Profitability and risk of banks pre and post mas

Vo Xuan Vinh | Profitability and risk of banks pre and post M&As: Preliminary evidence from Vietnam VO XUAN VINH University of Economics Ho Chi Minh City CFVG Ho Chi Minh City Email: vinhvx@ueh.edu.vn Abstract The conduct of Mergers and Acquisitions (M&As) of commercial banks is an important activity in order to fulfil the strategic objectives of all banks involved However, M&As activities in Vietnamese banking sector have unique characteristics because most of the recent deals are arranged by central bank and other financial regulatory authority bodies with the purpose of achieving a prudential financial system This article examines the effects of M&As in banking sector by analyzing profits and risks of commercial banks pre and post M&As in the recent liberalization episode in Vietnam The preliminary result suggests that most of commercial banks experience lower profits and higher credit risks after M&A Hence, it seems that most of banks face more difficulties after M&A Keywords: mergers and acquisitions; Vietnam; commercial banks Introduction The banking system is facing significant challenges due to fundamental changes in regulation and technology In the last few decades, there is an unprecedented wave of consolidation in the financial sector (Amel et al., 2004) Mergers and Acquisitions (M&As) of commercial banks is an important strategy to achieve the strategic objectives of financial institutions These M&As are popular strategies and widely employed by commercial banks, insurance companies and other financial institutions In Vietnam, recent M&A activities in banking sector is an important step conducted by the Vietnamese government in restructuring the banking sector Clearly, M&A activities might not reflect the will of the financial institutions but the will of the central bank, the State Bank of Vietnam The communicated purpose of these mergers and acquisitions is suggested as an important step in the restructuring process of the banking and financial system Moreover, most of communications also states that the main objective of mergers and acquisitions in Vietnam banking sector is to help the merged bank to grow in scale, improve financial strengths and minimize costs However, as discussed in previous section, an important and prominent feature of M & A activity in Vietnam is that most of M&A activities in Vietnam's banking system are aimed at implementing the restructuring strategy conducted by the State Bank of Vietnam in order to improve the financial system Therefore, considering the effectiveness of the bank's profit and risk after the merger is an important task to evaluate the effectiveness of merger There is a growing body of empirical literature which focus on measuring the efficiency gains from mergers and acquisitions in the financial sector However the literature remains inconclusive about the effectiveness of mergers and acquisitions on bank profitability and risk It is likely that the results varies according to the country, industry and time period analyzed (Amel et al 2004) This paper aims at providing some preliminary evidence on the profits and risks of commercial banks pre and post M&As We offer some preliminary evidence on the effectiveness of M&As in banking sector This is important to provide some initial assessment of the recent government strategy in order to improve the soundness of the financial system in Vietnam The remainder of the paper is organized as follows Section provides a review of previous papers on the impact of M&As on bank profitability and risk Section provides the information on banks involved in M&A activities Section introduces some preliminary evidence on profits and risks of commercial banks pre and post M&A Section provides some concluding remarks and suggests directions for future research Literature Review A number of previous papers assess the impact of bank M&A on profitability and risk In this section, we provide a review of previous studies on this subject in the current literature Vennet (1996) analyze the effect of mergers and acquisitions on the efficiency and profitability of EC financial institutions The findings from this study suggest that domestic mergers among equal-sized partners extensively improve the performance of the merged banks Improvement of cost efficiency is also reported in cross-border acquisitions However, this study highlights that domestic takeovers are influenced predominantly by defensive and managerial motives such as size maximization Berger (1998) conducts estimation of the cost, standard profit, and alternative profit efficiency effects of bank mergers of the 1990s The finding highlights that on average, bank mergers increase profit efficiency in comparison with other nonmergerbanks However, mergers not have much impact on cost efficiency This study also report that efficiency gains are considerably higher when the participating banks are relatively inefficient This provide evidence to support the preposition that mergers may “wake up” inefficient management This also provide evidence to support the implementation of unpleasant restructuring More importantly, this study highlights that part of the efficiency