The UK Banking Sector - Essay Example

Performance Analysis of M&A in UK banking sector (2nd STAGE) Table of Contents Introduction 2. Overview of UK banking sector overthe period 2003-2007 2.1 Structural features 2.2 Financial Structure 2.3 Performance of UK Banks 3. Overview of M&A in UK Banking Sector over the Period 2003-2007 3.1 Number of M&A Transactions in the UK Banking Sector 2003-2007 3.2 Performance of M&A in the UK banking sector over the period 2003-2007 3.3 Methods 3.3.1 Research Situation and Sample, Data and Measures 3.3.2 Measurement of Strategic Characteristics through Resource Allocations 3.3.3 Performance Measurement 3.4 Results 4. Conclusions 1. Introduction According to Casu et. al, there has been a scarcity of comprehensive data which deals with a broad range of banks and related issues (Casu, et. al, 2006). This paper explores the influence of mergers and acquisitions on the performance of banks, thereby, investigating the sources of any merger-persuaded transformations in the performance. It is often aggravated by the relative scarcity of the empirical evidences on the impact of mergers and acquisitions which involve European Banks. As a matter of fact, the studies with regards to mergers and acquisition activities in the UK banking sector offers assorted conclusions. Altunabas and Ibanez describe about the bank mergers between the years 1992 and 2001 to lead on average in order to improvise the accounting profitability (Altunaz and Ibanez, 2004). Many empirical evidences have been provided which are evocative of the restrained opportunities for cost savings from bulk mergers in the banking commerce. Moreover, a little improvisation in the profit efficiency is also reported, but not in terms of cost efficaciousness with position to cross-border deals only. According to Cooke, most of the research analyses on mergers and acquisitions have been focused on the organizations which have been undergo a merger and many studies have seen a common condition marking the post-merger period (Cooke, 1986). Therefore, this paper targets the investigation of the influences of the M & A operations on accounting profitability measures with reference to the UK banking sector over the period 2003-2007 by with the help of examining several performance gauges, thereby, distinguishing the part of transformation in presentation due to the M & A itself. According to Heffernan, banking can be construed to a wide range of financial institutions and organizations to the large money-centralized commercial banks and this paper describes about it in detail (Heffernan, 2005). 2. Overview of UK banking sector over the period 2003-2007 2.1 Structural features The UK banking sector witnesses itself to be the third largest in the world after the United States and Japan, and is also a major international hub for investment and private banking (DeltaQuest, 2009). The banking sector of UK has an authoritative international recognition which is replicated in the considerable overseas company and large assets of the foreign banks in London. The total number of authorized banks in the UK summed up to about 690 by the end of 2004 where, even though, the count of UK built-in banks turned down over the past decade, there was observed a noteworthy augmentation in their standard ad financial potency (DeltaQuest, 2009). Nevertheless, due to the growing presence of European Economic Area or the EEA banks, there was a substantial increase in the count of authorized banks in the UK, many of which banks do not possess a physical presence in the UK but fail to agree to the deposits on a cross-border foundation. Even though, the shares of the assets and liabilities of the UK banking sector decreased during the past decade, foreign banks still clutched over approximately half of the UK banking sector assets in the year 2003. We can, hereby, conclude that European banks reported for virtually a half of this, trailed by the US and Japanese banks. By the end of the year 2006, the Cash Machines or the ATMs in the UK in the UK accounted to be 60, 428, thereby, bringing in nearly 63% of all cash to the individuals (Report, 2008). Moreover, the number of cash machines owned by independent ATM deployers counted to 27,003 by the end of 2006 which illustrated a 45 per cent share of the Market. Noticeably, it accounted of only 1 per cent growth in comparison to 2005 (Report, 2008). 2.2 Financial Structure The United Kingdom’s large financial sector attributes essentially sound and highly established financial hubs, markets, as well as infrastructure. A financial stability policy framework has been significantly aided in a number of ways in current times which has supported the infrastructure of the UK in many respects at the forefront. UK has been prone to many intricacies with regards to its financial system and not to deny that there are potential menaces and susceptibilities which policy makers are required to pay meticulous attention to. Moreover, there are so policy concepts which could be strengthened, nevertheless, do not constitute to the systematic considerations for the reason that they are conventionally well cognizant by the authorities who seek for steady improvisation in the policy framework in order to address the vulnerabilities. The UK financial system has delineated itself in a way of resilience with regards to the various menaces in the current years. The major aspect that distinguishes the UK financial system from others is undoubtedly its major international inclination (Sundararajan et. al, 2003). There are significant links between the overseas financial market activities in the UK and the current reforms to bring the important parts of the United Kingdom financial system up to the paramount international gradation prove to be a significant mechanism for maintaining the absolute as well as indirect associations manageable. Moreover, amongst the broader institutions, the risk management activities have been authorized importantly over the last decade or so, and this proves to be d most beneficial aspect of UK banks to be amongst the highest-rated banks in the world. 