the eleventh dubrovnik economic conference

J.M. Campa and I. Hernando

M&As performance in the European Financial Industry

Croatian National Bank, July 2005THE ELEVENTH DUBROVNIK ECONOMIC CONFERENCE

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M&As performance in the European Financial Industry

From the beginning of the 90´s, there has been a reduction in the number of banks in the UE.

– 1997: 9600 banks; 2003: 7400. Concentration process mainly on a domestic

scale. – UE-15: 1990-2001: 78% (in value) of the mergers

are domestic. Complexity in cross-border operations

– ECB Report on EU-Banking Structure: Lower potential synergies and lower potential earnings of market power.

– Recent Evidence: Cybo-Ottone&Murgia (2000) and Beitel, Schiereck&Warenburg (2004)

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Content of the presentation

European Financial Industry integration Literature review M&As abnormal return around the

announcement date Subsequent performance of M&As Conclusions

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European Financial Industry Integration

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Source: Thomson Financial.

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Source: Hartmann, Maddaloni, and Manganelli (2003), ECB Working

Paper 230.

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Market share of the top five banks

1997 2003

Belgium 54 83Germany 17 22Greece 56 67Spain 32 44France 40 47Ireland 41 44Italy 25 27Holland 79 81UK 24 33

EMU-Average 45 53EMU-C5(a) 12 16source: BCE(a) as of 1996 and 2001 respectively

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European Commercial Banking: Product contribution to total profits (2003)

-20%

0%

20%

40%

60%

80%

100%

Spain Portugal UK Ireland France Italy Germany Sw eden Norw ay TotalEurope

Per

cen

tag

e

Mortgages Consumer Cards Loan Checking accounts Deposits Asset Management

Source: JP Morgan (2004).

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EUROPEAN BANKS

Germany France Italy Netherland Portugal UK SpainNet interest income 0.79 1.26 2.42 1.68 2.29 2.01 2.46Gross Income 1.59 2.35 3.92 2.46 3.16 3.11 3.88Administration expenses -1.1 -1.46 -2.22 -1.59 -1.61 -1.53 -1.89Operating expenses -1.2 -1.57 -2.56 -1.67 -1.84 -1.71 -2.09Net operating income 0.4 0.78 1.36 0.78 1.32 1.4 1.79Provisions -0.53 -0.2 -0.69 -0.17 -0.4 -0.35 -0.44Profit before tax -0.13 0.58 0.67 0.61 0.92 1.05 1.35Net income -0.19 0.41 0.4 0.44 0.78 0.74 1.02 RATIOSEquity/ Total assets % 2.72 3.72 5.6 3.56 6.2 4.63 6.49Net Income/ Equity -6.92 11.02 7.07 12.27 12.61 16.05 15.64

Source: AEB, data 2003

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Literature Review

1. M&As Transactions most likely to generate value

Evidence for USA. Mergers with better results are those with a greater ex-ante potential for cost reductions :

– High Degree of Market Overlap– High cost differential between target and acquirer

Evidence for Europe points in the same direction . Most successful mergers are:

– Companies with the same activities– Domestic mergers– Target with poor results

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Literature Review

2. International Mergers

Foreign banks have higher operating expenses and lower returns than domestic banks, on average (Berger et al. 2000)

Information costs are the source of segmentation in the International Financial Markets (Buch, 2002)

Negative excess returns for the acquirers in international banking mergers(for ex. Amihud, DeLong and Saunders, 2002)

Merger benefits materialize mainly in costs reduction. The shorter the geographical distance, the higher Efficiency benefits (Berger and DeYoung, 2001)

Technological and regulatory developments: lower costs of the cross-border financial service provision (Buch and DeLong, 2002)

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Abnormal Returns around the announcement date

1.M&As announcements in the European Financial sector in 1998-2002

2.172 transactions:– 96(104) deposit institutions– 52(37) intermediary and financial holdings– 24(31) insurance companies

3.Market value available for 158 transactions4.120 domestic transactions and 52

international transactions

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1.Abnormal returns: difference between expected and observed returns.

