level (in relative
figures, ROA stands 21.18% below industry
while ROE stands 24.8% below industry). For
sample B, median ROE for 1-3 year period
declines dramatically under the industry
median (60.40% below industry) while
median ROA is situated closer to the industry
ratio (15.79% below).
Median equity ratio (ER) for sample A banks
shows a downward trend (from 16.19% in
the 1st year to 10.31% in the 3rd year)
ascribed to a faster growth rate recorded by
bank assets as compared with bank equity
(table 2c). This evolution implies a reduction
of the degree in which banks use
shareholders’ equity to finance their assets.
Median financial leverage (FL) confirms it:
merged banks seem to be more levered than
the industry (in relative figures, bank median
is 6.78% above industry – table 2d). A
decrease of ER would normally lead to an
increase in ROE. For sample A banks this
happens only during the 2nd year of the postM&A period. Due to the evolution of other
indicators (mainly, net income), the median
ROE declined in the 3rd year by 40.12%
(relative change).
Journal of Eastern Europe Research in Business & Economics 10
Sample B banks also report a negative trend
of the median ER for the first 2 years after
the M&As and a slight recovery in the 3rd. The
latter evolution is due to a nominal decline in
assets (something not quite desirable during
a recession) which took place at a faster pace
than the rise in the volume of equity.
Correspondingly, on average, the median FL
confirms that merged banks are less levered
than industry (by a 15.26% - relative figure)
which illustrates their unused debt.
Table 2c Bank and Industry Mean/Median Annual ER for 12 Target Banks in Years after the
M&A
Year relative to
merger&acquisition
Bank mean
Industry
Bank
Industry
mean
median median
Panel A - post M&A 1-3 year before 2007
Number of
observations
1
18,46
13,67
16,19
13,92
6
2
13,88
13,44
12,94
13,51
6
3
11,89
12,90
10,31
13,35
6
Mean annual
performance for year 1-3
14,74
13,34
13,15
13,59
Panel B - post M&A 1-3 year after 2007
1
16,24
10,06
12,74
10,06
6
2
13,85
9,03
10,26
9,03
6
3
12,58
8,95
10,47
8,95
6
Mean annual
performance for year 1-3
14,22
9,35
11,16
9,35
Table 2d Bank and Industry Mean/Median Annual FL for 12 Target Banks in
Years after the M&A
Year relative to
merger&acquisition
Bank
Industry
Bank
Industry
mean
mean
median
median
Panel A - post M&A 1-3 year before 2007
Number of
observations
1
7,41
7,33
6,17
7,18
6
2
7,82
7,47
7,73
7,42
6
3
8,85
7,85
9,70
7,51
6
Mean annual
performance for year 13
8,03
7,55
7,87
7,37
Panel B - post M&A 1-3 year after 2007
1
7,73
9,98
7,93
9,98
6
2
9,11
11,09
9,76
11,09
6
3
9,78
11,19
9,63
11,19
6
Mean annual
performance for year 13
8,87
10,75
9,11
10,75
11 Journal of Eastern Europe Research in Business & Economics
The median net profit margin (NPM) suffered
an evident decline in the 2nd year for sample
A banks, but recovered in the 3rd year to
stabilize at a level situated between those
recorded in the 1st and 2nd year (1st year –
4.68%; 2nd year – 2.48%) (table 2e). The
median NPM for sample B banks shows a
significant decrease in the second year,
stabilizing at a level around 5% in the 3rd
year
(relative
change:
-2.16%).
Unfortunately, incomplete data hampered
calculating industry means and medians, but
the available data indicates that sample B
banks strongly underperform the industry.
The NPM evolution is one of the most
important drivers of ROE, explaining its
fluctuant unfolding.
Table 2e Bank and Industry Mean/Median Annual NPM for 12 Target Banks in
Years after the M&A
Year relative to
merger&acquisition
1
Bank
Industry
Bank
Industry
mean
mean
median
median
Panel A - post M&A 1-3 year before 2007
0,86
-4,68
--
Number of
observations
2
0,15
--
2,48
--
6
3
5,24
--
3,26
--
6
Mean annual
performance for year
1-3
2,08
--
3,47
--
6
1
Panel B - post M&A 1-3 year
after 2007
3,28
15,72
7,29
15,72
6
2
0,58
11,32
5,09
11,32
6
3
-6,18
--
4,98
--
6
Mean annual
performance for year
1-3
-0,77
13,52
5,79
13,52
- - means not available data
Regarding the asset turnover (ATO), sample
A banks record a relative change of -16.06%
in the 2nd year after the M&As, but in the 3rd
year there is a slight increase of 2.16%.