2.3 Performance of UK Banks The banks in UK have concluded from a policy of acquisitions of small provincial banks the reason behind which has been the preponderance of consumers to opt for banking at the bank which is nearest to their places of living and work. In accordance to it, the more outlets a bank has in its silhouette, the larger is their market share for the reason that whilst, some component of the demographic apportionment might have appeared to influence the banks at the same time as they decided where to open the branches, just the once the branches were introduced, the financial sides of the retail position delineated that the banks would attempt to plea to every likely consumer in a provided catchment field. It can be assumed that the size has always been of more significance in terms of attaining competitive prosperity than comprehending as well as making use of the disparities amongst the wants and requirements of a variety of customers. As Harris suggested, with regards to their efforts to improvise their representations extrinsic to the banking materials apart from establishing a collection of brands, there is a significant thing for the banks which is the product strategy (Harris, 2000). In current times, there is seen a progress inclined to the bundling products, meticulously by the products whose success signals a consumer’s first choice for convenience and value. It may, nevertheless, well be that a retail vicinity is the most preferable for the augmentation of such kind of products and with such a convenience for the vents, the banks are well positioned so as to establish as well as promote the notion of financial service purchasing. As a matter of fact, it is vital for the banks to establish bundled materials which are possessed by the consumers above values such as convenience and simplicity. Some specific figurations with regards to the way in which the banks in UK have fared since the deregulation are a bit difficult to acquire. However, it is quite obvious that the banks have successfully hung on to many of their clients and without any negotiation with the prices and profits. Undeniably, many banks have been indicted by the commission of government for earning atypical profits. If at all, the successful financial representation of the UK since the deregulation can be attributed above all to the inertial aspect, instead of any other significant appearance of brand loyalty, and then the challenge pretense by the online banks can be considered as critical (Harris, 2000). Moreover, there is a further combination which occurs not only amongst the banks of UK but also across the borders for the reason that some banks perceive size as a prime attribute in the sustaining competitive in international business world. As a result, the efficaciousness and performance of the banks of UK is an appealing topic of analysis. The banks can be illustrious into small and large ones as founded on their assets along with their multivariate vicinities. 3. Overview of M&A in UK Banking Sector over the Period 2003-2007 3.1 Number of M&A Transactions in the UK Banking Sector 2003-2007 In the circumstance of mergers and acquisitions in the banking system, it can easily be supposed that the mass or dimension is a matter of immense concern and the development in size can be attained through mergers and acquisitions in an easy and simple manner. The development attained by assisting mergers and acquisitions in the banking sector can be well defined as lifeless growth. Equally, the government and private sector banks have been efficaciously adopting policies with regards to mergers and acquisitions. In many countries, global or multinational banks are extending their operations through mergers and acquisitions with the regional banks in those countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions in the banking sector. By doing this, global banking corporations are able to place themselves into a dominant position in the banking sector, achieve economies of scale, as well as garner market share. According to the report of international direct investments, the Merger and Acquisition (M&A) transactions have witnessed a significant play in the UK banking sector for the reason that the growing meaning of the collective speculation funds i.e. private equities, pensions, hedge funds, etc., which have been steadily increasing their shares amongst the activities of M&A are a significant element of this fashion. By the year 2006, there took place 172 mega deals, each of which were worth over USD 1 billion and had accounted for about two-thirds of the entire value of the overseas Mergers and Acquisitions. Moreover, private equity funds steadily incremented their shares in the M&A activities, and witnessed their involvement in cross-border Mergers and Acquisitions valued at USD 158 billion with an increment of 18 per cent over the year 2005. Regardless of the reduce speed experienced in the previous quarter, the year 2007 has witnessed the exhibition of a new apex in global Mergers and Acquisitions. As estimated, more than USD 1 trillion of the whole M&A transactions made during the year possess their origin from cross-border M&A transactions (Report [1], 2008). 