2.Expected returns (CAPM model):

3.Buyer, target, joint return.4.Event windows:

– (t-30,t-1), (t-90, t-1), – (t-1,t+1), (t-30,t+1)– (t-1,t+30), (t-30, t+30)– (t-30,t+360), (t-1,t+360)

itftmtiftit RRRR )(

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Targets Acquirers Targets Acquirers

Cumulative average abnormal returns

Pre-announcement

(t-30,t-1) 1.85% -1.03% 42.4% 54.7%

(t-90,t-1) 4.35% ** -0.08% 35.5% 45.3%

Announcement

(t-1,t+1) 3.24% ** -0.87% ** 45.9% 51.7%

(t-30,t+1) 5.80% ** -1.81% ** 40.1% 54.7%

Post-announcement

(t-1,t+30) 2.38% ** -1.20% 48.8% 57.0%

(t-30,t+30) 5.43% ** -2.37% ** 39.0% 57.0%

Long-run

(t-30,t+360) -3.56% -2.42% 55.8% 45.3%

(t-1,t+360) -4.43% -3.37% 57.6% 52.3%

Average % negative

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Excess Returns from Recent Merger Annonucement (t-1,t+1)

-12 -10 -8 -6 -4 -2 0 2 4 6 8

% Excess Return

Acquirer Ex.Return Target Ex.Return

BNL

BBVA

Antonvenetta

ABN-AMRO

BSCH

Abbey

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Excess returns for acquirers

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

Cross-border National

Excess returns for targets

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Cross-border National

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(1) (2) (3) (4) (5) (6) (7) (8)Event Window (t-90,t-1) (t-30,t-1) (t-1,t+1) (t-30,t+1) (t-1,t+30) (t-30,t+30) (t-30,t+360) (t-1,t+360)

DOMESTIC 0.043 0.065 0.023 0.089 0.017 0.096 0.134 0.129'(1.49) (2.39)** '(1.36) (3.00)** '(0.71) (2.97)** (2.31)** (1.99)*

BANK -0.059 -0.015 0.014 0.011 -0.011 -0.003 -0.018 -0.048'(1.70)* '(0.61) '(1.02) '(0.39) '(0.42) '(0.09) '(0.26) '(0.67)

RSIZE -0.118 0.01 0.346 0.397 0.134 0.262 0.025 -0.089'(0.48) '(0.06) (3.15)** '(1.95)* '(0.90) '(1.20) '(0.06) '(0.18)

SMALLDEAL -0.051 -0.023 0.001 -0.018 0.008 -0.018 0.015 0.036'(0.73) '(0.46) '(0.03) '(0.37) '(0.23) '(0.35) '(0.07) '(0.18)

LARGEDEAL 0.013 0.028 -0.019 -0.003 -0.013 0.007 0.079 0.078'(0.43) '(0.98) '(1.18) '(0.10) '(0.60) '(0.21) '(1.33) '(1.29)

Observations 145 147 148 147 147 147 141 145R-squared 0.14 0.18 0.25 0.25 0.13 0.28 0.14 0.12

Targets

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(1) (2) (3) (4) (5) (6) (7) (8)Event Window (t-90,t-1) (t-30,t-1) (t-1,t+1) (t-30,t+1) (t-1,t+30) (t-30,t+30) (t-30,t+360) (t-1,t+360)

DOMESTIC -0.038 -0.017 -0.012 -0.03 -0.014 -0.04 0.033 0.04'(1.61) '(1.18) '(1.07) '(1.65) '(0.93) '(1.87)* '(0.74) '(0.84)

BANK -0.005 -0.011 -0.005 -0.021 0.003 -0.012 0.068 0.072'(0.20) '(0.71) '(0.48) '(1.05) '(0.23) '(0.55) '(1.19) '(1.17)