gains result from enhanced diversification of risks This is important because the consolidated banks undertake gradual shifting of their output mixes from risky investment securities toward loans, thereby increasing expected revenues Hughes et al (1999) state that the main motivations for mergers and acquisitions in banking are improved potential for geographic expansion This is achieved by differences in state laws controlling branching and a more favorable antitrust climate This paper also asserts that the banks engaged in interstate expansion attain the highest economic benefits of consolidation More specially, banks engaged in interstate expansion also achieve strong benefits from the diversification of macroeconomic risk Finally, this paper confirms the benefits of society from the enhanced bank sounness resulting from bank consolidation Amel et al (2004) provide a critical review of previous studies which analyze the major players of the financial industry (commercial and investment banks, insurance and asset management firms) in a number of advanced countries over an extended time frame This paper focus on common patterns that transcend national and sectoral peculiarities (Amel et al 2004) The result is quite interesting This paper reports that consolidation in the financial sector is beneficial up to a relatively small size However, it is important to note that this paper offers little evidence to confirm the economies of scope or gains in managerial efficiency yielding from bank mergers and acquisitions (Amel et al 2004) Nicoló et al (2004) investigate recent trends in bank activity, consolidation, internationalization, and financial firm conglomeration using a huge data from a large number of countries This paper also explores the impacts of consolidation and conglomeration on financial firm risk and systemic risk of these involved banking firms The paper offers strong evidence to confirm the strong link between consolidation, conglomeration and financial risk Uhde and Heimeshoff (2009) utilize aggregate balance sheet data from commercial banks across the EU-25 over the period from 1997 to 2005 This paper offers empirical evidence that national banking market concentration has a negative impact on financial soundness of banks Halkos and Tzeremes (2013) employ a bootstrapped Data Envelopment Analysis (DEA)-based procedure to estimate the short-run operating efficiency gains of a potential bank merger or acquisition (M&A) This study confirms that a merger or acquisition between efficient banks does not necessarily ensure an efficient bank M&A Dunn et al (2015) examine non-government-assisted US commercial bank merger activity prior to and during the recent financial crisis The study suggests that overall merger announcement value creation during the financial crisis is greater when targets have higher quality assets, are better capitalized, and are less efficient An overview of Vietnamese commercial Banks involved in M&A activities Table presents some basic information about mergers in the banking system in Vietnam This table shows that most of the mergers in Vietnam banking system are conducted recently Clearly, the time is not long enough to make conclusions about the effectiveness of the merger Table Information of Banks which are involved in merger activity Merg er Date 15-122011 Commercial Bank Involved De Nhat Joint Stock Commercial Bank Bank Name in Vietnames Ngân hàng TMCP Đệ Nhất Bank Name Post Merger Sai Gon Joint Stock Bank Name in Vietnamese Ngân hàng TMCP Sài Gòn Merg er Date Commercial Bank Involved Tin Nghia Joint Stock Commercial Sai Gon Joint Stock Commercial Bank 28-082012 Hanoi Housing Development Joint Stock Bank Saigon – Hanoi Joint Stock Commercial Bank 20/12/201 Ho Chi Minh Housing Development Bank 5-5-2015 12-082015 Bank Name Post Merger Commercial Bank Bank Name in Vietnamese Saigon – Hanoi Joint Stock Commercial Bank Ngân hàng TMCP Sài GònNội Hà Ngân hàng Ho Chi Minh Ngân hàng TMCP Phát triển nhà TP Hồ Chí Minh Housing TMCP Phát Developmen triển nhà TP t Bank Hồ Chí Minh Nghĩa Ngân hàng TMCP Sài Gịn Ngân hàng TMCP Nhà Hà Nội Ngân hàng TMCP Sài Gòn Hà Nội Dai A Joint Stock Commercial Bank Ngân hàng TMCP Đại Á Mekong Housing Development Joint Stock Bank Ngân hàng TMCP Phát triển Nhà Đồng Sông Cửu Long Vietnam Bank for Investment and Development Ngân hàng Đầu tư Phát triển Việt Nam Ngân hàng Mekong Development Bank Maritime Joint Stock 14/09/20 15 Bank Name in Vietnamese Ngân hàng TMCP Tín Phát triển Mekong Ngân hàng Commercial Bank TMCP Hàng Hải Western Bank Ngân hàng TMCP Phương Nam Sacombank Ngân hàng TMCP Sài Gịn Thương Tín Source: Tabulated by author Vietnam Bank for Investment and Ngân hàng Đầu tư Phát triển Việt Developmen Nam t Maritime Joint Stock Commercial Bank Sacombank Ngân hàng TMCP Hàng Hải Ngân hàng TMCP Sài Gịn Thương Tín Profits and Risks of Vietnamese banks pre and post Mergers and Acquisitions – Some preliminary evidence In this paper, profit of commercial bank is measured by the ROA – returns on total assets We use the credit risk measure to proxy for bank risk, which is calculated by the ratio of the loan loss provision to total outstanding loans Figures through describe the profitability and