3.2 Performance of M&A in the UK banking sector over the period 2003-2007 Researches in the area of mergers and acquisitions have given away various significant imminences in to the advantages and disadvantages in association with each of the elements of the series of corporate strategy alternatives. As Singh and Montgomery noticed, some gradation of the product-market association amongst the target and bidder corporations is a pleasing attribute which can aid in post-merger representation (Singh and Montgomery, 1987: 377-381). On the other hand, as scholars like Shelton and Schweiger viewed, others have delineated that the like-mindedness in the generation of technologies, organizational cultures and customer communes possesses significant representation insinuations. However, these are a few subject matters of a substantial anatomy of work which shoots for further comprehension of mergers. Mergers and Acquisitions are perhaps construed as the diversification substitutes which have been a subject of the most broadened investigation in the corporate world. These investigations are rich and wide-ranging, thereby, covering various perspectives which also include the industrial economies, strategic management along with finance (Ramaswamy, 1997). Regardless of the developed evidences in association with the performance consequences of the different types of mergers, both related and unrelated ones, there is very little information known about the representation differences. This difference, nevertheless, can be somewhat traced to the measurement of association. As Lubatkin suggested, even though, the Standard Industrial Classification as well as the Federal Trade Commission categorizations of mergers in to groups for instance, horizontal, vertical, multi-national and, so on are restrained in their capability to facilitate the imminence in to the intricate behavior of relatedness (Lubatkin, 1983). As a matter of fact, the leading logical method supports the strategic likeness as a condition for attaining an appreciable post-merger representation. Therefore, it can be put forward that mergers between target and bidder firms which stress on the similar strategic behaviors will conclude in an appreciable performance in comparison to the mergers between the targets and bidders that stress on the unlike strategic behaviors (Ramaswamy, 1997). A significant attribute of the above theory is its conduct of the strategic behaviors. Even though, the behaviors such as risk propensity, operational efficaciousness that are involved here represent the diverse fields of a corporation’s functions, they are often conducted as a communal construct for their own reasons. As a result, it is quite challenging to unravel the total frame so as to determine the associative significance of each of the constituents that comprise of the corporation’s strategy, for the reason that there is little hypothetical model to allow such a method. As a result, any prioritization of the strategic variables can more be construed as an experiential thing. We can also construe to the fact that equivalences result in the generation of value through the actualization of the energies and dissimilarities chip away at the performance for not having fostered any kind of energy, irrespective of their characteristics. We can discuss the examination of this hypothesis by carrying out on a sample of mergers which have taken place in the banking business. A hierarchical deterioration analysis has been implemented so as to examine the performance influence of the similarities between the target and bidder on an assortment of the strategic characteristics. 3.3 METHODS 3.3.1 Research Situation and Sample, Data and Measures The samples were inclusive of all the intrastate mergers which involved the Federal Deposit Insurance Corporation or FDIC associate banks that were completed in the year 1987. The pick of this very time frame is chiefly driven by the sample accessibility limitations. The frequency of mergers over successive periods was examined and the determination of a particular year which would, perhaps, yield a huge sample of mergers inclusive of bank sectors which were not associated with other mergers for a three-year period post or prior a single merger event (Ramaswamy, 1997). The analysis delineated that the year 1987 witnessed the largest examples meeting such a criterion and as a result, the trends in the essential aspects of the banking industry such as deposits, loans and employment were examined. From the period 1984 to 1990, the objective data which was related to both the target and bidding banks had been compiled. This information was complemented with the data obtained from various reports organized by each of the FDIC associates. 3.3.2 Measurement of Strategic Characteristics through Resource Allocations The strategic inclination of an organization delineates the pattern of the resource allocations settings made by the paramount management in steering the corporation through the majority of environmental limitations in order to attain competitive benefits. According to Bowden, within the banking constraints, these settlements associate to certain fields of significance: 1. Market Coverage 2. Marketing Posture 3. Risk Propensity 4. Operational Efficaciousness 5. Client Mix (Bowden, 1980). The areas were measured utilizing the above set of five proportion indicators which have been delineated so as to influence the bank profitability. 