RSIZE -0.054 -0.014 0.027 0.016 -0.014 -0.016 -0.035 -0.022'(0.42) '(0.17) '(0.70) '(0.20) '(0.19) '(0.15) '(0.14) '(0.08)

SMALLDEAL 0.037 0.001 0.008 0.018 -0.013 -0.002 -0.101 -0.063'(0.53) '(0.03) '(0.69) '(0.50) '(0.47) '(0.04) '(0.53) '(0.31)

LARGEDEAL 0.023 0.001 -0.006 -0.002 0.015 0.014 0.057 0.062'(0.87) '(0.07) '(0.73) '(0.12) '(0.96) '(0.57) '(1.34) '(1.37)

Observations 148 146 147 146 147 146 150 147R-squared 0.11 0.07 0.15 0.08 0.12 0.11 0.06 0.07

Acquirers

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Subsequent performance of merged entities

1.Sub-sample of the completed banking mergers

2.66 transactions: 42 domestic, 24 international3.Financial variables (Bankscope)

Return (ROE, Financial margin) Market value Eficiency:Operating expenses/Net income Credit Activity: Loans/Total assets Risk: Loan insolvency provisions or net financial

result provision

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Financial Characteristics of the banks Target Acquirer

Difference.Medians Difference.Mediansin relation to the in relation to the

Average market Average market

Return on equity (ROE) 11.11 1.27 11.56 1.30Net financial margin (NFM) 2.20 0.39 2.01 0.25Capitalization ratio(CAP) 12.15 0.25 8.47 0.58Efficiency ratio (EFF) 62.87 -0.22 62.35 -1.85Loans 52.50 6.26 44.76 -4.84Loan insolvency provisions (PROV) 0.89 0.20 0.82 0.09Net financial result provisions (RISK) 22.31 0.77 16.76 1.37

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Differences of merger´s impact on target entities

•Better evolution of the financial margin when operating with different size banks.•Poorer evolution of the efficiency ratio when operating with different size banks and in domestic mergers.•Increase of the capitalization ratio when operating with different size banks, in domestic mergers and in the mergers that took place in the period 1998-1999.

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(1) '(4) (5) (8)ROE EFF ROE EFF

DFUS1 -1.888 3.142 -1.053 -8.932(1.59) (0.97) '(0.55) '(1.66)*

DFUS2 -1.751 1.636 -1.1 -9.568(1.25) (0.42) '(0.49) '(1.56)

DFUS3 -0.363 -2.724 0.189 -14.532(0.20) (0.55) '(0.07) '(1.90)*

DFUS4 -1.777 -3.678 -1.678 -16.244(0.75) (0.55) '(0.44) '(1.56)

DFUS5 1.456 1.014 1.644 -13.082(0.33) (0.08) '(0.30) '(0.89)

RSIZE*POSTFUS -8.11 47.459'(1.16) '(2.43)**

DOM*POSTFUS -0.401 11.312'(0.31) '(3.16)***

UPTURN*POSTFUS 0.46 4.022'(0.26) '(0.84)

Observations 371 362 348 339R-squared 0.31 0.22 0.29 0.27Absolute value of t statistics in parentheses* significant at 10%; ** significant at 5%; *** significant at 1%

Table 8. Evolution of ex-post acquirer performance

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-10

-50

510

-.5 0 .5excalp0

difa_a_roe Fitted values

Acquirer

-30

-20

-10

010

20

-.5 0 .5 1exctlp0

difa_t_roe Fitted values

Target

change in ROE vs. excess return over (t-30,t+360)

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Conclusions

1.The European Financial market is not well integrated in commercial banking. In Europe, the diversity of competitive and business structures is high.

2.There is a value transfer from the acquirers to the targets. This value transfer is higher in the case of domestic mergers.

3.The acquiring banks show a better financial situation than the targets, although the latter are not in a poorer situation than the sector´s average, observing an improvement in their returns from the second year onwards

the eleventh dubrovnik economic conference

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