Effect of merger and acquisition on financial performance of commercial banks in Nepal

Abstract

Merger and Acquisition is a strategy adopted by the organizations globally to meet the needs of dynamic business environment. This strategy also has much importance in Nepal mostly in banking sector. After Nepal Rastra Bank implemented new merger and acquisition bylaws in 2011 and monetary policy in 2015, there has been an increase in the number of mergers and acquisitions in Nepalese Banking sector. Therefore, the objective of the study is to assess the impact of M&A on the financial performance of banks in Nepal. The accounting and financial data of 5 commercial banks were used in this study. Data was taken from the financial statement of selected BFI’s & Nepal Rasta Bank from the period of 2070-2080. For the analysis of pre- and post-merger and Acquisition performance 4major financial ratios i.e. Return on Assets, Capital Adequacy Ratio, Non-Performing Loan & Return on Equity were used in the study. To compare the results sample T-Test was used to measure the significant increment/reduction in ratios after M&A. The overall results show that there is no significant increment in financial performance such as ROA, CAR & ROE after merger. Also, there was no significant reduction in NPL after M&A. Thus, the merger should not be viewed as a sure-fire way to address market difficulties. Key factors that determine success in mergers and acquisitions should also be established in order to provide critical insight to the merging and acquiring organizations before, during and after the process. This would be important since this study revealed that there is a percentage of organizations, though small, whose financial performance did not improve after the merger and acquisition. Intensive and extensive feasibility studies should be carried out before the merging or acquiring process is undertaken.