riskiness of the banking system in Vietnam In general, we find the preliminary evidence that the profitability of merging banks has decreased and risk has increased after mergers 2.32% 2.50% 1.67% 1.41% 1.16% 1.38% 0.84% 0.49% 0.76% 0.41% 0.50% 1.09% 0.78% 1.12% 0.73% 0.73% 0.41% 0.00% 2004 2005 2006 2007 2008 2009 ROA 2010 2011 0.05% 2012 0.03% 2013 0.54% 0.05% 0.72% 0.04% 20142015 RISK Figure Profit and Risk of SCB for the period from 2004 to 2015 Source: author’s calculation 2.20% 1.87% 1.71% 1.51% 1.42% 0.99% 1.41% 1.22% 1.29% 1.12% 0.74% 0.30% 2006 1.55% 0.70% 1.01% 0.74% 1.08% 0.50% 0.41% 0.19% 2007 2008 2009 2010 2011 ROA 2012 2013 2014 2015 RISK Figure Profit and Risk of SHB for the period from 2006 to 2015 Source: author’s calculation 2.34% 2.11% 1.58% 1.33% 1.21% 0.87% 0.84% 0.65% 0.69% 0.78% 1.02% 0.73% 1.26% 1.03% 1.15% 0.92% 0.81% 0.40% 2005 2006 2007 0.63% 1.25% 0.74% 0.28% 2008 2009 2010 ROA 2011 2012 2013 2014 2015 RISK Figure Profit and Risk of HDB for the period from 2005 to 2015 Source: author’s calculation 2.55% 2.62% 2.20% 2.08% 1.99% 1.74% 1.46% 0.75% 2006 0.99% 1.22% 1.26% 0.95% 1.04% 1.57% 1.49% 0.96% 0.97% 1.26% 0.93% 2013 2014 2015 0.70% 2007 2008 2009 2010 ROA 2011 2012 RISK Figure Profit and Risk of BIDV for the period from 2006 to 2015 Source: author’s calculation 2.59% 2.68% 2.31% 1.2287%% 1.37% 0.53% 1.34% 0.76% 1.57% 0.73% 1.32% 0.97% 00 9917%% 0.23% 2006 2007 2008 2.14% 2009 2010 ROA 2011 2012 0.37% 2013 0.16% 0.15% 2014 2015 RISK Figure Profit and Risk of MSB for the period from 2006 to 2015 Source: author’s calculation 2.47% 2.45% 2.09% 0.57% 0.50% 0.72% 1.96% 1.68% 1.62% 0.86% 0.99% 1.83% 1.50% 1.01% 1.49% 1.22% 0.90% 1.07% 1.23% 1.23% 0.50% 0.16% 2006 2007 2008 2009 2010 2011 ROA 2012 2013 2014 2015 2016 RISK Figure Profit and Risk of STB for the period from 2006 to 2016 Source: author’s calculation Concluding remarks and Direction for future research Typically, mergers and acquisitions of commercial banks not only serve the interests of banks involved but also create benefits for the general economy Consequently, investigating the effectiveness of mergers and acquisitions should also consider the interests of society in conjunction with the interests of the merging banks Within the framework of this study, we examine the profitability and risk of merging banks in the past period This paper examines the effectiveness of the merger in Vietnamese Banking system Specially, we analyze the profitability and risk of Vietnamese commercial banks pre and post mergers and acquisitions With preliminary data, we show that most of the banks after the mergers are facing difficulties This is evidenced by the reduced profitability and increased risk However, a deeper assessment requires longer time series The paper also offers some suggestions for future research Firstly, many different case studies should be conducted to analyze different aspects of bank operations in details 780 | ICUEH2017 Secondly, further research on this should be conducted once the time frame is long enough to provide a valid generalized conclusion References Amel, D., Barnes, C., Panetta, F & Salleo, C 2004, 'Consolidation and efficiency in the financial sector: A review of the international evidence', Journal of Banking & Finance, vol 28, no 10, pp 2493-2519 Berger, A.N 1998, 'The efficiency effects of bank mergers and acquisition: A preliminary look at the 1990s data', Bank Mergers & Acquisitions, Springer, pp 79-111 Dunn, J.K., Intintoli, V.J & McNutt, J.J 2015, 'An examination of non-governmentassisted US commercial bank mergers during the financial crisis', Journal of Economics and Business, vol 77, pp 16-41 Halkos, G.E & Tzeremes, N.G 2013, 'Estimating the degree of operating efficiency gains from a potential bank merger and acquisition: A DEA bootstrapped approach', Journal of Banking & Finance, vol 37, no 5, pp 1658-1668 Hughes, J.P., Lang, W.W., Mester, L.J & Moon, C.-G 1999, 'The dollars and sense of bank consolidation', journal of banking & finance, vol 23, no 2, pp 291-324 Nicoló, G.D., Bartholomew, P., Zaman, J & Zephirin, M 2004, 'Bank consolidation, internationalization, and conglomeration: Trends and implications for financial risk', Financial markets, institutions & instruments, vol 13, no 4, pp 173-217 Uhde, A & Heimeshoff, U 2009, 'Consolidation in banking and financial stability in Europe: Empirical evidence', Journal of Banking & Finance, vol 33, no 7, pp 1299-1311 Vennet, R.V 1996, 'The effect of mergers and acquisitions on the efficiency and profitability of EC credit institutions', Journal of Banking & Finance, vol 20, no 9, pp 1531-1558  ... paper aims at providing some preliminary evidence on the profits and risks of commercial banks pre and post M&As We offer some preliminary evidence on the effectiveness of M&As in banking sector... impact of M&As on bank profitability and risk Section provides the information on banks involved in M&A activities Section introduces some preliminary evidence on profits and risks of commercial banks. .. effectiveness of the merger in Vietnamese Banking system Specially, we analyze the profitability and risk of Vietnamese commercial banks pre and post mergers and acquisitions With preliminary data,