3.3.3 Performance Measurement The performance was measured by bringing into use the accounting measures of profitability for the reason that, as Rose noticed, some surveys of the merger decisions have pointed out that the managers usually look forward to improvise the profitability with the help of mergers (Rose, 1989). Both the post and prior outcomes were measured over a three-year period as it has been discussed above. As a point of fact, it can be argued that the three year period was not adequate enough for the energetic profits for the reason that a significant amount of banks in the sample possessed some acquisitions beyond that end. Moreover, two regulation variables i.e. the weighted standard pre-merger performance as well as the size of the target in comparison with the bidder were brought in to use in the analysis. According to Kusewitt, The relative size had been implemented as a regulatory variable for the reason that the preceding analysis delineates large firms tending to acquire smaller firms so as to comprehend the scale-associated energies which would, or else, be challenging to attain (Kusewitt, 1985). Therefore, regardless of the strategic disparities, the size degree of difference may tend to exemplify some diversification in the post-merfer performance. 3.4 RESULTS The conclusions of the hierarchical deterioration analysis delineate the capability of strategic variables to exemplify the diversification in the post-merger representation transformations. They facilitate with the evidences that resemblances in the strategic attributes which are reflected by the steadiness in the resource allocation methods of both the bidder and target firms possess an absolute and positive impact of the post-merger performance. The disparities amongst the target and bidder on significant constituents of the bank strategy such as marketing stress, operational efficaciousness, and mix of customers were found to be disadvantageous to the performance transformation that trails the merger. 4. Conclusions Resultantly, too many mergers, both intrinsically as well as extrinsically, in the banking sector appear to be qualified as economic failures. Even in the long term interest of the share-holders, it is in the interest of the society so as to prevent such mergers as much as is possible. It would be appealing if the ways and means of the recent competition policies are considered again in a much efficacious manner. Also, it would be appreciable to restructure the capital market in such a way that the small scale enterprises would not require footing the bill which is present by unnecessarily merger-delighted banks. References 1. Altunbas, Y., and Ibanez, D.M. 2004, Mergers and acquisitions and bank performance in Europe. The role of strategic similarities. ECB Working paper n. 398, Frankfurt. 2. Amihud, Y. and Miller, G. 2000, Bank Mergers & Acquisitions, Boston: Kluwer Academic Publishers. 3. Bowden E. V. 1980, Revolution in banking. Richmond, VA: Robert F. Dame. 4. Casu, B., Giradone, C. and Molyneux, P. 2006, Introduction to Banking, Prentice Hall-FT. 5. Cooke, T. 1986. Mergers and acquisitions. Oxford: Basil Blackwell. 6. DeltaQuest. 2009, Banking Systems of UK. The DeltaQuest Group. 7. Harris, Greg. 2000, Brand strategy in the U.K. retail banking sector: Adapting to the financial services revolution. Journal of financial transformation, The CAPCO Institute. 8. Heffernan, S. 2005, Modern Banking, Chichester: Wiley. 9. Kusewitt, J. 1985. An exploratory study of strategic acquisition factors relating to performance. Strategic Management Journal, 6: 151-169. 10. Lubatkin, M. 1983. Mergers and the performance of the acquiring firm. Academy of Management Review, 8: 218-225. 11. Ramaswamy, Kannan. 1997, The Performance Impact of Strategic Similarity in Horizontal Mergers: Evidence from the U.S. Banking Industry. Academy of Management Journal, Vol. 40, No. 3: 697-715. 12. Report. 2008, Cash Machines in the UK. APACS Administration Ltd. 13. Report [1]. 2008, Recent Trends in International Direct Investments and an Evaluation of 2007 in the World and in Turkey. International Direct Investments Report (March 2008). International Investors Association of Turkey (YASED). 14. Rose, P. S. 1989. The interstate banking revolution: Benefits, risks, and tradeoffs for bankers and consumers. Westport, CT: Quorum. 15. Singh, H., & Montgomery, C. A. 1987. Corporate acquisition strategies and economic performance. Strategic Management Journal, 8: 377-381. 16. Sundararajan, V. et al. 2003, United Kingdom: Financial System Stability Assessment including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Insurance Supervision, Securities Regulation, Payment Systems, Monetary and Financial Transparency, Securities Settlement Systems, and Anti-Money Laundering and Countering Terrorist Financing. Country Report No. 03/46. International Monetory Fund. Appendix A Number and Value of M & A Transactions between Banks in Europe Number of M&A Deals:- Source: Cipollini, Andrea and Franco Fiordelisi. 2009, The impact of bank concentration on financial distress: the case of the European banking system. Appendix B Value of M&A Deals Source: Cipollini, Andrea and Franco Fiordelisi. 2009, The impact of bank concentration on financial distress: the case of the European banking system. Appendix C Major U.K Banks’ Aggregate Balance Sheet at the end- 2006 Source: Bank of England, FSA regulatory returns, published accounts and Bank calculations. The graph includes the following: (a) Borrowing from major UK banks. (b) Loans to UK-resident banks and other financial corporations and holdings of UK government debt. (c) Tier 2 capital, short positions, insurance liabilities and derivative contracts with negative market-to-market value. (d) As a percentage of risk-weighted assets, Tier 1 capital is 8%. Appendix D Annual Growth rate of Major UK Banks’ lending to UK non-financial companies Source: Bank of England, FSA regulatory returns, published accounts and Bank calculations. (a) Data excludes nationwide. (b) Includes lending to real estate companies. Read More