Median ATO for sample B banks shows a
significant increase over the 3-year period
caused mainly by a nominal decline in assets
(during the financial crisis, banks sold fixed
assets to improve their short-term financial
position) and not by a rise in operating
revenues. Nevertheless, the available data
show
the
merging
banks
strongly
outperforming the industry in terms of the
efficiency of assets utilization (table 2f).
Journal of Eastern Europe Research in Business & Economics 12
Table 2f Bank and Industry Mean/Median Annual ATO for 12 Target Banks in Years after the
M&A
Year relative to
merger&acquisition
Bank mean
Industry
Bank
Industry
mean
median median
Panel A - post M&A 1-3 year before 2007
Number of
observations
1
29,10
--
21,54
--
6
2
30,40
--
18,08
--
6
3
33,94
--
18,47
--
6
Mean annual
performance for year 13
31,15
--
19,36
--
Panel B - post M&A 1-3 year after 2007
1
9,05
7,30
9,10
7,30
6
2
11,13
8,06
11,22
8,06
6
3
17,38
--
13,50
--
6
Mean annual
performance for year 13
12,52
7,68
11,27
7,68
Both sample A and B banks record a positive
trend of median net interest margin (NIM)
over the 3-year period. This evolution shows
that merging banks generate higher net
interest income as a portion of earning assets
every year. While for sample A banks there is
insignificant change from one year to
another, and the sample median NIM is very
similar to the industry median, sample B
banks post a more meaningful rise of the
ratio in the 3rd year (a relative change of
39.16%). This could be attributable to an
increase in the spread between lending and
deposit rates due to a general policy of
raising interest margins for lei and foreign
currency. Overall, sample B banks
outperform industry (median NIM is 56.42%
above industry) as shown in table 2g.
Table 2g Bank and industry mean/median annual NIM for 12 target banks in years after the
M&A
Year relative to
merger&acquisition
1
2
3
Mean annual performance
for year 1-3
1
2
3
Mean annual performance
for year 1-3
Bank mean
Industry
Bank
Industry
mean
median
median
Panel A - post M&A 1-3 year before 2007
8,23
7,54
7,25
7,47
7,90
7,81
7,37
8,30
8,09
6,45
7,71
6,57
8,07
7,27
7,44
7,45
Panel B - post M&A 1-3 year after 2007
7,15
4,60
6,41
4,60
7,82
4,67
6,64
4,67
12,53
4,98
9,24
4,98
9,17
4,75
7,43
4,75
Number of
observations
6
6
6
6
6
6
13 Journal of Eastern Europe Research in Business & Economics
Conclusions
The present study attempts to shed further
light on the effects of M&As in the Romanian
banking system. It focuses on target banks
located in Romania and involved in mergers
and acquisitions between 1998 and 2008. It
follows a methodology of assessing
performance in terms of bank profitability
using accounting information derived from
annual financial statements. Although
accounting data is considered an imperfect
measure of economic performance (Healy et
al., 1992) because it can be affected by
certain manipulative actions, the researchers
still find it useful and argue that if there is
any M&A impact on bank performance, this is
bound to appear in the published accounts.
The complete findings of this paper are
mixed. On one hand, bank M&A in Romania
does not result in improved ROE or ROA in
the post M&A 3-year period under review. On
the other hand, both samples report median
NIM above the industry median. Regarding
ROE, sample banks underperform industry in
each of the 3 years. The targets’ overall
performance in terms of ROE is not
significantly different for the two samples.
Both are situated below industry, but sample
A (containing the deals taking place before
2006) reports a median ROE closer to the
industry median (24.8% below industry
median) than the one of the second sample
(comprising deals taking place after 2006)
which shows a median ROE situated 60.48%
below industry. Nevertheless, sample B
results are worse than sample A’s, ranging
between 2% and 4% (72.40% below sample
A banks median ROE). This latter result is
strongly influenced by the effects of the
global financial crisis and the Romanian
economic crisis. Although the researchers
agree that further analyses is required to
separate the M&A impact on bank
performance from the impact of the global
financial crisis, these results are considered
relevant because they are compared with the
industry aggregate ratios (the whole banking
system being affected by the crisis). The
present findings are in contradiction to
Altunbas et al.’s (2004) or Campa and
Hernando’s (2005) findings that bank M&A
results in improved ROE, but confirm the
results of other studies (Beccalli and Frantz,
2008) that show a deterioration of
performance induced by the bank M&As.
Regarding NIM, both samples post increasing
result from one year to another, sample B
banks strongly outperforming the industry.
The overall results of the both sample are
very similar (sample A median NIM is 7.44%,
while sample B median NIM is 7.43%).
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Endnotes
[1] See DeYoung, Evanoff and Molyneaux
(2009) for a review of the handful of both
American and European studies using this
methodology, emerging after 2000.